SPECTRUM INFORMATION TECHNOLOGIES INC, 10-K, 1998-06-26

SPECTRUM INFORMATION TECHNOLOGIES INC
10-K, 1998-06-26
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal year ended March 31, 1998

Commission File No. 0-15596

Spectrum Information Technologies, Inc.
(Exact name of registrant as specified in its charter)

Delaware 75-1940923
(State of incorporation) (I.R.S. Employer
Identification Number)

2700 Westchester Avenue
Purchase, New York 10577
(914) 251-1800
(Address including zip code of principal executive
offices and Registrant's telephone number,
including area code)

Securities registered pursuant to section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None Not applicable

Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE

Indicate by check mark whether the registrant (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 of this Form 10-K. [ X ]

The aggregate market value of voting common stock held by
nonaffiliates of the Registrant as of June 12, 1998 was
approximately $1,259,000 based on the average of the high and low
prices of the Common Stock on June 12, 1998 of $.86 as reported
by the National Quotation Bureau.

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
YES [ X ] NO [ ]

As of June 12, 1998, the registrant had outstanding approximately
1,570,000 shares of its Common Stock, par value $.001 per share.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information as set forth in Part IV (Item 14) has been
incorporated by reference from the Company's Annual Report on
Form 10-K, as amended, for the fiscal years ended March 31, 1990,
1993, 1995, 1996 and 1997 and the Company's Registration
Statements on Form 10 dated April 10, 1987 and on Form S-8 dated
March 31, 1997 as set forth herein.

<PAGE>

SPECTRUM INFORMATION TECHNOLOGIES, INC.

INDEX TO FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 1998

Item Page
No. No.
---- ----

Part I

1 Business............................................. 2

2 Properties........................................... 13

3 Legal Proceedings.................................... 13

4 Submission of Matters to a Vote
of Security Holders.................................. 14

Part II

5 Market for the Registrant's Common Equity and
Related Stockholder Matters.......................... 15

6 Selected Financial Data.............................. 16

7 Management's Discussion and Analysis of
Financial Condition and Results of Operations........ 16

8 Financial Statements and Supplementary Data.......... 20

9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............... 21

Part III

10 Directors and Executive Officers of the
Registrant........................................... 21

11 Executive Compensation............................... 21

12 Security Ownership of Certain Beneficial
Owners and Management................................ 24

13 Certain Relationships and Related Transactions....... 24

Part IV

14 Exhibits, Financial Statements Schedules and
Reports On Form 8-K.................................. 25

<PAGE>

SPECTRUM INFORMATION TECHNOLOGIES, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 1998

PART I

Item 1. Business.

Overview

Spectrum Information Technologies, Inc., a Delaware
corporation ("Spectrum"), and its subsidiaries (collectively, the
"Company"), have been developing software and related services
designed to make Internet/Intranet access a faster, more
productive and enjoyable experience. The Company also owns a
portfolio of patents ("legacy assets") relating to commercially
practicable methods of data transmission over circuit-switched
cellular networks. For several years preceding current
management, Spectrum was operating as a holding company of
several operating subsidiaries with primary emphasis on being an
intellectual property company focused on generating revenues from
royalties associated with the licensing of its proprietary
technology (the "legacy business"). Since January 1995,
Spectrum's current management has been implementing strategies to
resolve the many financial and legal problems inherited from
prior years and to refocus the business direction of the Company.
One of the Company's strategies was to seek protection and
reorganize under Chapter 11 of the United States Bankruptcy Code.
On March 31, 1997, the Company consummated its plan of
reorganization and emerged from bankruptcy (See Item 3 - Legal
Proceedings - Bankruptcy Proceedings).

As stated above, Spectrum's business objective is to
develop software and offer related products and services that
make Internet/Intranet access a faster, more productive and
enjoyable experience. Spectrum plans to develop a communications
software product suite, the Spectrum INTELLIGENT PIPE(TM), that
is intended to address communications solutions for remote access
in the Internet service provider and corporate markets.
FastLane(TM), the first product of the intended suite, is a
software server that performs compression that significantly
improves the speed of World Wide Web (WWW) access for most
dial-up subscribers currently connecting at speeds up to 56 Kbps.
FastLane(TM) is designed for home users, telecommuters and
enterprises accessing the Internet on dial up modem connections.
On May 4, 1998, Spectrum announced that it was offering free
trials for a limited time of FastLane(TM), the world's first Web
acceleration service employing this technology. The service is
available to direct dial-up users accessing the Web through
local, regional, national, and international Internet Service
Providers (ISPs), and does not require any complex set-up by
users. FastLane(TM) is also available to ISPs looking to provide
faster image downloading speeds to all or part of their
subscribers. Users can sign up for the FastLane(TM) Service on
Spectrum's Web sites at www.spectruminfo.com. and
www.fastlanehome.com

Spectrum is actively seeking to raise capital to implement
this business strategy. Unless Spectrum successfully raises this
capital, the Company projects that it will have adequate capital
to sustain its operations until September 1998, or possibly
December 1998, depending on how successful the Company is
concluding licensing discussions regarding its legacy technology
to fund its continuing operations.

With respect to Spectrum's legacy business, Spectrum's
proprietary wireless data transmission technology enables
transmission of data between portable computer devices over
existing analog cellular telephone networks. Spectrum licenses
this technology to leading manufacturers of integrated circuits
and modems and other related data communications product
providers. Spectrum also markets, through a distributor, direct
connect cellular data transmission activation kits (cellphone
software drivers and cables) to some of the Company's licensees.
These two components - marketing of activation kits and
technology licensing comprise the Company's operating revenues
during this fiscal year. Because of the minimal revenues in this
business area, the Company expects to continue to experience
operating losses while it attempts to successfully develop and
market its Internet related products and services. (See Liquidity
and Capital Resources.)

The Company's executive offices are located at 2700
Westchester Avenue, Purchase, New York 10577.

Spectrum's 1997 Reorganization

On January 26, 1995, the Company together with its
wholly-owned subsidiaries Computers Unlimited of Wisconsin, Inc.
d/b/a Computer Bay, Dealer Services Business Systems, Inc. d/b/a
Data One and Spectrum Cellular Corporation (collectively, the
"Debtors"), filed petitions for relief under Chapter 11 of the
Federal Bankruptcy Code (the "Bankruptcy Proceeding"). Upon
motion by the Debtors, the Bankruptcy Court converted the action
for Computer Bay to a case under Chapter 7 of the Bankruptcy
Code. A

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<PAGE>

trustee is overseeing the liquidation of Computer Bay's assets
and the Company no longer has control over the Computer Bay
estate. Data One consummated a separate liquidating plan of
reorganization on October 4, 1996. The estates of Spectrum and
Spectrum Cellular were substantively consolidated as part of the
bankruptcy proceeding and are operating as a single entity.

On March 31, 1997 (the "Effective Date"), Spectrum
consummated its proposed Chapter 11 plan of reorganization (the
"Plan"). The Plan provided all administrative creditors with full
payment, settled all material litigation pending against the
Company and provided all general unsecured creditors with 100% of
the value of their claims plus 6% interest per annum from the
bankruptcy filing date thereon. It also settled the $676 million
class action lawsuits filed against the Company by the payment of
$250,000 and the delivery of approximately 45% of the equity
ownership in Spectrum to a trustee to be distributed to the
members of the class. Although then existing Spectrum
shareholders were substantially diluted under the terms of the
Plan, the shareholders as of the Effective Date obtained the
majority of the 45% equity ownership in Spectrum set aside for
existing shareholders and certain creditors. The Plan also
provided that the remaining 10% of the equity ownership be
distributed among officers, employees and non-executive
directors. (See Item 3 - Legal Proceedings - Bankruptcy
Proceedings).

Company History

Spectrum has been actively involved in cellular
telecommunications since its inception in 1984. The Company first
investigated the capabilities of then-existing land-line modem
protocols (the set of rules that specify how information is
transferred between modems), and determined that they did not
provide the reliability needed for dependable transmission of
computer data through cellular communications. The Company also
recognized that none of the cellular telephone products then
available offered the intelligent interface capabilities required
to interface with modems that are needed for data communications
over cellular networks. In response to this need, the Company
developed and patented (i) other specific modem control
technology and (ii) various cellular telephone-modem interface
technologies. The Company has six U.S. patents (See Proprietary
Rights).

In 1993, the Company commenced a licensing program for its
patented technology and has entered license agreements with many
major modem and integrated circuit manufacturers. Current
revenues from royalties under these agreements and existing
product sales have failed to meet prior expectations. The Company
has been attempting to convert some or all of these agreements to
paid up agreements to fund its current research and development
and business strategy. Accordingly, as reported during this
fiscal year, the Company has increased its focus on the
development of software and related products and services that
make Internet/Intranet access a faster, more productive and
enjoyable experience for dial up modem users.

In May 1993, the Company was named as a defendant in a
consolidated class action (in which the plaintiffs filed a proof
of claim alleging $676 million in damages in the Company's
pending bankruptcy) and became involved in related legal
proceedings and lawsuits (See Item 3 - Legal Proceedings -
Securities Related Proceedings). The expense associated with
these proceedings, in addition to continuing operating losses,
contributed to the Company's decision to file its Chapter 11
bankruptcy petition in January 1995.

In January 1995, the Company engaged Donald J. Amoruso as
President and Chief Executive Officer. At the time of Mr.
Amoruso's employment, a new Board of Directors was elected to
replace the then existing Board. In late January 1995, the
Company and three of its operating subsidiaries filed the Chapter
11 bankruptcy petitions to conserve limited resources needed to
resolve outstanding litigation and to allow the Company time to
develop its core business. Spectrum consummated its plan of
reorganization on March 31, 1997. (See Item 3 - Legal Proceedings
- - Bankruptcy Proceedings).

Spectrum's Strategy

Statements contained in this Item 1 Business section and
elsewhere throughout this report contain forward looking
statements that are based on current expectations about
Spectrum's business, its business strategy and management's
beliefs and assumptions. Words such as "expects," "anticipates,"
"intends," "potential," "believes" and similar expressions are
intended to identify forward looking statements. These statements
are not guarantees of future performance and are subject to
significant risk and uncertainty and actual results may differ
materially from what is expressed. A discussion of the risk
factors regarding the implementation of the Company's business
strategy is set forth below. The Company's failure to
successfully implement this strategy or its failure to raise
capital near term will prevent the Company from continuing as a
going concern.

With respect to Spectrum's legacy business, during the
fiscal years ended March 31, 1996 and 1997, Spectrum implemented
a redesigned intellectual property licensing program in an effort
to grow the market for circuit switched analog cellular data
transmission and specifically improve Spectrum's share of this
market. Spectrum and some of its licensees believed that the
slower than expected growth in the number of cellular data users
may have been due in part to costly royalty barriers to entering
the market.

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<PAGE>

Spectrum addressed this problem by developing a product-oriented
strategy as part of its licensing program intended to motivate
its original equipment manufacturer ("OEM") modem customers
(licensees) to purchase and actively market Spectrum's
proprietary activation kit. Notwithstanding this more attractive
licensing program, Spectrum's market share for cellular data
products has not grown. The continued poor performance and its
need to fund its Internet/Intranet research and development and
business strategy has led Spectrum to convert material licenses
to paid up agreements and engage a distributor to take over the
activation kit sales business during fiscal year ended March 31,
1998.

Products and Services, and Products Under Development

On May 4, 1998, Spectrum announced that it was offering
free trials of its proprietary compression software for a limited
time with the introduction of FastLane(TM), the world's first Web
Acceleration Service. The service is available directly to
dial-up users accessing the Web through local, regional,
national, and international Internet Service Providers (ISPs),
and does not require any complex set-up by users. Interested
users can sign up for the FastLane(TM) Service on Spectrum's Web
sites at www.spectruminfo.com. and www.fastlanehome.com. The
Company is currently outsourcing most of its FastLane(TM) Service
operations at NaviSite, a full service data center in Andover,
MA. Spectrum recently hired James G. Moore, formerly Director of
Network Operations and Internet Services at Prodigy, as Director
of Internet Operations to manage Spectrum's service.

FastLane(TM) will also be available to ISPs looking to
provide faster image downloading speeds to all or part of their
subscribers. Spectrum plans to implement a reseller program and
recruit ISPs to resell the FastLane(TM) service to all or a
portion of their subscribers. Many ISPs are constrained by
financial limitations and Spectrum will be competing for their
limited dollars.

The FastLane(TM) Service features the first product of
Spectrum's planned INTELLIGENT PIPE(TM) software suite. It
combines proprietary architecture with optimized processing
techniques and is intended to enable more efficient information
transfer over wide area networks using Internet and Intranet
technologies. The technology is designed to minimize the
inefficiencies in Internet interactions between standard Web
browsers and Web servers. It attacks the problem of limited
bandwidth on the final connection between the remote user and the
Internet or corporate Intranet. Developed primarily for dial up
access, the FastLane(TM) Service uses Content Management Agents
(CMAs) that restructure the data received from Web servers before
sending the data to the user requesting it. Extensions of this
technology can be adopted to provide a wide variety of value
added capabilities between network connected clients and servers.
Spectrum's initial set of CMAs are designed to accelerate the
download of graphically rich web images for most end users by a
factor of up to three times for modem connections with speeds up
to 56K.

Spectrum believes that it has identified an opportunity to
deliver a technology that provides improvements to the Web
browsing experience for dial-up land line access to Internet
connections. Spectrum sees opportunities for future proprietary
CMAs that may include functions such as mapping of page formats
to non-standard display platforms (i.e., Windows CE based
Handheld Personal Computers) and compression of additional data
types.

Spectrum expects that its FastLane(TM) Service will be most
valuable to individual users connected to the Internet through an
ISP and to corporations providing dial in Intranet access.
Development and marketing of a service targeted directly at end
users is a significant challenge for a company with limited
resources. Spectrum's management continually monitors development
progress and market threats for deployment. If Spectrum
determines during the development and deployment process that
product performance or market acceptance are not meeting
expectations, or capital resources are not available if needed,
the Company will assess alternative strategies to maximize
shareholder value.

The Industries

Internet Services and Technology

The Internet marketplace is rapidly growing . Some
estimates place the number of U.S. Internet subscribers at
approximately 65 million with over 45% of U.S. households owning
a computer. The Internet subscriber base is expected to grow to
over 100 million by calendar year ended December 31, 1999.

With this growth has come congestion on the Internet. Many
users report frustration at the relatively slow speed of
downloading images, audio, and video content and have coined the
phrase the "The World Wide Wait". The provider companies response
so far has been to increase the capacity of the backbone "pipes"
that carry Internet traffic.

While many service providers have focused on improving the
backbone infrastructure of the Internet, relatively little
attention has been paid to what Zona Research terms the "last
critical mile". Zona defines this as the link between the ISP and
the

4
<PAGE>

dial-up subscriber, which is typically an analog modem.
Currently, this "last critical mile" is the bottleneck that
causes user frustration by waiting for downloading of product
images. This is the segment on which the FastLane(TM) impacts.

The way a user can access the Internet via their ISP is
generally broken down into two categories: High-speed and Low-
speed. High-speed is typically considered anything in the T-1
speed class. While speed is the obvious benefit, high cost
prohibits this solution from being viable for home users.
Low-speed refers to the analog modem, which has been around for
years and only most recently was the beneficiary of a technology
focus. This has resulted in the current class of 56K modems. The
vast majority of home users are using analog modems to connect to
their ISPs. Dataquest predicts that by the year 2002 over 50% of
Internet users will still be using analog modems as their access
technology.

The current state-of-art for analog modem technology is the
56K modem. Through some technical modifications , modem
manufacturers have been able to demonstrate 56K performance under
ideal conditions. Due to poor line conditions, a staggered
rollout of 56K technology at the ISP, and other elements, users
very rarely see an actual 56K connection. The average appears to
be in the 34K to 40K range. A standards issue in 1997 inhibited
the adoption of 56K technology; that issue has been resolved with
the adoption of the V90 standard and for the past year most new
systems have been shipping with 56K modems.

The Company believes FastLane(TM) is an ideal complement to
analog modems including the newest 56K modems. In internal tests,
FastLane(TM) has demonstrated making a 56K modem appear to be
working at speeds up to double its normal throughput rate for web
pages with high graphic content. They are an important part of
the target dial-up market for FastLane.

Competition

In 1997, both Intel and Compaq announced similar solutions
to FastLane(TM), but only Intel delivered a software product
called QuickWeb. In January, 1998, three ISPs Erol's, Netcom, and
GlobalCenter, formally offered Intel's QuickWeb as a premium
service to their subscribers. In May, Intel stopped offering
QuickWeb. As a result of Intel's withdrawal, Spectrum does not
believe it has any direct competition with respect to an on-line
acceleration service. There are, however, other technologies
competing for consumer's mindshare that are attempting to improve
the "last critical mile". In recent years several hybrid
technologies have appeared for home use. With the exception of
Integrated Services Digital Network, ("ISDN") which has been
available for many years, technologies such as cable TV modems
and Digital Subscriber Line ("xDSL") are currently discussed as
the next prevalent alternatives for home use. While these
relatively new high speed offerings are frequently cited in the
press, industry experts such as Dataquest forecast that analog
modems will still comprise over 50% of the way users access the
Internet in the year 2002. These new technologies are expected to
enjoy large growth rates, but it will take a number of years
until a majority of the dial-up users migrate to other
technologies.

ISDN provides 128 Kbps access, which is adequate for most
home users' needs. ISDN, however, has never garnered wide spread
acceptance, because, among other things, support is fractious,
pricing is expensive and installation set up on a user's computer
is technically difficult.

Spectrum also plans to implement a reseller program and
recruit ISPs to resell the FastLane(TM) service to all or a
portion of their subscribers. Many ISPs are constrained by
financial limitations and Spectrum will be competing for their
limited dollars. Caching has recently enjoyed a groundswell of
interest and many ISPs are implementing caching solutions. In a
caching system, an ISP stores popular Web pages at servers that
are located close to their subscribers. If a user requests a page
that is stored in the server's "cache" or memory, the ISP
delivers the page from the cache and does not have to go to the
Internet to retrieve the data. Unlike compression, however,
caching only works on a portion of the Internet traffic, storing
in cache memory the most popular web site requests. Compression,
however, speeds the delivery of all Web pages with popular
graphic images. Although Spectrum's technology is complementary
to many of the available caching technologies, caching is
sometimes seen as a competitor to Spectrum's compression.

Spectrum's FastLane(TM) service will have to achieve
significant market acceptance in the face of many available
alternatives to be successful.

Mobile Data Communications (Legacy Business)

The development of networks linking portable computers,
workstations, minicomputers and mainframes at separate locations
has occurred primarily in connection with the decentralization of
business operations, the environment of client/server computing.
As a result, demand is also increasing for more sophisticated,
cost-effective and reliable mobile data communication system
solutions, including portable computers, wireless data
communication devices, associated peripheral equipment, and
software utilities for mobile applications.

5
<PAGE>

Computer and telecommunications companies have been making
significant investments in the development and manufacturing of
new mobile computing devices and wireless networks. As a result,
the wireless communication industry has experienced the emergence
of a number of competing digital wireless data network
technologies and services such as Cellular Digital Packet Data
("CDPD"), Code Division Multiple Access ("CDMA"), Groupe Special
Mobile ("GSM") and Personal Communication Services ("PCS"). The
Company's proprietary technology (the legacy business) is
particularly applicable to data transmission over analog
circuit-switched cellular networks. The emerging digital wireless
communications networks are competing with analog circuit
switched cellular wireless data transmission resulting in a
declining market for the Company's legacy technology.

Although the mobile workforce continues to grow, the
projected market for Spectrum's activation kits, which are sold
by many leading modem manufacturers to their end user customers,
has not materialized. Some of Spectrum's OEM customers which
purchased activation kits under licensing arrangements reported
that end-users have shown minimal interest in activating their
cellular modems. These trends led the Company to focus on its
Internet related technology and services.

Risk Factors

Overview. Spectrum has suffered and continues to suffer
significant losses from continuing operations. The Company's
expenditures have increased recently as the Company deploys and
markets its FastLane(TM) Web Acceleration Service in an attempt
to grow subscribers. In light of the continued negative cash flow
and limited capital resources, the Company will not be able to
fund the marketing and development of its Internet software and
services with its existing capital resources and must raise
capital during the second or third quarter of its fiscal year
ending March 31, 1999, depending on how successful the Company is
concluding licensing discussions regarding its legacy technology
to fund its continuing operations (See Limited Capital
Resources).

Other significant risks associated with Spectrum's strategy
include, but are not limited to: overcoming the negative image
Spectrum has developed in the past, and its ability to rebuild
credibility in the marketplace; successfully developing software
and services that bring value to Internet subscribers and
Internet Service Provider markets; developing new channels for
distribution; hiring and retaining key technical and marketing
staff to implement the strategy; and competing successfully
within markets where competitors have significantly more
resources and access to capital than the Company. The following
specific risk factors should be considered in evaluating
Spectrum's ability to achieve its business objectives.

Limited Capital Resources. At the close of the fiscal year
reported, the Company had total Cash and Cash Equivalents of
approximately $1.6 million. During the quarter ended March 31,
1998, the Company's Cash and Cash Equivalents decreased
approximately $1.2 million. The Company has limited capital
resources to invest in product development, service deployment,
marketing and selling. It is critical, therefore, that the
Company raise money within the next several months to fund its
operations and business strategy. There can be no assurances that
Spectrum's new Internet technology and service business will
interest potential investors. Further, the Company believes that
an indemnification claim that it has received from a current
employee related to activities that took place in 1993 may
present an impediment to attracting investors. The Company cannot
quantify the burden that this claim may place upon its capital
resources at this time. (See Item 3 - Legal Proceedings;
Securities Related Proceedings.) If the Company successfully
raises capital, it is likely that existing stockholders'
ownership will be materially diluted.

Past Operating History. The Company's future must be
considered in light of the risks associated with the past
difficulties and negative press encountered by the Company.
Concurrently, to effectively enter the Internet and services
market, Spectrum must establish management and technical
credibility as well as financial viability with potential
customers and investors, continue to attract, retain and motivate
qualified persons, and develop market opportunities and
acceptance of its new products. There can be no assurance that
the Company will be successful in addressing such risks.

Changing and Segmented Market; Acceptance of the Company's
Services and Products. The market for the Company's Web
Acceleration Service is large, but difficult and expensive to
penetrate. Unless the Company is able to grow a material
subscriber base through word of mouth and other "grass roots"
methods, it is unlikely that the Company will succeed without a
substantial investment to fund the marketing and development of
brand recognition. While the Company believes that its service
offers substantial advantages, there can be no assurance that the
Company's service will be successfully developed or become widely
adopted. Additionally, the margins in service businesses are
traditionally much lower than software businesses. The Company
intends to market its service initially for approximately $4.95
per month. In order to sustain its existing infrastructure, the
Company must quickly attract a material subscriber base.

Competition. The market for Internet software and services
is intensely competitive and subject to rapid technological
change. The Company expects competition to persist, intensify and
increase in the future. Companies that have announced Web

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performance software or software/hardware solutions similar or
related to Spectrum's technology include Compaq, Intel and
others. Intel released its Web performance software solution in
January 1998 and three national ISPs announced that they planned
to offer Intel's faster access software as a premium service. It
was also reported that Intel was in discussions with the 30
largest ISPs, the most likely potential reseller market for
Spectrum's software. In June 1998, Intel announced that it was
discontinuing its Web performance offering for business reasons,
stating that the product did not ramp as quickly as Intel would
have liked. There can be no assurance that Spectrum's strategy
of marketing directly to end users will be successful.

Other technologies that offer faster Internet connections
are currently being developed and deployed, such as cable modems
and DSL. Market forecasts indicate, however, that dial-up
Internet access will continue to be the prevalent method of
access for several years. If the faster access methods become
widely adopted earlier than anticipated, Spectrum's available
market will be reduced accordingly.

Nearly all of these potential competitors have longer
operating histories producing hardware and software products or
offering services, greater name recognition, significant
installed customer bases and significantly greater financial,
technical and marketing resources than the Company. In order to
successfully compete in this market, Spectrum must be able to
differentiate its services based on their value proposition,
including price, performance and scalability for additional
features. Such competition could prevent Spectrum from
successfully entering the market and materially adversely affect
the Company's business, operating results or financial condition.

For its legacy business, the Company has appointed a
distributor to sell activation kits to licensees of its
technology and their customers. The license arrangements that the
Company has entered with most manufacturers enable them to sell
activation kits for use with their respective products without
additional royalty obligation. These licensees compete with
Spectrum's primary distributor. The Company is no longer
manufacturing or selling activation kits itself, but earns a
royalty for each kit sold by the primary distributor it has
appointed and certain licensees.

Synergies may exist between the Company and its
competitors. Spectrum is engaged in assessing and evaluating such
synergies and potential partnerships. However, there can be no
assurance that these activities will result in favorable business
arrangements.

New Product Development and Technological Change. All of
the Company's current revenues have been derived from the
licensing of its proprietary technology and royalties from the
sale of its associated activation kit products. Given the limited
revenue being generated and expected to be generated from this
existing business, it is essential for Spectrum to generate
revenues from its new product developments offered through its
Web Acceleration Service for dial up users of the Internet.

Sales of the Company's new Internet service is dependent on
the Company's ability to add substantial value to service
providers or directly to their subscribers. Also, certain
elements of the Company's new technology may be covered by
patents owned by others which may require licenses. The Company's
inability to introduce and sell the products and services that it
is currently developing in a timely manner or to successfully
expand its product offerings on a timely basis will have a
material adverse effect on the Company's business, operating
results or financial condition.

Evolving Distribution Channels. Spectrum has historically
sold its legacy business activation kit products to its
licensees, most of which are original equipment manufacturers
("OEMs") in the modem industry. Given the limited distribution of
its products through these channels, the Company has appointed a
distributor to attempt to stimulate sales of activation kits.
Although the Company receives a royalty for each kit sold by the
licensee/distributor, the Company does not expect these revenues
to be material given the size of the market.

Spectrum's existing OEM channels are not the primary
channels for distribution of its Web Acceleration Service.
Spectrum must market effectively directly to dial up Internet
users, and must develop new channels that include their ISPs and
other Company's with Internet presence. Spectrum has not
previously sold products into these channels. Failure to develop
new channels will inhibit the Company's ability to generate
revenues from the Company's new software products and will likely
result in continued operating losses and negative cash flow.

The Company has limited sales and marketing staff and
resources. There can be no assurance that these resources will
enable it to successfully compete against the significantly more
extensive and well-funded sales and marketing operations of
current or potential competitors.

7
<PAGE>

Management of Growth. The timely execution necessary for
the Company to fully exploit the market window for its products
and services requires an effective planning and management
process. The Company continues to seek to hire highly skilled
technical staff but due to the competitive high demand for
software skills, the Company is also dependent upon outside
services for aspects of its software development. To manage its
growth, the Company must continue to implement and improve its
operational and financial systems and to expand, train and manage
its employee base. There can be no assurance that the Company
will be able to successfully implement these activities on a
timely basis. Further, the Company will be required to manage
multiple relationships with various customers and other third
parties. Although the Company believes that it has made adequate
allowances for the initial costs and risks associated with this
expansion, there can be no assurance that the Company's systems,
procedures or controls will be adequate to support the Company's
operations or that the Company's management will be able to
achieve in a timely manner the expansion necessary to fully
exploit the market window for the Company's products and
services. If the Company is unable to manage growth effectively,
the Company's business, operating results and financial condition
will be materially adversely affected.

Dependence on Key Personnel. The Company is dependent on
its ability to retain and motivate high quality personnel,
especially its management and highly skilled technical and
operational teams. The loss of the services of any of its
executive officers or other key employees could have a material
adverse effect on the business, operating results or financial
condition of the Company.

The Company's future success also depends on its continuing
ability to identify, attract, hire, train and retain other highly
qualified technical and marketing personnel. Competition for such
personnel is intense, and given Spectrum's past history and
performance, there can be no assurance that the Company will be
able to attract, assimilate or retain other highly qualified
personnel in the future. The inability to attract and retain the
necessary technical and managerial personnel could have a
material adverse effect upon the Company's business, operating
results or financial condition.

Market Listing; Volatility of Stock Price. Spectrum was
delisted from the NASDAQ National Market in April 1995. Since
then, the Company's common stock has been traded on the OTC
Bulletin Board. Since the Company's emergence from Chapter 11,
the market for the Company's common stock has been relatively
illiquid and subject to wide fluctuations. There can be no
assurance that an active public market for the common stock will
develop or be sustained. Further, the market price of the
Company's common stock may be highly volatile based on quarterly
variations in operating results, announcements of technological
innovations or new products by the Company or its competitors, or
other events or factors.

Shares Eligible for Future Sale. The preferred stock that
was issued to the plaintiffs to settle class action litigation
pursuant to the Plan is convertible to common stock upon request
of the holder and automatically converts to common stock on March
31, 1999. Conversion to common stock of a significant number of
shares of preferred stock and a subsequent sale in the public
market could adversely affect the future market price for the
common stock.

Customers

During the fiscal year ended March 31, 1998, sales of
activation kits to SMART Modular Technologies, Supplynet Inc. and
Simple Technologies accounted for approximately 34%, 19% and 13%,
respectively, of the Company's merchandise sales. During the
fiscal years ended March 31, 1997 and March 31, 1996, sales to
SMART Modular Technologies and Global Village Communications
accounted for approximately 55% and 27%, respectively, of the
Company's merchandise sales. During the quarter ended December
31, 1997, the Company placed its remaining inventory valued at
approximately $68,000 with its distributor, Supplynet Inc., on a
consignment basis.

The Company entered into an agreement with a distributor
to assume the Company's activation kit business. Under the
agreement, the distributor has committed to undertake specified
marketing efforts intended to stimulate the market for activated
cellular capable modems and will pay the Company a royalty for
each activation kit it sells.

During the fiscal year ended March 31, 1998 licensing and
royalty revenues from Rockwell International accounted for
approximately 74% of the Company's licensing revenue. During the
fiscal year ended March 31, 1997 revenues from Rockwell
International and Smart Modular Technologies accounted for
approximately 62% and 18%, respectively. During the fiscal year
ended March 31, 1996 approximately 82% and 12%, respectively, of
the Company's licensing revenues were from US Robotics and
Rockwell International.

The Company has received no revenues from its newly
introduced compression Web Acceleration Service. Subscribers are
currently on a free trial basis until the Company starts selling
the service. The Company is also actively investigating selling
this service to ISPs who would resell the compression service to
the subscribers.

8
<PAGE>

Manufacturing

The Company utilizes a distributor to manufacture and
market its direct connect activation kit products. Hence, no
product assembly is performed by the Company.

Seasonality

Spectrum's financial performance has not exhibited
significant seasonality in the past and the Company does not
anticipate future seasonality.

Proprietary Rights

The Company relies on patent, trade secret, copyright and
trademark laws, in addition to technical measures, to protect its
legacy products. The Company currently has six issued U.S.
patents, three issued foreign patents, and several pending U.S.
and foreign applications. Although the Company believes that its
patents and licensed patent rights have value, there can be no
assurance that the Company's patents, or any additional patents
issued in the future, will provide meaningful protection from
competition.

The Company's six U.S. patents are summarized below:

Portable Hybrid Communication System and Methods: On
November 20, 1990, the Patent Office issued to the Company this
patent which covers the Company's unique method of combining a
cellular transceiver, modem and variety of telephone devices into
a single functioning, user-controlled device providing wired or
wireless voice and data communications.

System and Method for Interfacing Computers to Diverse
Telephone Networks: On June 30,1992, the Patent Office issued to
the Company this patent which covers (i) the Company's original
AXSYS(R) brand cable interface circuit and (ii) modems that are
adapted to operate with the AXSYS(R) brand cable interface
circuit. This patent further covers other connectivity features
useful in connecting a modem to various cellular telephones.

Cellular Telephone Data Communication System and Method: On
August l8, 1992, the Company obtained this patent which has
claims covering fundamental techniques required for commercially
acceptable and reliable data transmission over any conventional
cellular communication channel. The Company was originally issued
a patent for these concepts on September 29, 1987 and this patent
is a reissue of that original patent.

Programmable Universal Interface System: On September 28,
1993, the Company was issued this patent, which has claims
covering the Company's "direct connect" technology and which
enables specially programmed modems to be connected to a cellular
telephone by a simple passive cable. Software in the modem
generates control signals appropriate to the model of cellular
telephone in use. This technology also allows a single computer
modem to be connected to different types of cellular telephones
without intervening electronic circuits to permit computer
control of the cellular telephone for data transmission purposes.
This product is currently being marketed under the AXSYS(R) brand
name.

System and Method for Interfacing Computers to Diverse
Telephone Networks: On October 4, 1994, the Company was issued
this patent which expands the Company's basic patent rights in
the area of direct connect modem technology originally covered by
the Company's 1993 Programmable Universal Interface patent.

Programmable Universal Interface System: On November 22,
1994, the Patent Office issued this patent which broadens and
expands the Company's coverage for direct connect modems, adds
coverage for methods used in direct connect technology and
provides coverage for upgrade kits that provide a software driver
and cable to make the direct connect modem compatible with a
specific cellular telephone.

The Company has non-exclusively licensed various aspects of
this proprietary technology to modem and modem integrated circuit
manufacturers. Licensees of the Company include AT&T, Rockwell
International, U.S. Robotics, Motorola, IBM, Zoom Telephonics,
and SMART.

The Company has developed a library of software drivers
related to its direct connect technology. Each software driver is
designed to permit control of a particular cellular telephone by
a direct connect modem, when installed in the modem. The software

9
<PAGE>

drivers are subject to copyright protection and the Company
claims the right, pursuant to national and international
copyright laws, to control copying and distribution of its
software drivers.

The Company has additional patents pending in the U.S.
Patent and Trademark Office and in foreign patent offices, and
intends to apply for additional patents as its development
efforts progress. The Company is also seeking additional patent
rights in the technologies covered by the issued patents.

The Company has regularly used the following trademarks and
service marks to describe certain of its products and services,
and considers each of these marks to be proprietary: SPECTRUM
CELLULAR(R), SPCL(R), AXSYS(R), SPECTRUM CONNECTED(R), the
SPECTRUM CONNECTED logo and DIRECT CONNECT AXSYS. The Company has
obtained U.S. Federal trademark registrations for its SPECTRUM
CELLULAR(R), SPCL(R) and AXSYS(R), SPECTRUM CONNECTED(R) and
SPECTRUM CONNECTED logo marks and has (or plans to file) an
application pending for federal trademark registration for DIRECT
CONNECT AXSYS(TM) FastLane(TM) and INTELLIGENT PIPE(TM). These
trademark registrations and applications provide legal notice to
other parties that the Company claims exclusive rights in these
marks. Since its bankruptcy filing, the Company has selectively
proceeded to seek foreign patent and trademark rights based on
its limited financial resources.

With respect to the Company's Internet compression
technology, the Company has filed a patent disclosure. However,
the Company believes its success will depend primarily upon the
experience, creative skills, technical expertise, and marketing
and sales abilities of its personnel. Furthermore, given the
rapid development of technology in the data communications
industry, there can be no assurance that certain aspects of the
Company's products do not infringe the proprietary rights of
others.

Research and Development Expenditures

During fiscal 1998, 1997 and 1996, the Company spent
approximately $2,064,000, $1,252,000 and $366,000, respectively,
on research and development. These expenditures are expected to
significantly increase in fiscal year 1999 in accordance with
management's current strategy to develop and market remote access
communication software products and service.

Government Regulations

The Company operates solely as an adjunct to the telephone
and computer industries. Federal and state regulation of
telephone service currently has no direct adverse impact on the
Company, although regulations affecting the cost of cellular
telephone service could have an impact on the Company. The
Company believes that deregulation in the telecommunications
industry will increase competition and make mobile communications
more accessible.

Employees

The Company currently employs 20 employees and enjoys a
good relationship with its employees. No employee of the Company
is a member of a labor union or other collective bargaining
association.

Implementation of the Company's strategy contemplates that
the Company will increase the engineering staff during the 1999
fiscal year (See Spectrum's Strategy).

10
<PAGE>

Directors and Executive Officers of the Company

The following table sets forth information with respect to
the directors and executive officers of the Company:

Name Age Position with the Company
---- --- -------------------------

Donald J. Amoruso 60 Chairman,
Chief Executive Officer

Sheldon A. Buckler 66 Director

George Bugliarello 70 Director

Robert D. Dalziel 63 Director

Mikhail Drabkin 51 Chief Technical Officer

Richard duFosse 49 Vice President - Engineering

Christopher M. Graham 33 Vice President, General
Counsel and Secretary

Barry J. Hintze 41 Chief Financial Officer

Christopher L. Wraight 38 Vice President - Marketing

Business Experience of Directors and Executive Officers

Donald J. Amoruso became Spectrum's President, Chief
Executive Officer and Chairman of its Board of Directors in
January 1995. From 1991 to 1994, Mr. Amoruso founded and was the
principal consultant of DMA Associates, a consulting firm
specializing in management, marketing and turnaround strategies
and alliances for small and mid-sized technology firms. Before
1991, Mr. Amoruso held several senior executive positions with
Norden Systems, a subsidiary of United Technologies Corporation.
As Senior Vice President and General Manager, he was responsible
for three high technology business units: the Command, Control
and Communications Systems operation based in Connecticut; the
Marine and Ground Systems operation based in New York; and Norden
Services Company of Maryland. All these units were extensively
involved in computer software activities. Mr. Amoruso holds a
Bachelors and Masters degree in electrical engineering from
Manhattan College and Polytechnic University, respectively.

Sheldon A. Buckler is Chairman of Commonwealth Energy
System and was Vice Chairman of Polaroid before his retirement in
1994. At Polaroid he held various positions in a thirty-year
career including Vice President, Research and Executive Vice
President, Technical and Industrial Products. Dr. Buckler has
been awarded thirty-seven patents and has authored numerous
papers. He has a Ph.D. in Chemistry from Columbia University and
a B.A. from New York University. Dr. Buckler is also a member of
the Board of Directors of Aseco Corporation, Cerion, Lord
Corporation, Nashua Corporation, Parlex Corporation and Chairman
of the Massachusetts Eye and Ear Infirmary.

George Bugliarello is the Chancellor of Polytechnic
University, and was President from 1973 to 1994. Before joining
Polytechnic University, Mr. Bugliarello was the Dean of
Engineering, and a Professor of Civil Engineering and
Biotechnology at the University of Illinois. Mr. Bugliarello was
also a Professor of Biotechnology and Civil Engineering, and
Chairman of the Biotechnology Program at Carnegie-Mellon
University. Mr. Bugliarello holds degrees from the Massachusetts
Institute of Technology, University of Minnesota, and the
University of Padua. Mr. Bugliarello is the recipient of many
professional honors, and has been associated with and held
positions in numerous professional societies throughout his
career. Mr. Bugliarello is on the Board of Directors of ANSER,
Comtech Corporation, Educational Commission for Foreign Medical
Graduates, Greenwall Foundation, Jura Corporation, MarketSpan
Corporation, Lord Corporation, Symbol Technologies, Inc., and
Teagle Foundation.

Robert D. Dalziel is an international executive with
operations and sales experience. From 1991 to 1995, Mr. Dalziel
was the Chairman of Telecommunications Cooperative Network, Inc.
He has also consulted for Bechtel, the Government of Kazahstan
and the Kvant Company in Ukraine. From 1956 to 1991, Mr. Dalziel
served in numerous capacities for AT&T, including

11
<PAGE>

the positions of Vice President -- International Operations,
President -- AT&T Europe, and Vice President -- Global Networks.
Mr. Dalziel has a degree in electrical engineering from
Polytechnic University, where he is currently a trustee.

Mikhail Drabkin joined the Company as its Chief Technical
Officer in March, 1996. Since 1988, Mr. Drabkin has held various
positions with Hayes Microcomputer Products, Inc. ("Hayes").
Through March 1996 as Vice President - Corporate Engineering, Mr.
Drabkin had responsibility for new platform design and
implementation of strategic partnerships with key technology
providers. Mr. Drabkin also held the positions as Vice President
- - Product Development from 1992 to 1994, General Manager - Hayes
ISDN Technologies from 1990 to 1992 and Director of
Engineering-San Francisco Hayes Development Center from 1988 to
1990. Before joining Hayes, Mr. Drabkin was employed by SOFTCOM
and Macleod Laboratories as a design engineer and engineering
manager, respectively. Mr. Drabkin is a member of IEEE and Beta
Gamma Sigma and holds a Dipl.-Ing. in electrical communications
from the St. Petersburg Institute for Telecommunications and an
M.B.A. from the University of San Francisco.

Richard F. duFosse joined the Company as Vice President of
Software Engineering in February 1996 and was elected Vice
President of Engineering in May 1998. Immediately prior to
joining Spectrum, Mr. duFosse provided consulting services
related to software product development and mobile computing to
Fortune 1000 clients. From 1990 through 1995, Mr. duFosse held
several positions with Lotus Development Corporation. From 1994
through 1995, as Director of Mobile Computing, Lotus Business
Partners Programs, Mr. duFosse created a business partner program
to implement and deliver products to wirelessly enable Lotus
Notes and cc:Mail. Mr. duFosse previously held the positions of
Development Director, Mobile Computing Group and Senior
Development Manager where he managed development of Lotus
products for mobile computing. Mr. duFosse is a former Member of
the Board of Directors of the Portable Computer and
Communications Association and former Chairman of the Modem
Architecture Subcommittee of the PCCA. Mr. duFosse received a
Bachelor's Degree in Humanities and Technology, a Masters degree
in Computer Science and an M.B.A. from Worcester Polytechnic
Institute.

Christopher M. Graham has served as General Counsel and
Secretary of Spectrum since May 1995 and was also elected Vice
President in May 1998. From July 1994 until May 1995, Mr. Graham
served as Spectrum's Associate General Counsel. From 1992 until
1994, Mr. Graham was an attorney associated with the New York law
firm of Kelley Drye & Warren. Mr. Graham served previously as an
operations manager with The Chase Manhattan Bank in its Capital
Markets and Foreign Exchange Sector. Mr. Graham received a
Bachelor of Science degree in finance from Lehigh University and
a Juris Doctorate degree from the University of Connecticut
School of Law, where he was an Associate Editor of the
Connecticut Law Review.

Barry J. Hintze was elected Chief Financial Officer in May
1998. Mr. Hintze served as Spectrum's Controller since May 1995
and also as Principal Accounting Officer since September 1995.
From 1988 to 1995 Mr. Hintze was Controller of CEL
Communications, Inc. Before joining CEL Communications, Mr.
Hintze served as the Assistant Controller of Delson Business
Systems and held various accounting positions with Ticketron. Mr.
Hintze holds a Bachelor of Science degree and an M.B.A. in
finance from C.W. Post Center, Long Island University.

Christopher L. Wraight joined Spectrum in March 1998 and
was elected Vice President - Marketing in May 1998. Before
joining Spectrum, Mr. Wraight held the position of Vice President
of Marketing at start-up software companies Sovereign Hill
Software (1997 - 1998) and FutureTense (1995 - 1996). Prior to
these positions, Mr. Wraight held several marketing positions at
Digital Equipment Corporation, including Director of Alta Vista
Business Development, Internet Software Business Unit. Mr.
Wraight also held marketing positions with Lotus Development
Corporation from 1988 - 1995.

12
<PAGE>

Item 2. Properties.

The Company's headquarters occupy approximately 4,200
square feet of office space in an office building located on
Westchester Avenue in Purchase, New York. The Company holds a
lease for such offices expiring on April 30, 2001. The Company
leases approximately 2,700 square feet of office space for its
research and software product development in an office building
located on Mount Royal Avenue in Marlboro, Massachusetts. This
lease expires on July 31, 1999. The Company is also leasing an
individual office in an executive office park near Redwood City,
California for its research and development. This lease expires
on September 15, 1998. The Company believes that its properties
and facilities are suitable and adequate for its purposes for the
foreseeable future.

Item 3. Legal Proceedings.

Bankruptcy Proceedings

On January 26, 1995 (the "Petition Date"), the Company and
three of its four operating subsidiaries (Computer Bay, Data One
and Cellular) filed petitions for relief under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the
Eastern District of New York (the "Bankruptcy Court"), Case Nos.
195 10690 260, 195 10691 260, 195 10692 260 and 195 10693 260,
respectively (the "Chapter 11 case"). A fourth subsidiary at the
time, Spectrum Global Services, Inc., did not file for bankruptcy
protection. On February 8, 1995, the United States Trustee
appointed an Official Committee of Unsecured Creditors to
represent the creditors of Spectrum, Data One and Cellular (the
"Committee"), and another committee for Computer Bay to represent
the interests of all unsecured creditors whose claims arose
before the Petition Date. No other committees were appointed. On
May 25, 1995, the Bankruptcy Court, upon motion by the Debtors,
converted the Computer Bay proceeding to a case under Chapter 7
of the Bankruptcy Code. A trustee has been appointed to oversee
liquidation of the Computer Bay assets. Data One consummated a
separate plan of liquidation under Chapter 11 on October 4, 1996.

In March 1996, the United States Bankruptcy Court approved
the Third Amended Disclosure Statement (the "Disclosure
Statement") with respect to the Third Amended Consolidated Plan
of Reorganization (the "Plan") Proposed by Spectrum Information
Technologies, Inc. and Spectrum Cellular Corporation
(collectively, the "Company") dated as of March 18, 1996 finding
the Disclosure Statement adequate for distribution and vote by
interested parties. As contemplated by the Plan, the bankruptcy
estates of Spectrum Information Technologies, Inc. and Spectrum
Cellular Corporation were substantively consolidated. On August
14, 1996, the Bankruptcy Court entered an order confirming the
Plan, as amended. The effective date of the Plan was March 31,
1997 (the "Effective Date"). The material provisions of which are
described in Note 1(b) to the Consolidated Financial Statements.

The details of the Plan, the recapitalization, and the
Company's by-laws are set forth in detail in the Plan and
associated Disclosure Statement, which the Company filed with the
SEC on its Current Report on Form 8-K dated as of March 26, 1996.
The Company's amended certificate of incorporation is contained
in the Company's Registration Statement on Form S-8 dated March
31, 1997.

Securities Related Proceedings

In December 1997, the SEC filed a civil lawsuit in the
United States District Court for the Eastern District of New York
against Salvatore T. Marino, a current employee and former
officer of the Company, and two of the Company's former directors
and officers alleging violations of certain sections of the
Securities Exchange Act of 1934 and rules promulgated thereunder,
including violations of Rule 10b-5, related to accounting and
disclosure issues with respect to certain patent and advertising
agreements the Company entered into during 1993 (fiscal 1994) and
the exercise of options to purchase and subsequent sale of
Spectrum stock in the relevant time frame. As previously reported
by the Company, the SEC notified Mr. Marino in April 1996 that it
intended to bring this action. Upon learning of the SEC staff's
position and pending resolution of this issue, the Company at
that time removed Mr. Marino as an executive officer. Mr. Marino
has denied any wrong doing and is represented by independent
counsel in this matter. Mr. Marino is seeking to have the Company
advance the legal fees that he incurs in defense of this action
pursuant to his Bankruptcy Court approved employment agreement.
The Company is currently examining its obligation to continue to
advance these fees and the extent of its indemnification of the
former officer. It is not possible to estimate the damages to be
assessed upon settlement of these proceedings at this time.

As previously reported by the Company, during May 1997, the
SEC and Spectrum reached a settlement agreement under which
Spectrum agreed to the entry of an administrative order requiring
it to cease and desist from committing any and future violations
of the registration, antifraud, reporting and record-keeping
provisions of the federal securities laws. Spectrum neither
admitted nor denied the SEC's findings relative to events in 1992
and 1993, and which relate to the allegations in the SEC's action

13
<PAGE>

against Mr. Marino. The SEC did not seek monetary penalties and
recognized that Spectrum's current Chief Executive Officer and
Board of Directors had cooperated in the SEC's investigation.

The United States Attorney's Office for the Eastern
District of New York has previously informed the Company that it
is the subject of an investigation regarding violations of
securities laws that may have occurred prior to the appointment
of the Company's current Chief Executive Officer and Board of
Directors. The Company is cooperating fully with the
investigation.

Other Proceedings

On July 10, 1997, the United States Patent and Trademark
Office notified the Company that, at the request of Compaq
Computer Corporation ("Compaq"), it had declared an interference
proceeding to establish whether the Company or Compaq is the
inventor of certain claimed subject matter within the Company's
issued U.S. Patent No. 5,249,218, one of the Company's portfolio
of six issued patents relating to wireless data transmission.
Spectrum and Compaq resolved this interference in March 1998 by
reaching a cross-license and settlement agreement. The proceeding
did not relate to the Company's Internet software development.

From time to time, the Company has been a party to other
legal actions and proceedings incidental to its business. As of
the date of this report, however, the Company knows of no other
pending or threatened legal actions that could have a material
impact on the financial condition of the Company.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

14
<PAGE>

PART II

Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters.

The common stock, par value $.001 per share, of the Company
(the "Common Stock") was traded in the Nasdaq System from
September 8, 1987 through December 18, 1990. Prior to this
period, and from December 19, 1990 through June 11, 1991, the
Common Stock traded in the over-the-counter market. From June 12,
1991 through April 27, 1992, the Common Stock again was traded in
the Nasdaq System. The Common Stock was traded in the Nasdaq
National Market System from April 28, 1992 through April 26,
1995. On April 27, 1995, during the first quarter of fiscal 1996,
the Nasdaq delisted the Company from the National Market System
because the Company failed to meet certain net tangible asset and
bid and ask price criteria. The stock is currently being traded
on the OTC Bulletin Board. There are currently 13 registered
market makers for the Common Stock.

On March 31, 1997, the Company's Plan of Reorganization
became effective, which included a 75:1 reverse stock split. On
that day, the Company's reorganized common stock became eligible
for trading under the symbol SITI. The range of high and low
closing bid prices for the Common Stock for the fiscal years 1998
and 1997 are set forth below reflecting the 75:1 reverse stock
split effective March 31, 1997 for all bids. The National
Quotation Bureau provided this information which may not reflect
actual transactions.

HIGH AND LOW BID PRICES

1998 1997(1)
- ---------------------------------------------------------------
Low High Low High
- ---------------------------------------------------------------

First Quarter $ 2.75 $7.00 $ 9.00 $29.25
Second Quarter 1.13 3.50 11.25 21.00
Third Quarter 1.50 2.28 3.75 12.00
Fourth Quarter 1.13 1.69 6.00 18.75

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

(1) Bid prices reflect the 75:1 reverse stock split effective
March 31,1997. For example, the low bid price in the first
quarter fiscal 1997 of $0.12 was multiplied by 75 to reflect
a low bid of $9.00.

On June 12 , 1998, the last reported bid and ask prices of
the Company's Common Stock were $.81 and $.91, respectively.

As of June 12, 1998, there were approximately 5,115 holders
of record of the Company's common stock (which amounts do not
include the number of shareholders whose shares are held of
record by brokerage houses but include each brokerage house as
one shareholder).

The Company has paid no dividends for the years ended March
31, 1998 and 1997 and the Company has no current plans to pay
dividends in the foreseeable future. The Company plans to retain
earnings, if any, to finance development and expansion of the
Company's operations. Payment of cash dividends, if any, in the
future will be determined by the Company's Board of Directors in
light of future earnings, capital requirements, financial
condition and other relevant considerations.

Also, on March 31, 1997, pursuant to the Plan, the Company
issued 1,022,339 shares of Class A Convertible Preferred Stock,
par $.001 per share, in connection with the settlement of the
Class Action lawsuit. (See Item 3 Legal Proceedings - Bankruptcy
Proceedings). The exemption from the requirements of Section 5 of
the Securities Act of 1933 and any state or local law requiring
registration for the offer or sale of a security is provided for
in Section 1145 of the Bankruptcy Code and applies to Reorganized
Spectrum Common Stock and Class A Convertible Preferred Stock
issued under the Plan. For two years after the Effective Date,
Class A Convertible Preferred Stock will have a liquidation
preference over Reorganized Spectrum Common Stock in the event
that Reorganized Spectrum again becomes a debtor in a bankruptcy
case under the United States Bankruptcy Code (unless the case is
an involuntary case and is dismissed before an order for relief
is entered therein against Reorganized Spectrum). Interests of
holders of Class A Convertible Preferred Stock will have priority
in such proceedings over interests of holders of Reorganized
Spectrum Common Stock. The Class A Convertible Preferred Stock is
convertible to Reorganized Spectrum Common Stock at any time
within

15
<PAGE>

two years of its date of issuance and automatically converts to
Reorganized Spectrum Common Stock on March 31, 1999. Holders of
Class A Convertible Preferred Stock will be entitled to vote in
the same manner as holders of Reorganized Spectrum Common Stock,
although, for the period of time that the Class A Convertible
Preferred Stock is in the hands of the Class Action Trustee and
has not been distributed to members of the class, such stock will
be required to be voted in the same proportions as the holders of
the Reorganized Spectrum Common Stock have voted. Class A
Convertible Preferred Stock will be fully tradable.

Item 6. Selected Financial Data.

The following table presents selected financial information
relating to the financial condition and results of operations of
the Company and should be read in conjunction with the
consolidated financial statements and notes included elsewhere.

For the Years Ended March 31,
-------------------------------------------------
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------
(Amounts in thousands, except per share amounts)

Summary of
Operations:

Total revenues $1,833 $1,873 $8,458 $2,623 $2,924

Loss from continuing
operations (3,077) (5,911) (1,160) (10,673) (18,253)

Loss from continuing
operations per
common share (2.33) (5.78) (1.13) (10.47) (19.21)
Net income (loss) (3,077) (6,180) 2,942 (14,276) (25,470)
Net income (loss)
per share (2.33) (6.04) 2.88 (14.01) (26.81)
Weighted average
common shares
outstanding 1,325 1,022 1,022 1,019 950

Summary of Financial
Position:
Total assets 2,772 6,043 16,105 14,706 30,575
Long-term debt - - - - 151
Stockholders' equity
(deficit) 678 2,161 2,089 (901) 12,787

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

Dividends per share None None None None None

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

Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.

Organization And Business Combination

The Company is developing software and related services
designed to make Internet/Intranet access a faster, more
productive and enjoyable experience for users. The Company also
owns a portfolio of patents ("legacy assets") relating to
commercially practicable methods of data transmission over
circuit-switched cellular networks. For several years preceding
current management, Spectrum was operating as a holding company
of several operating subsidiaries with primary emphasis on being
an intellectual property company focused on generating revenues
from royalties associated with the licensing of its proprietary
technology (the "legacy business"). Since January 1995,
Spectrum's current management has been implementing strategies to
resolve the many financial and legal problems inherited from
prior years and to refocus the business direction of the Company.
One of the Company's strategies was to seek protection and
reorganize under Chapter 11 of the United States Bankruptcy Code.
On March 31, 1997, the Company consummated its plan of
reorganization and emerged from bankruptcy (See Item 3 Legal
Proceedings - Bankruptcy Proceedings).

16
<PAGE>

the world's first Web acceleration service employing this
technology. The service is available directly to dial-up users
accessing the Web through local, regional, national, and
international Internet Service Providers (ISPs), and does not
require any complex set-up by users. FastLane(TM) is also
available to ISPs looking to provide faster image downloading
speeds to all or part of their subscribers. Users can sign up for
the FastLane(TM) Service on Spectrum's Web sites at
www.spectruminfo.com. and www.fastlanehome.com

Summary of Operations

The following table sets forth, for the periods indicated,
the percentage relationship that certain items bear to revenue.
This summary provides trend data relating to the Company's normal
recurring operations. Amounts set forth below reflect the
Company's Data One and Computer Bay subsidiaries as discontinued
operations.

Years Ended March 31,

- -------------------------------------------------------------------------
1998 % 1997 % 1996 %
- -------------------------------------------------------------------------
(Amounts in thousands)

Revenues $1,833 100.0 $1,873 100.0 $8,458 100.0
--------------------------------------------------
Operating costs and
expenses:
Cost of revenues 52 2.8 161 8.6 290 3.4
Selling, general
and administrative 5,015 273.6 5,677 303.1 7,591 89.8
--------------------------------------------------
Total operating
costs and expenses 5,067 276.4 5,838 311.7 7,881 93.2
--------------------------------------------------

Operating income
(loss) $(3,234) (176.4) $(3,965) (211.7) $577 6.8
==================================================

Consolidated Revenues

Consolidated revenues decreased approximately $40,000 or 2%
for the twelve months ended March 31, 1998 as compared to the
prior year due to a $245,000 or 63% decrease in merchandise sales
offset by a $205,000 or 14% increase in licensing revenues.
Consolidated revenues decreased approximately $6,585,000 or 78%
for the twelve months ended March 31, 1997 as compared to the
prior year due to a $6,452,000 or 81% decrease in licensing
revenues and a $133,000 or 26% decrease in merchandise sales.

Merchandise sales decreased for the year ended March 31,
1998 as compared to the year ended March 31, 1997 because of
lower demand for the Company's cellular data activation kits and
the effects of a licensing agreement the Company entered into
with a distributor to assume the Company's activation kit
business. Under the agreement, the distributor has committed to
undertake specified marketing efforts intended to stimulate the
market for activated cellular capable modems and will pay the
Company a royalty for each activation kit it sells. Merchandise
sales decreased for the twelve months ended March 31, 1997, as
compared to 1996 primarily due to management's decision to sell
the AXCELL(R) product line and its rights to related patents in
July of 1995. The Company did not sell AXCELL(R) products during
the year ended March 31, 1997. AXCELL(R) sales for the year ended
March 31, 1996 were approximately $132,000.

The increase in licensing revenues for the twelve months
ended March 31, 1998 as compared to the twelve months ended March
31, 1997 is primarily due to a renegotiated license agreement the
Company entered into with a leading modem chipset manufacturer,
which included an upfront fee of $1,000,000. This increase was
partially offset by a decrease in royalties that the Company
recognized as a result of the AT&T break-up. The Company is
currently negotiating the terms of a new license agreement with
an entity formed as a result of the AT&T breakup, but there can
be no assurance that these discussions will yield favorable
results to Spectrum. The decrease in licensing revenues for the
twelve months ended March 31, 1997, as compared to 1996 is
primarily attributable to the recognition of a one time fee of
$6,000,000 pursuant to a licensing settlement agreement with U.S.
Robotics (and its Megahertz, Inc. subsidiary) in fiscal 1996.
Licensing revenues for fiscal years 1997 and 1996 included
payments of approximately $850,000 and $965,000, respectively, of
an up-front license fee pursuant to an agreement that the Company
entered

17
<PAGE>

into during fiscal 1994. The Company received the last of these
up front installments in the fiscal quarter ended September 30,
1996 and no such payments are reflected in the results reported
for fiscal 1998.

Operating Costs and Expenses

Operating costs and expenses decreased approximately
$771,000 or 13% for the year ended March 31, 1998 as compared to
the year ended March 31, 1997 primarily due to a $662,000 or 12%
decrease in selling, general and administrative expenses and a
$109,000 or 68% decrease in cost of sales.

The decrease in selling, general and administrative
expenses for the twelve months ended March 31, 1998 as compared
to the prior fiscal year was primarily due to a decrease in legal
fees of $518,000 or 66% due to the reduction of legal expenses
following the Company's reorganization. During fiscal year 1997,
the Company recognized a $334,000 write-down of intangible assets
that was related to legal expenses incurred defending the
Company's patents. Insurance expense decreased approximately
$123,000 or 35% for the year ended March 31, 1998 as compared to
the same period in the prior year primarily due to the reduction
of policy premiums associated with the Company's directors' and
officers' insurance. Personnel and related expenses decreased
$141,000 or 6% for the year ended March 31, 1998 as compared to
the same period in the prior year due to a reduction in head
count and because the Company did not pay bonuses which had been
paid in fiscal 1997 pursuant to the Bankruptcy Court approved
plan of reorganization. These decreases were offset by an
increase of $581,000 or 95% in outside services for the twelve
months ended March 31, 1998 as compared to the twelve months
ended March 31, 1997 due to retention of independent contractors
to assist in the Company's engineering development and marketing
activities.

Operating costs and expenses decreased approximately
$2,043,000 or 26% for the year ended March 31, 1997 as compared
to the year ended March 31, 1996 primarily due to a $1,914,000 or
25% decrease in selling, general and administrative expenses and
a $129,000 or 44% decrease in cost of sales.

The decrease in selling, general and administrative
expenses for the twelve months ended March 31, 1997 was primarily
due to a decrease in professional fees (other than professional
fees associated with the Company's bankruptcy proceedings) of
$1,661,000 or 68%. This decrease was primarily due to the
reduction of non-bankruptcy related litigation during fiscal year
1997. Insurance expense decreased approximately $345,000 or 37%
for the year ended March 31, 1997 as compared to the same period
in the prior year primarily due to the $273,000 reduction of
policy premiums associated with the Company's directors' and
officers' insurance. During the fourth quarter of the prior
fiscal year, the Company disposed of certain assets resulting in
decreased depreciation expense for fiscal 1997 as compared to
fiscal 1996 of approximately $202,000 or 59%. These decreases
were partially offset by a $334,000 write-down of intangible
assets that were related to legal expenses incurred defending the
Company's patents.

Operating Income (Loss)

The Company's operating loss decreased $731,000 or 18% to
$3,234,000 for the twelve months ended March 31, 1998 as compared
to the same period in the prior fiscal year primarily due to
decreased selling, general administrative expenses of $662,000 or
12%.

The Company's operating loss was approximately $3,965,000
in 1997 as compared to operating income of $577,000 in 1996. The
difference is a result of the decreased revenues of $6,585,000 or
78% offset by decreased selling, general and administrative
expenses of $1,914,000 or 25%.

Other Income and Expense

Other income decreased approximately $193,000 or 55% for
the year ended March 31, 1998 as compared to the year ended March
31, 1997 primarily due to a $273,000 or 63% decrease in interest
income. Interest income decreased because the Company had lower
cash balances than in the prior year as a result of creditor
payments of approximately $3,250,000 pursuant to the consummation
of the Plan of Reorganization. This decrease was partially offset
by a loss the Company recognized upon the sale of an investment
during fiscal year 1997.

Other income decreased approximately $1,439,000 or 80% for
the year ended March 31, 1997 as compared to 1996. This change
was primarily due to the $1,616,000 gain on the sale of the
AXCELL(R) product line during the year ended March 31, 1996 and a
loss of approximately $142,000 on the sale of marketable
securities during 1997.

18
<PAGE>

Discontinued Operations

On October 4, 1996, Data One, a subsidiary of the Company,
consummated its Chapter 11 liquidation plan, which resulted in a
gain of $531,000. On October 17, 1995, the Company sold its
Global subsidiary for approximately $4,549,000 in net proceeds
resulting in a $773,000 gain. As of January 25, 1995, the Company
closed its Computer Bay subsidiary which is reflected as a
discontinued operation in the consolidated financial statements.
The Company did not record a provision related to its anticipated
loss on a disposal because the case was converted into a
liquidation under Chapter 7. Computer Bay was turned over to a
trustee and the Company no longer maintains control over that
subsidiary. As a result, the Company recorded a gain of
$2,539,000 by writing off the net liabilities of Computer Bay.

Extraordinary Loss

For the fiscal year ended March 31, 1997, the Company
reported an extraordinary loss of approximately $800,000 in
connection with the consummation of the Plan. (See Item 3 - Legal
Proceedings - Bankruptcy Proceedings.) As of March 31, 1996, the
Company had reserved approximately $8,400,000 related to
litigation and pre-petition accounts payable and accrued
liabilities. On the Effective Date of the Plan, the Company made
payments of $3,000,000 in cash and issued approximately
$6,134,000 in Class A Convertible Preferred Stock. The Company
also recorded approximately $1,100,000 in connection with future
cash payments and stock issuances pursuant to the Plan.
Collectively, these transactions resulted in an extraordinary
loss of $1,800,000, which was partially offset by a gain of
approximately $1,000,000 associated with a reduction in
professional fees approved by the Bankruptcy Court.

Liquidity and Capital Resources

Spectrum has suffered and continues to suffer significant
losses from continuing operations. The Company's expenditures
have increased recently as the Company markets its FastLane(TM)
Web Acceleration Service in an attempt to grow subscribers. In
light of the continued negative cash flow and limited capital
resources, the Company will not be able to fund the marketing,
development and deployment of its Internet services with its
existing capital resources and must raise capital during the
second or, possibly, the third quarter of its fiscal year ended
March 31, 1999, depending on how successful the Company is
concluding licensing discussions regarding its legacy technology
to fund its continuing operations in the near term.

From fiscal 1997 to fiscal 1998, working capital (current
assets less current liabilities) decreased by approximately
$3,067,000 primarily due to a decrease in cash and marketable
securities of $3,259,000. The decrease is due to the payment of
approximately $2,572,000 in operating expenses and $440,000 in
bonus expenses for all employees, primarily in accordance with
Bankruptcy Court approved success bonus and new hire employment
contracts. From fiscal 1996 to fiscal 1997, working capital
decreased approximately $6,434,000 primarily due to the payments
of approximately $2,972,000 to holders of secured, administrative
and unsecured claims pursuant to the Plan and the decrease in
accounts payable, accrued liabilities and other liabilities of
approximately $3,055,000 due to the payment of professional fees
and holdbacks associated with the Company's Chapter 11
reorganization.

Net cash used by continuing operations for operating
activities decreased $5,467,000 in 1998 as compared to 1997. Net
cash used by continuing operations for operating activities was
$8,358,000 in 1997 as compared to net cash provided by continuing
operations of $2,544,000 in 1996. These changes of $5,467,000 and
$10,902,000, respectively, for 1998 and 1997 are primarily due to
the decreases of $3,243,000 and $6,973,000, respectively, in
accounts payable, accrued liabilities and other liabilities and
the decrease of $2,972,000 and $2,812,000, respectively, in
liabilities subject to compromise. These decreases in all
liabilities were primarily due to payments pursuant to the Plan
and the payment of professional fees incurred during the
reorganization process.

In 1998 net cash of approximately $1,484,000 was provided
by investing activities due to the sale of US Treasury bonds of
approximately $1,759,000. Net cash of approximately $1,512,000
was used by investing activities in 1997 primarily due to the
purchase of U.S. treasury notes of approximately $1,504,000. Net
cash provided by continuing operations for investing activities
in 1996 consisted primarily of cash proceeds from the sales of
Spectrum Global subsidiary, the AXCELL(R) product line and real
property in Dallas.

During the fiscal year ended March 31, 1998. the Company
purchased $4,000 of treasury stock as part of the distribution of
stock to employees. There were no financing activities for the
fiscal years ended March 31, 1997 and 1996.

19
<PAGE>

Capital expenditures amounted to approximately $199,000 and
$116,000, respectively, for the twelve months ended March 31,
1998 and March 31, 1997. These expenditures are primarily related
to the outfitting of new engineering development facilities in
the Boston, Massachusetts area and the individual office in
Redwood City, California.

As discussed elsewhere within this report, the Company
projects it will not have adequate near term (i.e., over the next
12 months) capital resources to fund its operations. Near and
long term (i.e., beyond 12 months) liquidity therefore depend
upon the Company's ability to raise capital during the second or
third quarter of the fiscal year ended March 31, 1999, and its
ability to generate a positive cash flow from its Internet
products and services, or raise additional capital, thereafter.
The accompanying consolidated financial statements have been
prepared assuming the Company will continue as a going concern,
however, there can be no assurance that the Company will be able
to successfully raise capital in the time frame noted above or
achieve management plans. The consolidated financial statements
do not include any adjustments that might result from the outcome
of these uncertainties.

Recent accounting pronouncements

In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard ("SFAS") No.
130, "Reporting Comprehensive Income" which establishes standards
for reporting and display of comprehensive income, its components
and accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other
disclosures, SFAS 130 requires that all items that are required
to be recognized under current accounting standards as components
of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial
statements. SFAS 130 is effective for fiscal years beginning
after December 15, 1997 and requires comparative information for
earlier years to be restated. The adoption of this standard is
not expected to have a material impact on the Company's financial
statements.

In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard ("SFAS") No. 131,
"Disclosures about Segments of an Enterprise and Related
Information", which supersedes Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise", establishes
standards for the reporting of certain information about
operating segments by public companies, in both annual and
interim financial statements. SFAS 131 defines an operating
segment as a component of an enterprise for which separate
financial information is available and whose operating results
are reviewed regularly by the chief operating decision maker to
make decisions about resources to be allocated to the segment and
to assess its performance. SFAS 131 is effective for fiscal years
beginning after December 15, 1997 and requires comparative
information for earlier years to be restated. The adoption of
this standard will have no effect on the Company's financial
position or results of current operations and the Company is
currently reviewing SFAS 131 in order to fully evaluate the
impact, if any, the adoption of the provisions of this Statement
will have on future financial disclosures.

In March 1998 and October 1997, respectively, the AICPA
issued Statements of Position ("SOP") Nos. 98-4 and 97-2,
"Software Revenue Recognition", which supersede SOP 91-1,
"Software Revenue Recognition". SOP 98-4 defers for one year the
application of SOP 97-2 in certain instances. SOP 97-2 provides
guidance on when revenue should be recognized and in what amounts
for licensing, selling, leasing, or otherwise marketing computer
software. As a result of SOP 98-4, SOP 97-2 is effective for
fiscal years beginning after December 15, 1998. Adoption of this
standard is not expected to have a material effect on the
Company's financial position or results of operations.

Year 2000

Management has reviewed plans to prepare the Company's
computer systems and applications for the year 2000, as well as
identify critical third parties which the Company relies upon to
operate its business to assess their readiness for the year 2000.
The Year 2000 issue arises from the widespread use of computer
programs that rely on two-digit date codes to perform
computations or decision-making functions. The Company does not
expect to incur any material costs in order to be compliant with
the year 2000. There can be no assurance that the systems of
other companies which the Company's systems rely upon will be
timely converted, or that such failure to convert by another
company would not have a material adverse effect on the Company's
systems and results of operations.

Item 8. Consolidated Financial Statements and Supplementary
Data.

Information called for by this item is set forth in the
Company's consolidated financial statements and supplementary
data contained in this report, and can be found at the pages
listed in the following index on page F-1.

Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.

None.

20
<PAGE>

PART III

Item 10. Directors and Executive Officers of the Registrant.

The information concerning the directors and executive
officers of the Company is set forth under Directors and
Executive Officers of the Company heading in Item 1 and is
incorporated herein by reference.

Item 11. Executive Compensation.

The following table sets forth information regarding the
cash compensation paid by the Company for services rendered to
the Company in all capacities during fiscal 1998, 1997 and 1996
to its Chief Executive Officer and its executive officers whose
cash compensation exceeded $100,000. The Compensation Committee
is comprised of two of the outside board members, Mr. Sheldon A.
Buckler and Mr. George Bugliarello.

SUMMARY COMPENSATION TABLE

- -------------------------------------------------------------------------------------------------------------
Long-Term Compensation
-----------------------------
Annual Compensation Grants & Awards Payouts
---------------------------------- -------------------- -------
Shares
Other Restricted Under- LTIP All
Name and Principal Annual Stock lying Payouts Other
Position Year Salary Bonus Comp. Award(s) Options Comp.
($) ($) ($) ($) ($)
- -------------------------------------------------------------------------------------------------------------

Donald J. Amoruso 1998 295.000 - - - 25,000 - 19,965 (3)
President, 1997 295,000 132,686 (1) 681,558 (2) - - - 19,965 (3)
Chief Executive 1996 295,000 100,000 (4) - - - - 19,965 (3)
Officer, Chairman
of the Board

Mikhail Drabkin 1998 195,000 - - - 22,719 - -
Chief Technical 1997 195,000 72,500 (6) 46,080 (2) - - - -
Officer 1996 15,625 (5) 22,500 (7) - - - - -

Richard duFosse 1998 167,083 - - - 22,719 - -
Vice President, 1997 142,083 50,000 (8) 46,080 (2) - - - -
Engineering 1996 22,346 (5) 10,000 (7) - - - - -

Christopher M. Graham 1998 136,333 - - - 16,500 - -
Vice President, 1997 121,250 50,000 (1) 136,314 (2) - - - -
General Secretary 1996 106,667 - - - - - -

Barry J. Hintze 1998 125,125 - - - 15,000 - -
Chief Financial 1997 102,500 30,000 (1) 68,154 (2) - - - -
Officer 1996 74,702 (5) - - - - - -

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

(1) Pursuant to the Plan approved by the Bankruptcy Court, as
part of a success fee for effecting a confirmed plan of
reorganization, $300,000 was set aside to be awarded to the
officers and employees of the Company that were responsible
for consummation of the Plan. The amounts in the table above
that reference this footnote are cash awards made pursuant
to the Plan.

(2) Pursuant to the Plan approved by the Bankruptcy Court, as
part of a success fee for effecting a confirmed plan of
reorganization and as incentive compensation, ten percent
(10%) of Spectrum's reorganized equity (242,002 shares) was
set aside to be awarded

21
<PAGE>

to officers, employees and non-executive directors
responsible for consummation of the Plan. Pursuant to the
Plan the following individuals were awarded the following
number of shares of reorganized common stock:

Mr. Amoruso 113,593
Mr. Drabkin 7,680
Mr. duFosse 7,680
Mr. Graham 22,719
Mr. Hintze 11,359

The shares described above were awarded and will be
distributed pursuant to the Company's 1996 Incentive
Deferral Plan, which provides for distribution in three
equal installments in August 1997, February 1998 and August
1998. These shares have been recorded at their fair value.
Actual value of the awards are determined on the date of
distribution for each installment in August 1997, February
1998 and August 1998. All of the officers and directors have
retained all of the shares that they were awarded.

(3) Represents premiums paid under a variable life insurance
policy paid by the Company pursuant to Mr. Amoruso's
employment agreement.

(4) Represents one-half of a $200,000 signing bonus paid by the
Company in equal installments in fiscal 1995 and 1996.

(5) Partial year.

(6) Represents the final installment of starting bonus and
performance bonus paid pursuant to Mr. Drabkin's employment
contract.

(7) Represents all or part of a starting bonus paid pursuant to
employment agreement.

(8) Represents performance bonus paid pursuant to employment
agreement.

</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>

OPTIONS GRANTED IN 1998 FISCAL YEAR

Potential
Realizable
Value at Assumed
Annualized Rates
of Stock Price Grant
Appreciation for Date
Individual Grants Option Term Value
------------------------------------------- ----------------- --------
% of Total
Options/SAR's Grant
Options Granted to Exercise Date
SAR's Employees in or Base
Granted Fiscal Year Price Expiration 5% 10% Present
Name (#) (%) ($) Date ($) ($) Value ($)
- ------------------------------------------------------------------------------------------------

Donald J. Amoruso 25,000 11.92% 2.15 8/15/2007 $33,803 $85,664 -
Mikhail Drabkin 22,719 10.83% 2.15 8/15/2007 30,719 77,848 -
Richard F. duFosse 22,719 10.83% 2.15 8/15/2007 30,719 77,848 -
Christopher M. Graham 15,000 7.15% 2.15 8/15/2007 20,282 51,398 -
Christopher M. Graham 1,500 .71% 1.69 10/29/2007 1,594 4,040 -
Barry J. Hintze 15,000 7.15% 2.15 8/15/2007 20,282 51,398 -
Christopher Wraight 20,000 9.53% 1.50 2/27/2008 18,867 47,812 -
</TABLE>

22
<PAGE>

AGGREGATED OPTIONS EXERCISES IN 1998 FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES

Value of
Unexercised
Shares In-the-
Acquired Number of Money Options
on Value Unexercised Options at Fiscal
Name Exercise Realized at Fiscal Year-End Year-End (1)
-------- -------- ---------------------- -------------
Unexer-
Exercisable cisable
----------- -------
Donald J. Amoruso 0 0 26,250 0
Mikhail Drabkin 0 0 5,680 0 0
Richard F. duFosse 0 0 5,680 0 0
Christopher M. Graham 0 0 5,083 0 0
Barry J. Hintze 0 0 3,750 0 0

(1) All of the options included in this chart were out-of-the
money on March 31, 1998.

Compensation of Directors

Each of the Company's outside directors is paid $18,000 per
year plus $1,000 per meeting attended. Each outside director is
also paid $500 per diem for any special assignments. The Board of
Directors adopted and implemented a plan during fiscal year 1998
pursuant to which the Company pays one-half of the director's
fixed annual compensation in common stock of the Company.

Employment Agreements

The Company currently has employment agreements with each
of the individuals identified above. Messrs. Amoruso, Drabkin,
duFosse, Graham, Hintze and Wraight are employed in the position
noted in the Summary Compensation Table at annual salaries of
$295,000, $195,000, $180,000, $149,000, $145,000 and $125,000
respectively. In addition to salary, the above-described
employment agreements provide for health and medical insurance,
life insurance benefits, certain other benefits and require
indemnification in certain circumstances. These agreements also
provide that if the Company discharges the individual without
cause they are entitled to full compensation and medical benefits
for up to one year.

23
<PAGE>

Item 12. Security Ownership of Certain Beneficial Owners
and Management.

The following table sets forth information as of June 12,
1998 with respect to beneficial ownership of Common Stock of each
of the Company's directors, the executive officers identified in
the Summary Compensation Table in Item 11 and all directors and
executive officers as a group.

Amount and Nature
of Beneficial Percent
Name Ownership(1)(2) of Class
- -----------------------------------------------------------------

Donald J. Amoruso 146,595 8.97%

Sheldon A. Buckler 20,490 1.25%

George Bugliarello 24,990 1.53%

Robert D. Dalziel 23,490 1.44%

Mikhail Drabkin 65,484 4.01%

Richard F. duFosse 20,608 1.26%

Christopher M. Graham 32,117 1.96%

Barry J. Hintze 19,674 1.20%

Christopher Wraight 1,250 *

All Directors and Executive 354,698 21.70%
Officers of the Company
as a Group
(9 persons)

- -------------------------
* Less than 1%

(1) Unless otherwise indicated, each named person has voting and
investment power over the listed shares and such voting and
investment power is exercised solely by the named person or
shared with a spouse.

(2) Includes the following number of shares subject to options
exercisable within sixty days from June 12, 1998.

Mr. Amoruso - 32,502
Mr. Buckler - 3,506
Mr. Bugliarello - 3,506
Mr. Dalziel - 3,506
Mr. Drabkin - 8,804
Mr. duFosse - 11,928
Mr. Graham - 9,398
Mr. Hintze - 8,315
Mr. Wraight - 1,250

Item 13. Certain Relationships and Related Transactions.

None.

24
<PAGE>

PART IV

Item 14. Exhibits, Financial Statements Schedules and Reports
on Form 8-K.

(a) The following documents are filed as part of this Annual
Report on Form 10-K:

1. Consolidated Financial Statements:

The consolidated financial statements filed as a part
of this report are listed in the "Index to Consolidated
Financial Statements and Financial Statement Schedules"
at Item 8.

2. Consolidated Financial Statement Schedules:

The consolidated financial statement schedules filed as
part of this report are listed in the "Index to
Consolidated Financial Statements and Financial
Statement Schedules" at Item 8.

Schedules other than those listed on the accompanying
Index to Consolidated Financial Statements and
Financial Statement Schedules are omitted for the
reason that they are either not required, not
applicable, or the required information is included in
the consolidated financial statements or notes thereto.

3. Exhibits

2.1 Consolidated Plan of Reorganization Proposed by
Spectrum Information Technologies, Inc. and
Spectrum Cellular Corporation, dated as of
February 8, 1996 (7)

2.2 Stock Purchase Agreement, dated September 11,
1995, by and among the Company and the Lori
Corporation, COMFORCE Corporation, et al. (6)

3.1 Certificate of Incorporation of Spectrum
Information Technologies, Inc., as amended (3)

3.2 Amended and Restated By-laws of Spectrum
Information Technologies, Inc., as amended
effective December 29, 1994 (5)

3.3 Restated Certificate of Incorporation of the
Company (9)

3.4 Restated Bylaws of the Company (7)

4.1 Specimen common stock certificate of Spectrum
Information Technologies, Inc. (2)

4.2 Specimen reorganized common stock certificate of
Spectrum Information Technologies, Inc. (10)

4.3 Specimen Class A convertible preferred stock
certificate of Spectrum Information
Technologies, Inc. (10)

10.1 Patent License Agreement between the Company and
American Telephone & Telegraph Company (4)

10.2 Purchase and Sale Agreement dated April 11, 1995
by and between the Company and Telular
Corporation (5)

10.3 Employment Agreement entered into between the
Company and Donald J. Amoruso (5)

10.4 Amendment to Employment Agreement between the
Company and Donald J. Amoruso dated as of March
1, 1997 (10)

10.5 Stock Option Agreement entered into between the
Company and Donald J. Amoruso (5)

10.6 Employment Agreement between the Company and
Mikhail Drabkin dated as of January 21, 1996 (8)

10.7 Amendment to Employment Agreement between the
Company and Mikhail Drabkin dated as of May 23,
1996 (8)

10.8 Employment Agreement between the Company and
Richard duFosse dated as of January 18, 1996 (8)

10.9 Amendment to Employment Agreement between the
Company and Richard duFosse dated as of May 23,
1996 (8)

10.10 Employment Agreement entered into between the
Company and Christopher M. Graham (5)

10.11 Stock Option Agreement entered into between the
Company and Christopher M. Graham (5)

10.12 Amendment to Employment Agreement between the
Company and Christopher M. Graham dated as of
December 7, 1995 (8)

10.13 Employment Agreement between the Company and
Barry J. Hintze dated as of April 27, 1995 (8)

10.14 Amendment to Employment Agreement between the
Company and Barry J. Hintze dated as of December
4, 1995 (8)

10.15 Amendment to Employment Agreement between the
Company and Barry J. Hintze dated as of May 16,
1997 (10)

10.16 Employment Agreement entered into between the
Company and Salvatore T. Marino (5)

25
<PAGE>

10.17 Amendment to Employment Agreement between the
Company and Salvatore T. Marino dated as of
December 7, 1995 (8)

10.18 Amended and Restated 1992 Stock Option Plan of
the Company (5)

10.19 Amendment to 1992 Stock Option Plan dated July
6, 1994 (5)

10.20 Amendment to 1992 Stock Option Plan dated April
26, 1995 (5)

10.21 Spectrum 1996 Stock Incentive Plan (7)

10.22 Spectrum 1996 Incentive Deferral Plan (7)

10.23 Employment Agreement between the Company and
Christopher L. Wraight dated as of February 27,
1998.

21.1 Subsidiaries of the Company (8)

23.1 Consent of BDO Seidman, LLP (1)

27.1 Financial Data Schedule (1)

99.1 Disclosure Statement with Respect to the
Consolidated Plan of Reorganization Proposed by
Spectrum Information Technologies, Inc. and
Spectrum Cellular Corporation, dated as of
February 8, 1996 (7)

(1) Filed herewith.

(2) Previously filed as an exhibit to the Company's
Registration Statement on Form 10 dated April 10,
1987, and incorporated herein by reference.

(3) Previously filed as an exhibit to the Company's
Annual Report on Form 10-K for the fiscal year
ended March 31, 1990, and incorporated herein by
reference.

(4) Previously filed as an exhibit to the Company's
Annual Report on Form 10-K for the fiscal year
ended September 30, 1993, and incorporated herein
by reference.

(5) Previously filed as an exhibit to the Company's
Annual Report on Form 10-K for the fiscal year
ended March 31, 1995, and incorporated herein by
reference.

(6) Previously filed as an exhibit to the Company's
Current Report on Form 8-K filed October 17, 1995,
and incorporated herein by reference.

(7) Previously filed as an exhibit to the Company's
Current Report on Form 8-K filed March 26 1996,
and incorporated herein by reference.

(8) Previously filed as an exhibit to the Company's
Annual Report on Form 10-K for the fiscal year
ended March 31, 1996, and incorporated herein by
reference.

(9) Previously filed as an exhibit to the Company's
Registration Statement on Form S-8 dated March 31,
1997, and incorporated herein by reference.

(10) Previously filed as an exhibit to the Company's
Annual Report on Form 10-K for the fiscal year
ended March 31, 1997, and incorporated herein by
reference.

(b) Reports on Form 8-K

The Company filed a Current Report on Form 8-K dated
May 4, 1998, which included: Item 5, "Other Items"
reporting that the Company, on May 4, 1998, launched
FastLane(TM), its Web acceleration service.

26
<PAGE>

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.

SPECTRUM INFORMATION TECHNOLOGIES,
INC.

Dated: June 24, 1998 By /s/ Barry J. Hintze
--------------------------------
Barry J. Hintze
(Chief Financial Officer)

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

Dated: June 24, 1998 By /s/ Donald J. Amoruso
--------------------------------
Donald J. Amoruso
(President, Chief Executive
Officer and Chairman of the
Board of Directors)

Dated: June 24, 1998 By /s/ Sheldon A. Buckler
--------------------------------
Sheldon A. Buckler
(Director)

Dated: June 24, 1998 By /s/ George Bugliarello
--------------------------------
George Bugliarello
(Director)

Dated: June 24, 1998 By /s/ Robert D. Dalziel
--------------------------------
Robert D. Dalziel
(Director)

27
<PAGE>

Spectrum Information Technologies, Inc. and Subsidiaries

Index to Consolidated Financial Statements
And Financial Statement Schedule

Report of Independent Certified Public Accountants for the
Years Ended March 31, 1998, 1997 and 1996 F-2

Consolidated Balance Sheets as of March 31, 1998 and 1997 F-3 - F-4

Consolidated Financial Statements for Each of the Three
Years in the Period Ended March 31, 1998

Consolidated Statements of Operations F-5

Consolidated Statements of Stockholders' Equity (Deficit) F-6

Consolidated Statements of Cash Flows F-7

Notes to Consolidated Financial Statements F-8 - F-20

Schedule II - Valuation and Qualifying Accounts for Each of the
Three Years in the Period Ended March 31, 1998 F-21

F-1

<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
Spectrum Information Technologies, Inc.
Purchase, New York

We have audited the accompanying consolidated balance sheets of
Spectrum Information Technologies, Inc. and subsidiaries as of
March 31, 1998 and 1997, and the related consolidated statements
of operations, stockholders' equity (deficit) and cash flows for
each of the three years in the period ended March 31, 1998. We
have also audited the schedule listed on the accompanying index.
These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule 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 and schedule are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements and schedule. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the
financial statements and schedule. 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 Spectrum Information Technologies, Inc. and
subsidiaries at March 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the
three years in the period ended March 31, 1998 in conformity with
generally accepted accounting principles.

Also, in our opinion, the schedule presents fairly, in all
material respects, the information set forth therein.

The Company has experienced significant losses from continuing
operations for the three years ended March 31, 1998, largely due
to professional fees incurred in defending itself in the numerous
litigation cases discussed in Note 8 to the consolidated
financial statements and the decline in its legacy business.
Unless the Company is able to successfully raise financing to
implement and develop the marketing of its new Internet/Intranet
product, there remains a substantial doubt about the Company's
ability to continue as a going concern. The accompanying
consolidated financial statements have been prepared assuming the
Company will continue as a going concern. Management's plans in
regard to these matters are described in Notes 1(a), 1(b) and
1(c) to the consolidated financial statements. The consolidated
financial statements do not include any adjustments that might
result from the outcome of the uncertainties discussed herein.

/s/ BDO Seidman, LLP
BDO Seidman, LLP

New York, New York
June 11, 1998

F-2
<PAGE>

Spectrum Information Technologies, Inc. and Subsidiaries

Consolidated Balance Sheets
(Amounts in thousands)

March 31, 1998 1997
- -------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 1,600 $ 3,132
Marketable securities 449 2,176
Accounts receivable (net of allowance
for doubtful accounts of $6 in 1998
and $86 in 1997) 194 288
Employee loans 79 -
Prepaid expenses and other current assets 192 239
-------------- ------------
Total current assets 2,514 5,835
-------------- ------------

Property and equipment, at cost:

Furniture, fixtures and equipment 598 542
Less - accumulated depreciation (340) (334)
-------------- ------------

Net property and equipment 258 208
-------------- ------------

Total assets $ 2,772 $ 6,043
============== ============

See accompanying notes to consolidated financial statements.

F-3
<PAGE>

Spectrum Information Technologies, Inc. and Subsidiaries

Consolidated Balance Sheets
(Amounts in thousands, except par value)

March 31, 1998 1997
- -------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 227 $ 49
Accrued liabilities 453 843
Reserve for litigation 645 400
Deferred royalty income 153 -
Reserve for unpaid Chapter 11 claims 25 465
------------- ------------
Total current liabilities 1,503 1,757
------------- ------------

Reserve for Chapter 11 and other stock
claims 591 2,125
------------- ------------
Total liabilities 2,094 3,882
------------- ------------

Commitments and contingencies

Stockholders' Equity:
Class A Convertible Preferred Stock,
$.001 par value, 1,500 shares
authorized and 813 and 1,022 issued
and outsta1ding, respectively 1 1
Common stock, $.001 par value, 10,000
shares authorized and 1,557 and
1,022 issued and outstanding,
respectively 2 1
Paid-in capital 71,740 70,170
Accumulated deficit (70,758) (67,681)
------------- ------------
985 2,491
Treasury stock, 4 and 1 shares at cost,
respectively (304) (300)
Unrealized loss on marketable securities (3) (30)
------------- ------------
Total stockholders' equity 678 2,161
------------- ------------

Total liabilities and
stockholders' equity $ 2,772 $ 6,043
============= ============

See accompanying notes to consolidated financial statements.

F-4
<PAGE>

Spectrum Information Technologies, Inc. and Subsidiaries

Consolidated Statements of Operations
(Amounts in thousands, except per share amounts)

Year ended March 31, 1998 1997 1996
- ----------------------------------------------------------------------------

Revenues:
Licensing revenue $ 1,690 $ 1,485 $ 7,937
Merchandise sales, net 143 388 521
------------ ------------ -------------
Total revenues 1,833 1,873 8,458
------------ ------------ -------------
Operating costs and expenses:
Cost of revenues 52 161 290
Selling, general and
administrative 5,015 5,677 7,591
------------ ------------ -------------
Total operating costs
and expenses 5,067 5,838 7,881
------------ ------------ -------------

Operating income (loss) (3,234) (3,965) 577
------------ ------------ -------------

Chapter 11 administrative
expenses - (2,296) (3,526)
------------ ------------ -------------

Other income (expense):
Gain on Sale of Axcell
Product Line - - 1,616
Other income (expense), net 157 350 173
------------ ------------ -------------
Total other income
(expense), net 157 350 1,789
------------ ------------ -------------
Loss from continuing operations (3,077) (5,911) (1,160)
------------ ------------ -------------

Discontinued operations:
Gain (loss) on disposal of
Data One and Computer Bay - 531 2,539
Income from operations of
Spectrum Global - - 790
Gain on sale of Spectrum
Global - - 773
------------ ------------ -------------
Income (loss) from
discontinued operations - 531 4,102
------------ ------------ -------------

Extraordinary loss on
extinguishment of debt - (800) -
------------ ------------ -------------

------------ ------------ -------------
Net income (loss) $ (3,077) $ (6,180) $ 2,942
============ ============ =============

Basic and diluted income
(loss) per common share:
Loss from continuing
operations $ (2.33) $ (5.78) $ (1.13)
Income (loss) from
discontinued operations - - .77
Gain on disposal of
discontinued operations - .52 3.24
Loss on extinguishment
of debt - (.78) -
------------ ------------ -------------
Net income (loss) per
common share $ (2.33) $ (6.04) $ 2.88
============ ============ =============
Weighted Average Number of
Common Shares used in basic
and diluted calculation 1,325 1,022 1,022
============ ============ =============

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

Spectrum Information Technologies, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity (Deficit)
(Amounts in thousands)

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Class A
Convertible Treasury Unrealized
Preferred Stock Common Stock Stock Loss on
---------------- ------------- Paid-in Accumulated ------------- Marketable
Shares $ Shares $ Capital Deficit Shares $ Securities Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1995 - $ - 76,675 $77 $63,961 $(64,443) 100 $(300) $(196) $ (901)

Net income - - - - - 2,942 - - - 2,942
Unrealized loss on
marketable securities - - - - - - - - 48 48
------------------------------------------------------------------------------------------------------
Balance, March 31, 1996 - - 76,675 77 63,961 (61,501) 100 (300) (148) 2,089

Net loss - - - - - (6,180) - - - (6,180)
Unrealized loss on
marketable securities - - - - - - - - 118 118
Issuance of Class A
convertible preferred
stock 1,022 1 - - 6,133 - - - - 6,134
One for seventy five
stock split - - (75,653) (76) 76 - (99) - - -
------------------------------------------------------------------------------------------------------
Balance, March 31, 1997 1,022 1 1,022 1 70,170 (67,681) 1 (300) (30) 2,161

Net loss - - - - - (3,077) - - - (3,077)
Unrealized loss on
marketable securities - - - - - - - - 27 27
Issuance of Class A
convertible preferred
stock 67 - - - 300 - - - - 300
Conversion of Class A
convertible preferred
stock to common stock (276) - 276 - - - - - - -
Issuance of common stock - - 259 1 1,270 - - - - 1,271
Purchase of treasury stock - - - - - - 3 (4) - (4)
------------------------------------------------------------------------------------------------------
Balance, March 31, 1998 813 $ 1 1,557 $ 1 $71,740 $(70,758) 4 $(304) $ (3) $ 678
======================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>
Spectrum Information Technologies, Inc. and Subsidiaries

Consolidated Statements of Cash Flows
(Amounts in thousands)

Year ended March 31, 1998 1997 1996
- ----------------------------------------------------------------
Cash flow from operating
activities:
Net income (loss) $(3,077) $6,180) $2,942
Adjustments to reconcile
net loss to net cash
used by continuing
activities:
Compensation paid to
outside services and
employees via stock 37 1,525 -
(Gain) Loss on sale
of marketable securities (6) 142 -
Depreciation and
amortization 132 138 341
Allowance for doubtful
accounts (80) 6 -
Loss on sale of equipment 14 - 221
(Increase) decrease in:
Accounts receivable 174 1,071 (173)
Prepaid expenses and
other assets 48 59 1,719
Increase (decrease) in:
Accounts payable 178 (2,512) 2,545
Accrued liabilities (390) (943) 973
Reserve for unpaid
Chapter 11 claims (440) 305 -
Reserve for litigation 245 400 -
Deferred royalty income 153 - -
Loss on extinguishment
of debt - 800
Gain on liquidation
of Data One - (531) -
Gain on Chapter 7
conversion of
Computer Bay - - (2,539)
Gain on sale of
Global subsidiary - - (773)
Gain on sale of
building - - (86)
Gain on sale of
Axcell product line - - (1,616)
Deferred income - - (850)
Write-off of intangible
assets - 334 -
Liabilities subject
to compromise - (2,972) (160)
------- ------- -------
Net cash (used)
provided by
continuing
operations (3,012) (8,358) 2,544
Net cash (used)
provided by
discontinued
operations - (121) (1,800)
- ----------------------------------------------------------------
Net cash (used)
provided by
operating
activities (3,012) (8,479) 744
- ----------------------------------------------------------------
Cash flows from investing
activities:
Proceeds from the sale
of equipment 3 - -
Issuance of employee
loans (79) - -
Proceeds from sale
of marketable securities 1,759 108 -
Purchase of property
and equipment (199) (116) (33)
Purchase of marketable
securities - (1,504) -
Proceeds from sale of
Axcell product line - - 3,000
Proceeds from sale of
Global subsidiary - - 4,549
Proceeds from sale of
building - - 733
------- ------- -------
Net cash (used)
provided by
continuing
operations 1,484 (1,512) 8,249
Net cash used
by discontinued
operations - - (275)
- ----------------------------------------------------------------
Net cash (used)
provided by
investing
activities 1,484 (1,512) 7,974
- ----------------------------------------------------------------
Cash flow from financing
activities:
Purchase of treasury
stock (4) - -
Net cash used by
continuing
operations (4) - -
------- ------- -------
Net cash used by
discontinued
operations - - (3)
- ----------------------------------------------------------------
Net cash used by
financing
activities (4) - (3)
- ----------------------------------------------------------------
Net (decrease) increase in
cash and cash equivalents (1,532) (9,991) 8,715
Cash and cash equivalents,
beginning of year 3,132 13,123 4,408
Total cash and cash equivalents,
end of year (including cash
amounts in net assets of
discontinued operations)
$1,600 $3,132 $13,123
======= ======= =======

See accompanying notes to consolidated financial statements.

F-7
<PAGE>

Spectrum Information Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies

(a) Business
Spectrum Information Technologies, Inc., a Delaware
corporation ("Spectrum"), and its subsidiaries
(collectively, the "Company"), are developing software
and related products and services designed to make
Internet/Intranet access a faster, more productive and
enjoyable experience. The Company also owns a portfolio
of patents ("legacy assets") relating to commercially
practicable methods of data transmission over
circuit-switched cellular networks. For several years
preceding current management, Spectrum was operating as a
holding company of several operating subsidiaries with
primary emphasis on being an intellectual property
company focused on generating revenues from royalties
associated with the licensing of its proprietary
technology (the "legacy business"). Since January 1995,
Spectrum's current management has been implementing
strategies to resolve the many financial and legal
problems inherited from prior years and to refocus the
business direction of the Company. One of the Company's
strategies was to seek protection and reorganize under
Chapter 11 of the United States Bankruptcy Code. On March
31, 1997, the Company consummated its plan of
reorganization and emerged from bankruptcy (Note 1(b)).

As stated above, Spectrum's business objective is to
develop software and offer related products and services
that make Internet/Intranet access a faster, more
productive and enjoyable experience. Spectrum plans to
develop a communications software product suite, the
Spectrum INTELLIGENT PIPE(TM), that is intended to
address communications solutions for remote access in the
Internet service provider and corporate markets.
FastLane(TM), the first product of the intended suite, is
a software server that performs compression that
significantly improves the speed of World Wide Web (WWW)
access for most dial-up subscribers currently connecting
at speeds up to 56 Kbps. FastLane(TM) is designed for
home users, telecommuters and enterprises accessing the
Internet on dial-up modem connections. On May 4, 1998,
Spectrum announced that it was offering free trials for a
limited time of FastLane(TM), the world's first Web
acceleration service employing this technology. The
service is available to dial-up users accessing the Web
through local, regional, national, and international
Internet Service Providers (ISPs), and does not require
any complex set-up by users. FastLane(TM) is also
available to ISPs looking to provide faster image
downloading speeds to all or part of their subscribers.

With respect to Spectrum's legacy business, Spectrum's
proprietary wireless data transmission technology enables
transmission of data between portable computer devices
over existing analog cellular telephone networks.
Spectrum licenses this technology to leading
manufacturers of integrated circuits and modems and other
related data communications product providers. Spectrum
also markets, through a distributor, direct connect
cellular data transmission activation kits (cellphone
software drivers and cables) to some of the Company's
licensees. These two components - marketing of activation
kits and technology licensing - comprise the Company's
operating revenues. Because of the minimal revenues in
this business area, the Company expects to continue to
experience operating losses while it attempts to
successfully develop, market and deploy its Internet
related products and services.

(b) The Company's Reorganization
On January 26, 1995 (the "Petition Date"), as part of
management's effort to stem the Company's substantial
financial losses and focus on developing its core
technology, the Company, together with its wholly-owned
subsidiaries Computer Bay, Data One and Cellular
(collectively, the "Debtors"), filed petitions for relief
under Chapter 11 of the Federal Bankruptcy Code (the
"Chapter 11 proceeding"). Upon motion by the Debtors, the
United States Bankruptcy Court for the Eastern District
of New York (the "Bankruptcy Court") converted the action
for Computer Bay to a case under Chapter 7 of the
Bankruptcy Code. A trustee is overseeing the liquidation
of Computer Bay's assets and the Company no longer has
control over the Computer Bay estate. Data One
consummated a separate liquidating plan of

F-8
<PAGE>

Spectrum Information Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

reorganization on October 4, 1996, which had been
unanimously supported by Data One's voting creditors
Note 8).

In March 1996, the Bankruptcy Court approved the
Company's Third Amended Disclosure Statement (the
"Disclosure Statement") with respect to the Third Amended
Consolidated Plan of Reorganization Proposed by Spectrum
and Cellular (the "Plan") dated as of March 18, 1996
finding the Disclosure Statement adequate for
distribution and vote by interested parties. As
contemplated by the Plan, the bankruptcy estates of
Spectrum and Cellular have been substantively
consolidated. On August 14, 1996, the United States
Bankruptcy Court of the Eastern District of New York
entered an order confirming the Plan, as amended. On
March 31, 1997, the Company consummated the Plan (the
"Effective Date"). The Plan, as approved by the
Bankruptcy Court, provided for the following:

(i) Full payment of all general unsecured and priority
claims plus 6% interest per annum from the filing date
thereon totaling approximately $2,954,000.

(ii) $300,000 of common stock to be issued to the trustee
of Computer Bay as a portion of the settlement of the
trustee's claim. The number of shares issued in May 1997,
66,667, was determined based on the average bid or
reported low price of the reorganized common stock for
the last five business days preceding the thirty-first
day following the Effective Date of the Plan set forth in
the Bankruptcy Court approved settlement agreement. This
amount was recorded as a reserve for Chapter 11 claims to
be paid in stock.

(iii) $112,000 of common stock to be issued to the
Company's former financial advisor in settlement of an
administrative claim. The number of shares issued in May
1997, 24,939, was determined based on the average bid or
reported low price of the reorganized common stock for
the last five business days preceding the thirty-first
day following the Effective Date of the Plan as set forth
in the Bankruptcy Court approved settlement agreement.
This amount was recorded as a reserve for Chapter 11
claims to be paid in stock.

(iv) The settlement of the class action lawsuits of
approximately $676,000,000 filed against the Company by
the payment by the Company of $250,000 and the delivery
of approximately 45% of the equity ownership in Spectrum
to a trustee to be distributed to the members of the
class.

This resulted in a total of 1,089,006 shares of
Class A Convertible Preferred Stock to be granted to the
class. These shares were recorded at their fair value of
$6,434,000. 1,022,339 of these shares were recorded as
Class A Convertible Preferred Stock and paid-in capital
since they were issued on the Effective Date. The
remaining 66,667 shares were issued in May 1997 and
therefore recorded as a reserve for Chapter 11 claims to
be paid in stock.

(v) A 75 to 1 reverse stock split for all outstanding
shares of the Company's common stock on the Effective
Date of Plan.

(vi) Success bonus payable of $300,000 in cash and
approximately 227,000 shares of reorganized common stock
pursuant to the incentive plans discussed in Note 4. The
shares were valued at $1,363,122 . This value was
recorded as a reserve for Chapter 11 claims to be paid in
stock. The cash portion was recorded as an accrued
liability at March 31, 1997.

(vii) Waiver and non-payment of approximately $1,082,000
of accrued professional fees approved by the Bankruptcy
Court.

F-9
<PAGE>

Spectrum Information Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As a result of the consummation of the Plan and the
consummation of the liquidating plan of reorganization of
Data One, the Company recorded an extraordinary loss of
approximately $800,000 in fiscal 1997 calculated as
follows:

Liabilities subject to compromise at
March 31, 1996 (excluding Data One
because a separate liquidating plan
of reorganization was consummated
on October 14, 1996 resulting in a
gain on $531,000) $8,456,000
Waiver and non-payment of accrued
professional fees 1,082,000
Class Action settlement (6,684,000)
General unsecured and priority claims
plus interest and reserve for disputes (3,654,000)
----------
Total extraordinary loss on extinguish-
ment of debt (800,000)
==========

(c) Basis of Presentation
The accompanying consolidated financial statements of the
Company have been prepared on the basis that it is a
going concern, which contemplates the realization of
assets and the satisfaction of liabilities, except as
otherwise disclosed, in the normal course of business.
However, because of the Company's recurring losses from
continuing operations, such realization of assets and
liquidation of liabilities is subject to significant
uncertainty. Further, the Company's ability to continue
as a going concern is highly dependent near term on its
ability to raise capital and upon the achievement of the
business objectives described in Note 1(a) and profitable
operations therefrom and the ability to generate
sufficient cash from operations and financing sources to
meet obligations. The Company continues to monitor
expenses in order to conserve cash and is assessing
alternatives to address the continued negative cash flow.
However, there can be no assurance that these objectives
will be met or that acceptable alternatives will be
found. Except as otherwise disclosed, the consolidated
financial statements do not include any adjustments to
reflect the possible future effects on the recoverability
and classification of assets or the amounts and
classification of liabilities that may result from the
possible inability of the Company to continue as a going
concern. The financial statements for the years ended
March 31, 1997, reflect accounting principles and
practices set forth in AICPA Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under
the Bankruptcy Code", which the Company adopted as of
January 26, 1995, the date of the Company's Chapter 11
filing (Note 8).

(d) 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 and revenues and
expenses during the reporting period. Actual results
could differ from those estimates.

(e) Principles of Consolidation
The accompanying consolidated financial statements
include the accounts and results of operations of the
Company's wholly owned subsidiary, Cellular. Its three
former subsidiaries, Data One (through October 4, 1996
when the subsidiary was liquidated in Chapter 11),
Computer Bay (through May 25, 1995 when its bankruptcy
was converted to a liquidation under Chapter 7) and
Spectrum Global (through October 17, 1995 when it was
sold) have been reflected as discontinued operations for
all periods presented (Note 2). All significant
intercompany accounts and transactions have been
eliminated in consolidation.

(f) Cash and Cash Equivalents
Cash and cash equivalents include the Company's cash
balances and short-term investments that mature in 90
days or less when acquired. Cash and cash equivalents are
carried at cost plus accrued interest, which approximates
market.

F-10
<PAGE>

Spectrum Information Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(g) Marketable Securities
The Company does not have the positive intent to hold its
investments to maturity, and classifies these securities
as available-for-sale and carried them at fair value.
Unrealized holding gains and losses (determined by
specific identification) on investments classified as
available-for-sale, are carried as a separate component
of stockholders' equity.

(h) Revenue Recognition
Deferred revenue on licensing agreements is recognized
when earned based on each individual agreement. Sales of
product are recognized upon shipment to the customer.

In March 1998 and October 1997, respectively, the AICPA
issued Statements of Position ("SOP") Nos. 98-4 and
97-2, "Software Revenue Recognition", which supersede SOP
91-1, "Software Revenue Recognition". SOP 98-4 defers for
one year the application of SOP 97-2 in certain
instances. SOP 97-2 provides guidance on when revenue
should be recognized and in what amounts for licensing,
selling, leasing, or otherwise marketing computer
software. As a result of SOP 98-4, SOP 97-2 is effective
for fiscal years beginning after December 15, 1998.
Adoption of this standard is not expected to have a
material effect on the Company's financial position or
results of operations.

(i) Property and Equipment
Property and equipment are recorded at cost. Depreciation
is recorded using the straight-line method over the
estimated useful lives of the assets of 3 to 5 years.

(j) Intangible Assets
The Company reviews the carrying values of its long-lived
and identifiable intangible assets for possible
impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not
be recoverable. Based on the Company's current business
objectives and expected long range potential of the
legacy business, the Company determined that the carrying
amount of its intangible assets may not be recoverable
and as a result wrote-off the entire carrying amount of
approximately $334,000 in fiscal 1997.

(k) Licensing Agreements
On September 30, 1997, the Company entered an agreement
with a leading modem chipset manufacturer that converted
its existing master license agreement to a broader
license under the company's legacy technology. The new
agreement provided for a non-recurring significant up
front payment and guaranteed increased royalty payments
over two years. Under the terms of the revised agreement,
however, the Company expects reduced royalties from
certain of the chipset manufacturer's customers because
the chipset manufacturer is allowed to sell certain
chipsets with full pass through rights to the Company's
technology without need for an additional sublicense from
the Company. Under the agreement, the Company will
continue to be the preferred source of cables used to
activate cellular capable modems. The agreement also
provides for a strategic relationship where the parties
will meet to discuss product development and possible
future business arrangements.

For the fiscal year ended March 31, 1998, the Company has
included revenues of approximately $1,084,000 in
licensing revenues and approximately $606,000 in
royalties pursuant to license agreements that it entered
during fiscal 1998 and earlier. Included in license
revenues is an up front fee of $1,000,000 pursuant to a
licensing settlement agreement with a major modem chipset
manufacturer.

The Company entered two new non-exclusive license
agreements and renegotiated one prior non-exclusive
agreement during fiscal 1998. The Company entered eight
new non-exclusive license agreements and renewed or
renegotiated ten prior non-exclusive agreements during
fiscal 1997, and entered one non-exclusive license
agreement and renegotiated and consolidated two prior
non-exclusive agreements during fiscal 1996, pursuant to
which it licensed others to utilize Spectrum's patented
technology. The license

F-11
<PAGE>

Spectrum Information Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

agreements (except for one cross-license agreement)
require up-front license fees or ongoing royalty
obligations, or a combination thereof. The Company was
also required to repay a license fee that it received
pursuant to a license agreement that it entered during
fiscal 1994 with a major modem chipset manufacturer a
portion of the royalties the Company may receive from
license agreements with the chipset manufacturer's
customers. For fiscal 1997, the Company repaid $103,748
and in fiscal 1996 the Company repaid $62,484.

For the fiscal year ended March 31, 1997, the Company has
included revenues of approximately $25,000 in licensing
revenues and approximately $1,460,000 in royalties
pursuant to license agreements that it entered during
fiscal 1997 and earlier. For the fiscal year ended March
31, 1996, the Company has included revenues of
approximately $6,821,000 in licensing revenues and
approximately $1,116,000 in royalties pursuant to license
agreements that it entered during fiscal 1996 and
earlier. Included in license revenues is a one time fee
of $6,000,000 pursuant to a licensing settlement
agreement with a leading modem manufacturer.

(l) Research and Development Expenses
Research and development expenditures are recorded as
period costs when incurred. Such expenses were
approximately $2,064,000, $1,252,000 and $366,000 in
1998, 1997 and 1996, respectively.

Statement of Financial Accounting Standard No. 86,
"Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed," requires
capitalization of certain software development costs
subsequent to the establishment of technological
feasibility. Based on the Company's product development
process, technological feasibility is established upon
completion of a working model. Costs incurred by the
Company between completion of the working model and the
point at which the product is ready for general release
have been insignificant. All research and development
costs have been expensed.

(m) Income (Loss) Per Common Share
The Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings
per Share" for the fiscal year ended March 31, 1998. The
adoption of this standard did not have a material impact
on the Company's income (loss) per share computation. The
computation of income (loss) per common share is based on
the weighted average number of common shares and common
stock equivalents (convertible preferred shares, stock
options and warrants), if applicable, assumed to be
outstanding during the year. The weighted average number
of shares used in the computation of income (loss) per
share for 1998, 1997 and 1996 are approximately
1,325,000, 1,022,000 and 1,022,000, respectively. Common
stock equivalents were not included in the computation of
weighted average shares outstanding for all periods
presented because such inclusion would be anti-dilutive.
All references in the consolidated financial statements
with regard to average number of shares have been
calculated giving retroactive effect to the reverse stock
split discussed in Note 1(b)(v).

(n) Recent accounting pronouncement
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard
("SFAS") No. 130, "Reporting Comprehensive Income" which
establishes standards for reporting and display of
comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all
changes in equity except those resulting from investments
by owners and distributions to owners. Among other
disclosures, SFAS 130 requires that all items that are
required to be recognized under current accounting
standards as components of comprehensive income be
reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS
130 is effective for fiscal years beginning after
December 15, 1997 and requires comparative information
for earlier years to be restated. The adoption of this
standard is not expected to have a material impact on the
Company's financial statements.

F-12
<PAGE>

Spectrum Information Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard
("SFAS") No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which supersedes
Statement No. 14, "Financial Reporting for Segments of a
Business Enterprise", establishes standards for the
reporting of certain information about operating segments
by public companies, in both annual and interim financial
statements. SFAS 131 defines an operating segment as a
component of an enterprise for which separate financial
information is available and whose operating results are
reviewed regularly by the chief operating decision maker
to make decisions about resources to be allocated to the
segment and to assess its performance. SFAS 131 is
effective for fiscal years beginning after December 15,
1997 and requires comparative information for earlier
years to be restated. The adoption of this standard will
have no effect on the Company's financial position or
results of current operations and the Company is
currently reviewing SFAS 131 in order to fully evaluate
the impact, if any, the adoption of the provisions of
this Statement will have on future financial disclosures.

2. Dispositions

Computer Bay

Due to Computer Bay's continuing losses and loss of market
share, the Company officially discontinued the operations of
the Computer Bay subsidiary on January 25, 1995. Upon
conversion of Computer Bay's Chapter 11 case to a case under
Chapter 7 on May 25, 1995, which mandates the liquidation of
Computer Bay, control of Computer Bay was transferred from
the Company to the Computer Bay trustee. As a result, the
Company recorded a gain of $2,539,000 by writing off the net
liabilities of Computer Bay. The Computer Bay trustee filed a
claim with the Bankruptcy Court to substantively consolidate
the Computer Bay liabilities with the liabilities of the
Debtors in Chapter 11. The Company settled this claim for a
$600,000 allowed cash claim and $300,000 allowed stock claim.
(Note 1(b) ).

Data One

Data One consummated a separate liquidating plan of
reorganization on October 4, 1996, which had been unanimously
supported by Data One's voting creditors (Note 8). The
consummation of the Plan resulted in a gain on disposal of
$531,000 to be recorded by the Company.

Spectrum Global

Effective October 17, 1995, the Company sold its Spectrum
Global subsidiary for net proceeds of approximately
$4,549,000, after expenses of $325,000, to certain former
members of management. Spectrum Global was acquired in fiscal
1994 from the nephew of the former President of the Company
for approximately $4,120,000. Spectrum Global has been
reported as a discontinued operation for all periods
presented.

3. Investment in Marketable Securities

As of March 31, 1998, the Company's equity reflects a charge
of $3,000, which represents the recognition of unrealized
holding losses for the Company's investments determined to be
available for sale, previously carried at the lower of cost
or market. The realized gain from sales of available-for-sale
securities for the year ended March 31, 1998 was
approximately $6,000.

F-13
<PAGE>

Spectrum Information Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Marketable securities as of March 31, 1998 were comprised of
investments in government securities which consisted
primarily of U.S. Treasury Notes. The aggregate cost, fair
value and unrealized holding losses for U.S. Treasury Notes
held at March 31, 1998 and 1997, are as follows:

Aggregate Gross Unrealized
Cost Basis Fair Value Holding Losses
- -----------------------------------------------------------------
March 31, 1998: (Amounts in thousands)

Government securities,
maturing between
1 and 3 years $452 $449 $(3)
============================================

March 31, 1997:
Government securities,
maturing between
1 and 3 years $2,206 $2,176 $(30)
============================================

4. Stockholders' Equity

(a) Class A Convertible Preferred Stock
Shares of Class A Convertible Preferred Stock are
convertible to common stock on a one-to-one basis upon
the request of the holder and automatically convert to
common stock on March 31, 1999. Until March 31, 1999,
holders of such shares shall have liquidation preference
in bankruptcy and have the same voting rights as the
common stockholders. During the year ended March 31, 1998
approximately 276,000 shares were converted from
preferred stock to common stock.

(b) Stock and Option Issuances
The Company has issued common stock and options under the
provisions of:

(i) 1991 and 1992 Stock Option Plans

The Company has two Stock Option Plans (the "1991
and 1992 Plans") covering the issuance of incentive
and non-qualified stock options to key employees,
consultants and nonemployee directors of the Company
and its subsidiaries. The aggregate number of shares
of common stock granted under the 1991 and 1992
Plans is 294,560 shares. All of the options
available under these plans had been awarded prior
to the Company's reorganization and were treated in
accordance with the 75:1 reverse split set forth in
the Plan. Additional information follows:

Shares Weighted
Subject Average
to Exercise
Options Price
-------------------------
Outstanding at March 31, 1995
and 1996 at $75.00 - $337.50
per share 95,393 $149.78
Extinguished at $84.38 -
$234.38 per share (41,496) $119.14
-------------------------
Outstanding at March 31, 1997
at $75.00 - $337.50 per share 53,897 $173.37
Extinguished at $84.38 -
$225.00 per share (7,999) $178.13
-------------------------
Outstanding at March 31, 1998
at $84.38 - $337.50 per share 45,898 $172.54
=========================

F-14
<PAGE>

Spectrum Information Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

The following table summarizes information about stock
options outstanding and exercisable at March 31, 1998:

Weighted
Average
Remaining Weighted
Range of Outstanding and Contractual Average
Exercise Exercisable at Life Exercise
Prices March 31, 1998 (Years) Price
- -------------------------------------------------------------

$75.00 to $337.50 27,751 1.75 $185.53
$84.38 to $324.75 9,212 2.49 $129.02
$84.38 to $225.00 8,935 5.80 $177.08
--------------
45,898 2.69 $172.54
==============

(ii) 1996 Incentive Deferral Plan
As part of a Bankruptcy Court approved success fee
to employees, officers and all non-executive
directors for confirming a plan of reorganization,
the Company also issue Reorganized Spectrum Common
Stock pursuant to the two incentive compensation
programs described in the Company's Plan of
Reorganization. The 1996 Incentive Deferral Plan
authorizes the issuance of 207,925 shares of
Reorganized Spectrum Common Stock to officers and
employees who were in the employ of the Company on
the Effective Date, March 31, 1997. During the first
quarter of fiscal 1998, the Company specifically
allocated 194,790 of these 207,925 shares to be
distributed in three equal installments of 64,930
during August 1997, February 1998 and August 1998.
These distributions were utilized to decrease the
Reserve for Chapter 11 and other stock claims. The
remaining 13,135 shares have not been allocated for
distribution. This Incentive Deferral Plan provides
that Participants may elect to satisfy certain
income tax withholding requirements by remitting to
the Company cash or, subject to certain conditions,
shares of Reorganized Spectrum Common Stock or by
instructing the Company to withhold shares payable
to the Participant. In addition, the Incentive
Deferral Plan provides that the Compensation
Committee may, in its absolute discretion, make
loans to Participants to assist them in meeting
income tax liabilities arising in connection with
awards under the Plan. During fiscal 1998, the
Company purchased 3,131 shares of treasury stock for
approximately $4,000 and issued approximately
$79,000 of officers and employee loans with variable
interest rates in order to pay the withholding taxes
attributable to these distributions. These loans are
collateralized by the stock issued in conjunction
with the loan and are payable on demand within 30
days.

(iii) 1996 Stock Incentive Plan
The 1996 Stock Incentive Plan authorizes the
issuance of 276,079 shares of Reorganized Spectrum
Common Stock, or options to purchase such common
stock, to employees, officers, and directors of the
Company. Pursuant to this Plan, the three
non-executive directors who were in the employ of
the Company on the Effective Date were specifically
allocated an aggregate of 34,077 shares to be
distributed as follows: 300 shares on the Effective
Date, 11,259 during June 1998, 11,259 during
November 1998 and 11,259 during June 1999. During
fiscal 1998, 7,400 shares with a fair market value
of $9,250 were distributed to employees and
directors of the Company as additional compensation.
Total options, under the plan, granted to employees
and officers of the Company with various vesting
periods and performance criteria totaled 209,815.

F-15
<PAGE>

Spectrum Information Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Additional information as follows:

Weighted
Average
Shares Subject Exercise
to Options Price
------------------------
Outstanding as of March 31, 1997 0 $ 0
------------------------
Granted at $1.50-$2.15 per share 209,815 $2.09
Extinguished at $2.15 per share (3,500) $2.15
-----------------------
Outstanding at March 31, 1998 at
$1.50-$2.15 per share 206,315 $2.09
=======================

The following table summarizes information about stock
options outstanding and exercisable at March 31, 1998:

$1.69 to $2.15 53,777 9.40 $2.11

The Company applies the Accounting Principles Board
("APB") Opinion 25, "Accounting for Stock Issued to
Employees", and related Interpretations in accounting for
their stock option plans. Under APB Opinion 25, no
compensation cost is recognized if the exercise price of
the Company's employee stock options equals the market
price of the underlying stock on the date of the grant.

SFAS No. 123 of the Financial Accounting Standards Board,
"Accounting for Stock-Based Compensation", which is
effective for transactions entered into after December 15,
1995, requires the Company to provide pro forma
information regarding net income and earnings per share as
if compensation cost for the Company's stock option plans
had been determined in accordance with the fair value
method prescribed by SFAS No. 123. There were 209,815
stock options granted during the year ended March 31, 1998
and there were no stock options granted during the two
years ended March 31, 1997.

The Company estimates the fair value of each stock option
at the grant date by using the Black Scholes
option-pricing model with the following weighted-average
assumptions used for grants in 1998: no dividends paid;
expected volatility of 46.5%; weighted-average risk free
interest rate of 5.67%; and expected lives of 1-10 years.

F-16
<PAGE>

Spectrum Information Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Under the accounting provisions of SFAS No. 123, the
Company's net income and earnings per share would have
been reduced to the proforma amounts indicated below:

1998 1997 1996
(In thousands, except per share data)
-------------------------------------------
Net Income:
As reported $(3,077) $(6,180) $2,942
Pro forma $(3,116) $(6,180) $2,942

Basic and diluted
earnings per share:
As reported $(2.33) $(6.04) $2.88
Pro forma $(2.36) $(6.04) $2.88

The Board of Directors has reserved an additional 100,000
shares of common stock for an incentive stock plan for
consultants of which 35,000 were granted and 3,334 vested as
of March 31, 1998.

5. Concentrations of Credit Risk, Fair Value of Financial
Instruments and Major Customers

Financial instruments which potentially subject the Company
to concentrations of credit risk consist principally of
temporary cash investments and marketable securities. The
Company currently invests most of its cash investments in
money market funds with financial institutions insured by the
FDIC and government securities. At times, such cash
investments were in excess of the FDIC insurance limit.

The carrying amount of these cash investments approximates
the fair value due to their short maturity. The investments
in government securities are valued at market.

During the fiscal year ended March 31, 1998, sales of
activation kits to three customers accounted for
approximately 34%, 19% and 13%, respectively, of the
Company's merchandise sales. During the fiscal years ended
March 31, 1997 and March 31, 1996, sales to two customers
accounted for approximately 55% and 27%, respectively, of the
Company's merchandise sales. During the quarter ended
December 31, 1997, the Company placed its remaining inventory
valued at approximately $68,000 with a distributor Inc. on a
consignment basis.

During the fiscal year ended March 31, 1998 licensing and
royalty revenues from a customer accounted for approximately
74% of the Company's licensing revenue. During the fiscal
year ended March 31, 1997 revenues from two customers
accounted for approximately 62% and 18% respectively. During
the fiscal year ended March 31, 1996 approximately 82% and
12%, respectively, of the Company's licensing revenues were
from two customers. Funds received totaling approximately
$153,000 have been deferred on the balance sheet while the
Company is attempting to conclude a license agreement with a
chipset manufacturer.

F-17
<PAGE>

Spectrum Information Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

6. Commitments and Contingencies

The Company leases office space and certain equipment under
operating leases. Total rent expense for 1998, 1997, and 1996
was approximately $167,000, $173,000 and $121,000,
respectively.

Future minimum annual rental commitments for all
noncancellable operating leases are as follows:

Years Ended March 31,
--------------------------------------------
(Amounts in
thousands)
1999 $ 109
2000 114
2001 7
--------------------------------------------
Total $ 230
==========

The Company has entered into employment agreements (the
"Employment Agreements") with certain officers and employees.
Under the terms of the Employment Agreements, these officers
are to receive annual salaries of approximately $1,145,000 in
the aggregate and certain employee benefits. Pursuant to
Employment Agreements, certain officers are at will
employees, but if the Company discharges any of these
individuals without cause, the discharged individual will be
entitled to full compensation, including participation in all
benefit programs, for periods of up to one year. The
Bankruptcy Court approved the Company's assumption of the
Employment Agreements of certain officers during the
Company's reorganization proceeding. Certain Employment
Agreements provide that certain employees are entitled to an
annual bonus to be paid in cash or common stock based on the
pretax profits of the Company in an amount established at the
discretion of the Board of Directors of the Company and that
the Company maintain $6,000,000 coverage of directors and
officers insurance.

The Company has also entered a license agreement regarding
certain aspects of the Company's Internet software which
requires the payment of royalties in certain cases.

7. Income Taxes

Deferred income taxes are provided for temporary differences
between amounts reported for financial statement and income
tax purposes. Deferred tax assets consist of:

March 31, 1998 1997
- ----------------------------------------------------------------
(Amounts in thousands)
Net operating loss carryforwards $22,125 $26,673
Reserve for employee stock
compensation 201 545
Other 47 106
- -----------------------------------------------------------------
$22,373 $27,324
Valuation allowance (22,373) (27,324)
- -------------------------------------------- -------------
$ - $ -
======= =============

Given the developmental stage of the Company's business
strategy and the expectation of continued operating losses
for the foreseeable future, it is unknown as to whether the
benefit of any of the deferred tax assets will be realized.
Therefore, at March 31, 1998 and 1997, the Company recorded a
deferred tax asset with a valuation

F-18
<PAGE>

Spectrum Information Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

allowance of equal value. The change in the valuation
allowance for the three years in the period ended March 31,
1998 was $4,951,000, $686,000 and $264,000 .

The Company's net operating loss carryforwards on March 31,
1998 were approximately $65,073,000. These net operating loss
carryforwards expire between 1999 and 2018 with approximately
$3,054,000 expiring in 2018.

8. Litigation

Bankruptcy Proceedings

On January 26, 1995 (the "Petition Date"), the Company and
three of its four operating subsidiaries (Computer Bay, Data
One and Cellular) filed petitions for relief under Chapter 11
of the Bankruptcy Code in the United States Bankruptcy Court
for the Eastern District of New York (the "Bankruptcy
Court"), Case Nos. 195 10690 260, 195 10691 260, 195 10692
260 and 195 10693 260, respectively (the "Chapter 11 case").
A fourth subsidiary at the time, Spectrum Global Services,
Inc., did not file for bankruptcy protection. On February 8,
1995, the United States Trustee appointed an Official
Committee of Unsecured Creditors to represent the creditors
of Spectrum, Data One and Cellular (the "Committee"), and
another committee for Computer Bay to represent the interests
of all unsecured creditors whose claims arose before the
Petition Date. No other committees were appointed. On May 25,
1995, the Bankruptcy Court, upon motion by the Debtors,
converted the Computer Bay proceeding to a case under Chapter
7 of the Bankruptcy Code. A trustee has been appointed to
oversee liquidation of the Computer Bay assets. Data One
consummated a separate plan of liquidation under Chapter 11
on October 4, 1996.

In March 1996, the United States Bankruptcy Court approved
the Third Amended Disclosure Statement (the "Disclosure
Statement") with respect to the Third Amended Consolidated
Plan of Reorganization (the "Plan") Proposed by Spectrum
Information Technologies, Inc. and Spectrum Cellular
Corporation (collectively, the "Company") dated as of March
18, 1996 finding the Disclosure Statement adequate for
distribution and vote by interested parties. As contemplated
by the Plan, the bankruptcy estates of Spectrum Information
Technologies, Inc. and Spectrum Cellular Corporation were
substantively consolidated. On August 14, 1996, the
Bankruptcy Court entered an order confirming the Plan, as
amended. The effective date of the Plan was March 31, 1997
(the "Effective Date"). The material provisions of which are
described in Note 1(b).

The details of the Plan, the recapitalization, and the
Company's by-laws are set forth in detail in the Plan and
associated Disclosure Statement, which the Company filed with
the SEC on its Current Report on Form 8-K dated as of March
26, 1996. The Company's amended certificate of incorporation
is contained in the Company's Registration Statement on Form
S-8 dated March 31, 1997.

Securities Related Proceedings

In December 1997, the SEC filed a civil lawsuit in the United
States District Court for the Eastern District of New York
against a current employee and former officer of the Company,
and two of the Company's former directors and officers
alleging violations of certain sections of the Securities
Exchange Act of 1934 and rules promulgated thereunder,
including violations of Rule 10b-5, related to accounting and
disclosure issues with respect to certain patent and
advertising agreements the Company entered into during 1993
(fiscal 1994) and the exercise of options to purchase and
subsequent sale of Spectrum stock in the relevant time frame.
As previously reported by the Company, the SEC notified the
former officer in April 1996 that it intended to bring this
action. Upon learning of the SEC staff's position and pending
resolution of this issue, the Company at that time removed
the former officer as an executive officer. The former
officer has denied any wrong doing and is represented by
independent counsel in this matter. The former officer is
seeking to have the Company advance the legal fees that he
incurs in defense of this action pursuant to his Bankruptcy
Court approved employment agreement. The Company is currently
examining its obligation to continue to advance

F-19
<PAGE>

Spectrum Information Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

these fees and the extent of its indemnification of the
former officer. It is not possible to estimate the damages to
be assessed upon settlement of these proceedings at this
time.

As previously reported by the Company, during May 1997, the
SEC and Spectrum reached a settlement agreement under which
Spectrum agreed to the entry of an administrative order
requiring it to cease and desist from committing any and
future violations of the registration, antifraud, reporting
and record-keeping provisions of the federal securities laws.
Spectrum neither admitted nor denied the SEC's findings
relative to events in 1992 and 1993, and which relate to the
allegations in the SEC's action against the former officer..
The SEC did not seek monetary penalties and recognized that
Spectrum's current Chief Executive Officer and Board of
Directors had cooperated in the SEC's investigation.

The United States Attorney's Office for the Eastern District
of New York has previously informed the Company that it is
the subject of an investigation regarding violations of
securities laws that may have occurred prior to the
appointment of the Company's current Chief Executive Officer
and Board of Directors. The Company is cooperating fully with
the investigation.

Other Proceedings

On July 10, 1997, the United States Patent and Trademark
Office notified the Company that, at the request of Compaq
Computer Corporation ("Compaq"), it had declared an
interference proceeding to establish whether the Company or
Compaq is the inventor of certain claimed subject matter
within the Company's issued U.S. Patent No. 5,249,218, one of
the Company's portfolio of six issued patents relating to
wireless data transmission. Spectrum and Compaq resolved this
interference in March 1998 by reaching a cross-license and
settlement agreement. The proceeding did not relate to the
Company's Internet software development

From time to time, the Company has been a party to other
legal actions and proceedings incidental to its business. As
of the date of this report, however, the Company knows of no
other pending or threatened legal actions that could have a
material impact on the financial condition of the Company.

9. Statements of Cash Flows

Years ended March 31,

------------------------------------
1998 1997 1996
------------------------------------
(Amounts in thousands)
Supplemental disclosures of
cash flow information:
Cash paid during the year
for interest $ - $ - $ -
Cash paid during the year
for income taxes $ 14 $ 3 $ 2

Non-cash transactions:
Class A Preferred Stock issuance $ 300 $6,434 $ -
Common Stock reserved for
Computer Bay Trustee $ - $ 300 $ -
Pursuant to Bankruptcy Court $ 1,234 $ - $ -
approved success
bonuses and payments of
unsecured claims via common
stock issuance
Conversion of Class A Preferred
Stock to Common Stock $ 276 $ - $ -

F-20
<PAGE>

Spectrum Information Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Spectrum Information Technologies, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
For the Years Ended March 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Additions
Balance at Charged to Balance at
Beginning Costs and Write- End of
Description of Period Expenses offs Other Period
- --------------------------------- ------------- ------------- ------------ ------------ -------------

Year Ended March 31, 1996
Allowance for Doubtful Accounts
Receivable $ 80,293 $ - $ - $ - $80,293
Reserve for Inventory Obsolescence $100,310 $ - $(54,234) $ - $46,076

Year Ended March 31, 1997
Allowance for Doubtful Accounts
Receivable $ 80,293 $ 5,606 $ - $ - $85,899
Reserve for Inventory Obsolescence $ 46,076 $50,000 $ - $ - $96,076

Year Ended March 31, 1998

Allowance for Doubtful Accounts
Receivable $ 85,899 $ - $(79,858) $ - $ 6,041
Reserve for Inventory Obsolescence $ 96,076 $ - $(28,187) $ - $67,889
</TABLE>

F-21

<PAGE>

EXHIBIT INDEX