TELECHIPS CORP, 10KSB, 1997-04-15

TELECHIPS CORP
10KSB, 1997-04-15
TELEPHONE & TELEGRAPH APPARATUS

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U.S. Securities and Exchange Commission
Washington, D.C. 20549

FORM 10-KSB

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]

For the fiscal year ended December 31, 1996

[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]

For the transition period from __________ to __________

Commission file number 0-26764

TELECHIPS CORPORATION
----------------------------------------------
(Name of small business issuer in its charter)

Nevada 88-0266392
------------------------ -------------------
(State of other juris- (I.R.S. Employer
diction of incorporation Identification No.)
or organization)

6880 S. McCarran Blvd., Reno, Nevada 89509 Issuer's telephone number:
(Address of principal (Zip Code) (702) 824-5555
executive offices)

Securities registered under Section 12(b) of the Exchange Act: None
--------

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

Common Stock, par value $0.01
-----------------------------
(Title of Class)

Common Stock purchase warrants
------------------------------
(Title of Class)

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

Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure
will be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB [ ].

Issuer's revenues for its most recent fiscal year: $107,797

Aggregate market value of the voting stock held by non-affiliates as
of March 31, 1997: $726,536

Number of shares of Common Stock outstanding as of March 31, 1997:
1,094,262

Documents Incorporated by Reference: None.
<PAGE> 2
PART I

Item 1. Description of Business

BUSINESS DEVELOPMENT

Telechips Corporation (the "Company" or "Telechips"), a
development-stage company, incorporated under the laws of Nevada on January 7,
1991, designs, develops and markets network client and interactive
computer/telephony devices, related peripheral devices and software
applications. The Company is seeking to develop a family of products
potentially including component level variants which, if developed, will enable
customers to access and to take advantage of the many innovations in network
computing, including the integration of computing and telephony capabilities at
client devices. At one end of the product family is the Telechips Access(TM)
Network Client (the "Network Client") currently in the pre-production and
regulatory testing phase of development, with commercial deployment expected by
June, 1997. This product allows users to plug in their monitor, keyboard,
mouse, printer and other peripherals to the Telechips Access Network Client and
enable remote access utilizing Citrix Systems Inc.'s ("Citrix"(R)) Intelligent
Console Architecture ("ICA"(R)) protocol, via a built-in modem to the computing
power of a central server running Citrix's WinFrame(R) multi-user Windows(R)
application server software. At the other end of the product family is the
current Telechips Access 3000 Series integrated computer/telephony workstation
with a touch-sensitive display screen.

As businesses become more reliant upon computer networks, the need to
discover more cost-effective ways to dispense and secure corporate data,
provide access to the Internet, and deploy business-critical applications
becomes even more urgent. Recently, the Company has produced pre-production
units of the Telechips Access Network Client, a low-cost solution to connecting
users with their networks. Users can connect their monitor, keyboard and mouse
directly to the Network Client. Daily log-ins enable users to access their
organization's host server running Citrix's WinFrame multi-user application
software. Utilizing the Citrix ICA protocol, the Network Client transmits
keyboard and mouse input to the server and receives only the display output to
the attached screens. All applications and data reside on the server. Like
personal computers ("PCs"), users of the Network Client can utilize Windows and
other applications, access the Internet, save and transfer files, and print
locally.

The Network Client has a relatively small footprint being
approximately 8" x 5" x 1." Each unit is equipped with a 33.6 modem and AMD's
ElanSC400 486-based 33MHz processor running Citrix's WinFrame Client for DOS(R)
(client end of the ICA protocol) on a Microsoft DOS platform. The Network
Client comes with standard SVGA or VGA monitor connection, keyboard connector,
serial port, parallel port and mouse connector. The product allows remote
dial-in network access, compatibility with standard PC components and is
designed to utilize DOS, 16-bit and 32-bit Windows applications running on the
server. The user supplies the analog phone connection, access to a server
running Citrix's WinFrame multi-user

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application server software, monitor, mouse, keyboard and other desired
peripherals. A second version, currently under development, is expected to
include an on-board LAN in place of the modem.

Telechips Access 3000 models have the following standard and optional
features: (i) simplified access to advanced telephone services such as call
waiting, caller ID and three-way calling; (ii) a built-in organizer, including
calendar and appointment notification and indexing of calls received; (iii)
full internal modem capabilities which will allow a user to communicate with
other computers; (iv) speakerphone technology which is designed to reduce the
voice clipping prevalent in many speakerphones; and (v) proximity detection
facilities which allow for automatic activation or audio and graphical
announcements in public information station applications. In addition, with
specific software applications written, the hardware exists to support the
following additional capabilities: (i) advanced messaging capabilities such as
automatic answering, screening and routing of calls and sophisticated indexing
of calls received; (ii) complete facsimile transmission and reception
capabilities along with the ability to save, print and otherwise manipulate
incoming faxes; and (iii) access to the Internet or on-line services. Other
uses will depend on the development of applications and features, either by the
Company, by a customer, by the Company and a customer working together or by
noncustomer third parties, alone or in cooperation with the Company.

The Company's strategy is to take advantage of the OEM and VAR
relationships which its strategic partners, such as Citrix and Tandem, already
have in place. In addition, the Company has established a presence in certain
markets that management believes have substantial opportunities and Telechips
has sold Telechips Access 3000 Series products to leaders in these markets.
These markets are (i) financial services; (ii) interactive lottery and gaming;
and (iii) hospitality and entertainment. The Company has gained three
important benefits from these relationships. First, by developing
customer-specific software applications, the Company gained an understanding of
these markets and developed proven applications adaptable for use with other
industry participants. Second, by attracting industry leaders as customers,
the Company effectively gained validation of the technology user within those
industries. Third, by targeting large industry leaders, the sales to each
customer are at a potentially high volume. Representative customers to date
include industry leaders such as Massachusetts Mutual and Tandem Computers
Canada, Ltd.

The Network Client uses the ICA protocol licensed from Citrix Systems,
Inc. The agreement dated December 18, 1996, will initially run for two years
and will automatically renew each year for a one-year term unless either party
gives sixty days' written notice. The Company is obligated to pay minimum
royalties after the first customer shipment of product containing the ICA
protocol. The Telechips Access 3000 Series is designed to operate utilizing
the Microsoft Windows operating system. The Telechips Access Network Client
uses the DOS ROM Kernel. The Company entered into an agreement with Microsoft,
dated as of March 1, 1994, and amended as of February 1, 1996, and October 1,
1996, pursuant to which the Company has been granted a nonexclusive, worldwide
license to the Windows operating

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systems (the "Microsoft License"). The MS License Agreement establishes
minimum royalty payments. The Company is obligated to make monthly minimum
royalty payments. As of the date of this report, the Company has prepaid
royalties to Microsoft of approximately $260,000. The MS License Agreement may
only be terminated prior to its expiration date upon a default by the parties.
The Microsoft License expires on December 31, 1997, and there are no automatic
renewal terms.

The Telechips Access Series 3000 is currently set up to be
manufactured by Group Technologies pursuant to the terms of a Manufacturing and
Purchase Agreement, dated December 1, 1995, (the "Group Technologies
Agreement"). The initial term of the Group Technologies Agreement terminates
on February 26, 1998. The Company has not yet manufactured the Telechips
Access Model 3000 in commercial quantities and no assurance can be given that
the Company will be able to develop commercial manufacturing capability, or,
once developed, that there will not be additional delays or setbacks in the
commercial manufacturing of the Telechips Access Model 3000. The Company is
also in the process of qualifying contract manufacturers (including Group
Technologies) to produce the Telechips Access Network Client. The Company
expects to qualify the contract manufacturer and complete the required tooling
and nonrecurring engineering necessary to begin the commercial manufacturing
process for volume delivery in June, 1997. However, there can be no assurance
that such contract manufacturing resources can be secured, nor the required
tooling and nonrecurring engineering completed in a timely manner, if at all.

The Company's independent accountants have included an explanatory
paragraph in their report on the Company's financial statements for the year
ended December 31, 1996, stating that the Company's has not, to date,
recognized significant revenues from product sales nor produced units in
quantities and at a cost which will yield a gross margin adequate to cover
product and operations costs. In addition, that the Company has incurred
significant losses from operations since inception; and, further that the
Nasdaq has notified the Company that its stock may be delisted pending a
hearing tentatively scheduled for May, 1997; and that together these factors
raise substantial doubt about the Company's ability to continue as a going
concern (See "Significant Capital Requirements; Need for Additional Capital;
Explanatory Paragraph in Accountant's Report").

The Common Stock and the Warrants are traded on the Nasdaq SmallCap
Market under the symbols "TCHP" and "TCHPW," respectively. The Company's
executive offices are located at 6880 S. McCarran Boulevard, Reno, Nevada
89509, and its telephone number is (702) 824-5555.

Recent Developments

In March, 1994, and as amended on February 1, 1996, and October 1,
1996, the Company entered into a License Agreement with Microsoft (the "MS
License Agreement") to license certain software to be used in the Company's
products. The MS License Agreement

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establishes minimum royalty payments. The Company is obligated to make monthly
minimum royalty payments. As of the date of this report, the Company has
prepaid royalties to Microsoft of approximately $260,000. The MS License
Agreement may only be terminated prior to its expiration date upon a default by
the parties. This license expires on December 31, 1997, and there are no
automatic renewal terms.

On October 2, 1996, the Company completed a private placement of 4,188
shares of 4% cumulative convertible preferred stock, face value $1,000 per
share (the "Preferred Shares"). The Preferred Shares were issued without
registration under the Securities Act of 1933, as amended (the "Act"), pursuant
to Regulation S promulgated under the Act. The conversion price of the
Preferred Shares is determined by multiplying each Preferred Share by 1,000 and
dividing the result by the lower of $45.00 or the fair market value of the
Company's Common Stock on the date of conversion. The Preferred Shares are
convertible at any time until August 31, 1998. The Company received
approximately $2.9 million in net proceeds. In connection with the financing,
the Company also issued to Third World Investments, Ltd., certain Common Stock
Purchase Warrants to purchase 26,667 shares of Common Stock at an exercise
price of $33.75 per share as adjusted. These warrants were canceled as a
result of the April 2, 1997, financing described below.

On October 3, 1996, the Company entered into a Consulting Agreement
(the "Consulting Agreement") with Coastline Financial Group, Inc.
("Coastline") pursuant to which Coastline has agreed to provide certain
financial consulting, business consulting, investor relations and financial
public relations services to the Company for a period of one year (unless
earlier terminated). The Company has agreed to pay Coastline a cash fee of
$7,500 per month and to issue to Coastline options to purchase up to 3,333
shares of Common Stock at any time from January 31, 1997, through March 31,
1999, at an exercise price of $33.75 per share. In addition, unless the
Consulting Agreement is earlier terminated, the Company has agreed to issue to
Coastline, on each of January 2, 1997, April 2, 1997, and June 30, 1997,
options to purchase up to 3,333 shares of Common Stock at an exercise price of
$33.75 per share on or before March 31, 1999. In the event Coastline is solely
responsible for arranging a financing, the Company has agreed to issue to
Coastline options to purchase up to 10,000 shares of Common Stock at an
exercise price equal to 110% of the price per share paid by investors in such
financing. If Coastline is directly and solely responsible for arranging a
merger or acquisition transaction during the term of the Consulting Agreement
or one thereafter, the Company has agreed to pay to Coastline a fee based on
the value of such a transaction to the Company or its shareholders of 5% of the
first million dollars in value, 4% of the next million dollars, 3% of the next
million dollars, 2% of the next million dollars and 1% of each additional
million dollars thereafter. The Consulting Agreement may be terminated by
either Coastline or the Company at the end of six months with 30 days' notice
to the other party. If no such notice is received by the end of the fifth
month, the Consulting Agreement will continue through the term.

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During October, 1996, the Board of Directors approved the Company's
1996 Director's Stock Option Plan ("Director's Plan"). The Director's Plan
authorizes the automatic granting of nonqualified stock options to purchase an
aggregate of up to 20,333 shares of common stock to nonemployee directors of
the Company. The exercise price of the options will be fair market value on
the date of grant. Each nonemployee director will receive an option to
purchase 2,000 shares ("Initial Grant Option") on the date such person first
becomes a director. These shares may be exercised either (i) over a five-year
period by cash, stocks, or similarly valued property, with the options vesting
ratably over a 36-month period from the date of grant; or, (ii) immediately by
delivery of promissory notes to the same provisions described below for
Director's Options. In addition, each nonemployee director will receive an
automatic grant of an option to purchase 333 shares ("Annual Grant Options") on
each annual anniversary of the date that such person first becomes a director.
Annual Grant Options are immediately exercisable on the date of grant under
terms similar to those of the Initial Grant Option. Both Annual and Initial
Grant Options expire five years from the date of grant. During October, 1996,
7,000 options to purchase shares of common stock were granted to nonemployee
directors.

During October, 1996, nonemployee members of the Board of Directors
exercised options ("Director's Options") to purchase 5,000 shares of common
stock at a price of $32.8125 per share for a total consideration of $164,063.
The shares were purchased with nonrecourse notes collateralized by the stock.
The notes bear interest at 8.25%, have a maturity date of ten years from the
date of exercise and can be satisfied by cash, stock or similarly valued
property. The shares were placed in escrow, subject to a right of repurchase
by the Company. The Company's repurchase right lapses ratably over 36 months
beginning on the date of the option exercise. The repurchase price will be
equal to the original exercise price. Interest associated with unpaid notes on
those shares repurchased will be canceled. The shares are released from escrow
upon lapse of the repurchase rights and payment of the related portion of the
notes. Subsequent to December 31, 1996, 4,750 Director's Options valued at
$155,859 and related accrued interest of $15,853 were canceled and removed from
paid-in capital and notes receivable from shareholders, respectively.

On December 6, 1996, the Company and Tandem Computers Canada Limited
("Tandem") entered into an OEM Purchase and Sale Agreement (the "Tandem
Agreement") whereby the Company has granted Tandem the exclusive right to use
Telechips products for incorporation into its gaming product lines and makes
Tandem the exclusive Telechips reseller to Acces Controle Telematique, Inc., a
Quebec company involved in the ticketing industry. The Company also granted
Tandem a nonexclusive right to resell Telechips products to the banking
industry. The pricing terms for the products purchased under the Tandem
Agreement will be mutually agreed upon by the parties. The Tandem Agreement
terminates on December 6, 2001.

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On December 18, 1996, the Company and Citrix Systems, Inc. ("Citrix")
entered into the Client Software License Agreement (the "Citrix Agreement")
whereby Citrix has granted the Company the right to embed the ICA protocol into
the Telechips Access line of products. The ICA protocol software will enable
Telechips Access products to run standard Windows applications in conjunction
with Citrix's WinFrame multi-user application server software over any type of
network connection, including modems, wide-area networks, Intranets or the
Internet. Telechips is obligated to make certain minimum royalty payments
under the Citrix Agreement. The initial term of the Citrix Agreement will
expire on December 18, 1998, and shall renew automatically each year for a
one-year term, unless either party gives sixty days' written notice of its
intent to terminate the agreement at the end of the current term. In addition,
the Citrix Agreement may be terminated by either party upon a default in the
performance of any material provision of the Citrix Agreement or upon
insolvency, each after a sixty-day cure period.

During January, 1997, the Company entered into a consulting agreement
with Eurolink International Services ("Eurolink") to provide certain
international financing public relations to the Company for a period of six
months. The Company has agreed to pay Eurolink an initial sum of $12,500
representing the first month's fee and a nonrefundable deposit toward expenses.
Thereafter, the Company will pay a minimum of $6,250 per month, based on a
certain number of minimum hours of work with additional hours beyond the
minimum to be charged incrementally.

On January 20, 1997, the Company announced a strategic relationship
with Advanced Micro Devices, Inc. ("AMD"), in which the Company and AMD will
collaborate on development of the Network Client and other network appliances
based on AMD's ElanSC400 microcontroller.

On August 19, 1996, Mr. Richard E. Salwen resigned from the Company's
Board of Directors, and also on August 19, 1996, Mr. Bruce Chatterley was
appointed to the Board. On October 11, 1996, the Company's Board was expanded
to six members and Mr. Frank Vigilante and Mr. Richard Wolf were appointed
directors. Due to commitments outside of Telechips, Mr. Wolf resigned on
January 7, 1997 and Mr. Chatterley resigned on January 31, 1997. For personal
reasons, Mr. Phillips also resigned on January 7, 1997. On January 25, 1997,
the Board resolved to begin an active search for a new President and CEO and
that Mr. C. A. Burns would remain as Chairman and assume whatever role with the
Company that the Board desired. On January 30, 1997, Mr. Burns resigned as
Chief Executive Officer, President and Chairman. On February 5, 1997, Mr.
Nelson B. Caldwell and Mr. Richard Adrey were appointed to the Board of
Directors to fill the existing vacancies. The Board also, in accordance with
the Company Bylaws, reduced the number of Board seats to four. On February 14,
1997, Mr. Caldwell was appointed as interim President and Chief Executive
Officer until such time that the Company locates a permanent replacement.

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Of the remaining outside directors, Mr. Vigilante, 66, was a director
with Network Equipment Technologies from April, 1992, to August, 1996. He has
been a director of the Visiting Nurses Association of Central New Jersey since
October, 1991. Mr. Vigilante has also been a director of the Arthritis
Foundation of New Jersey since February, 1986, and is currently its Chairman.
He was a consultant with Pyramid Technologies Corporation from April, 1987 to
February, 1995. Mr. Vigilante held various positions with AT&T and, in 1985,
he became a Senior Vice President. Mr. Vigilante retired from AT&T in 1987
after 30 years of service.

On February 7, 1997, Mr. Richard Adrey, 52, was appointed to the Board
of Directors. Mr. Adrey has been president of Coastline Financial, a financial
advisory and merchant banking entity based in Boca Raton, Florida, since 1992.
Prior to that, Mr. Adrey worked as an investment banker and financial advisor
for 25 years in specialized public and private financings and corporate
turnaround situations. Mr. Adrey is also a director of Vacation Break USA and
Exothermal Technology Corporation.

On February 7, 1997, the Company issued a note payable for $300,000.
The note was discounted, yielding net proceeds to the Company of $250,000. The
note bears a stated annual interest rate of 1% (effective annualized rate of
252.91%, after taking into account the discount including issuance of common
stock) and is payable upon the earlier of 180 days from date of issuance or
upon the closing of a significant equity, quasi-equity or debt financing by the
Company. In addition, the Company agreed to issue to the lender 75,000 shares
of common stock upon maturity. The note was paid and shares issued April 2,
1997.

On March 10, 1997, the Company issued a note payable for $700,000.
The note was discounted, yielding net proceeds to the Company of $500,000. The
note bears an annual interest rate of 1% (effective annualized rate of 634.78%,
after taking into account the discount) and is payable upon the closing of a
financing transaction. Upon closing of the transaction, the note will be
canceled and the proceeds along with accrued interest will be deposited into
escrow to be used to purchase securities in the financing transaction. On
April 2, 1997, the note was canceled and was converted to Series B 4%
cumulative convertible preferred stock.

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("offering costs") and an increase in paid-in capital. Upon occurrence of
certain events, the exercise price of the warrants may be adjusted downward.
The Series B Preferred Stock is convertible any time beginning May 17, 1997,
until March 31, 1999, using a formula ("Series B Conversion Formula")
multiplying each Series B Preferred share by 1,000 and dividing the result by
the lower of either 110% of the fair market value at April 2, 1997, or the fair
market value at the time of conversion. The Series B Preferred Stock will
automatically convert, if conversion has not previously been effected, on March
31, 1999, or upon consummation of a public offering of securities with gross
proceeds of $10,000,000 or more provided that such offering may not close prior
to September 29, 1997. The 4% dividend is payable semiannually in cash or
shares of common stock converted using the Series B Conversion Formula
described above. The Preferred Stock is nonvoting and has a liquidation
preference over all shares of Common Stock, is subordinate to the liquidation
preference of the Series A Preferred Stock, and shall be entitled to payment of
$1,000 per share plus dividends that have accrued. A portion of the net
proceeds was used to pay off the $300,000 February 7, 1997, promissory note.

FACTORS AFFECTING OPERATING RESULTS

The securities of the Company are speculative and involve a high
degree of risk, including, but not necessarily limited to, the factors
affecting operating results described below. The statements which are not
historical facts contained in this report are "forward looking statements" (as
defined in the Private Securities Litigation Reform Act of 1995) that involve
risks and uncertainties including, but not limited to, the factors set forth
below.

1. Development Stage Company; Limited Revenues from Product Sales;
Limited Relevant Operating History; Significant and Continuing Operating
Losses; Accumulated Deficit. Since its inception in 1991, the Company has been
engaged primarily in research and development and has had limited revenues from
sales of products. Accordingly, the Company has a limited relevant operating
history upon which an evaluation of its prospects can be made. Such prospects
must be considered in light of the risks, expenses and difficulties frequently
encountered in the establishment of a new business in the computer-telephony
industry, which is a continually evolving industry characterized by an
increasing number of market entrants and intense competition, as well as the
risks, expenses and difficulties encountered in the commercialization of new
products based on innovative technology. The Company has incurred operating
losses in each quarter since December 31, 1993 and, on December 31, 1996, the
Company had an accumulated deficit of approximately $10,970,000. Since such
date, losses have increased and are continuing through the date of this report.
While not the Company's principal business, research and development revenues
from National Semiconductor Corporation ("NSC"), the Company's only significant
source of revenue as of the date of this report, ceased during 1994 when the
NSC contract was terminated by mutual agreement of the parties. In addition,
the Company's operating expenses have increased and can be expected to continue
to increase in the future in connection with the Company's efforts to increase
its marketing program and efforts to continue to develop new products.

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Accordingly, it is anticipated that the Company will continue to incur
significant losses at least until it is able to sell its products with an
adequate margin and in sufficient quantities to support operations. There can
be no assurance that the Company will be successful in generating product sales
at a sufficient quantity or margin or that the Company will ever achieve
profitable operations.

2. Significant Capital Requirements; Need for Additional Capital;
Explanatory Paragraph in Accountant's Report. The Company's capital
requirements have been and will continue to be significant. The Company has
been dependent primarily on the Company's initial public offering (the "IPO")
of its Common Stock and certain warrants (the "Public Warrants"), private
placements of equity securities and indebtedness. Over the next 12 months, the
Company intends to focus on increasing its sales and marketing efforts and
research and development for new proposed products. The Company anticipates,
based on its current proposed growth plans and assumptions relating to its
growth and operations, that the proceeds from the IPO and private placements,
borrowings and planned revenues will not be sufficient to satisfy the Company's
contemplated cash requirements for the next 12 months and that the Company will
be required to raise additional funds within the next 12 months. In addition,
in the event that the Company's plans change or its assumptions prove to be
inaccurate (due to unanticipated expenses, delays, problems, or otherwise), the
Company would be required to seek additional funding sooner than anticipated.
Any such additional funding could be in the form of additional equity capital.
Further, in the event that the Company receives a larger-than-anticipated
number of purchase orders for Telechips Access products, it may require
resources substantially greater than those that are currently available to the
Company. In such event the Company may be required to raise additional capital
or to engage third parties (as to which there can be no assurance) to assist
the Company in meeting such orders. The Company is currently pursuing several
potential funding opportunities. However, there can be no assurance that any
of such opportunities will result in actual funding or that additional
financing will be available to the Company when needed, on commercially
reasonable terms, or at all. If the Company is unable to obtain additional
financing if needed, it will likely be required to curtail its marketing and
manufacturing plans and possibly cease its operations. Any additional equity
financing may involve substantial dilution to the Company's then-existing
shareholders. The Company's independent accountants have included an
explanatory paragraph in their report on the Company's financial statements for
the year ended December 31, 1996, stating that the Company's has not, to date,
recognized significant revenues from product sales nor produced units in
quantities and at a cost which will yield a gross margin adequate to cover
product and operations costs. In addition, that the Company has incurred
significant losses from operations since inception; and, further that the
Nasdaq has notified the Company that its stock may be delisted pending a
hearing tentatively scheduled for May, 1997; and that together these factors
raise substantial doubt about the Company's ability to continue as a going
concern.

3. Uncertainty of New Product Development; Single Product. The
Company has not generated significant revenues from the sale of the Telechips
Access line of products. No

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assurance can be given that the Company's performance objectives will be met or
that Telechips Access products may be sold in sufficient quantities and at
margins that will be commercially viable. Consequently, there can be no
assurance that Telechips Access products will meet current performance
objectives or prove to be as effective as products based on other technology.
In addition, the Company is currently developing new products. The inability
to successfully complete development of a product or application or a
determination by the Company, for financial, technical or other reasons, not to
complete development of any product or application, particularly in instances
in which the Company has made significant capital expenditures, could have a
material adverse affect on the Company. To the extent that Telechips Access
products are not accepted in the market at sufficient quantities and produced
at a margin that will support operations, the Company will not be able to
complete development of additional products and the Company will likely be
required to seek additional capital in order to seek alternative business
opportunities. See "Item 1--Business of Issuer--The Telechips Access."

4. New Concept and Emerging Markets; Uncertainty of Market Acceptance
and Commercialization Strategy. The use of integrated computer/telephony and
network computing products for commercial and consumer applications represents
a relatively new business activity characterized by emerging markets and an
increasing number of market entrants who have introduced or are developing an
array of new telecommunications and network computing products and services,
some of which will compete against Telechips Access products and any other
products which may be developed by the Company. Achieving market acceptance
for Telechips Access products will require substantial marketing efforts and
expenditure of funds to create awareness and demand by potential customers.
There can be no assurance that Telechips Access products will ever gain such
acceptance. The Company sold initial production units of the Telechips Access
Series 3000 at an introductory price substantially lower than the proposed sale
price for its commercial units, and at a cost basis substantially higher than
anticipated cost for volume commercial units, which resulted in a negative
gross margin. Additionally, the remaining initial production units
(approximately 400 units), even if sold at the commercial sales price as
planned, will likely be sold at a cost resulting in a negative gross margin.
Even though, based on quotes from manufacturers, the Company anticipates that
it will be able to produce commercial units (beyond the remaining 400 initial
production units) at a cost that will yield an adequate gross margin, there can
be no assurance that such margin will be achieved or that the Company will be
able to purchase goods at such quotes. In addition, the Company is currently
developing, testing and evaluating and anticipates that it will continue to
develop, evaluate and test various product commercialization strategies, such
as using Telechips Access products in a public payphone environment, placing
the Telechips Access products in hotel lobbies and rooms, adding full VGA color
screens and componetizing the products for use in various network computing
products or for use by OEMs for incorporation into various network computing or
integrated computer/telephony product platforms. The Company expects that due
to rapid technological change many of these products will eventually eclipse
the 3000 Series and, consequently, Telechips has prudently taken a current year
allowance against existing Series 3000 inventory

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(including raw materials designated for Series 3000 production) and recognized
an impairment of certain components of the related manufacturing tooling for
potential replacement with tooling designed for other products. The Company
has produced pre-production units of its network computing product, the
Telechips Access Network Client, and expects to place all 30 available
pre-production units in Beta test sites during April, 1997. The Company also
expects to have 100 pilot production units manufactured in May/June, 1997 and
be ready for commercial volume production in June/July, 1997. The current
version of the product is marketed as a remote access terminal utilizing a
standard 33.6 modem and Citrix's Intelligent Console Architecture (ICA)
protocol and is dependent on potential customers utilizing servers enabled with
Citrix's WinFrame multi-user application server software. In order to develop
such new products or services, the Company will be required to devote
substantial resources, financial and otherwise, to such products. The failure
of any of these projects could result in substantial losses to the Company.
The inability to successfully complete development of a product or application
or a determination by the Company, for financial, technical or other reasons,
not to complete development of any product or application, particularly in
instances in which the Company has made significant capital expenditures, could
have a material adverse affect on the Company (See "Dependence on Licensed
Software").

5. Possible Delisting of Securities from Nasdaq System; Disclosure
Relating to Low-Priced Stocks. The Company's Common Stock is quoted on The
Nasdaq SmallCap Market. However, in order to continue to be included in
Nasdaq, a company must maintain $2,000,000 in total assets, a $200,000 market
value of the public float and $1,000,000 in total capital and surplus. In
addition, continued inclusion requires two market makers and a minimum bid
price of $1.00 per share; provided, however, that if a company falls below such
minimum bid price, it will remain eligible for continued inclusion in Nasdaq if
the market value of the public float is at least $1,000,000 and the Company has
$2,000,000 in capital and surplus. Failure to meet these maintenance criteria
in the future may result in the delisting of the Company's securities from
Nasdaq and trading in the Company's securities would thereafter be conducted in
the non-Nasdaq over-the-counter market. As a result of such delisting, an
investor may find it more difficult to dispose of, or to obtain accurate
quotations as to the market value of, the Company's securities. In addition,
if the Common Stock or Public Warrants were delisted from trading on Nasdaq and
the trading price of the Common Stock was less than $5.00 per share, trading in
the Common Stock and Public Warrants would also be subject to certain rules
promulgated under the Exchange Act which require additional disclosure by
broker-dealers in connection with any trades involving a stock defined as a
penny stock (generally, any non-Nasdaq equity security that has a market price
of less than $5.00 per share, subject to certain exceptions). Such rules
require the delivery, prior to any penny stock transaction, of a disclosure
schedule explaining the penny stock market and the risks associated therewith,
and impose various sales practice requirements on broker-dealers who sell penny
stock to persons other than established customers and accredited investors
(generally institutions). For these types of transactions, the broker-dealer
must make a special suitability determination for the purchaser and have
received the purchaser's written consent to the transactions prior to sale.
The additional burdens imposed upon broker-dealers by such

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<PAGE> 13
requirements may discourage broker-dealers from effecting transactions in the
Common Stock and Public Warrants, which could severely limit the market
liquidity of the Common Stock and Warrants.

The Company's Common Stock has continued to trade at less than the
minimum bid price of $1.00 per share. In addition, the Company does not
currently meet the minimum public float and capital and surplus requirements
required to maintain its Nasdaq listing and has been notified by Nasdaq that
the Company's stock may be delisted pending a hearing tentatively scheduled for
May, 1997. The Company is attempting to take the corrective actions necessary
to meet minimum eligibility requirements. The Company is currently in the
process of obtaining additional financing which, if completed, would meet the
minimum capital and surplus requirements and is also seeking conversion of
existing Series A 4% cumulative convertible preferred shares with the
anticipated result that such additional shares will increase the public float
to a level that the market value of the public float will meet the minimum
eligibility requirements. However, there can be no assurance that such
additional financing will be available to the Company when needed, on
commercially reasonable terms, or at all. In addition, the Company has no
assurance that it will be able to induce the conversions necessary to increase
the public float. If both the funding and additional share transactions do not
take place, it is likely that the Company's securities will be delisted from
the Nasdaq system, and even if such actions are completed, there can be no
assurance that Nasdaq will continue to list the Company's securities.

6. Lack of Intellectual Property Protection; Right of NSC to Certain
Telechips Access Technology. The Company does not possess any patent or
registered intellectual property rights with respect to any of its technology
and has not filed any patent applications. The Company has filed an
application for registration of the marks "Telechips " and "Telechips Access."
However, there can be no assurance that the Company will obtain registration of
these marks. In addition, some of the technology embodied in the Telechips
Access products, such as the touch-sensitive display, modems and other
components, is generally available to other manufacturers. Intellectual
property embodied in certain portions of the mechanical design of the Access
Series 3000 product is licensed by the Company on a world-wide, perpetual,
royalty-free basis from NSC. Although NSC has agreed not to manufacture or
sell products incorporating such technology prior to March 31, 1997, NSC has
substantially greater financial, marketing and other resources than the Company
and if it chooses to make use of such technology, or to license it to other
companies, products similar to the Telechips Access Series 3000 could be
introduced to the market; although such products incorporating such mechanical
design would not be permitted to contain any technology proprietary to
Telechips without the Company's consent.

The Company depends in part upon certain technology and know-how to
differentiate its products from those of its competitors, and relies on a
combination of trade secret laws and nondisclosure and confidentiality
agreements with its employees, consultants, distributors, researchers and
advisors to protect its technology. In addition, others may obtain access to
or

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independently develop technologies or know-how similar to the Company's. The
computer and telecommunications industries are characterized by the existence
of a large number of patents and frequent litigation based on allegations of
patent infringement. Although the Company believes that its products and
technologies do not infringe on the proprietary rights of others and has not
received any notice of claimed infringement, it is possible that an
infringement of proprietary rights may occur. In such event, the Company may
be required to modify its products or obtain a license. There can be no
assurance that the Company will be able to do so in a timely manner, upon
acceptable terms and conditions, or at all, or that the Company will have the
financial or other resources necessary to successfully defend a claim of
violation of proprietary rights. Failure to do any of the foregoing could have
a material adverse effect on the Company. Furthermore, if the Company's
products or technologies are deemed to infringe patents or proprietary rights
of others, the Company could, under certain circumstances, become liable for
damages, which would have a material adverse effect on the Company.

7. Technological Advances and Evolving Industry Standards. The
computer marketplace and, in particular, the integrated computer/telephony
marketplace, is characterized by technological developments, changes in
customer requirements, evolving industry standards and frequent new product
introductions. In the future, the Company may be required to enhance its
existing systems and to develop and introduce new products that take advantage
of technological advances and respond promptly to new customer requirements and
evolving industry standards. There can be no assurance that the Company will
be able to keep pace with the rapid evolution of the computer/telephony
industry.

8. Dependence on Contract Manufacturing; Unanticipated and Costly
Delays in Manufacturing. For the foreseeable future, the Company intends to
assemble and test Telechips Access products using contract manufacturers. The
Company's Series 3000 products were originally assembled by Lucent
Technologies, Inc. ("Lucent"). The Company experienced considerable and costly
delays due to the inability of Lucent to ship product which met the Company's
quality standards. As a result, the Company was required to perform additional
quality assurance work on Telechips Access Series 3000 products received by
Telechips from Lucent. Henceforth, Group Technologies Corporation ("Group") is
expected to be the Company's primary manufacturer. The initial term of the
Group Manufacturing Agreement, dated December 1, 1995, terminates on February
26, 1997, and is automatically renewed for an additional 12-month period unless
terminated by the Company upon 30 days' written notice before expiration of the
initial term. In the event Group technologies is unable to deliver quality
products in a timely manner, the Company could continue to face substantial
delays which could have a material adverse on the Company's reputation,
financial condition and marketing capability. The Company has supplemented its
support capabilities with the ability to assemble and test modest quantities of
product in house while a transition could be made to other contract
manufacturers which the Company has pre-qualified. However, the Company
competes with numerous other companies for the capacity of these contract

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<PAGE> 15
manufacturers, and no assurance can be given that the Company will be able to
obtain desired quantities of products on a timely basis.

9. Dependence on Licensed Software. The Telechips Access 3000 Series
is designed to operate utilizing the Microsoft Windows operating system. The
Telechips Access Network Client uses the DOS ROM Kernel. The Company would be
materially and adversely affected if that portion of Microsoft DOS necessary to
operate Windows or the network client became unavailable to the Company for use
with its products. The Company entered into an agreement with Microsoft, dated
as of March 1, 1994, and amended as of February 1, 1996, and October 1, 1996,
pursuant to which the Company has been granted a nonexclusive, worldwide license
to the Windows operating systems (the "Microsoft License"). The Microsoft
License expires on December 31, 1997, and there are no automatic renewal terms.
There can be no assurance that, after such date, Microsoft will renew such
license and it is possible that the license would be renewed on terms less
favorable to the Company than the current license. The Telechips Access Network
Client also uses the ICA protocol licensed from Citrix. The agreement dated
December 18, 1996, will initially run for two years and will automatically renew
each year for a one-year term unless either party gives sixty days' written
notice. The Company is obligated to pay minimum royalties after the first
customer shipment of product containing the ICA protocol.

In the event that the Microsoft license is terminated or expires and
is not renewed, and in the case of the Network Client product, the Citrix
license were not renewed, the Company would no longer be authorized to
manufacture or sell its products as currently configured and the Company would
be materially and adversely affected. In addition, in the event products are
introduced that compete directly with the Telechips Access products, the
Company will not be able to prevent the developers of such products from
obtaining a Windows license from Microsoft or an ICA protocol license from
Citrix.

10. Competition; Technological Change and Obsolescence. The market
for the Telechips Access product line is the highly competitive
computer/telephony industry which has been characterized in recent periods by
intense pricing pressures and numerous market entrants. The Company is aware
of several companies that may be perceived or real competitors with its
Telechips Access Network Client product. These include Wyse and Boundless,
which both produce Citrix ICA protocol-dependent network client products, even
though there are some functionality and form factor differences, including the
Network Client's built-in modem. NCD, HDS and Acorn each produce a variety of
network client and server hardware units in various configurations.

Also, Compaq, Dell and Hewlett Packard, supported by Intel and
Microsoft, have recently announced a reference specification for creating
"Network PCS" which are expected to have a lower Total Cost of Ownership
compared to regular PCS but will have added features including a hard drive
which will significantly differentiate the products from network client-like
devices.

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<PAGE> 16
In addition, a consortium of technology companies led by Oracle
Corporation and Microsoft with its recent acquisition of WebTV, have announced
Internet PCs that are expected to sell for as little as $500 and use a
conventional television for a display (not included in the $500 price). This
computer/telephony device may allow users to access the Internet and perform
basic on-line computing functions. Such devices have significant limitations
as compared to the Telechips Access products; however, there can be no
assurance that such companies or other companies will not introduce products
that are substantially similar to the Telechips Access Network Client product
or that such products will not compete with the Telechips Access products.

The Company is also aware of several companies that may be perceived
or real competitors with the Telechips Access 3000 Model. These include
Navitel, which is marketing a product with a touch-sensitive display screen and
computer/telephony function, as a consumer appliance with several
pre-configured programs. Also included are products by British Telecom, Forval
and InfoGear which have touch-sensitive display screens but are not Windows
based and may have other functionality limitations when compared with the 3000
Series. In addition, certain screenphone products may be perceived as
competitors though their systems are based on proprietary operating systems, do
not use touch-screen technology and have other limiting features compared to
the 3000 Series. These include systems produced by Forval, Phillips, AT&T,
Transphone, Cidco and Colonial Data.

The telecommunications and computer industries are also subject to
rapid and significant technological change and the ability of the Company to
compete is dependent in significant part on its ability to continually enhance
and improve its products and technologies. In order to do so, the Company must
effectively utilize and expand its research and development capabilities and,
once developed, expeditiously convert new technology into products and
processes which can be commercialized. There can be no assurance that the
Company will be able to identify, develop, manufacture and offer products
necessary to remain competitive. Moreover, the Company may, from time to time,
maintain a significant investment in its product inventory and, in such event,
would be subject to the risk of inventory obsolescence. If a significant
amount of inventory is rendered obsolete, the Company's business and operating
results would be materially and adversely affected.

11. Dependence on Limited Sources of Supply. Many of the key
components used in the manufacture of the Company's products are currently
being purchased from single sources, including Microsoft, which is the sole
source of the Telechips Access product line operating system and Citrix which
is the sole source of the ICA protocol utilized in the Access Network Client
product line. If the Company's relationship with Microsoft were terminated,
and in the case of the Network Client product, if the Citrix relationship were
terminated, the Company would no longer be authorized to manufacture and sell
its products as currently configured and the Company would be materially
adversely affected. Other than the contract with Microsoft and Citrix, the
Company has no supply contracts. While the Company believes that it can obtain
supplies from other parties, should any of its suppliers terminate their
relationship with

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the Company, such terminations may cause delays in obtaining necessary
supplies, which could in turn result in delays or reductions in product
shipments and loss of sales and consequently have a material adverse effect on
the Company's business, operating results and financial condition.

12. Possible Dependence on a Few Large Customers. The Company's
current marketing efforts have focused primarily on a few large companies in
the hospitality and entertainment industries, the insurance industry and value
added resellers ("VARs") marketing Citrix's ICA protocol-based products. It
is, therefore, likely that, particularly in the early stages of
commercialization, the Company will depend primarily on one or a few large
customers. If the Company were to lose such a customer, it would likely have a
material adverse effect on the Company's business and prospects. There can be
no assurance that the Company will be able to diversify its customer base.

13. Dependence on Key Personnel. The Company believes that its
continued success will depend to a significant extent upon its present
management. On January 30, 1997, C. A. Burns resigned as Chief Executive
Officer, President and Chairman of the Board. Nelson B. Caldwell has been
designated as interim President and CEO. The Company will be searching for a
Chairman and CEO who will also perform certain duties related to the office of
the President. However, the market for qualified persons is extremely
competitive and there can be no assurance that the Company will be able to find
a suitable individual. In such event, the Company may be materially and
adversely affected. In addition, the loss of the services of any of the
Company's present management or other personnel could materially and adversely
affect the Company. Further, in order to successfully implement and manage its
business plan, the Company will be dependent upon, among other things,
successfully recruiting qualified managerial and sales personnel having
experience in business activities such as those contemplated by the Company.
Competition for the type of qualified individuals sought by the Company is
intense. There can be no assurance that the Company will be able to retain
existing employees or that it will be able to find, attract and retain
qualified personnel on acceptable terms.

14. Government Regulation. Telecommunication companies are subject to
regulation by state public utility commissions, the Federal Communications
Commission (the "FCC") and other regulatory authorities. The sale of
telecommunications equipment, such as the Telechips Access, is regulated in the
United States and in many countries, primarily to ensure compliance with
federal technical standards for interconnection, radiation emissions and
noninterference (i.e., type acceptance of a particular product). In addition,
any terminal equipment, such as the Telechips Access, connected to a public
telephone network is required to be registered with the FCC. The Company may
also be subject to further federal and state regulation in the future, as well
as court challenges. The Company has obtained a Part 15 Class B Certificate
and Part 68 Certificate from an FCC-certified laboratory that the Telechips
Access Series 3000 meets certain radiation emission standards and that the
Telechips Access Series 3000 is compatible with existing connection protocols.
The Company is in the process of obtaining

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similar certification on its Telechips Access Network Client product and, while
preliminary tests have indicated the product will receive such certification,
there can be no assurance that the Telechips Access Network Client will meet
minimum compliance standards. In addition, federal and state regulations of
telecommunications companies and equipment are subject to future change. The
Company cannot predict what impact, if any, such changes might have on its
business. Introduction of the Company's products into foreign markets will
likely require compliance with federal export regulations and may require
compliance with foreign laws and regulations.

15. Elimination of Liability of Directors and Officers. The Company's
Articles of Incorporation eliminates the liability of a director or officer of
the Company for monetary damages for breach of fiduciary duty as a director or
officer, subject to certain exceptions. The foregoing provision may reduce the
likelihood of derivative litigation against directors and may discourage or
deter shareholders or management from suing directors for breaches of their
duty of care, even though such an action, if successful, might otherwise
benefit the Company and its shareholders.

16. Possible Volatility of Market Price. The market price of the
Common Stock may be highly volatile as has been the case with the securities of
other small capitalization companies. Factors such as the Company's financial
results, new product introductions and the technological advances and various
factors affecting the telephony industry generally, may have a significant
impact on the market price of the Company's securities. Additionally, in
recent years, the securities markets have experienced a high level of price and
volume volatility and the market prices of securities for many companies,
particularly small capitalization companies, have experienced wide fluctuations
which have not necessarily been related to the operating performances or
underlying asset values of such companies.

17. Options and Warrants. As of the date of this report, the Company
had 17,156 shares of Common Stock reserved for issuance upon the exercise of
outstanding options and 186,894 shares of Common Stock reserved for issuance
upon exercise of outstanding warrants. To the extent that such stock options
and warrants are exercised, dilution to the interests of the Company's
shareholders may occur. In addition, certain warrant agreements contain
anti-dilutive provisions which, as of the date of this report, would result in
an estimated equivalent of 90,000 additional shares being issued for the same
aggregate consideration as the existing warrants. Moreover, the terms upon
which the Company will be able to obtain additional equity capital may be
adversely affected since the holders of the options can be expected to exercise
them at a time when the Company would, in all likelihood, be able to obtain any
needed capital on terms more favorable to the Company than those provided in
the options. In addition, the holders of the outstanding options and warrants
have certain registration rights relating to the shares of Common Stock
issuable upon the exercise thereof, the exercise of which may involve
substantial expense to the Company.

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BUSINESS OF ISSUER

The Company believes that the worldwide acceptance of the
Internet/Intranet (Interxxnet), broader on-line services as well as recognition
that PC users often work with limited standard application programs, has
created the need for inexpensive "client" devices. These clients interact with
PC-based servers which handle the complexities of the computing function and
provide a secure, easy-to-maintain repository of applications and data. The
need to combine the on-line services and applications available to end-users
with telephony functions has created the need for single-client devices
integrating computer and telephony functions in one platform.

Although general purpose, powerful PCs are now commonly available,
they are expensive and more complicated than is necessary for Interxxnet
access, on-line data and telephony-based computing functionality. The Company
believes network client devices will provide greatly expanded computing options
rather than replacing PC functionality.

A central theme of the Company's global strategy is to establish
technology partnerships and business alliances with the leading participants
among the network client, network computer and PC peripheral manufacturers and
suppliers, telecommunications equipment manufacturers, value-added resellers
(VARs) in the computer/telephony distribution channels, and information service
providers. The Company believes that such relationships will assist it in its
efforts to design integrated computer/telephony products compatible with
rapidly evolving public and private networks.

The Company has secured licensing arrangements with Microsoft and
Citrix and a manufacturing agreement with Group and has, in the past, worked
with NSC. The Company has also entered into a Master Purchase Agreement with
MassMutual and a contract with Tandem Computers Canada Ltd., giving Tandem the
exclusive right to use Telechips products for incorporation into its gaming
product lines and makes Tandem the exclusive Telechips reseller to Acces
Controle Telematique Inc., a Quebec company involved in the ticketing industry.
Telechips also granted Tandem a nonexclusive right to resell Telechips products
to the banking industry. However, there can be no assurance that any other
relationships will be developed.

The Company is utilizing its development expertise as validated by the
3000 Series to expand Telechips Access products into a family of products
potentially including component level variants which, if developed, will enable
customers to access and to take advantage of the many innovations in network
computing, including the integration of computing and telephony capabilities at
client devices. At one end of the product family is the Telechips Access
Network Client currently in the pre-production and regulatory testing phase of
the development cycle with commercial deployment expected by June, 1997. This
product allows users to plug in their monitor, keyboard, mouse, printer and
other peripherals to the Telechips Access Network Client and enable remote
access utilizing Citrix's ICA protocol, via a built-in modem

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to the computing power of a central server running Citrix's WinFrame multi-user
Windows application server software. At the other end of the product family is
the current 3000 Series integrated computer/telephony workstation with a
touch-sensitive display screen. Telechips is conducting market assessment in
consideration of expanding this product to include a large, full VGA color
screen and potentially other enhancements to take advantage of rapid advances
in operating system environments. As the product family expands, Telechips
expects to produce variants of the Network Client which may include added
telephony capability and touch-screen technology in various product
configurations. These configurations and others utilizing the 3000 Series base
technology may include board-level products enabling OEMs to incorporate
Telechips technology into an array of end-user products which would combine
integrated computer/telephony capabilities in various PC peripheral devices or
other end-user information appliances. In addition, by developing and
fostering strategic relationships with industry leaders, the Company believes
that it will be in a position to identify other needs and opportunities that
can be addressed by integrated computer/telephony products.

THE TELECHIPS ACCESS NETWORK CLIENT

Users can connect their monitor, keyboard and mouse directly to the
Network Client. Daily log-ins enable users to access their organization's host
server running Citrix's WinFrame multi-user application software. Utilizing the
Citrix ICA protocol, the Network Client transmits keyboard and mouse input to
the server and receives only the display output to the attached screens. All
applications and data reside on the server. Like PCs, users utilize Windows
and other applications, access the Internet, save and transfer files, and print
locally.

The Network Client is designed to reduce an organization's Total Costs
of Ownership for computing. Unlike PCs, the Network Client does not require
software upgrades, since all software applications reside on the server.
Hardware upgrades occur at the server level, rather than at each individual
station. This also reduces the amount of support and training costs. By
administering applications from the server, the Network Client delivers updated
screens upon login. No matter the number of remote users, distribution can be
executed in one step. Files are stored centrally rather than locally, which
eliminates the potential for viruses and adds data security.

The Telechips Access Network Client has a relatively small footprint
being approximately 8" x 5" x 1." Each unit is equipped with a 33.6 modem and
AMD's ElanSC400 486-based 33MHz processor running Citrix's WinFrame Client for
DOS (client end of the ICA protocol) on a Microsoft DOS platform. It comes
with standard SVGA or VGA monitor

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connection, keyboard connector, serial port, parallel port and mouse connector.
The product allows remote dial-in network access, compatibility with standard
PC components and is designed to utilize DOS, 16-bit and 32-bit Windows
applications running on the server. The user supplies the analog phone
connection, access to a server running Citrix's WinFrame multi-user application
server software, monitor, mouse, keyboard and other desired peripherals. A
second version, currently under development, will include on-board LAN
technology in place of the modem. No assurance can be given that such product
will be developed in a timely manner, if at all.

Both versions of the Telechips Access Network Client are expected to
have a reseller list price of $500. Certain volume discount structures will be
available to the VAR channel. No assurance can be given that the Company can
successfully market the Telechips Access Network Client product line at a price
that will be acceptable to potential purchasers or be commercially successful
to the Company.

THE TELECHIPS ACCESS 3000 SERIES

The Company believes that the recent popularity of the Internet and
on-line services, including the ready availability of electronic data over
standard telephone lines, has established the need for inexpensive, efficient
and user-friendly devices that combine telephone and computer technologies in a
single product. The Series 3000 product is a synthesis of several established
technologies designed to be used by people and businesses that require the
voice communications capabilities of a sophisticated business telephone and the
information capability of a PC. As the Company expands its product family, it
is considering introducing variants of the Network Client which will include
added telephony capability and touch-screen technology in various product
configurations. These configurations and others will utilize the 3000 Series
base technology which may include board-level products enabling OEMs to
incorporate Telechips technology into an array of end-user products which
would combine integrated computer/telephony capabilities in various PC
peripheral devices or other end-user information appliances. The Company
expects that due to rapid technological change many of these products will
eventually eclipse the 3000 Series and, consequently, Telechips has prudently
taken a current-year allowance against existing Series 3000 inventory
(including raw materials designated for Series 3000 production) and recognized
an impairment of certain components of the related manufacturing tooling for
potential replacement with tooling designed for other products. However, the
Company will continue to support current users of the 3000 Models and expects
that its marketing efforts will result in development of the product for
targeted industry uses.

As currently configured, the Telechips Access 3000 Series occupies
approximately the same amount of space on a desk as a standard business
telephone and comes equipped with a touch-sensitive display screen that rises
approximately four inches from the body of the device. The display screen,
which is the Access 3000's primary interface between the device and the user,
is utilized by pressing directly on the screen with a finger or a stylus and
functions in a

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similar fashion to the display screens found in certain automated bank teller
machines. The display screen typically displays various icons that represent
the various functions and applications installed in that particular device.
The user is able to access any given function or application simply by pressing
on the particular icon on the screen. The Access 3000 also includes a standard
telephone handset, a standard telephone numeric keypad, an expansion slot for
PCMCIA cards containing such peripherals as a hard disk, voice compression
facilities and video compression facilities for graphics display and connectors
for other peripheral equipment including keyboards and printers. The graphical
interface on the touch-screen display allows the Access 3000 to be completely
operational without the use of a computer keyboard, although a keyboard may be
attached to the Access 3000 as a peripheral device. Voice and data
applications may be used at the same time on the Access 3000, either through
alternating usage on the same telephone line or by using two separate telephone
lines.

The current Access 3000 is equipped with a microprocessor chip, up to
eight megabytes of random access memory ("RAM"), and up to five megabytes of
nonvolatile memory ("flash memory"). A hard disk incorporated in a PCMCIA card
may be added to increase the amount of data storage significantly. The Access
3000 telephone contains all the features usually found in a sophisticated
business phone, including one- or two-line capability, conferencing and
forwarding functions and a speakerphone. The Company has developed speakerphone
technology, included in the Access 3000, which is designed to reduce the voice
clipping prevalent in many speakerphones. Each Access 3000 has the following
standard and optional features: (i) simplified access to advanced telephone
services such as call waiting, caller ID and three-way calling; (ii) a built-in
organizer, including calendar and appointment notification and indexing of
calls received; (iii) full internal modem capabilities which will allow a user
to communicate with other computers. In addition, with specific software
applications written, the hardware exists to support the following additional
capabilities: (i) advanced messaging capabilities such as automatic answering,
screening and routing of calls and sophisticated indexing of calls received;
(ii) complete facsimile transmission and reception capabilities along with the
ability to save, print and otherwise manipulate incoming faxes; and (iii)
access to the Internet or on-line services. Other uses will depend on the
development of applications and features, either by the Company, by a customer,
by the Company and a customer working together or by noncustomer third parties,
alone or in cooperation with the Company.

The Company began shipping commercial production units in October,
1995. The current standard list price for a standard Access 3000 is
approximately $1,250 per unit. However, the Company has marketed initial
production units at an introductory trial price substantially lower than the
current list price, approximately $799 to $1,050 per unit, depending upon
configuration, a price that resulted in the Company's negative gross margin. No
assurance can be given that the Company can market the Access 3000 at a price
that will be acceptable to potential purchasers or be commercially successful
to the Company.

Because the Access 3000 technology uses a PC processor, the potential
uses are extremely varied. Potential applications for the Access 3000 include
(i) simplified access to

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information services, such as reference information, stock quotes, on-line
White and Yellow Pages telephone directories, on-line services, banking
services and weather reports; (ii) simplified access to complex telephone
systems, such as the Centrex, Private Branch Exchange ("PBX") and Key Service
Unit ("KSU") systems to the extent they operate with standard nonproprietary
analog phones; and (iii) company-specific dedicated applications such as the
utilization of the Access 3000 to assist pension plan administrators to access
on-line systems for pension fund planning and administration where the
administrator can utilize the Access 3000 to access a wide variety of plan
management functions, including updating participant information, verifying
account balances and performing actuarial calculations.

The computer marketplace and, in particular, the computer/telephony
marketplace, is characterized by rapid technological developments, changes in
customer requirements, evolving industry standards and frequent new product
introductions. There can be no assurances that the Company will be able to
identify or adapt to such development and changes. In the future, the Company
will likely be required to enhance its existing products and to develop and
introduce new products that are compatible with technological advances and
respond promptly to new customer requirements and evolving industry standards.
The failure to do so would result in a material adverse effect on the Company.

MARKETING POSITION

Telechips is positioned as a supplier of network client computing
devices and computer telephony integration ("CTI") appliances including related
software and peripherals. Telechips technology and products are designed to
add value to OEMs and users alike as they are designed to lower the total cost
of ownership including capital cost, training and on-going maintenance.

Telechips offers value in network client and CTI environments by
transparently integrating broadly accepted open operating systems with server
and telephony infrastructures. This results in sealed, tamper-proof units with
optional, easy-to-use ergonomics, such as touchscreen user interfaces and
integrated telephony facilities. Telechips believes its unique CTI value set
creates a strategic advantage.

MARKETING STRATEGY

22
<PAGE> 24
adaptable for use with other industry participants. Second, by attracting
industry leaders as customers, the Company effectively gained validation of the
technology user within those industries. Third, by targeting large industry
leaders, the sales to each customer are at a potentially high volume.
Representative customers to date include industry leaders such as Massachusetts
Mutual and Tandem Computers Canada, Ltd. Telechips OEM alliances and corporate
focus in 1997 are key to achieving the Company's revenue goals.

During 1997, the Company intends to leverage the successful validation
of the market and product testing demonstrated in existing blue chip accounts
(MassMutual, Tandem, The Walt Disney Company); explore its OEM marketing and
development alliance with Citrix, a well-recognized network computing industry
leader; and introduce its new, low-cost Telechips Access Network Client device
for OEM and VAR distribution in volume in June, 1997.

Accordingly, the Company intends to shift in focus from intensive R&D
activities, product testing and market validation to a channel and sales
development emphasis. To build its customer base, Telechips intends to
increase its sales force. It anticipates adding sales people to broaden its
geographic coverage, particularly in the Western region of the United States.
Salespeople will generally operate from a home base. They will be responsible
for new business development, as well as account maintenance and support. To
assist in their activities, the Company anticipates assigning to every two
sales people a field systems engineer who will act as liaison between the field
and the professional services group and engineering department at Telechips.

The Company intends to use a wide range of established marketing
techniques to increase name recognition and strengthen product credibility in
the marketplace. This includes exhibiting at major computer industry trade
shows, such as the Computer Telephony, Net InterOp, Embedded Systems Conference
and other trade shows, as well as trade shows in the identified vertical
markets. It will issue product announcements, as well as pursue articles in
leading financial, general and trade publications to stimulate interest. The
Company is also enhancing its Web/Internet presence, including hyperlinks to
strategic alliance websites and financial databases.

Even though the Company anticipates that it will be able to produce
commercial units of its products at a cost that will yield an adequate gross
margin, there can be no assurance that such margin will be achieved. Further,
the Company has not conducted, and does not intend to conduct, formal market or
concept feasibility studies. Achieving market acceptance for the Company's
existing Telechips Access products and products under development will require
substantial marketing efforts and expenditure of significant funds to create
awareness and demand by potential customers. The Company's past marketing
efforts have focused primarily on a few large OEMs and service providers as
well as a few other similarly large companies. Its present focus with the
Network Client product is on a large group of VARs who market and promote
Citrix technology centric products. It is therefore likely, particularly in
the early

23
<PAGE> 25
stages of commercialization, that the Company will depend primarily on one or a
few large customers.

The Company currently has no distribution arrangements. The Company
intends to develop relationships with specific manufacturers, dealers and
service providers in the telephony industry. There can be no assurance that the
Company will be able to enter into such distribution arrangements. If the
Company is not able to develop such relationships, it may have a material
adverse effect on the Company's ability to distribute the Company's products on
economically reasonable terms, or at all.

In the computer/telephony equipment industry, although general
specifications exist for intelligent network services, network variations among
telcos often require manufacturers to field test and debug their products on
various telephone networks in order to ensure that their equipment operates
properly throughout these networks. The Company believes that the emerging
market for computer/telephone combination products will, therefore, be
characterized by close, mutually dependent distribution arrangements and
relationships between the telcos/standard setting consortiums/suppliers of
network technology and the equipment suppliers, and there can be no assurance
that the Company will be able to establish and maintain such relationships.
There can be no assurance that emerging markets for the Company's products will
not be limited, that the Company will be able to enter into satisfactory
marketing arrangements, or that increased marketing efforts or the Company's
strategies will result in successful product commercialization or in initial or
continued market acceptance for the Company's products under development.

MANUFACTURING

The Company does not presently intend to establish its own
manufacturing facilities. The Telechips Access Series 3000 is currently set up
to be manufactured by Group Technologies pursuant to the terms of the Group
Technologies Agreement. The initial term of the Group Technologies Agreement
terminates on February 26, 1998. The Company is also in the process of
qualifying contract manufacturers (including Group Technologies) to produce the
Telechips Access Network Client. Considering the nature of the technology
incorporated in the Network Client, the Company expects to qualify the contract
manufacturer and complete the required tooling and nonrecurring engineering
necessary to begin the commercial manufacturing process for volume delivery in
June, 1997. However, there can be no assurance that such contract
manufacturing resources can be secured, nor the required tooling and
nonrecurring engineering completed in a timely manner, if at all.

In addition, in the event Group Technologies or other qualified
contract manufacturer is unable to deliver quality products in a timely manner,
the Company could continue to face substantial delays. Such delays could have
a material adverse effect and harm the Company's reputation, financial
condition and marketing capability. To somewhat offset such an advent, the
Company has supplemented its support capabilities with the ability to assemble
and test

24
<PAGE> 26
modest quantities of product in house while a transition could be made to other
contract manufacturers which the Company has pre-qualified. However, the
Company competes with numerous other companies for the capacity of these
contract manufacturers, and no assurance can be given that the Company will be
able to obtain the desired quantities of products on a timely basis.

Many of the key components used in the manufacture of the Company's
products are currently being purchased from single sources, including
Microsoft, which is the sole source of the Telechips Access operating system
and Citrix which is the sole source of the ICA protocol used in the Telechips
Access Network Client. Other than the contracts with Microsoft and Citrix, the
Company has no supply contracts. While the Company believes that it can obtain
supplies from other parties, should any of its suppliers terminate their
relationship with the Company, such terminations may cause delays in obtaining
necessary supplies, which could in turn result in delays or reductions in
product shipments and loss of sales and consequently have a material adverse
effect on the Company's business, operating results and financial condition. If
the Company's relationship with Microsoft or Citrix were terminated, the
Company would no longer be authorized to manufacture and sell its products as
currently configured and the Company would be materially adversely affected.

RESEARCH AND DEVELOPMENT

The Company's current research and development activities have
resulted in the development of working prototypes and pre-production units of
the Telechips Access Network Client. The current version of the Network Client
allows users to plug in their monitor, keyboard, mouse, printer and other
peripherals and perform standard computer functions, utilizing the Network
Client's remote access capability via a built-in modem. The Network Client
utilizes the Citrix ICA protocol which enables the product to access servers
running the Citrix WinFrame multi-user Windows application server software.
Other than the DOS platform embedded in the Network Client, all applications
and operating system functions are handled at the server.

A second version of the Network Client utilizing LAN-based technology
is under development. This will allow network users to perform standard
computing functions utilizing the Citrix ICA protocol on a LAN-based system
which includes a Citrix WinFrame server. The Company expects to have working
prototypes in May, 1997. However, there can be no assurances that such
products will be developed on a timely basis or at all.

The Company will not devote further resources to the development of
the World Wide Web Browser software and the E-Mail software. However, the
Company has not devoted significant resources to the development of these
product lines.

The Company also plans to potentially initiate R&D activities in the
upcoming fiscal year to develop variants of the Network Client which will
include added telephony capability

25
<PAGE> 27
and touch-screen technology in various product configurations. These
configurations and others utilizing the 3000 Series base technology may include
board-level products enabling OEMs to incorporate Telechips technology into an
array of end-user products which would combine integrated computer/telephony
capabilities in various PC peripheral devices or other end-user information
appliances. See "Item 1--Factors Affecting Operating Results--3. Uncertainty
of New Product Development; Single Product."

It is expected that the Company will devote substantial resources to
the research and development of new or enhanced Telechips Access products. The
inability to successfully complete development of a product or application or a
determination by the Company, for financial, technical or other reasons, not to
complete development of any product or application, particularly in instances
in which the Company has made substantial capital expenditures, could have a
material adverse affect on the Company. To the extent that such development
efforts are unsuccessful, the Company will not have the capability to develop
additional products to generate revenues and will likely be required to seek
additional capital in order to seek alternative business opportunities. The
Company conducts research and development with an in-house staff of researchers
and technicians as well as through third-party providers. The Company has no
long-term research or development arrangements with third parties.

COMPETITION

The market for the Access product line is the highly competitive
computer/telephony industry which has been characterized in recent periods by
intense pricing pressures and numerous market entrants. The Company is aware
of several companies that may be perceived or real competitors with its
Telechips Access Network Client product. These include Wyse and Boundless,
which both produce Citrix ICA protocol-dependent network client products, even
though there are some functionality and form factor differences, including the
Access Network Client's built-in modem. NCD, HDS and Acorn each produce a
variety of network client and server hardware units in various configurations.
However, these systems may utilize other proprietary systems in addition to or
excluding the Citrix ICA protocol and Citrix WinFrame multi-user application
server software. Sun Microsystems is also promoting a "thin" client based on
the Java VM operating systems which appears to be gaining rapid acceptance in
the marketplace.

Also, Compaq, Dell and Hewlett Packard, supported by Intel and
Microsoft, have recently announced a reference specification for creating
"Network PCs" which will have a lower total cost of ownership compared to
regular PCs, will be sealed, have limited peripheral access and allow software
upgrades, configuration and support to be done from an organization's network.
However, this will include hardware and will likely cost more than the
"thinner" network client products.

26
<PAGE> 28
In addition, a consortium of technology companies led by Oracle
Corporation and Microsoft with its recent acquisition of WebTV, have announced
Internet PCs that are expected to sell for as little as $500 and use a
conventional television for their display (not included in the $500 price).
This computer/telephony device may allow users to access the Internet and
perform basic on-line computing functions. Such devices have significant
limitations as compared to the Telechips Access products; however, there can be
no assurance that such companies or other companies will not introduce products
that are substantially similar to the Telechips Access Network Client product.

The Company is also aware of several companies that may be perceived
or real competitors with the Telechips Access 3000 Model. These include
Navitel, which is marketing a product with a touch-sensitive display screen and
computer/telephony functions, as a consumer appliance with several
pre-configured programs. Also included are products by British Telecom, Forval
and InfoGear which have touch-sensitive display screens but are not Windows
based and may have other functionality limitations when compared with the 3000
Series. In addition, certain screenphone products may be perceived as
competitors though their systems are based on proprietary operating systems, do
not use touch-screen technology and have other limiting features compared to
the 3000 Series. These include systems produced by Forval, Phillips, AT&T,
Transphone, Cidco and Colonial Data.

In addition, the Telechips Access 3000 Series functions can be
performed by a PC equipped with a high-performance voice capable fax/modem
integrated with other hardware and software enhancements. Therefore, the
Company must be able to demonstrate the distinct advantages of its system over
those features available in PCs equipped as described above. PCs are becoming
more commonplace everyday and many are manufactured and marketed by well
financed, established companies with significantly greater financial and other
resources than the Company. In addition, due to extreme competition, the
prices for PCs that are substantially more powerful than the Telechips Access
have declined sharply and will likely continue to decrease. There can be no
certainty that the Company will be successful in its efforts to distinguish the
Telechips Access from PCs or that the Telechips Access will ever be
commercially accepted as a substitute for a PC equipped as described above.

The Company also potentially competes, depending on the introduction
of similar products, with a large number of companies, such as Northern Telecom
(NorTel); Matshushita (Panasonic); AT&T and Phillips in the telecommunications
business; IBM, Compaq and Apple in the computer business; and Matsushita
(Panasonic), Apple-Sharp and Casio-Tandy in the consumer electronics business.
Many of the Company's competitors and potential competitors are significantly
larger and have significantly greater financial and management resources than
the Company. The Company expects that competition will continue to be intense
in the markets to be addressed by the Company, and there can be no assurance
that the Company will compete successfully.

27
<PAGE> 29
The telecommunications and computer industries are also subject to
rapid and significant technological change and the ability of the Company to
compete is dependent in significant part on its ability to continually enhance
and improve its products and technologies. In order to do so, the Company must
effectively utilize and expand its research and development capabilities and,
once developed, expeditiously convert new technology into products and
processes which can be commercialized. There can be no assurance that the
Company will be able to identify, develop, manufacture and offer products
necessary to remain competitive. Moreover, the Company may, from time to time,
maintain a significant investment in its product inventory and, in such event,
would be subject to the risk of inventory obsolescence. If a significant
amount of inventory is rendered obsolete, the Company's business and operating
results would be materially and adversely affected.

INTELLECTUAL PROPERTY

The Company holds no United States or foreign patents and has not
filed any U.S. or foreign patent applications. In addition, much of the
technology embodied in the Telechips Access, such as the touch-sensitive
display and the computer technology, is generally available to other
manufacturers and may be used by competitors of the Company. The Company uses
various trade names and trademarks in the conduct of its business and has filed
an application for registration of the marks "Telechips " and "Telechips
Access" with the U.S. Patent and Trademark Office. In addition, the Company
depends in part upon certain technology and know-how to differentiate its
products from those of its competitors, and relies on a combination of trade
secret laws and nondisclosure and confidentiality agreements with its
employees, consultants, distributors, researchers and advisors to protect its
technology. There can be no assurance that such laws or agreements will
provide meaningful protection for the Company's trade secrets or proprietary
know-how in the event of any unauthorized use or disclosure of such trade
secrets or know-how. In addition, there can be no assurance that third parties
will not independently develop the same or similar technology, obtain
unauthorized access to the Company's proprietary technology or misuse the
technology to which the Company has granted access. The Company believes that,
because of the rapid pace of technological change in the telecommunications
market, the legal protection for its products will be less significant to the
Company's success than the knowledge, ability and experience of the Company's
employees, the frequency of product enhancements and the quality of support
services provided by the Company.

Certain intellectual property embodied in certain portions of the
Telechips Access 3000 Series mechanical design is licensed by the Company on a
worldwide, perpetual, royalty-free basis from NSC. Although NSC has agreed not
to manufacture or sell products incorporating such technology prior to March
31, 1997, NSC has substantially greater financial, marketing and other
resources than the Company and if it chooses to make use of its technology, or
to license its technology to other companies, products similar to the Telechips
Access 3000 Series could be introduced to the market, although, except to the
extent permitted by Telechips , such products would not be permitted to contain
any technology developed by Telechips after the

28
<PAGE> 30
termination of the NSC Agreement. Such products, if introduced, may have
features, pricing and other characteristics which would make them more
acceptable to the market than the Telechips Access.

The Telechips Access product line uses a PC-compatible version of the
Microsoft Windows operating system. The Company, pursuant to the MS License
Agreement with Microsoft, dated March, 1994 and as amended on February 1, 1996,
and October 1, 1996, has been granted a nonexclusive license to that portion
of MS DOS necessary to operate Windows (5.0 ROM Version (Kernel), and to the
Windows Operating System, 3.1 ROM Version. The Telechips Access Network
Client uses the DOS Kernel only. The Company is obligated to make monthly
minimum royalty payments based on 600 units per month. As of the date of this
report, the Company has prepaid royalties to Microsoft of approximately
$260,000. The MS License Agreement may only be terminated prior to its
expiration date upon a default by the parties. This license expires on
December 31, 1997, and there are no automatic renewal terms. There can be no
assurance that, after such date, Microsoft will renew such license and it is
possible that the license would be renewed on terms less favorable to the
Company than the current license. The Telechips Access Network Client also
uses the ICA protocol licensed from Citrix Systems, Inc. The agreement dated
December 18, 1996 will initially run for two years and will automatically renew
each year for a one-year term unless either party gives sixty days' written
notice. The Company is obligated to pay minimum royalties every three months
after the first customer shipment of product containing the ICA protocol.

In the event that the MS License Agreement is terminated and not
renewed, and in the case of the Network Client product, the Citrix license were
not renewed, the Company would no longer be authorized to manufacture or sell
its products as currently configured and the Company would be materially and
adversely affected. In addition, in the event products are introduced that
compete directly with the Telechips Access products, the Company will not be
able to prevent developers of such products from obtaining a Windows license
from Microsoft or an ICA protocol license from Citrix.

The telecommunications industry is characterized by the existence of a
large number of patents and frequent litigation based on allegations of patent
infringement. The Company is not aware of any infringement by its products or
technology of the proprietary rights of others. However, the Company has not
conducted any investigation as to the possible infringement and there can be no
assurance that third parties will not assert infringement claims against the
Company in connection with its products, that any such assertion of
infringement will not result in litigation, or that the Company would prevail
in such litigation or be able to license any valid and infringed patents of
third parties on commercially reasonable terms. If the Company was unable to
obtain such a license, it would likely encounter significant delays in product
market introductions and may be precluded from marketing its products entirely.
Furthermore, litigation, regardless of its outcome, could result in substantial
cost to and diversion of effort by the Company. Any infringement claims or
litigation against the

29
<PAGE> 31
Company could materially and adversely affect the Company's business, results
of operations and financial condition.

GOVERNMENT REGULATION

Telecommunication companies are subject to regulation by state public
utility commissions, the Federal Communications Commission (the "FCC") and
other regulatory authorities. The sale of telecommunications equipment, such
as the Telechips Access, is regulated in the United States and in many
countries, primarily to ensure compliance with federal technical standards for
interconnection, radiation emissions and noninterference (i.e., type acceptance
of a particular product). In addition, any terminal equipment, such as the
Telechips Access, connected to a public telephone network is required to be
registered with the FCC. The Company may also be subject to further federal
and state regulation in the future, as well as court challenges. The Company
has obtained a Part 15 Class B Certificate and Part 68 Certificate from an
FCC-certified laboratory that the Telechips Access Series 3000 meets certain
radiation emission standards and that the Telechips Access Series 3000 is
compatible with existing connection protocols. The Company is in the process
of obtaining similar certification on its Telechips Access Network Client
product and, while preliminary tests have indicated the product will receive
such certification, there can be no assurance that the Telechips Access Network
Client will meet minimum compliance standards.

In addition, federal and state regulations of telecommunications
companies and equipment are subject to future change. The Company cannot
predict what impact, if any, such changes might have on its business.
Introduction of the Company's products into foreign markets will likely require
compliance with federal export regulations and may require compliance with
foreign laws and regulations.

EMPLOYEES

As of the date of this report, the Company has a total of 19
employees, 6 of whom are involved in product development and related support
activity, 4 of whom are involved in manufacturing interface, and 9 of whom are
responsible for general management, sales and marketing. The Company's
employees are not represented by a labor union or a collective bargaining
agreement.

On January 31, 1997, the Company terminated the employment of 11
employees in an effort to reduce expenses. Since such date, the Company has
rehired four of the employees that were terminated.

Item 2. Description of Property

The Company occupies an 8,500 square-foot facility in Reno, Nevada,
for its executive and administrative staff under two identical leases
(collectively referred to as the "Lease")

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<PAGE> 32
which cover separate but contiguous units. The term of the Lease is from June
1, 1995 through June, 2000 at a base monthly rental of $12,312, plus any
excise, privilege or sales tax or any tax levied. The base rent increases each
year by approximately $500 per month, such base monthly rental during the last
term is $14,401 per month. The Company does not have an option to renew the
Lease nor any option with respect to expansion. However, the Company believes
that this facility will be adequate to meet its needs for the foreseeable
future.

The Company also occupies a 5,310 square-foot facility in Reno,
Nevada, for on-site testing, assembly and inventory storage under a separate
lease. The term of the lease is from December 1, 1996, through November 30,
1997, at a base monthly rent of $7,965 plus an excise, privilege or sales tax
or any tax levied. The Company does not have an option to renew the lease nor
any option with respect to expansion. However, the Company believes this
facility will be adequate to meet its needs for the foreseeable future.

Item 3. Legal Proceedings

As of the date of this report, the Company is not involved in any
material legal proceedings.

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

1. A special meeting of the stockholders was held on March 5,
1997, at the principal office of the Company at 8:30 A.M., Pacific time and
adjourned to March 7, 1997, at 2:00 P.M. Pacific time, for the purpose of
approving an amendment to the Company's Articles of Incorporation to effect a
1-for-15 reverse stock split of the issued and outstanding Common Stock (the
"Reverse Split"); 7,777,017 shares voted in favor of the Reverse Split, 572,524
shares voted against the Reverse Split, 33,674 shares abstained from voting.

2. A special meeting of the stockholders was held on December 6,
1996, at the principal office of the Company at 2:00 P.M., Pacific time, for
the purpose of approving an amendment to the Company's Articles of
Incorporation to increase the authorized Common Stock from 10,200,000 shares to
20,200,000 shares (the "Amendment"); 2,755,113 shares voted in favor of the
Amendment, 67,688 shares voted against the Amendment and 4,000 shares abstained
from voting.

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<PAGE> 33
PART II

Item 5. Market for Common Equity and Related Stockholder Matters

a) Market Information. The Company's Common Stock, and Warrants are
listed on the National Association of Securities Dealers Automated Quotation
System, specifically, The Nasdaq SmallCap Market ("Nasdaq") under the symbols
"TCHP" ("TCHPD" until April 11, 1997 [approximately 30 days subsequent to the
15:1 reverse split]) and "TCHPW," respectively. The tables below set forth the
range of high and low closing prices for the Common Stock and Public Warrants
as reported on Nasdaq in the fourth quarter of the Company's most recently
completed fiscal year and each quarter or portion thereof since the end of the
last fiscal year. All figures have been adjusted to reflect the 1-for-15
reverse stock split of the Company's Common Stock.

COMMON STOCK
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1996
----

First Quarter . . . . . . . . . . . . . . . . . . $90 $82-1/2

Second Quarter . . . . . . . . . . . . . . . . . . $75 $73-1/8

Third Quarter . . . . . . . . . . . . . . . . . . $28-1/8 $22-1/2

Fourth Quarter . . . . . . . . . . . . . . . . . . $3-3/4 $2-13/16

1997
----

First Quarter . . . . . . . . . . . . . . . . . . . $6-3/32 $22/32
</TABLE>

WARRANTS
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1996
----

First Quarter . . . . . . . . . . . . . . . . . . $37-1/2 $33-3/4

Second Quarter . . . . . . . . . . . . . . . . . . $25-5/16 $24-3/8

Third Quarter . . . . . . . . . . . . . . . . . . . $7-1/2 $3-3/4

Fourth Quarter . . . . . . . . . . . . . . . . . . $15/16 $15/16

1997
----

First Quarter . . . . . . . . . . . . . . . . . . $3/16 $1/32
</TABLE>

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<PAGE> 34
b) Holders. As of March 31, 1997, the Company had approximately 150
holders of record of its Common Stock.

c) Dividends. The Company has never paid dividends on its Common
Stock and does not intend to pay cash dividends for the foreseeable future.

Item 6. Management's Discussion and Analysis or Plan of Operation

Telechips Corporation (the "Company") was organized in January, 1991,
and since its inception has been engaged primarily in the research, design and
development of the Company's Telechips Access products and related software and
other technology. The Company began marketing commercial units of the Access
Series 3000 to its customer during the last quarter of 1995. During the year
ending December 31, 1996, the Company sold units of the Access Series 3000 with
total revenues of approximately $108,000.

On February 7, 1997, the Company issued a note payable for $300,000.
The note was discounted, yielding net proceeds to the Company of $250,000. The
note bears a stated annual interest rate of 1% (effective annualized rate of
252.91%, after taking into account the discount including issuance of common
stock) and is payable upon the earlier of 180 days from date of issuance or
upon the closing of a significant equity, quasi-equity or debt financing by the
Company. In addition, the Company agreed to issue to the lender 75,000 shares
of common stock upon maturity valued at $51,600. The note was paid and shares
issued April 2, 1997.

On April 2, 1997, pursuant to Regulation S, the Company completed a
private placement of 1,906 shares of Series B 4% cumulative convertible
preferred stock ("Series B Preferred Stock") with a face value of $1,000 per
share. Of the Series B Preferred Stock, 1,031 shares were sold at a discount
of 20% of the face value after paying underwriting discounts, expenses and
other related fees of approximately $172,250. The Company received
approximately $652,750 in net proceeds. Also, the Company converted a $700,000
note payable into 875 shares of Series B Preferred Stock. The Series B
Preferred Stock is convertible any time beginning May 17, 1997, until March 31,
1999, using a formula ("Series B Conversion Formula") multiplying each Series B
Preferred share by 1,000 and dividing the result by the lower of either 110% of
the fair market value at April 2, 1997, or the fair market value at the time of
conversion. The Series B Preferred Stock will automatically convert, if

33
<PAGE> 35
conversion has not previously been effected, on March 31, 1999, or upon
consummation of a public offering of securities with gross proceeds of
$10,000,000 or more provided that such offering may not close prior to
September 29, 1997. A portion of the net proceeds was used to pay off the
$300,000 February 7, 1997, note payable.

The Company is currently using the remaining proceeds of the
Regulation S Offering to fund general corporate activities and complete
development of, and market the Telechips Access Network Client product. The
Company anticipates, based on its current proposed growth plans and assumptions
relating to its growth and operations, that the proceeds from the Regulation S
Offerings and private placements, borrowings and planned revenues will not be
sufficient to satisfy the Company's contemplated cash requirements for the next
12 months and that the Company will be required to raise additional funds in
the immediate future. In addition, in the event that the Company's plans
change or its assumptions prove to be inaccurate (due to unanticipated
expenses, delays, problems or otherwise), the Company would be required to seek
additional funding sooner than anticipated. See "Liquidity and Capital
Resources."

The Company is currently pursuing several potential funding
opportunities; however, there can be no assurance that any of such
opportunities will result in actual funding or that additional financing will
be available to the Company, when needed, on commercially reasonable terms, or
at all. If the Company is unable to obtain additional financing, if needed, it
will likely be required to curtail its marketing and manufacturing plans and
possibly cease its operations. Any additional equity financing may involve
substantial dilution to the Company's then existing shareholders. The
Company's independent accountants have included an explanatory paragraph in
their report on the Company's financial statements for the year ended December
31, 1996, stating that the Company has not, to date, recognized significant
revenues from product sales nor produced units in quantities which will yield a
gross margin adequate to cover product and operations costs and that these
factors raise substantial doubt about the Company's ability to continue as a
going concern. See "Liquidity and Capital Resources."

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<PAGE> 36
February 14, 1997, Mr. Caldwell was appointed as interim President and Chief
Executive Officer until such time that the Company locates a permanent
replacement.

Of the remaining outside directors, Mr. Vigilante, 66, was a director
with Network Equipment Technologies from April, 1992, to August, 1996. He has
been a director of the Visiting Nurses Association of Central New Jersey since
October, 1991. Mr. Vigilante has also been a director of the Arthritis
Foundation of New Jersey since February, 1986, and is currently its Chairman.
He was a consultant with Pyramid Technologies Corporation from April, 1987 to
February, 1995. Mr. Vigilante held various positions with AT&T and, in 1985,
he became a Senior Vice President. Mr. Vigilante retired from AT&T in 1987
after 30 years of service.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO YEAR ENDED DECEMBER 31,
1995. There were sales revenues of approximately $108,000 for the year ended
December 31, 1996, as compared to $20,700 for the year ended December 31, 1995.
In May, 1996, a major customer placed their first significant order.
Subsequent to the year ended December 31, 1996, the customer purchased
approximately $60,000 of the Telechips Access 3000 Series units. Telechips
Access 3000 Series units at a cost of approximately $55,000 were also supplied
to customers as demos and trial units during the year ended December 31, 1996
and were charged to advertising expense. During the year ended December 31,
1995, $9,000 of such units were charged to advertising expense. Also during
the year ended December 31, 1996, the Company recognized an allowance against
inventory, including raw materials related to the 3000 Series product of
approximately $760,000. No similar expense was recognized in the year ended
December 31, 1996.

For the year ended December 31, 1996, operating expenses, which
primarily consist of marketing, research and development and general
administrative expenses, were approximately $5,338,000 as compared to
$2,922,000 for the year ended December 31, 1995. The increase was due to
increased operating activity related to marketing the Telechips Access line of
products, increasing research and development activity related to new software
and hardware products and final modification for the initial Telechips Access
3000 models and increased general corporate activity as the Company begins to
emerge from the development stage to a fully operational entity. Also for the
year ended December 31, 1996, the Company included in operation expenses an
approximate $300,000 write-down for impairment of certain components

35
<PAGE> 37
of the 3000 Series tooling for potential replacement with tooling designed for
new products. No similar expense was recognized for the year ended December
31, 1995.

Research and development expenses increased to approximately
$2,207,000 for the year ended December 31, 1996, from $1,620,000 for the year
ended December 31, 1995. The increase was due to increased research and
development activities relating to new software products such as the World Wide
Web browser software and electronic mail software for the 3000 Series product,
a large screen and color versions of the product, cardreader adjuncts, and the
preliminary development of the Telechips Access Network Client as well as
noncapitilizable costs relating to final modifications of the initial Telechips
Access 3000 models.

Marketing expenses increased to approximately $1,297,000 for the year
ended December 31, 1996, from $572,000 for the year ended December 31, 1995.
This increase was due primarily to increased marketing efforts including hiring
sales and marketing support staff, increased use of collateral materials, trade
shows, public relations, sales negotiations and efforts at forming strategic
alliances.

General and administrative expenses increased to approximately
$1,528,000 for the year ended December 31, 1996 from $731,000 for the year
ended December 31, 1995. This increase was due, in part, to increased
administrative personnel as well as increased corporate, legal, investor
relations, financial consultation and other administrative costs correlating
with the anticipated growth in the Company's operations.

LIQUIDITY AND CAPITAL RESOURCES

The Company's capital requirements have been and will continue to be
significant. The Company has been dependent primarily on the Company's initial
public offering (the "IPO") of its Common Stock and certain warrants (the
"Public Warrants"), private placements of equity securities and indebtedness.
Over the next 12 months, the Company intends to focus on increasing its sales
and marketing efforts and research and development for new proposed products.

On April 11, 1995, the Company conducted the final closing of the sale
to private investors of an aggregate of 30 units (the "1994 Units"), each 1994
Unit consisting of (i) 1,072 shares of Common Stock; and (ii) 50,000 Shares of
Preferred Stock (the "Private Placement"). The purchase price per 1994 Unit
was $100,000. The Company received gross proceeds of $3,000,000 with respect
to the sale of the 1994 Units, yielding net proceeds after the payment of fees
and expenses of approximately $2,500,000. The Private Placement resulted in
the Company's issuance of 32,173 shares of Common Stock and 1,500,000 shares of
Preferred Stock (convertible into 32,173 shares of Common Stock). The Company
paid to D. H. Blair Investment Banking Corp. ("D. H. Blair") in connection with
the Private Placement and the 1994 Note Financing an aggregate of $330,000 and
issued to D. H. Blair and its designees

36
<PAGE> 38
warrants to purchase up to an aggregate of 20,269 shares of Common Stock.
Howard Phillips, a director of the Company, was Director of Corporate Finance
of D. H. Blair until August, 1995.

On September 1, 1995, the Company completed the sale (the "Bridge
Financing") to private investors of 17 units (the "Units"), each Unit
consisting of (i) an unsecured, nonnegotiable promissory note of the Company in
the principal amount of $100,000, due on the earlier of the consummation of an
initial public offering ("IPO") or July 31, 1996 (a "Bridge Note"); and (ii)
1,333 shares of Common Stock (the "Bridge Shares"). The purchase price per
Unit was $100,000. The Company received gross proceeds of $1,700,000 from the
sale of such Units. After the payment of $170,000 in placement fees to Whale
Securities Co., L.P. (the "Underwriter"), which acted as placement agent for
the Company with respect to the sale of such Units, and other offering expenses
of approximately $134,000, the Company received net proceeds of approximately
$1,396,000 in connection with the Bridge Financing.

The Company's sale of 17 Units resulted in the Company's issuance (in
connection with the Bridge Financing) of a total of $1,700,000 principal amount
of Bridge Notes and 22,667 Bridge Shares. The 22,667 Bridge Shares issued in
the Bridge Financing were included in the Selling Shareholders' Shares and were
registered by the Company in conjunction with the Company's initial public
offering described below.

On October 20, 1995, the Company completed its initial public offering
of 100,000 shares of Common Stock, par value $.01 ("Common Stock") and
redeemable warrants ("Warrants") to purchase 100,000 shares of Common Stock at
an exercise price of $75.00 per share (the IPO). In addition, the Underwriter
exercised its overallotment option to purchase an additional 15,000 Warrants.
The Common Stock and the Warrants are traded on The Nasdaq SmallCap Market
under the symbols "TCHP" and "TCHPW," respectively.

Upon consummation of the IPO, the Company received net proceeds of
approximately $6,255,000. The Company used approximately $2,451,000 of the
proceeds from the IPO to repay the outstanding Bridge Notes, the $300,000 in
notes issued in 1994, accrued dividends on Preferred Stock, $250,000 to NSC
notes and interest on all of such indebtedness. Pursuant to the terms of an
agreement with NSC, dated March, 1994, as restated August 31, 1994, and amended
September 20, 1994, $500,000 of debt owed to NCS was canceled, the Company paid
NSC $250,000 plus accrued and unpaid interest at $38,904, from the proceeds of
the IPO, and issued to NSC 15,288 shares of Common Stock and a Warrant to
purchase 1,341 shares of Common Stock at $46.65 per share.

In addition, the Company issued nonredeemable warrants (the
"Underwriter's Warrants") to purchase 10,000 shares of Common Stock at an
exercise price of $115.50 per share and 10,000 warrants (each exercisable to
purchase one share of Common Stock at a price of $115.50 per share) at an
exercise price of $2.31 per Warrant to the Underwriter. Further, all
outstanding shares of Preferred Stock and Series B Common Stock, par value
$.01, were

37
<PAGE> 39
converted to Series A Common Stock and the Series A Common Stock was
redesignated as Common Stock. Upon conversion of the Preferred Stock, the
Company paid an aggregate of $111,719 in accrued and unpaid dividends to the
holders of Preferred Stock ("Preferred Stockholders").

During November, 1995, the Company obtained a $1,200,000 revolving
line of credit from a commercial bank ("Line of Credit"). The Line of Credit
expires on December 13, 1996. The Line of Credit is collateralized by cash and
cash equivalents valued at 110% of outstanding draws. Interest is payable
monthly at the three-month U.S. Treasury Bill rate plus 3% (8.03% as of
September 30, 1996). Principal is due at maturity. As of the date of this
report, the Company has a zero balance on the Line of Credit.

In March, 1994, and as amended on February 1, 1996, and October 1,
1996, the Company entered into a License Agreement with Microsoft (the MS
License Agreement) to license certain software to be used in the Company's
products. The MS License Agreement establishes minimum royalty payments. The
Company is obligated to make monthly minimum royalty payments. As of the date
of this report, the Company has prepaid royalties to Microsoft of approximately
$260,000. The MS License Agreement may only be terminated prior to its
expiration date upon a default by the parties. This license expires on
September 30, 1997, and there are no automatic renewal terms.

On October 2, 1996, the Company completed a private placement of 4,188
shares of 4% cumulative convertible preferred stock, face value $1,000 per
share (the "Preferred Shares"). The Preferred Shares were issued without
registration under the Securities Act of 1933, as amended (the Act), pursuant
to Regulation S promulgated under the Act. The conversion price of the
Preferred Shares is determined by multiplying each Preferred Share by 1,000 and
dividing the result by the lower of $45.00 or the fair market value of the
Company's Common Stock on the date of conversion. The Preferred Shares are
convertible at any time beginning November 11, 1996, until August 31, 1998.
The Company received approximately $2.9 million in net proceeds. In connection
with the financing, the Company also issued to Third World Investments, Ltd.,
Common Stock Purchase Warrants to purchase 26,667 shares of Common Stock at an
exercise price of $33.75 per share as adjusted. These warrants were canceled
as a result of the April 2, 1997, financing described below.

On February 7, 1997, the Company issued a note payable for $300,000.
The note was discounted, yielding net proceeds to the Company of $250,000. The
note bears a stated annual interest rate of 1% (effective annualized rate of
252.91%, after taking into account the discount including issuance of common
stock) and is payable upon the earlier of 180 days from date of issuance or
upon the closing of a significant equity, quasi-equity or debt financing by the
Company. In addition, the Company agreed to issue to the lender 75,000 shares
of common stock upon maturity valued at $51,600. The note was paid and shares
issued April 2, 1997.

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<PAGE> 40
On March 10, 1997, the Company issued a note payable for $700,000.
The note was discounted, yielding net proceeds to the Company of $500,000. The
note bears an annual interest rate of 1% (effective annualized rate of 634.78%,
taking into account the discount) and is payable upon the closing of a
financing transaction. Upon closing of the transaction, the note will be
canceled and the proceeds along with accrued interest will be deposited into
escrow to be used to purchase securities in the financing transaction. On
April 2, 1997, the note was canceled and was converted to Series B 4%
cumulative convertible preferred stock.

On April 2, 1997, the Company completed a private placement of 1,906
shares of Series B 4% cumulative convertible preferred stock ("Series B
Preferred Stock") with a face value of $1,000 per share. Of the Series B
Preferred Stock, 1031 shares were sold at a discount of 20% of the face value
after paying underwriting discounts, expenses and other related fees of
approximately $172,250. The Company received aggregate net proceeds of
$652,750. The Company also converted a $700,000 note payable into 875 shares
of Series B Preferred Stock. In addition, the Company granted the underwriter
7,500 shares of common stock value at approximately $51,000 and warrants to
purchase 150,000 shares of common stock at approximately $.70 per share valued
at $105,000. The common stock and warrants, an aggregate value of $110,000,
were recorded as a reduction of Series B Preferred Stock ("offering costs") and
an increase in paid-in capital. Upon occurrence of certain events, the
exercise price of the warrants may be adjusted downward. The Series B
Preferred Stock is convertible any time beginning May 17, 1997, until March 31,
1999, using a formula ("Series B Conversion Formula") multiplying each Series B
Preferred share by 1,000 and dividing the result by the lower of either 110% of
the fair market value on April 2, 1997, or the fair market value at the time of
conversion. The Series B Preferred Stock will automatically convert, if
conversion has not previously been effected, on March 31, 1999, or upon
consummation of a public offering of securities with gross proceeds of
$10,000,000 or more provided that such offering may not close prior to
September 29, 1997. The 4% dividend is payable semiannually in cash or shares
of common stock converted using the Series B Conversion Formula described
above. The Preferred Stock is nonvoting, and has a liquidation preference over
all common shares, is subordinate to the liquidation preference of the Series A
Preferred Stock and shall be entitled to payment of $1,000 per share plus
dividends that have accrued. A portion of the net proceeds was used to pay off
the $300,000 February 7, 1997, note payable.

Over the next 12 months, the Company intends to focus on increasing
its sales and marketing efforts and research and development for expanded
proposed products. The Company anticipates, based on its current proposed
growth plans and assumptions relating to its growth and operations, that the
proceeds from the Regulation S Offerings, borrowings and planned revenues will
not be sufficient to satisfy the Company's contemplated cash requirements for
the next 12 months and that the Company will be required to raise additional
funds in the immediate future. In addition, in the event that the Company's
plans change or its assumptions prove to be inaccurate (due to unanticipated
expenses, delays, problems, or otherwise), the Company would be required to
seek additional funding sooner than anticipated.

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<PAGE> 41
Any such additional funding could be in the form of additional equity capital.
Further, in the event that the Company receives a larger-than- anticipated
number of initial purchase orders for Telechips Access products, it may require
resources substantially greater than those that are currently available to the
Company. In such event, the Company may be required to raise additional
capital or to engage third parties (as to which there can be no assurance) to
assist the Company in meeting such orders.

The Company is currently pursuing several potential funding
opportunities. However, there can be no assurance that any of such
opportunities will result in actual funding or that additional financing will
be available to the Company, when needed, on commercially reasonable terms, or
at all. If the Company is unable to obtain additional financing, if needed, it
will likely be required to curtail its marketing and manufacturing plans and
possibly cease its operations. Any additional equity financing may involve
substantial dilution to the Company's then-existing shareholders. The
Company's independent accountants have included an explanatory paragraph in
their report on the Company's financial statements for the year ended December
31, 1996, stating that the Company has not, to date, recognized significant
revenues from product sales nor produced units in quantities which will yield a
gross margin adequate to cover product and operations costs and that these
factors raise substantial doubt about the Company's ability to continue as a
going concern.

Item 7. Financial Statements

The response to this item is submitted in a separate section of this
report.

Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

None.

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<PAGE> 42
PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act

DIRECTORS AND EXECUTIVE OFFICERS

The current directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>
Name Age Position with the Company
- ---- --- ---------------------------
<S> <C> <C>
Richard Adrey 52 Director

Nelson B. Caldwell 40 President, Chief Executive Officer, Chief Financial Officer, Secretary and Director

Calvin DeCoursey 53 Vice President-Technology

Hans Junker 65 Vice President-Engineering, Assistant Secretary

Randall Pinato 52 Executive Vice President-Sales and Marketing and Director

Frank Vigilante 66 Director
</TABLE>

RICHARD ADREY, has been a director of the Company since February, 1997.
Mr. Adrey has been president of Coastline Financial, a financial advisory and
merchant banking entity based in Boca Raton, Florida since 1992. Prior to
that, Mr. Adrey worked as an investment banker and financial advisor for 25
years in specialized public and private financings and corporate turnaround
situations. Mr. Adrey is also a director of Vacation Break USA and Exothermal
Technology Corporation.

NELSON B. CALDWELL, CPA, has been President, Chief Executive Officer,
Chief Financial Officer and a director since February, 1997. Mr. Caldwell has
been the Secretary since May, 1995. Mr. Caldwell was Vice President -- Finance
of the Company from May, 1995, to February, 1997. From June, 1989, to April,
1995, Mr. Caldwell held various positions with the accounting firm of Coopers &
Lybrand, L.L.P., most recently as manager in the business assurance practice.
Coopers & Lybrand, L.L.P., is the Company's independent auditor and has issued
a report on the Company's financial statements included in this report.

CALVIN DECOURSEY was Vice President -- Engineering of the Company from
its inception in January, 1991, until May, 1995, and was a Director of the
Company from its inception until October, 1994. Since June, 1995, he has been
Vice President -- Technology of the Company.

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<PAGE> 43
From October, 1986, until July, 1990, Mr. DeCoursey was Hardware Manager at
Voysys Corporation.

HANS JUNKER was Vice President -- Operations from the Company's
inception to December, 1996. Mr. Junker has been Vice President -- Engineering
of the Company since December 1996 and was a Director of the Company from
inception until October, 1994. From October, 1986, until July, 1990, Mr.
Junker was Director of Hardware Engineering at Voysys Corporation. From April,
1986, to the present, Mr. Junker has served as Chairman of the Board of
Directors, Secretary and Treasurer of Commercial Sign Supplies, Inc., a vendor
of sign painting supplies. Mr. Junker devotes his full time to the Company and
devotes a minimal amount of time to Commercial Sign Supplies, Inc.

RANDALL PINATO has been Executive Vice President -- Sales and Marketing
of the Company, and a Director since July, 1993. From July, 1992, to July,
1993, Mr. Pinato was National Sales Director for NSC. From August, 1990, until
June, 1992, Mr. Pinato was Director of Sales at AT&T's UNIX Systems
Laboratories; and from June, 1987, until July, 1990, Mr. Pinato was a Vice
President of Sales of Voysys Corporation.

FRANK S. VIGILANTE was a director with Network Equipment Technologies
from April, 1992, to August, 1996. He has been a director of the Visiting
Nurses Association of Central New Jersey since October, 1991. Mr. Vigilante
has also been a director of the Arthritis Foundation of New Jersey since
February, 1986, and is currently its Chairman. He was a consultant with
Pyramid Technologies Corporation from April, 1987 to February, 1995. Mr.
Vigilante held various positions with AT&T and, in 1985, he became a Senior
Vice President. Mr. Vigilante retired from AT&T in 1987 after 30 years of
service.

COMMITTEES OF THE BOARD OF DIRECTORS

The Compensation Committee consists of Messrs. Adrey and Vigilante.
This Committee reviews and recommends to the Board of Directors the
compensation and benefits of all officers of the Company and reviews general
policy matters relating to compensation and benefits of employees of the
Company. The Compensation Committee also administers the Company's stock
option plans.

The Audit Committee consists of Messrs. Adrey and Vigilante. The Audit
Committee makes recommendations concerning the engagement of independent public
accountants, reviews with the independent public accountants the plans and
results of the audit engagement, approves professional services provided by the
independent public accountants, reviews the independence of the independent
public accountants, consider the range of audit and nonaudit fees and review
the adequacy of the Company's internal accounting controls.

The Nomination Committee consists of Messrs. Adrey and Vigilante. The
Nomination Committee identifies and nominates qualified persons to be elected
to the Board of Directors.

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<PAGE> 44
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities and Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent of the Company's Common Stock, to file with the Securities and Exchange
Commission, by a specified date, reports regarding their ownership of Common
Stock. Bruce Chatterley and Frank Vigilante each filed a late Form 3 with
respect to their selection to the Board of Directors in 1996.

Item 10. Executive Compensation

The following table sets forth the compensation paid by the Company for
services performed on the Company's behalf during each of the last three
completed fiscal years with respect to the Company's Chief Executive Officer
and each of the Company's other executive officers whose annual compensation
during the last fiscal year exceeded $100,000 (collectively, the "Named
Executive Officers"):

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
Fiscal Year Other Annual All Other
Ended Compen- Options Compen-
Name and Principal Position December 31, Salary($) Bonus($) sation($) (In Shares) sation($)
--------------------------- ------------ --------- -------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Nelson B. Caldwell, Chief 1996 80,000 -- -- -- --
Executive Officer, President, 1995 53,333 -- -- 2,606 --
Chief Financial Officer and 1994 -- -- -- -- --
Secretary

Hans Junker, Vice President - 1996 95,000 -- -- -- --
Operations 1995 91,039 -- -- 6,606 --
1994 112,500 -- -- -- --

Randall Pinato, Executive 1996 123,191 -- -- --
Vice President-Sales and 1995 94,956 -- -- 6,606 54,520
Marketing 1994 52,500 -- -- -- --

C. A. Burns, Chairman of the 1996 151,457 -- -- -- --
Board, Chief Executive 1995 220,000 -- -- 17,339 --
Officer and President 1994 366,300 -- -- -- --
</TABLE>

EMPLOYMENT AGREEMENTS

Effective October 31, 1994, as amended October 16, 1995, the Company
entered into employment agreements with Hans Junker, Vice President -
Operations; Calvin DeCoursey, Vice President - Technology; and Randall Pinato,
Executive Vice President - Sales and

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<PAGE> 45
Marketing (collectively, "the Executives"), each for an initial term of one
year ending October 31, 1995 (subject to the termination provisions described
below) ("Employment Agreements"). Pursuant to the employment agreements of
each of Messrs. Junker, Pinato and DeCoursey, each is entitled to (i) an annual
salary of $95,000, $110,000 and $95,000 respectively per year respectively;
(ii) bonus compensation based upon the growth and success of the Company's
business as may be determined by the Compensation Committee of the Board of
Directors; and (iii) other benefits equivalent to those provided to the
Company's other officers. The Employment Agreements have been extended by
mutual agreement of the parties for an additional two-year term ending October
31, 1997. The Employment Agreements may be amended only with the consent of
the parties.

The Employment Agreements are terminable by the Company for cause at any
time or in the event that the Executive becomes disabled and, as a result, is
unable to perform his duties in a normal manner for six consecutive months or
an aggregate of eight months, whether or not consecutive, during any 12
consecutive months. If any of the Employment Agreements are terminated as a
result of an Executive's death or disability, the terminated Executive will be
entitled to receive an amount equal to 12 months' salary at his base rate, less
disability benefits received, if any. In addition, each Executive has agreed
not to solicit or interfere with or attempt to disrupt the relationship between
the Company and its employees, licensors, licensees, customers or suppliers
with respect to the Company's business with the Company for a period of one
year after the termination of the Executive's employment.

Each Executive has executed an inventions and secrecy agreement pursuant
to which each Executive has agreed not to disclose any confidential information
acquired by him in the course of, or as an incident to, his employment and has
assigned to the Company all inventions made or conceived by the Executive
during his employment and for one year thereafter related to the business of
the Company.

STOCK OPTION PLANS

1994 Stock Option Plan.

The Company's 1994 Stock Option Plan (the "1994 Option Plan") was
adopted by the Company's Board of Directors on September 13, 1994, and was
approved by the Company's stockholders on August 17, 1995. The 1994 Option
Plan provides for the issuance to employees of the Company of both incentive
stock options under section 422 of the Internal Revenue Code and nonqualified
stock options. Nonemployee directors and consultants of the Company are
eligible to receive nonqualified stock options only. The Company has reserved
3,218 shares of authorized but unissued shares of Common Stock for issuance
under the 1994 Option Plan.

Options may be granted under the 1994 Option Plan at the sole discretion
of the Company's Board of Directors or a committee appointed by the Board to
administer the 1994

44
<PAGE> 46
Option Plan. The exercise price of options granted under the 1994 Option Plan
is determined by the Board, provided that with respect to incentive stock
options the exercise price must be at least the fair market value of the Common
Stock on the date such options are granted (110% of fair market value if
granted to 10% stockholders). Options granted under the 1994 Option Plan are
exercisable over such terms as the Board of Directors determines, up to a
maximum of ten years from the date of grant, in the case of incentive stock
options.

As of the date of this report, there were outstanding options granted
under the 1994 Option Plan to purchase up to an aggregate of 2,447 shares of
Common Stock, at option exercise prices ranging from $46.65 to $76.875 per
share. None of such options were issued to the Company's executive officers or
directors except Mr. Caldwell, the Vice President-Finance and Secretary, who
received options to purchase up to 939 shares of Common Stock at prices ranging
from $46.65 to $52.65 per share. All such options are exercisable on or before
January 4, 2006, and are intended to qualify as incentive stock options. The
right to exercise each such option becomes vested with respect to 25% of the
underlying shares on the first anniversary of the date of grant, or, in some
cases the anniversary of the optionee's employment date, and with respect to
the remaining 75% of shares ratably on the first day of each month thereafter
for a period of 36 months.

1995 Stock Option Plan.

The Company's 1995 Stock Option Plan (the "1995 Option Plan") was
adopted by the Company's Board of Directors on August 31, 1995, and was
approved by the Company's stockholders on August 31, 1995. The 1995 Option
Plan provides for the issuance to employees of the Company of both incentive
stock options under Section 422 of the Internal Revenue Code and nonqualified
stock options. Nonemployee directors and consultants of the Company are
eligible to receive nonqualified stock options only. The Company has reserved
23,000 shares of authorized but unissued shares of Common Stock for issuance
under the 1995 Option Plan.

Options may be granted under the 1995 Option Plan at the sole discretion
of the Company's Board of Directors or a committee appointed by the Board to
administer the 1995 Option Plan. The exercise price of options granted under
the 1995 Option Plan are determined by the Board, provided that with respect to
incentive stock options the exercise price must be at least the fair market
value of the Common Stock on the date such options are granted (110% of fair
market value if granted to 10% stockholders and, with respect to non-qualified
stock options, the Company has agreed with the Underwriter that the exercise
price will be at least fair market value on the date of grant). Options granted
under the 1995 Option Plan are exercisable over such terms as the Board of
Directors determines, up to a maximum of ten years from the date of grant, in
the case of incentive stock options.

As of the date of this report, there were outstanding options granted
under the 1995 Option Plan to purchase up to an aggregate of 9,377 shares of
Common Stock, at option

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<PAGE> 47
exercise prices ranging from $32.82 to $103.125 per share. None of such
options were issued to the Company's executive officers or directors except Mr.
Caldwell, the Chief Executive Officer, who received options on October 23,
1995, to purchase up to 1,667 shares of Common Stock at $71.25 per share. All
such options are exercisable on or before October 12, 2006, and are intended to
qualify as incentive stock options. The right to exercise each such option
becomes vested with respect to 25% of the underlying shares on the first
anniversary of the date of grant, or, in some cases, the anniversary of the
optionee's employment date, and with respect to the remaining 75% of shares
ratably on the first day of each month thereafter for a period of 36 months.

1996 Director's Stock Option Plan

On October 11, 1996, the Board of Directors approved the Company's 1996
Director's Stock Option Plan (the "Director's Plan"). The Director's Plan
authorizes the automatic granting of nonqualified stock options to purchase an
aggregate of up to 20,333 shares of Common Stock to nonemployee directors of
the Company or its subsidiaries. No option may be granted after October 10,
2006. The exercise price of the options will be the closing sales price of a
share on the date of grant. The Director's Plan is administered by the Board
of Directors, which has authority to administer the Director's Plan in
accordance with the provisions of Rule 16b-3 promulgated under the Securities
Exchange Act of 1934, as amended. All grants of options under the Director's
Plan will be automatic and nondiscretionary.

Under the Director's Plan, each nonemployee director not previously
granted a similar option will automatically be granted an option to purchase
2,000 shares on the date on which such person first becomes a director. Each
nonemployee director will automatically be granted an option to purchase 333
shares on each annual anniversary of such nonemployee director's election or
appointment to the Board of Directors. All option grants are subject to
stockholder approval of the Director's Plan. Options granted on the date the
recipient becomes a director are referred to herein as "Initial Grant Options."
Options issued annually thereafter are referred to herein as "Annual Grant
Options."

Payment of the exercise price for shares purchased upon exercise of an
Initial Grant Option may be made (i) by the delivery of a promissory note (a
"Note Exercise"), provided that the optionee may only utilize a Note Exercise
on the date of grant ("Grant Date"); (ii) by delivery to the Company of cash or
a check to the order of the Company in an amount equal to the purchase price of
such shares; (iii) by delivery to the Company of shares of Common Stock of the
Company then owned by the optionee having a fair market value equal in amount
to the purchase price of such shares; (iv) by any other means which the Board
of Directors determines is consistent with the purpose of the 1996 Director's
Stock Option Plan and with applicable laws and regulations; or (v) by any
combination of such methods of payment. In the event that the optionee elects
to exercise the Initial Grant Option by means of a Note Exercise, the option
vests and becomes exercisable in its entirety on the Grant Date. If the
optionee elects to pay the exercise price in a form other than a Note Exercise,
an Initial Grant Option

46
<PAGE> 48
will vest and become exercisable ratably over a 36-month period from the Grant
Date. Shares issued under a Note Exercise will be held in escrow until the
notes have been satisfied. In addition, such shares are subject to a
repurchase option exercisable by the Company if the optionee voluntarily
terminates his or her relationship with the Company (the "Repurchase Option").
The Repurchase Option decreases ratably over a 36-month period from the date of
exercise. Shares will be released from escrow only upon lapse of the
forfeiture condition and payment of the note.

Annual Grant Options are immediately exercisable on the date of grant
under terms similar to those of the Initial Grant Option.

Options granted under the Director's Plan will generally terminate on
the fifth anniversary of the date of grant. If an optionee ceases to serve as
a director for any reason, including death or disability, he or she may, but
within ninety (90) days, exercise the options.

On October 11, 1996, Bruce Chatterley, Richard Wolf and Frank Vigilante
each received 2,000 and Howard Phillips received 1,000 nonplan, nonqualified
options under substantially the same terms as described in the Director's Plan
for Initial Grant Options. With the exception of Frank Vigilante, each
recipient exercised such options pursuant to a Note Exercise.

On August 19, 1996, Richard E. Salwen resigned as a member of the Board
of Directors and forfeited 722 shares of common stock. On January 7, 1997,
Howard Phillips and Richard Wolf resigned as members of the Board of Directors
and forfeited 1,500 shares and 1,833 shares, respectively. On January 30,
1997, C. A. Burns resigned as Chief Executive Officer, President and Chairman
and forfeited 9,873 shares of common stock. On January 31, 1997, Bruce
Chatterley resigned as a member of the Board of Directors and forfeited 2,000
shares of common stock.

FOUNDER'S AND DIRECTOR'S OPTIONS

The Company issued to certain executive officers of the Company options
to purchase up to an aggregate of 37,154 shares of Common Stock (the "Founder's
Options"). An additional 2,000 options were issued to the Company's
non-employee directors (the "Director's Options" and, together with the
Founder's Options, the "Non-Plan Options"). The Founder's Options and the
Director's Options were issued outside of the 1994 Option Plan and 1995 Option
Plan. Each of the recipients of the Non-Plan Options exercised such options on
October 16, 1995, at an exercise price of $76.50 per share for an aggregate
purchase price of $2,995,230 (the "Founder's Shares"). Such founders and
directors paid for the Founder's Shares with non-recourse promissory notes,
bearing interest at 8.75% per annum, secured by the Founder's Shares. The
Founder's Shares are being held in escrow until the notes have been satisfied.
The Founder's Shares are subject to a repurchase option exercisable by the
Company if a founder or director voluntarily terminates his relationship with
the Company (the "Repurchase

47
<PAGE> 49
Option"). The Repurchase Option decreases ratably over a 36-month period. The
exercise price of the Non-Plan Options were paid by the optionees by delivery
to the Company of a 10-year nonrecourse promissory note (the "Non-Plan Option
Note") secured by the shares issued. The option shares were placed into escrow
and became subject to forfeiture in the event the optionee voluntarily leaves
his employment with the Company. The forfeiture condition lapses ratably over
the 36 months following exercise. Shares will be released from escrow only
upon lapse of the forfeiture condition and payment of the Non-Plan Option Note.
Founder's Options were issued and exercised by the following persons in the
amount indicated: C. A. Burns(1), 17,339 shares; Randall Pinato, 6,606 shares;
Hans Junker, 6,606 shares; and Calvin DeCoursey, 6,606 shares. Director's
Options were issued and exercised by the following persons in the amount
indicated: Howard W. Phillips, 1,000 shares and Richard E. Salwen: 1,000
shares. As of the date hereof, due to Messrs. Burns', Salwen's and Phillips'
resignations, 11,179 shares have been forfeited and 27,974 Non-Plan Options are
still outstanding.

ESCROW SHARES

As a condition to the initial closing of a private placement in 1995,
certain holders of shares of Common Stock placed 16,087 shares in escrow (the
"Escrow Shares"). The holders of the Escrow Shares may continue to vote such
shares; however, the Escrow Shares are not assignable or transferable and are
not deemed outstanding for purposes of the Company's financial statements.

The Escrow Shares are subject to release on the Company meeting the
following conditions:

(i) The Company's net income in any one of the fiscal
years ending December 31, 1997 or December 31, 1998, after provision for
income taxes and exclusive of any extraordinary earnings or charges to income
resulting from the release of the Escrow Shares (as derived from the Company's
financial statements audited by the Company's independent certified public
accountants) amounts to at least $3,500,000 for the fiscal year ending December
31, 1997 or $4,500,000 for the fiscal year ending December 31, 1998;

(ii) The Company is sold in a private sale at a price
which, after giving effect to the release of such shares, results in the
payment on the Common Stock of at least $270 per share in 1997, or $360 per
share in 1998 (the "Minimum Price"), then so much of the Common Stock held in
escrow as is required to provide for the sale of all shares of Common Stock at
a price at least equal to the Minimum Price per share shall be released prior
to the sale and sold; or

____________________

(1) Upon exercise, C. A. Burns assigned the option shares to the Marie A. Bell
Separate Property Trust U/D/T Dated October 16, 1992 (the "Marie A. Bell
Trust"). The Marie A. Bell Trust executed a Restricted Stock Purchase
Agreement, an Escrow Agreement Founder ption Note, representing the purchase
price of the options.

48
<PAGE> 50
(iii) For any period of thirty (30) consecutive
trading days, the average bid price of the Common Stock on Nasdaq equals or
exceeds (a) $225 during the Company's fiscal year ending December 31, 1997; or
(b) $300 during the Company's fiscal year ending December 31, 1998.

The Company expects that the release of the Escrow Shares will be deemed
compensatory and, accordingly, will result in substantial charges to earnings
equal to the fair market value of the Escrow Shares as of the date on which
they are released. Such charges could substantially increase the loss or
reduce or eliminate the Company's net income, if any, for financial reporting
purposes for the periods in which the Escrow Shares are released or are
probable of being released. If none of the foregoing earnings, sale or stock
goals are attained by December 31, 1998, the Escrow Shares as well as any
dividends or other distributions made with respect thereto, will be contributed
to the capital of the Company.

STOCK OPTION GRANTS

There were no stock options granted to the Named Executive officers
during 1996.

OPTION EXERCISE AND YEAR-END HOLDINGS

The following table provides information with respect to the Named
Executive Officers concerning the exercise of options during the last fiscal
year and unexercised options held as of December 31, 1996:

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options/SARs
Options/SARs at FY-End(#) at FY-End
------------------------- -------------------------
Shares
Acquired
on Value
Name Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
-------------- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
C. A. Burns -0- -0- -0- -0- -0- -0-

Nelson B. Caldwell -0- -0- 1,026 1,580 -0- -0-

Hans Junker -0- -0- -0- -0- -0- -0-

Randall Pinato -0- -0- -0- -0- -0- -0-
</TABLE>

__________________

(1) Market price at time of exercise less exercise price.

49
<PAGE> 51
Item 11. Security Ownership of Certain Beneficial Owners and Management

The table below sets forth certain information as of March __, 1997
(the "Reference Date") with respect to the beneficial ownership of (i) each
person who beneficially owns more than 5% of the outstanding shares of Common
Stock; (ii) each director; (iii) certain named executive officers; and (iv) all
officers and directors as a group. Except as otherwise indicated below, the
address for each such person is: c/o Telechips Corporation, 6880 S. McCarran
Boulevard, Reno, Nevada 89509.

<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percentage
Beneficial Owner Beneficial Ownership(1) Beneficially Owned
---------------- ----------------------- ------------------
<S> <C> <C>
Hans Junker . . . . . . . . . . . . . . 11,954(2) 1.1%

Randall Pinato . . . . . . . . . . . . 11,754(3) 1.1%

Richard Adrey . . . . . . . . . . . . . 3,333(4) *

Frank Vigilante . . . . . . . . . . . 2,000(5) *

Nelson B. Caldwell . . . . . . . . . . 2,628(6) *

All Officers and Directors as a
Group (six persons) . . . . . . . . . . 43,421(7) 3.9%

- ---------------
</TABLE>

* Less than 1%.

(1) A person is deemed to be the beneficial owner of voting securities
that can be acquired by such person within 60 days from the date of
this report upon the exercise of options, warrants or convertible
securities. Each beneficial owner's percentage ownership is
determined by assuming that convertible securities, options or
warrants that are held by such person (but not those held by any other
person) exercisable within such period have been exercised.
Percentage figures based on 1,094,262 shares of Common Stock
outstanding on the Reference Date, and including 16,087 shares of
Common Stock held in escrow pursuant to the Series B Escrow Agreement
by and among the Company, American Stock Transfer Company of New York
as escrow agent, and certain stockholders of the Company, dated as of
October 31, 1994, as amended on October 20, 1995 (the "Escrow
Agreement").

(2) Consists of (i) 2,574 shares of Common Stock; (ii) 2,574 shares of
Common Stock held in escrow pursuant to the Escrow Agreement; (iii)
6,606 shares of Common Stock held in escrow pursuant to the Founder's
Options; and (iv) 200 shares held by the Hans Jorgen Junker Trust, of
which Mr. Junker is the trustee.

(3) Consists of (i) 2,574 shares of Common Stock; (ii) 2,574 shares of
Common Stock held in escrow pursuant to the Escrow Agreement; and
(iii) 6,606 shares of Common Stock held in escrow under the terms of
the Founder's Options.

(4) Consists of 3,333 shares underlying currently exercisable options held
of record by Coastline Financial Group, Inc. of which Mr. Adrey is a
controlling person.

50
<PAGE> 52
(5) Consists of an option to purchase Common Stock held in escrow pursuant
to the terms of the Director's Option Agreements entered into between
the Company and nonemployee directors of the Company.

(6) Consists of (i) 22 shares of Common Stock owned of record by the
Zamora Family Trust, of which Mr. Caldwell is the trustee; and (ii)
2,606 shares of Common Stock reserved for issuance upon exercise of
stock options.

(7) Consists of (i) 7,944 shares of Common Stock; (ii) 7,722 shares of
Common Stock held in escrow pursuant to the terms of the Escrow
Agreement; (iii) 21,816 shares of Common Stock held in escrow pursuant
to the terms of the Directors and Founders Options; and (iv) 5,939
shares reserved for issuance upon exercise of currently exercisable
options.

Item 12. Certain Relationships and Related Transactions

On October 3, 1996, the Company entered into a Consulting Agreement
(the "Consulting Agreement") with Coastline Financial Group, Inc.
("Coastline"). Richard Adrey is President of Coastline and a Director of the
Company (though not at the time of executing the Consulting Agreement). Under
the Consulting Agreement, Coastline has agreed to provide certain financial
consulting, business consulting, investor relations and financial public
relations services to the Company for a period of one year (unless earlier
terminated). The Company has agreed to pay Coastline a cash fee of $7,500 per
month and issue to Coastline an option to purchase up to 3,333 shares of Common
Stock at any time from December 31, 1996 through March 31, 1999 at an exercise
price of $33.75 per share. In addition, unless the Consulting Agreement is
earlier terminated, the Company has agreed to issue to Coastline, on each of
January 2, 1997, April 2, 1997, and June 30, 1997, options to purchase up to
3,334 shares of Common Stock at an exercise price of $33.75 per share on or
before March 31, 1999. In the event Coastline is solely responsible for
arranging certain financing transactions, Coastline may receive additional
compensation. The Consulting Agreement may be terminated by either Coastline
or the Company at the end of six months with 30 days' notice to the other
party. If no such notice is received by the end of the fifth month, the
Consulting Agreement will continue through the term.

On October 11, 1996, the Company granted to Bruce Chatterley, Howard
Phillips, Richard Wolf and Frank Vigilante, each a nonemployee director of the
Company, options to purchase an aggregate of 7,000 shares of Common Stock at
$32.786 per share (the "New Director's Options"). With the exception of the
option issued to Mr. Vigilante, the New Director's Options were exercised by
the optionees effective October 11, 1996, by delivery to the Company of the
optionees 10-year, nonrecourse promissory notes secured by the shares issued.
Due to the resignations of Messrs. Chatterley, Phillips and Wolf, an aggregate
of 4,750 shares were forfeited.

On May 4, 1995, the Company granted to C. A. Burns, Hans Junker,
Calvin DeCoursey and Randall Pinato, each an executive officer of the Company,
options to purchase an aggregate of 37,154 shares of Common Stock at $76.50 per
share (the "Founder's Options"). The Founder's Options were exercised by the
optionees effective as of October 16, 1995, by delivery to the Company of the
optionee's 10-year, nonrecourse promissory note

51
<PAGE> 53
secured by the shares issued. Options to purchase an aggregate of 2,000 shares
on such terms were granted to and exercised by Howard W. Phillips, a former
nonemployee director of the Company, and Richard E. Salwen, a former
nonemployee director of the Company, on July 17, 1995 (the "Director's
Options"). The Director's Options were exercised by the optionees as of
October 16, 1995, by delivery to the Company of the optionee's 10-year
non-recourse promissory note secured by the shares issued.

On April 11, 1995, the Company conducted the final closing of the sale
to private investors of an aggregate of 30 units (the "1994 Units"), each 1994
Unit consisting of (i) 1,073 shares of Common Stock; and (ii) 3,334 shares of
Preferred Stock (the "Private Placement"). The purchase price per 1994 Unit
was $100,000. The Company received gross proceeds of $3,000,000 with respect
to the sale of the 1994 Units, yielding net proceeds after the payment of fees
and expenses of approximately $2,500,000. The Private Placement resulted in
the Company's issuance of 32,174 shares of Common Stock and 1,500,000 shares of
Preferred Stock (convertible into 32,174 shares of Common Stock).

The Company paid to D. H. Blair in connection with the Private
Placement and a 1994 note financing an aggregate of $330,000 and issued to D.
H. Blair and its designees warrants to purchase up to an aggregate of 20,270
shares of Common Stock. Howard Phillips, a director of the Company, was
Director of Corporate Finance of D. H. Blair until August 1995.

D. H. Blair acted as placement agent for both the 1994 Note financing
and the Private Placement.

With respect to each transaction between the Company and an affiliate
of the Company, the Company believes that such transactions were on terms at
least as favorable to the Company as they would have been had they been
consummated with unrelated third parties. The Board of Directors has adopted a
policy that, in the future, prior to entering into any transaction with a
related party, a similar determination must be made with respect to such
transaction by a majority of the Company's disinterested directors or
shareholders.

52
<PAGE> 54
Item 13. Exhibits and Reports on Form 8-K

(a) Exhibits

The following exhibits are filed herewith:

<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<S> <C>
3.1 Articles of Incorporation of the Company. (Incorporated by reference to Exhibit 3.1 of the Company's
Registration Statement Form SB-2 (File No. 33-96664-LA) (the "Registration Statement") filed with
the SEC on September 9, 1995)

3.2 Certificate of Amendment to Articles of Incorporation of Telechips Corporation dated January 10, 1996.

3.3 Certificate of Amendment to Articles of Incorporation of Telechips Corporation dated March 7, 1997.

3.4 Amended Certificate of Designation Number, Powers, Preferences and Relative Participating, Optional and
Other Special Rights and the Qualifications, Limitations, Restrictions, and other Distinguishing
Characteristics of Series A Preferred Stock.

3.5 Certificate of Designation, Number, Powers, Preferences and Relative, Participating, Optional, and Other
Special Rights and the Qualifications, Limitations, Restrictions, and other Distinguishing Characteristics
of Series B Preferred Stock.

3.6 Bylaws of the Company, as amended (Incorporated by reference to Exhibit 3.2 of the Company's Quarterly
Report filed on form 10-QSB for quarterly period ending September 30, 1995 filed November 30 1995
(the "Form 10-QRB")

4.1 Reference Exhibit 3.1.

4.2 Form of Specimen Certificate of Common Stock (incorporated by reference to Exhibit 4.2 to the
Registration Statement.
</TABLE>

53
<PAGE> 55
<TABLE>
<S> <C>
10.1 1994 Stock Option Plan (incorporated by reference to Exhibit 10.1 of the Registration Statement).*

10.2 1995 Stock Option Plan (incorporated by reference to Exhibit 10.2 of the Registration Statement).*

10.3 1996 Director's Option Plan.*

10.4 Employment Agreement between the Company and Randall Pinato, dated as of October 31, 1994, as amended
(incorporated by reference to Exhibit 10.4 of the Registration Statement).*

10.5 Employment Agreement between the Company and Hans Junker, dated as of October 31, 1994, as amended
(incorporated by reference to Exhibit 10.5 of the Registration Statement).*

10.6 Employment Agreement between the Company and Calvin DeCoursey, dated as of October 31, 1994, as amended
(incorporated by reference to Exhibit 10.6 of the Registration Statement).*

10.7 Invention and Secrecy Agreement between the Company and the following persons (incorporated by reference to
Exhibit 10.7 of the Registration Statement):

Randall Pinato
Hans Junker
Nelson B. Caldwell
Calvin DeCoursey

10.8 Form of Founder's Options between the Company and the following persons (incorporated by reference to Exhibit
10.8 of the Registration Statement):*

Hans Junker
Calvin DeCoursey
Randall Pinato
Frank S. Vigilante

10.9 Manufacturing Agreement between the Company and AT&T (incorporated by reference to Exhibit 10.9 of the
Registration Statement).

10.10 Lease dated July 17, 1996 between the Company and The Ribeiro Corporation for 5,310 square feet of the Premises
at 6490 South McCarran Blvd., Reno, NV 89509.
</TABLE>

54
<PAGE> 56
<TABLE>
<S> <C>
10.11 Lease dated August 3, 1994, between The Ribeiro Corporation and the Company for 5,586 square feet of the
premises at 6880 South McCarran Blvd., Reno, Nevada 89509 (incorporated by reference to Exhibit 10.12 of the
Registration Statement).

10.12 Lease dated August 3, 1994, between The Ribeiro Corporation and the Company for 2,905 square feet of the
premises at 6880 South McCarran Blvd., Reno, Nevada 89509 (incorporated by reference to Exhibit 10.13 of the
Registration Statement).

10.13 Microsoft OEM License Agreement for Desktop Operating Systems #7474-6052, between Microsoft Corporation
and the Company, dated effective as of October 1, 1996. (Incorporated by reference to Exhibit 10.14 of
the Company's Annual Report on Form 10-KSB for the fiscal year ended on Decembe 31, 1995 (the "Form
10-KSB")**

10.14 Manufacturing Agreement between Group Technologies and the Company, dated February 26, 1996 (incorporated by
reference to Exhibit 10.16 of the Form 10-KSB)**

10.15 Consulting Agreement between the Company and Whale Securities Co., L.P. (incorporated by reference
to Exhibit 10.15 of the Registration Statement.)

10.16 Client Software License Agreement between the Company and Citrix Systems, Inc., dated December 18, 1996.**

11.1 Computation of Earnings Per Share.

27.1 Financial Data Schedule
</TABLE>

* Management contract or compensation plan or arrangement.

** Portions of this exhibit have been redacted pursuant to a confidential
treatment request.

55
<PAGE> 57
(b) Reports on Form 8-K

On October 15, 1996, the Company filed a Form 8-K to report the
completion of a $2.9 million private placement of 4,188 Series A 4%
cumulative convertible preferred stock, face value $1,000 per share
pursuant to Regulation S promulgated under the Act and the issuance of
a press release relating to such financing. The date of the Form 8-K
was October 2, 1996.

56
<PAGE> 58

[COOPERS & LYBRAND LETTERHEAD]

REPORT OF INDEPENDENT ACCOUNTANTS

The Shareholders
Telechips Corporation

We have audited the accompanying balance sheets of Telechips Corporation (a
development stage company) as of December 31, 1996 and 1995, and related
statements of operations, shareholders' equity and cash flows for the years
then ended and for the period from inception (January 7, 1991) to December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Telechips Corporation at
December 31, 1996 and 1995, and the results of its operations and its cash
flows for the years then ended and for the period from January 7, 1991 to
December 31, 1996, in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has not, to date, earned any significant
revenues from product sales nor produced units in quantities and at a cost
which will yield a gross margin adequate to cover its ongoing costs of
operations. In addition, the Company has incurred significant losses from
operations since inception. Furthermore, the NASDAQ has notified the Company
that its stock may be delisted pending a hearing tentatively schedule for May
1997. These factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regards to these matters
are also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of the uncertainty.

COOPERS & LYBRAND L.L.P.

Sacramento, California
April 7, 1997

F-1
<PAGE> 59
TELECHIPS CORPORATION
(A Development Stage Company)
BALANCE SHEETS

<TABLE>
<CAPTION>
Years Ended
December 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents $ 289,993 $ 2,702,701
Accounts receivable 68,673 7,339
Inventory, net 675,660 831,664
Prepaid expenses 74,299 101,814
------------ ------------
Total current assets 1,108,625 3,643,518
------------ ------------

Equipment and tooling, net 759,491 793,321
Prepaid expenses -- 44,680
Deposits and other assets 33,577 34,312
Prepaid royalties 281,846 285,194
------------ ------------
$ 2,183,539 $ 4,801,025
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable $ 928,377 $ 437,393
Accrued expenses 33,262 18,303
Note payable 31,250 --
Other liabilities 22,407 --
------------ ------------
Total current liabilities 1,015,296 455,696
------------ ------------
Total liabilities 1,015,296 455,696
------------ ------------
Shareholders' equity:
Series A 4% cumulative convertible preferred
stock, par value $1.00, 3,000,000 shares
authorized, 3,340 and 0 issued and outstanding
at December 31, 1996 and 1995, respectively, aggregate
liquidation preference of $3,373,000 (Note 9) 2,047,150 --
Common stock, par value $.01, 20,200,000 shares
authorized, 377,990 and 257,540
issued and outstanding at December 31, 1996 and 1995,
respectively (Note 9) 3,780 2,575
Paid-in capital 13,515,796 12,254,672
Deficit accumulated during the development stage (10,973,186) (4,862,117)
------------ ------------
4,593,540 7,395,130

Less: Notes receivable from shareholders (Note 9) (3,425,297) (3,049,801)
------------ ------------
Total shareholders' equity 1,168,243 4,345,329
------------ ------------
$ 2,183,539 $ 4,801,025
============ ============
</TABLE>

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

F-2
<PAGE> 60

TELECHIPS CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Years Ended
December 31, Period From
---------------------------- January 7, 1991 to
1996 1995 December 31, 1996
------------ ------------ --------------
<S> <C> <C> <C>
Sales revenue $ 107,797 $ 20,700 $ 128,497
Contract revenue -- -- 2,652,274
Cost of sales (131,587) (33,783) (165,370)
Contract research and development costs -- -- (2,080,188)
Inventory allowance (763,340) -- (763,340)
------------ ------------ ------------
(787,130) (13,083) (228,127)
Operating expenses:
Marketing 1,297,280 572,053 2,372,299
General and administrative 1,527,985 730,577 2,816,733
Research and development 2,206,851 1,619,788 4,786,256
Write-down for impairment of capitalized tooling costs 300,820 -- 300,820
------------ ------------ ------------
Loss from operations (6,120,066) (2,935,501) (10,504,235)
------------ ------------ ------------

Other income (expense):
Interest income 60,334 38,000 102,388
Interest expense (51,337) (209,757) (290,544)
Amortization of 1995 Bridge financing costs -- (280,795) (280,795)
------------ ------------ ------------

Total other income (expense) 8,997 (452,552) (468,951)
------------ ------------ ------------
Net loss $ (6,111,069) $ (3,388,053) $(10,973,186)
============ ============ ============
Net loss per common and common equivalent shares
(Note 1) $ (27.65) $ (22.15) $ (68.89)
============ ============ ============
Weighted average common shares 251,347 152,964 159,292
============ ============ ============
</TABLE>

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

F-3
<PAGE> 61

TELECHIPS CORPORATION
(A Development Stage Company)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
for the Period from January 7, 1991 (inception) to December 31, 1996

<TABLE>
<CAPTION>
Preferred Stock Common Stock
----------------- --------------
Series A 4%Convertible
-------------------------
Shares Amount Shares Amount
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at January 7, 1991 (inception) -- $ -- -- $ --
Issuance of common stock; May 1991 at -- -- 16,087 161
$0.375 per share
Net income from inception to
December 31, 1991 -- -- -- --
------------ ------------ ------------

Balance at December 31, 1991 -- -- 16,087 161
Net income for the year
ended December 31, 1992 -- -- -- --
---------- ------------ ------------ ------------

Balance at December 31, 1992 -- -- 16,087 161

Issuance of common stock:
July 1993 at $0.375 per share -- -- 4,022 40
Net loss for the year
ended December 31, 1993 -- -- -- --
---------- ------------ ------------ ------------

Balance at December 31, 1993 -- -- 20,109 201
Split and conversion of common
stock into Series B common stock
and placement of half of the
resulting Series B shares
(16,087) into escrow -- -- (20,109) (201)
Issuance of Series A common stock:
October 1994, $7.455 per share -- -- -- --
November 1994, $7.455 per share -- -- -- --
Accrual of Series A redeemable
Preferred dividends -- -- -- --
Net loss for the year
ended December 31, 1994 -- -- -- --
---------- ------------ ------------ ------------
Balance at December 31, 1994 -- -- -- --
Issuance of Series A common stock:
January 1995, $7.455 per share -- -- -- --
February 1995, $7.455 per share -- -- -- --
April 1995, $7.455 per share -- -- -- --
September 1995, $5.70 per share -- -- -- --
Issuance of common stock:
October 1995 (IPO), $75.00 per share -- -- 100,000 1,000
October 1995 (exercise of Founders'
options for notes receivable),
$76.50 per share (See Note 9) -- -- 39,153 391
Accrual of Series A redeemable
Preferred dividends -- -- -- --
Conversion of convertible debt
upon close of IPO (See Note 9) -- -- 15,287 153
Conversion of Series A redeemable
Preferred stock into common
stock upon close of IPO
(See Note 9) -- -- 32,173 322
Conversion of Series A and B
common stock into common stock
upon close of IPO (See Note 9) -- -- 70,927 709
Accrual of interest on notes
receivable, collateralized by
common stock -- -- -- --
Net loss for the year ended
December 31, 1995 -- -- -- --
---------- ------------ ------------ ------------
Balance at December 31,1995 $ -- $ -- 257,540 $ 2,575
---------- ------------ ------------ ------------
</TABLE>

F-4
<PAGE> 62

TELECHIPS CORPORATION
(A Development Stage Company)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
for the Period from January 7, 1991 (inception) to December 31, 1996

<TABLE>
<CAPTION>
Common Stock
--------------
Series A Series B
------------ ------------ Paid-In
Shares Amount Shares Amount Capital
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at January 7, 1991 (inception) -- $ -- -- $ -- $ --
Issuance of common stock; May 1991 at -- -- -- -- 5,839
$0.375 per share
Net income from inception to
December 31, 1991 -- -- -- -- --
------------ ------------ ------------ ------------ ------------

Balance at December 31, 1991 -- -- -- -- 5,839
Net income for the year
ended December 31, 1992 -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1992 -- -- -- 5,839
--
Issuance of common stock:
July 1993 at $0.375 per share -- -- -- -- 1,460
Net loss for the year
ended December 31, 1993 -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1993 -- -- -- 7,299
--
Split and conversion of common
stock into Series B common stock
and placement of half of the
resulting Series B shares
(16,087) into escrow -- -- 16,087 161 40
Issuance of Series A common stock:
October 1994, $7.455 per share 9,920 99 -- -- 61,792
November 1994, $7.455 per share 3,486 35 -- -- 21,710
Accrual of Series A redeemable
Preferred dividends -- -- -- -- (9,644)
Net loss for the year
ended December 31, 1994 -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1994 13,406 134 16,087 161 81,197
Issuance of Series A common stock:
January 1995, $7.455 per share 2,145 22 -- -- 14,316
February 1995, $7.455 per share 4,022 40 -- -- 26,844
April 1995, $7.455 per share 12,601 126 -- -- 84,111
September 1995, $5.70 per share 22,666 226 -- -- 105,878
Issuance of common stock:
October 1995 (IPO), $75.00 per share -- -- -- -- 6,253,605
October 1995 (exercise of Founders'
options for notes receivable),
$76.50 per share (See Note 9) -- -- -- -- 2,994,839
Accrual of Series A redeemable
Preferred dividends -- -- -- -- (102,075)
Conversion of convertible debt
upon close of IPO (See Note 9) -- -- -- -- 499,847
Conversion of Series A redeemable
Preferred stock into common
stock upon close of IPO
(See Note 9) -- -- -- -- 2,241,539
Conversion of Series A and B
common stock into common stock
upon close of IPO (See Note 9) (54,840) (548) (16,087) (161) --
Accrual of interest on notes
receivable, collateralized by
common stock -- -- -- -- 54,571
Net loss for the year ended
December 31, 1995 -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31,1995 -- $ -- -- $ -- $ 12,254,672
------------ ------------ ------------ ------------ ------------
</TABLE>

F-5
<PAGE> 63

TELECHIPS CORPORATION
(A Development Stage Company)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
for the Period from January 7, 1991 (inception) to December 31, 1996

<TABLE>
<CAPTION>
Notes
Retained Receivable Total
Earnings Collateralized Shareholders'
(Accumulated by Common Equity
Deficit) Stock (Deficit )
------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at January 7, 1991 (inception) $ -- $ -- $ --
Issuance of common stock; May 1991 at -- -- 6,000
$0.375 per share
Net income from inception to
December 31, 1991 -- -- --
------------ ------------ ------------
Balance at December 31, 1991 -- -- 6,000
Net income for the year
ended December 31, 1992 33,269 -- 33,269
------------ ------------ ------------
Balance at December 31, 1992 33,269 -- 39,269

Issuance of common stock:
July 1993 at $0.375 per share -- -- 1,500
Net loss for the year
ended December 31, 1993 (3,943) -- (3,943)
------------ ------------ ------------
Balance at December 31, 1993 29,326 -- 36,826
Split and conversion of common
stock into Series B common stock
and placement of half of the
resulting Series B shares
(16,087) into escrow -- -- --
Issuance of Series A common stock:
October 1994, $7.455 per share -- -- 61,891
November 1994, $7.455 per share -- -- 21,745
Accrual of Series A redeemable
Preferred dividends -- -- (9,644)
Net loss for the year
ended December 31, 1994 (1,503,390) -- (1,503,390)
------------ ------------ ------------
Balance at December 31, 1994 (1,474,064) -- (1,392,572)
Issuance of Series A common stock:
January 1995, $7.455 per share -- -- 14,338
February 1995, $7.455 per share -- -- 26,884
April 1995, $7.455 per share -- -- 84,237
September 1995, $5.70 per share -- -- 106,104
Issuance of common stock:
October 1995 (IPO), $75.00 per share -- -- 6,254,605
October 1995 (exercise of Founders'
options for notes receivable),
$76.50 per share (See Note 9) -- (2,995,230) --
Accrual of Series A redeemable
Preferred dividends -- -- (102,075)
Conversion of convertible debt
upon close of IPO (See Note 9) -- -- 500,000
Conversion of Series A redeemable
Preferred stock into common
stock upon close of IPO
(See Note 9) -- -- 2,241,861
Conversion of Series A and B
common stock into common stock
upon close of IPO (See Note 9) -- -- --
Accrual of interest on notes
receivable, collateralized by
common stock -- (54,571) --
Net loss for the year ended
December 31, 1995 (3,388,053) -- (3,388,053)
------------ ------------ ------------
Balance at December 31,1995 $ (4,862,117) $ (3,049,801) $ 4,345,329
------------ ------------ ------------
</TABLE>

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

F-6
<PAGE> 64

TELECHIPS CORPORATION
(A Development Stage Company)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT), CONTINUED
for the Period from January 7, 1991 (inception) to December 31, 1996

<TABLE>
<CAPTION>
Preferred Stock Common Stock Common Stock
----------------- -------------- --------------
Series A 4% Convertible Series A
----------------------- --------
Shares Amount Shares Amount Shares Amount
------------ ------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 -- $ -- 257,540 $ 2,575 -- $ --
Cancellation of common stock issued for notes
receivable August 1996 -- -- (722) (7) -- --
Issuance of Series A 4% cumulative
Convertible Preferred stock (See Note 9)
August 1996, $1,000 per share 1,511 926,149 -- -- -- --
September 1996, $1,000 per share 2,052 1,257,749 -- -- -- --
October 1996, $1,000 per share 625 383,085 -- -- -- --
Issuance of warrants to purchase
common stock -- -- -- -- -- --
Issuance of common stock options to
consultant in exchange for services, October
1996, (See Note 9) -- -- -- -- -- --
Issuance of common stock and warrants to
vendor in exchange for services, October
1996 $75 per share -- -- 480 5 -- --
Issuance of common stock (exercise of options
issued under the 1996 Director's Option Plan,
October 1996 for notes receivable) $32.8125
per share (See Note 9) -- -- 5,000 50 -- --
Conversions of Series A 4% Convertible
Preferred stock (See Note 9)
November 1996 (321) (196,777) 24,846 248 -- --
December 1996 (527) (323,056) 90,846 909 -- --

Accrual of interest on notes receivable,
collateralized by common stock -- -- -- -- -- --
Net loss for the year
ended December 31, 1996 -- -- -- -- -- --
------------ ------------ ------------ ------------ ---------- ----------
3,340 $ 2,047,150 377,990 $ 3,780 -- $ --
============ ============ ============ ============ ========== ==========
</TABLE>

<TABLE>
<CAPTION>
Notes
Retained Receivable Total
Series B Earnings Collateralized Shareholders
-------- Paid-In (Accumulated by Common Equity
Shares Amount Capital Deficit) Stock (Deficit)
---------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 -- $ -- $ 12,254,672 $ (4,862,117) $ (3,049,801) $ 4,345,329
Cancellation of common stock issued for notes
receivable August 1996 -- -- (59,344) -- 59,351 --
Issuance of Series A 4% cumulative
Convertible Preferred stock (See Note 9)
August 1996, $1,000 per share -- -- -- -- -- 926,149
September 1996, $1,000 per share -- -- -- -- -- 1,257,749
October 1996, $1,000 per share -- -- -- -- -- 383,085
Issuance of warrants to purchase
common stock -- -- 310,000 -- -- 310,000
Issuance of common stock options to
consultant in exchange for services, October
1996, (See Note 9) -- -- 21,000 -- -- 21,000
Issuance of common stock and warrants to
vendor in exchange for services, October
1996 $75 per share -- -- 35,995 -- -- 36,000
Issuance of common stock (exercise of options
issued under the 1996 Director's Option Plan,
October 1996 for notes receivable) $32.8125
per share (See Note 9) -- -- 164,013 -- (164,063) --
Conversions of Series A 4% Convertible
Preferred stock (See Note 9)
November 1996 -- -- 196,529 -- -- --
December 1996 -- -- 322,147 -- -- --

Accrual of interest on notes receivable,
collateralized by common stock -- -- 270,784 -- (270,784) --
Net loss for the year
ended December 31, 1996 -- -- -- (6,111,069) -- (6,111,069)
---------- ------------ ------------ ------------ ------------ ------------
-- $ -- $ 13,515,796 $(10,973,186) $ (3,425,297) $ 1,168,243
========== ============ ============ ============ ============ ============
</TABLE>

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

F-7
<PAGE> 65

TELECHIPS CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Years Ended
December 31, Period From
---------------------------- January 7, 1991 to
1996 1995 December 31, 1996
------------ ------------ -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (6,111,069) $ (3,388,053) $ (10,973,186)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 56,306 18,812 86,154
Note receivable expensed as salary -- 48,750 48,750
Amortization and accretion of 1995 Bridge
financing costs -- 409,995 409,995
Valuation allowance for inventory 763,340 -- --
Write-down for impairment of tooling 300,820 -- 300,820
Issue of common stock and options and
warrants to purchase common stock in
exchange for services 57,000 -- 57,000
Net effect of changes in:
Accounts receivable (61,334) (7,339) (68,673)
Inventory (607,336) (831,664) (675,660)
Prepaid expenses 72,195 (146,494) (74,299)
Deposits 735 63,000 (33,577)
Accrued interest on note receivable -- 2,357 --
Prepaid royalties 3,348 (22,693) (281,845)
Accounts payable 553,484 256,023 990,877
Accrued expenses 14,959 (8,083) 33,262
Accrued interest on notes payable -- (26,258) --
Other liabilities 22,407 -- 22,407
------------ ------------ -----------------
Net cash used in operating activities (4,935,145) (3,631,647) (10,157,975)
------------ ------------ -----------------
Cash flows from investing activities:
Issuance of note receivable -- -- (48,750)
Purchase of equipment and tooling (323,296) (732,252) (1,140,466)
------------ ------------ -----------------
Net cash used in investing activities (323,296) (732,252) (1,189,216)
------------ ------------ -----------------
Cash flows from financing activities:
Proceeds from line of credit 354,289 -- 354,289
Loan proceeds -- 1,290,005 2,340,005
Proceeds from issuance of common stock -- 6,486,168 6,571,304
Proceeds from issuance of preferred stock (net) 2,876,983 1,339,135 5,118,844
Repayment of line of credit (354,289) -- (354,289)
Repayment of notes payable (31,250) (2,250,000) (2,281,250)
Payment of accrued Series A Preferred dividends -- (111,719) (111,719)
------------ ------------ -----------------
Net cash provided by financing activities 2,845,733 6,753,589 11,637,184
------------ ------------ -----------------
Net (decrease) increase in cash and cash equivalents (2,412,708) 2,389,690 289,993

Cash and cash equivalents at beginning of period 2,702,701 313,011 --
------------ ------------ -----------------
Cash and cash equivalents at end of period $ 289,993 $ 2,702,701 $ 289,993
============ ============ =================
Supplemental disclosure of cash flow information:
Interest paid during the year $ 51,337 $ 209,757 $ 290,544
============ ============ =================
</TABLE>

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

F-8
<PAGE> 66

TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies:

Nature of Business, Customer and Product Concentration

Telechips Corporation, a development stage company (Company), was
incorporated in Nevada on January 7, 1991, and began operations May 22,
1991. The Company designs and manufactures network client and
interactive computer/telephony devices and related peripheral devices,
and develops software applications. Currently, the Company has a small
number of customers and is marketing only one product line.

Accounting Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles (GAAP) requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. Actual results could
differ from those estimates.

Cash and Cash Equivalents

For purposes of reporting cash flows, the Company considers all
temporary cash investments with an original maturity of three months or
less to be cash equivalents. As of December 31, 1996, the Company had
deposits with two financial institutions totalling $297,149, which
exceeded Federal Deposit Insurance Corporation insurable limit of
$100,000. To date, the Company has not incurred any losses on these
deposits.

Also, the Company invests excess cash in U.S. Treasury Bills, maturing
within 90 days from the date of purchase, which are backed by the full
faith and credit of the U.S. Government. In accordance with the
provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the
Company classifies these securities as available-for-sale and carries
these investments at fair value based on market quotes which
approximate amortized costs. The Company had approximately $0 and
$2,000,000 invested in U.S. Treasury Bills at December 31, 1996 and
1995, respectively.

Inventory

Inventory consists primarily of parts and components (raw materials)
and is stated at the lower of cost (average cost) or market. Provision
for potentially obsolete or slow moving inventory is made based on
management's analysis of inventory levels and future sales forecasts.

Equipment and Tooling

Equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets
which range from 5 to 7 years. The cost and related accumulated
depreciation of property sold or retired are removed from the accounts
and the resulting gain or loss is included in current income.

F-9
<PAGE> 67

TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued

1. Summary of Significant Accounting Policies, continued:

Maintenance and repairs are charged to expense when incurred.
Expenditures for additions and improvements, where significant in
amount, are capitalized.

Tooling is amortized over the shorter of the useful life of the tooling
using the straight-line method or over the related product life-cycle
using a units of production method.

Revenue Recognition

Sales revenues are recognized at the time of shipment of product or
performance of services. Contract revenues are recognized on the
percentage-of-completion method. Research and development costs
related to contracts are charged to contract research and development
costs when incurred. Payments received in advance are deferred and not
recognized as revenue until the services are performed.

Research and Development Costs

Research and development costs not related to contracts are charged to
operations as incurred.

Prepaid Royalties

Prepaid royalties are expensed at a per-unit rate as sales of telephone
equipment are recognized.

Income Tax

The state of Nevada imposes no corporate income tax. Prior to November
1994, the Company maintained Subchapter S status for Federal tax
purposes. The income or loss of the Company was included in the tax
returns of the individual shareholders. Subsequent to the Company
obtaining equity financing in 1994, the Company converted to a C
corporation. The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standard No. 109 (SFAS No. 109) which
requires the liability method of accounting for income taxes. Future
tax benefits, such as net operating loss carryforwards, are recognized
to the extent that realization of such benefits is more likely than not
to occur prior to their expiration.

Net Loss Per Common Share

Net loss per common share and common equivalent share is computed by
dividing net loss, after increasing the net loss by the discount on
issuance of Series A 4% cumulative convertible preferred stock, by the
weighted average number of common and common equivalent shares
outstanding during each period. The discount on the Series A Preferred
Stock amounted to $837,500 for 1996. Primary and fully diluted earnings
per share are the same for the years ended December 31, 1996 and 1995.

F-10
<PAGE> 68

TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued

1. Summary of Significant Accounting Policies, continued:

SFAS No. 121

The Company adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" (SFAS No. 121) in 1996, the
Company recognized an impairment loss of $300,820 related to
capitalized tooling costs.

SFAS No. 121 stipulates that an impairment loss is recognized whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. The Company considers historical
performance and future estimated results in evaluation of potential
impairment and then compares the carrying amount of the asset to the
estimated future cash flows. If the carrying amount of the asset
exceeds estimated expected undiscounted future cash flows, the Company
measures the amount of the impairment by comparing the carrying amount
of the asset to its fair value. The estimation of fair value is
generally measured by discounting expected future cash flows at a rate
commensurate with the risks involved.

SFAS No. 123

The Company adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS No. 123), in 1996.
Under the provisions of SFAS No. 123, companies can elect to account
for stock-based employee compensation using a fair-value based method
or continue measuring compensation expense for those plans using the
intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25).
The Company has elected to continue to use the intrinsic value method
to account for stock-based compensation. SFAS No. 123 requires
companies electing to continue using the intrinsic value method to make
certain pro forma disclosures (See Note 9).

SFAS No. 128

In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings
Per Share." SFAS No. 128 simplifies the computation, presentation, and
disclosure requirements for earnings per share (EPS). The statement
requires presentation of basic and diluted EPS by all publically traded
entities having complex capital structures. SFAS No. 128 excludes
dilution from basic EPS and reflects potential dilution in diluted EPS.

The Company will adopt SFAS No. 128 for 1997. The Company is currently
determining the impact of the adoption of SFAS No. 128 on its
disclosures in its financial statements.

F-11
<PAGE> 69

TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued

2. Going Concern:

The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has not, to date,
recognized any significant revenues from product sales nor produced
units in quantities which will yield a gross margin adequate to cover
product and operations costs. In addition, the Company has incurred
significant losses from operations since inception. Furthermore, the
Nasdaq has notified the Company that its stock will be delisted
pending a hearing tentatively scheduled for May, 1997. These factors
raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any
adjustments that might result from the outcome of the uncertainty.

The Company is in the process of consummating various agreements
related to product sales and joint product development work. Based on
quotes from manufacturers under contract agreements with the Company,
the Company is seeking to produce commercial units at a cost that will
yield a gross margin, which combined with anticipated product sales,
will adequately cover cost of product and operations and produce
positive cash flow. The Company is also pursuing several potential
financing opportunities. However, there can be no assurance that the
Company's marketing, production and financing efforts will be
successful.

The Company has been granted an oral hearing on the delisting decision,
and is seeking to take corrective action to meet the minimum Nasdaq
eligibility requirements before the date of the hearing. There can be
no assurance that the Company's efforts to attain the minimum Nasdaq
eligibility requirements will be successful.

3. Inventory:

Inventory consists of the following:

<TABLE>
<CAPTION>
December, 31
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Raw materials $ 1,028,564 $ 688,802
Work-in-process 97,986 118,333
Finished goods 312,450 24,529
------------ ------------
1,439,000 831,664
Less valuation allowance 763,340 --
------------ ------------
Inventory, net $ 675,660 $ 831,664
============ ============
</TABLE>

F-12
<PAGE> 70

TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued

4. Equipment and Tooling:

Equipment and tooling consists of the following:

<TABLE>
<CAPTION>
December, 31
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Tooling $ 473,707 $ 659,506
Computer and other equipment 264,042 81,105
Furniture and fixtures 61,352 44,086
Leasehold improvements 42,326 38,472
----------- -----------
841,427 823,169
Less accumulated depreciation and amortization 81,936 29,848
----------- -----------
Equipment and tooling, net $ 759,491 $ 793,321
=========== ===========
</TABLE>

5. Notes Receivable:

During 1994, the Company loaned to a shareholder an aggregate amount of
$48,750. The note bears interest at an annual rate of 7% and was due
November, 1996. The note, including accrued interest of $5,770, was
canceled and charged to salary expense in December, 1995.

6. Notes Payable:

During April, 1996, the Company issued an uncollateralized note payable
(Note) to a vendor for $62,500, with an interest rate of 9% payable
monthly and principal due November, 1996. During October, 1996, the
Company paid $31,250 of the Note and extended the existing terms on the
remaining $31,250 until May, 1997.

On February 7, 1997, the Company issued a note payable for $300,000.
The note was discounted yielding net proceeds to the Company of
$250,000. The note bears a stated annual interest rate of 1% (effective
annualized rate of 252.91% after taking into account the discount
including issuance of common stock) and is payable upon the earlier of
180 days from date of issuance or upon the closing of a significant
equity, quasi-equity or debt financing by the Company. In addition, the
Company agreed to issue to the lender 75,000 shares of common stock
upon maturity valued at $51,600. The note was paid and shares issued
April 2, 1997 (see Note 9).

On March 10, 1997, the Company issued a note payable for $700,000. The
note was discounted yielding net proceeds to the Company of $500,000.
The note bears an annual interest rate of 1% (effective annualized rate
of 634.78% after taking into account the discount) and is payable upon
the closing of a financing transaction. Upon closing of the
transaction, the note will be canceled and the proceeds along with
accrued interest will be deposited into escrow to be used to purchase
securities in the financing transaction. On April 2, 1997, the note was
canceled and was converted to Series B 4% cumulative convertible
preferred stock (see Note 9).

F-13
<PAGE> 71

TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued

7. Line of Credit:

During November, 1995, the Company obtained a revolving line of credit
from a commercial bank for $1,200,000, collateralized by cash and cash
equivalents valued at 105% of outstanding draws. Interest is payable
monthly at the three-month U.S. Treasury Bill rate plus 3% (8.19% at
December 31, 1996). Principal is due at maturity. The line of credit
expires December 15, 1997. At December 31, 1996 and 1995, there were
no outstanding draws.

8. 1995 Bridge Financing:

On September 1, 1995, the Company completed the sale to private
investors of 17 units (the Units), each unit consisting of (1) an
unsecured, nonnegotiable promissory note of the Company in the
principal amount of $100,000, bearing interest initially at the rate of
8% per annum, increasing to 12% per annum, payable semiannually, in
arrears, with the principal and any accrued interest and unpaid
interest due on the earlier of the consummation of an IPO or July 31,
1996; and (2) 1,333 shares of Series A common stock (the 1995 Bridge
Shares). The purchase price per unit was $100,000. The Company received
gross proceeds of $1,700,000 from the sale of such units. After the
payment of $170,000 in placement fees to the placement agent and other
offering expenses of approximately $134,000, the Company received net
proceeds of approximately $1,396,000 of the total proceeds of
$1,700,000. The fair market value of the 1995 Bridge Shares ($129,200)
was allocated to Series A Common Stock and paid-in capital in the
amounts of $226 and $128,974, respectively, and $1,570,800 of the total
proceeds was allocated to debt. Aggregate financing costs of $303,891
was allocated between unamortized 1995 Bridge financing costs and
paid-in capital in the amounts of $280,795 and $23,096, respectively.
The notes including accrued interest of $18,630 were repaid upon
completion of the IPO (Note 9). Unamortized 1995 Bridge financing costs
were expensed and additional Bridge interest of $129,200 was accreted
and expensed.

9. Preferred Stock and Shareholder's Equity:

Initial Public Offering of Stock

On October 20, 1995, the Company completed the public sale (IPO) of
100,000 shares of common stock at a price of $75.00 per share and
115,000 (100,000 offered plus 15,000 overallotment) redeemable warrants
to purchase common stock at a price of $1.50 per warrant, which warrant
entitles the owner to purchase one share of common stock at an exercise
price of $75.00 (Redeemable Warrants). The warrants expire October,
2000 and are redeemable by the Company, with the consent of the
underwriter, upon 30 days' notice at any time commencing October 16,
1996, at a price of $1.50 per warrant, provided that the closing bid
quotation of the common stock of the Company has been $112.50 for 30
days prior to giving notice.

F-14
<PAGE> 72

TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued

9. Preferred Stock and Shareholder's Equity, continued:

The IPO yielded total proceeds of $7,672,500 and net proceeds of
approximately $6,255,000 after deducting the underwriter's discount of
$767,250, and underwriter's fees, legal and other financing costs
aggregating approximately $650,250. In addition, the Company sold to
the Underwriter for an aggregate of $150, warrants (Underwriter's
Warrants) to purchase up to 10,000 shares of common stock at an
exercise price of $115.50 per share and/or up to 10,000 warrants (each
exercisable to purchase one share of common stock at a price of $115.50
per share) at an exercise price of $2.31 per warrant. The Underwriter's
Warrants are exercisable over a four-year period beginning October 16,
1996.

The Company also granted to the Underwriter an overallotment option,
expiring November 30, 1995, to purchase up to 15,000 additional shares
of common stock and/or 15,000 additional warrants at $75.00 and $1.50,
respectively, less underwriting discounts and commissions. The warrant
overallotment was exercised at the close of the IPO.

Exercise of Founder's Options

Also upon closing of the IPO, members of the Company's senior
management team exercised options to purchase 39,153 additional shares
of common stock (Founders' Options) at a price of $76.50 per share for
a total consideration of $2,995,230. The shares were purchased with
nonrecourse notes collateralized by the stock. The notes bear interest
at 8.75%, have no maturity date and can be satisfied by cash, stock or
similarly valued property. The shares were placed in escrow, subject to
a right of repurchase by the Company. The Company's repurchase right
lapses ratably over 36 months beginning on the date of the option
exercise. The repurchase rights are triggered only if the employee
voluntarily leaves the Company. Repurchase price will be equal to the
original exercise price. Interest associated with unpaid notes on those
shares repurchased will be canceled. The shares are released from
escrow upon lapse of the repurchase rights and payment of the related
portion of the notes. During 1996, 722 Founder's Options shares valued
at $55,248 and related accrued note interest of $4,103 were canceled
and removed from paid-in capital and notes receivable from
shareholders, respectively. Subsequent to December 31, 1996, 10,457
Founder's Options shares valued at $799,920 and related accrued note
interest of $90,457 were canceled and removed from paid-in capital and
notes receivable from shareholders, respectively.

1995 Changes to Certain Existing
Agreements and Reverse Stock Split

During August, 1995, the Company initiated changes, requiring
shareholder vote, to certain existing agreements as follows: (1)
amendment to the Articles of Incorporation (Articles) to allow for
voluntary conversion of Series A redeemable Preferred Stock into shares
of Series A Common Stock at a conversion ratio of 1.25 per Series A
Common share; (2) election to convert the Series A redeemable Preferred
Stock into shares of Series A Common stock, as described in item (1),
upon the completion of an IPO (Conversion); (3) amendment to the terms
of the Series B Common stock escrow agreement, in addition to existing
release provisions, to allow for release upon

F-15
<PAGE> 73

TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued

9. Preferred Stock and Shareholder's Equity, continued:

attainment of certain stock market price goals following an IPO; (4)
consent to a reverse split of the Company's Series A and Series B
Common Stock at a ratio of 1 to 2.486536 (effective August 21, 1995);
and (5) amendment to the Articles of Incorporation to allow for Series
A Common Stock (into which all other outstanding [and Series B escrow]
shares would be converted) to be redesignated as common stock upon
completion of an IPO. As of the date of the IPO, all items received the
required favorable votes.

Upon the closing of the IPO, all of the outstanding Series A and B
Common Stock and the Series A redeemable Preferred stock were converted
into 103,100 shares of common stock. The Series B escrow shares were
also converted into common stock upon the closing. In addition,
$500,000 in convertible debt was converted into 15,287 shares of common
stock. Such conversions have been presented in the balance sheet, and
earnings per share computation.

Private Placement of Series A 4% Cumulative
Convertible Preferred Stock

On October 2, 1996, the Company completed a private placement of 4,188
shares of Series A 4% cumulative convertible preferred stock (Preferred
Stock) with a face value of $1,000 per share. The Preferred Stock was
sold at a discount of 20% of face value and after paying underwriting
discounts, expenses and other related fees of approximately $470,000
the Company received aggregate net proceeds of approximately
$2,880,000. In addition, the Company granted to the underwriter
warrants to purchase up to 26,667 shares of common stock at $33.75 per
share, exercisable at anytime until August, 2001. The warrants, valued
at $310,000, were recorded as a reduction in Preferred Stock (offering
costs) and an increase in paid-in capital. Upon occurrence of certain
events, the exercise price of the warrants may be adjusted downward.
Upon completion of the private placement of Series B 4% cumulative
convertible preferred stock on April 2, 1997, these warrants were
canceled.

The Preferred Stock is convertible anytime beginning November 11, 1996
until August 31, 1998 using a formula (Conversion Formula) multiplying
each Preferred share by 1,000 and dividing the result by the lower of
either the fair market value at the time of conversion or $45.00. The
Preferred Stock will automatically convert, if conversion has not
previously been effected, on August 31, 1998 or upon consummation of a
public offering of securities with gross proceeds of $10,000,000 or
more provided that such offering may not close prior to March 30, 1997.
The 4% dividend is payable semiannually in cash or shares of common
stock converted using the Conversion Formula described above.
Preferred dividends in arrears at December 31, 1996 approximate
$33,000. The Preferred Stock is nonvoting and has a liquidation
preference over all common shares and shall be entitled to payment of
$1,000 per share plus dividends that have accrued.

F-16
<PAGE> 74

TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued

9. Preferred Stock and Shareholder's Equity, continued:

As of December 31, 1996, 848 shares of Preferred Stock were converted
into 114,834 shares of common stock. In addition, 858 shares of common
stock were issued in payment of dividends on the converted Preferred
Stock. Subsequent to December 31, 1996, an additional 2,155 shares of
Preferred Stock were converted into 703,846 shares of common stock. In
addition, 8,444 shares of common stock were issued in payment of
dividends on the converted Preferred Stock.

Nonemployee Director's Options

During October, 1996, the Board of Directors approved the Company's
1996 Director's Stock Option Plan (Director's Plan). The Director's
Plan authorizes the automatic granting of nonqualified stock options
to purchase an aggregate of up to 20,333 shares of common stock to
nonemployee directors of the Company. The exercise price of the options
will be fair market value on the date of grant. Each nonemployee
director will receive an option to purchase 2,000 shares (Initial Grant
Option) on the date such person first becomes a director. These shares
may be exercised either, (1), over a five-year period by cash, stocks,
or similarly valued property, with the options vesting ratably over a
36-month period from the date of grant; or, (2), immediately by
delivery of promissory notes to the same provisions described below for
Director's Options. In addition, each nonemployee director will receive
an automatic grant of an option to purchase 333 shares (Annual Grant
Options) on each annual anniversary of the date that such person first
becomes a director. Annual Grant Options are immediately exercisable on
the date of grant under terms similar to those of the Initial Grant
Option. Both Annual and Initial Grant Options expire five years from
the date of grant. During October, 1996, 7,000 options to purchase
shares of common stock were granted to nonemployee directors.

During October, 1996, nonemployee members of the Board of Directors
exercised options (Director's Options) to purchase 5,000 shares of
common stock at a price of $32.8125 per share for a total consideration
of $164,063. The shares were purchased with nonrecourse notes
collateralized by the stock. The notes bear interest at 8.25%, have a
maturity date of ten years from the date of exercise and can be
satisfied by cash, stock or similarly valued property. The shares were
placed in escrow, subject to a right of repurchase by the Company. The
Company's repurchase right lapses ratably over 36 months beginning on
the date of the option exercise. The repurchase rights are triggered
only if the Director voluntarily leaves the Board. The repurchase price
will be equal to the original exercise price. Interest associated with
unpaid notes on those shares repurchased will be canceled. The shares
are released from escrow upon lapse of the repurchase rights and
payment of the related portion of the notes. Subsequent to December 31,
1996, 4,750 Director's Options valued at $155,859 and related accrued
interest of $15,853 were canceled and removed from paid-in capital and
notes receivable from shareholders, respectively.

F-17
<PAGE> 75

TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued

9. Preferred Stock and Shareholder's Equity, continued:

Consulting Agreements

During October, 1996, the Company entered into an agreement with an
outside consultant to provide certain financial, business, investor
relations and public relations consulting services to the Company for a
period of one (1) year. In exchange for services, the Company has
agreed to pay the consultant $7,500 per month and to issue the
consultant options to purchase up to 3,333 shares of common stock at
any time beginning January 1, 1997 through March 31, 1999, at an
exercise price of $33.75 per share. In addition, unless the consulting
agreement is earlier terminated, the Company has agreed to issue
additional options on each of January 2, 1997, April 2, 1997 and June
30, 1997 to purchase 3,333 shares of common stock at an exercise price
of $33.75 per share.

In addition, if the consultant is solely responsible for arranging
certain financing transactions, they may receive additional
compensation.

During January, 1997, the Company entered into an agreement with an
outside consultant to provide certain international financial public
relations to the Company for a period of six (6) months. In exchange
for services, the Company has agreed to pay the consultant an initial
sum of $12,500 representing the first month's fee and a nonrefundable
deposit toward expenses. Thereafter the Company will pay a minimum of
$6,250 per month based on a certain number of minimum hours of work
with additional hours beyond the minimum to be charged incrementally.
As of the date of this report, the Company has paid the consultant
3,101 shares of common stock valued at $12,500 and $8,720 in cash.

1994 and 1995 Stock Option Plans

In July, 1994, the Company adopted a Stock Option Plan (Plan) that
provides for a maximum of 3,217 shares of the Company's authorized but
unissued common stock, par value $.01 per share, to be available for
grant as Non-Statutory and/or Incentive Stock Options. In August, 1995,
the Company adopted the 1995 Stock Option Plan that provides for a
maximum of 23,000 shares of the Company's authorized but unissued
common stock par value of $.01 per share to be available for grant as
non-statutory and an incentive stock option with substantially
identical terms to the 1994 Stock Option Plan.

NON-STATUTORY OPTIONS: Non-Statutory Options may be granted to persons
who are employees, officers or directors of, or consultants or advisors
to the Company, at an exercise price determined by the Board of
Directors at the date of grant. The exercise and expiration period
shall be set forth in the applicable option agreement. No shares have
been granted under this portion of the Plan.

F-18
<PAGE> 76

TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued

9. Preferred Stock and Shareholder's Equity, continued:

INCENTIVE STOCK OPTIONS: Incentive Stock Options may be granted only to
employees of the Company at an exercise price of at least fair market
value, or not less than 110% of fair market value for any owners of
stock possessing more than 10% of the total combined voting power of
all classes of stock of the Company (10% owners), as determined by the
Board of Directors at the date of grant. The exercise period for
options granted to any 10% owners shall not exceed five years from the
date of grant. The remaining options expire 10 years from the date of
grant. The options generally vest at 25% one year from the initial date
of employment or date of grant and the remainder ratably over 36
months.

At December 31, 1996, there were 12,722 options outstanding and 4,832
exercisable as follows:

<TABLE>
<CAPTION>
Exercise
Date of Grant Granted Exercisable Price Expiration Date
------------- ------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
May, 1995 2,695 1,579 $46.65 May, 2005
July, 1995 523 57 $52.65 July, 2005
October, 1995 4,311 2,140 $71.25 October, 2005
November, 1995 1,547 222 $78.75 November, 2005
January, 1996 983 285 $76.875 January, 2006
February, 1996 5,527 549 $103.125 February, 2006
April, 1996 447 -- $75.00 April, 2006
June, 1996 5,563 -- $86.25 June, 2006
October, 1996 2,400 -- $32.813 October, 2006
-------- --------
23,996

Canceled (11,274)

Total 12,722 4,832
======= =====
</TABLE>

The weighted-average exercise price of options outstanding at December
31, 1996 and 1995 amounted to $67.75 and $64.24, respectively, and the
weighted-average exercise price of options exercisable at December 31,
1996 amounted to $67.29. The weighted-average contractual life of the
options outstanding at December 31, 1996 is 9.8 years.

During January, 1997, an additional 900 shares were canceled.

Stock-Based Compensation

The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, the compensation cost of stock options is
measured using an intrinsic value method whereby the excess, if any, of
the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock represents
compensation costs. Using this method, the

F-19
<PAGE> 77

TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued

9. Preferred Stock and Shareholder's Equity, continued:

Company recognized no stock-based compensation costs for 1996 and 1995.
Had compensation cost for the Company's stock-based compensation plan
been determined using a fair-value of the options at the grant date, as
proscribed by SFAS No. 123, the Company's net loss and loss per share
would be as follows:

<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net loss - as reported $6,111,069 $3,388,053
========== ==========
Net loss - pro forma $6,311,951 $3,515,025
========== ==========
Loss per share - as reported $(27.65) $(22.15)
======== ========
Loss per share - pro forma $(28.44) $(22.98)
======== ========
</TABLE>

The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions: risk-free interest rate equal to the
yield on U.S. Treasury Bonds at the date of grant (5.32% - 6.55%);
expected life of 4 years; expected volatility of 43.86%; and no
expected dividends. The weighted-average fair value on the date of
grant for options granted during 1996 and 1995 was $25.35 and $26.70
per option, respectively.

Other Warrants

As part of payment arrangements for various underwriting and other
agreements, the Company has issued and currently has outstanding
warrants to purchase common stock as follows:

<TABLE>
<CAPTION>
Number of Common Shares to
Date of Issuance be Issued upon Warrant Exercise Exercise Price Expiration Date
- ---------------- ------------------------------- -------------- ---------------
<S> <C> <C> <C>
August, 1994 4,183 $37.35 August, 1999
August, 1994 1,341 $46.65 August, 1999
October, 1994 5,952 $46.65 October, 1999
November, 1994 2,091 $46.65 November, 1999
January, 1995 1,287 $46.65 January, 2000
February, 1995 2,413 $46.65 February, 2000
April, 1995 7,561 $46.65 April, 2000
October, 1995 400 $45.00 September, 2000
-----
25,228
======
</TABLE>

Certain warrant agreements contain anti-dilutive provisions which, as
of December 31, 1996 and the date of the report, would result in an
estimated equivalent of 10,000 and 90,000, respectively, additional
shares being issued for the same aggregate consideration.

F-20
<PAGE> 78

TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued

9. Preferred Stock and Shareholder's Equity, continued:

Increase in Number of Authorized Shares,
1997 Reverse Stock Split

During December, 1996, the shareholders approved an increase in the
number of authorized shares from 10,200,000 to 20,200,000.

On March 7, 1997, the shareholders approved a 1-for-15 reverse split,
retaining the post-split authorized common shares at 20,200,000. Prior
to the reverse split on March 7, 1997, there were 16,172,625 shares
outstanding and post split, the number of shares outstanding was
1,078,175. The financial statements and accompanying footnotes reflect
the effects of the reverse split for all periods presented.

Private Placement of Series B 4% Cumulative
Convertible Preferred Stock

On April 2, 1997, the Company completed a private placement of 1,906
shares of Series B 4% cumulative convertible preferred stock (Series B
Preferred Stock) with a face value of $1,000 per share. Of the Series B
Preferred Stock, 1,031 shares were sold at a discount of 20% of the
face value after paying underwriting discounts, expenses and other
related fees of approximately $172,250, the Company received aggregate
net proceeds of $652,750. Also, as described in Note 6, the Company
converted a $700,000 note payable into 875 shares of Series B Preferred
Stock. In addition, the Company granted the underwriter 7,500 shares of
common stock valued at approximately $51,000 and warrants to purchase
150,000 shares of common stock at approximately $.70 per share valued
at approximately $105,000. The common stock and warrants, an aggregate
value of $156,000, were recorded as a reduction of Series B Preferred
Stock (offering costs) and an increase in paid-in capital. Upon
occurrence of certain events, the exercise price of the warrants may be
adjusted downward. The Series B Preferred Stock is convertible anytime
beginning May 17, 1997, until March 31, 1999, using a formula (Series B
Conversion Formula) multiplying each Series B Preferred share by 1,000
and dividing the result by the lower of either 110% of the fair market
value at April 2, 1997, or the fair market value at the time of
conversion. The Series B Preferred Stock will automatically convert, if
conversion has not previously been effected, on March 31, 1999, or upon
consummation of a public offering of securities with gross proceeds of
$10,000,000 or more provided that such offering may not close prior to
September 29, 1997. The 4% dividend is payable semiannually in cash or
shares of common stock converted using the Series B Conversion Formula
described above. The Preferred Stock is nonvoting and has a liquidation
preference over all common shares is subordinate to the liquidation
preference of the Series A Preferred Stock and shall be entitled to
payment of $1,000 per share plus dividends that have accrued. A portion
of the net proceeds was used to pay off the $300,000 February 7, 1997,
as described in Note 6.

F-21
<PAGE> 79

TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued

10. Software License Agreement:

In March, 1994, the Company entered into an agreement with Microsoft
Corporation to license Microsoft's software to be used in the graphic
display telephone equipment. Microsoft is the sole source supplier of
this software. The agreement provides for royalty payments based on $35
per unit, to be paid upon sale of the equipment. During March and
September, 1994, the Company prepaid $250,000 and $12,500 in royalties,
respectively. Beginning September 1, 1996, the Company is committed to
make minimum royalty payments based on an average of 600 units per
month. If the average is below the 600 units, the per-unit royalty
shall increase 20% to $42.00 per unit until such time that the volume
exceeds the minimum for three consecutive months. In the event the
Company fails to accrue any royalties prior to the expiration of the
agreement, the Company may be charged a $10,000 administrative fee. The
agreement as amended October 1, 1996, expires December 31, 1997.

11. Operating Lease:

The Company leases its office space under an operating lease. In June,
1995, the Company moved to a new and larger office. The five-year lease
expires June, 2000. The Company also leases space for assembly and
testing purposes under an additional operating lease. The one-year
lease expires November, 1997. Rental expenses for the years ended
December 31, 1996 and 1995, were $178,761 and $97,787, respectively.

Minimum annual rental payments consist of the following:

<TABLE>
<CAPTION>
Year Ending December 31:
------------------------
<S> <C>
1997 244,591
1998 163,250
1999 169,770
2000 79,206
Thereafter --
--------
Total $656,817
========
</TABLE>

F-22
<PAGE> 80

TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued

12. Income Taxes:

The income tax effect of temporary timing differences between financial
and income tax reporting that give rise to deferred income tax assets
and liabilities at December 31, 1996 and 1995, under the provisions of
SFAS No. 109, are as follows:

<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Net operating loss carryforwards $ 2,510,427 $ 850,776
Capitalized research and experimentation costs 616,216 644,642
Research and experimentation credits 111,794 127,036
Inventory reserve 259,536 --
Other 159,367 (13,038)
------------ ------------
3,657,340 1,609,416
------------ ------------
Less valuation allowance (3,657,340) (1,609,416)
------------ ------------
Net deferred $ -- $ --
============ ============
</TABLE>

As a result of providing a valuation allowance equal to the deferred
tax asset, there is no tax provision.

At December 31, 1996, the Company had approximately $7,384,000 in net
operating loss carryforwards and $111,800 in research and
experimentation credit carryforwards for federal tax purposes, which
expire from 2009 to 2012, respectively.

Under definitions in the Internal Revenue Code, a change of ownership
occurred during 1996. Utilization of net operating loss (NOL)
carryforwards existing at the date of the ownership change (as defined)
are limited. Any unused portion of the amount available may be carried
forward and utilized in subsequent years. Use of NOL's generated after
the ownership change are not limited.

13. Related Party Transactions:

Included in sales and marketing expenses at December 31, 1996, are
payments to a consultant related to a member of senior management of
the Company in the amount of $41,000.

F-23
<PAGE> 81

TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued

14. Commitments:

On December 18, 1996, the Company and vendor entered into a software
license agreement (the "Agreement") whereby the vendor has granted the
Company the right to embed certain protocol softwarein the Telechips
Access line of products. The Company is obligated to make certain
minimum royalty payments and license fees under the Agreement. The
Company paid $10,000 upon execution of the Agreement. Nonrefundable
minimum royalty payments for the first twelve months amount to $50,000.
The initial term of the Agreement will expire on December 18, 1998, and
shall renew automatically each year for a one-year term, unless
terminated.

F-24
<PAGE> 82

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized, on April 15, 1997.

TELECHIPS CORPORATION

By: /s/Nelson B. Caldwell
--------------------------------
Nelson B. Caldwell,
Chief Executive Officer

In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.

<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>

/s/ Richard Adrey Director April 15, 1997
- -------------------------------
Richard Adrey

/s/ Nelson B. Caldwell President, Chief Executive April 15, 1997
- ------------------------------- Officer, Chief Financial Officer
Nelson B. Caldwell and Secretary
(Principal Executive Officer,
Principal Financial and Accounting
Officer)

/s/ Randall Pinato Executive Vice-President - Sales and April 15, 1997
- ------------------------------- Marketing and Director
Randall Pinato

/s/ Frank S. Vigilante Director April 15, 1997
- -------------------------------
Frank S. Vigilante
</TABLE>

<PAGE> 1

EXHIBIT 3.2

CERTIFICATE OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
TELECHIPS CORPORATION

We the undersigned President and Secretary of TELECHIPS CORPORATION DO
HEREBY CERTIFY:

1. That the Board of Directors of TELECHIPS CORPORATION pursuant to a
special meeting of the Board on February 5, 1997, adopted resolutions to amend
the Articles of Incorporation as follows:

"The First Paragraph of Article FOUR be amended in its entirety to
read as follows:

"FOUR: The total number of shares of all classes of stock
which the Corporation has authority to issue is 23,200,000 consisting
of (A) 20,200,000 shares of Common Stock, par value $0.01 per share
(the "Common Stock" and the holders thereof referred to herein as the
"Common Stockholders"), and (B) 3,000,000 shares of Preferred Stock,
par value $1.00 per share (the "Preferred Stock" and the holders
thereof being referred to herein as the "Preferred Stockholders"),
none of which shall be entitled to any preemptive rights.

Effective as of the close of business on the date of filing of
this amendment ("Amendment") to the Articles of Incorporation (the
"Effective Time"), the filing of this Amendment shall effect a reverse
stock split (the "Reverse Split") on the basis of one new share of
Common Stock for each fifteen then issued and outstanding shares of
Common Stock.

Immediately as of the Effective Time, and without any action
by the holders of outstanding Common Shares, outstanding certificates
representing the Corporation's Common Shares shall represent for all
purposes, and each Common Share issued and outstanding immediately
before the Effective Time shall automatically be converted into, new
Common Shares in the ratio of fifteen old Common Shares for one new
Common Share, all by virtue of the Reverse Split and without any
action on the part of the holder of such Common Shares.

Notwithstanding any of the foregoing to the contrary, no scrip
or fractional Common Shares shall be issued in connection with the
Reverse Split. In lieu thereof, each record holder of Common Shares as
of the Effective Date who would otherwise have been entitled to
receive a fractional new Common Share shall, upon surrender of such
stockholder's certificates representing pre-Reverse Split Common
Shares, be issued an additional fraction of a share as is necessary to
increase the fractional share to a full share."

2. That the number of shares of stock of TELECHIPS CORPORATION
outstanding and entitled to vote on an amendment to the Articles of
Incorporation is 15,138,329 shares of Common Stock; that said change and
amendment has been consented to and authorized by at least a majority of the
shares of stock outstanding and entitled to vote thereon.

/s/ NELSON B. CALDWELL
----------------------------
President

/s/ HANS JUNKER
----------------------------
Hans Junker
Assistant Secretary

<PAGE> 1
EXHIBIT 3.3

CERTIFICATE OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
TELECHIPS CORPORATION

We the undersigned President and Secretary of TELECHIPS CORPORATION DO
HEREBY CERTIFY:

1. That the Board of Directors of TELECHIPS CORPORATION pursuant to a
special meeting of the Board on February 5, 1997, adopted resolutions to amend
the Articles of Incorporation as follows:

"The First Paragraph of Article FOUR be amended in its entirety to read
as follows:

"FOUR: The total number of shares of all classes of stock which
the Corporation has authority to issue is 23,200,000 consisting of (A)
20,200,000 shares of Common Stock, par value $0.01 per share (the
"Common Stock" and the holders thereof referred to herein as the
"Common Stockholders"), and (B) 3,000,000 shares of Preferred Stock, par
value $1.00 per share (the "Preferred Stock" and the holders thereof
being referred to herein as the "Preferred Stockholders"), none of which
shall be entitled to any preemptive rights.

Immediately as of the Effective Time, and without any action by
the holders of outstanding Common Shares, outstanding certificates
representing the Corporation's Common Shares shall represent for all
purposes, and each Common Share issued and outstanding immediately
before the Effective Time shall automatically be converted into, new
Common Shares in the ratio of fifteen old Common Shares for one new
Common Share, all by virtue of the Reverse Split and without any action
on the part of the holder of such Common Shares.

Notwithstanding any of the foregoing to the contrary, no scrip
or fractional Common Shares shall be issued in connection with the
Reverse Split. In lieu thereof, each record holder of Common Shares as
of the Effective Date who would otherwise have been entitled to receive
a fractional new Common Share shall, upon surrender of such
stockholder's certificates representing pre-Reverse Split Common Shares,
be issued an additional fraction of a share as is necessary to increase
the fractional share to a full share."

/s/ Nelson B. Caldwell
--------------------------------
Nelson B. Caldwell, President

/s/ Hans Junker
--------------------------------
Hans Junker, Assistant Secretary

<PAGE> 1
EXHIBIT 3.4

FILED

IN THE OFFICE OF THE
SECRETARY OF STATE OF THE
STATE OF NEVADA

SEP 09 1996

C-90-91

DEAN HELLER, SECRETARY OF STATE

[SIG]
- ---------------------------

AMENDED
CERTIFICATE OF DESIGNATION, NUMBER, POWERS,
PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL, AND OTHER SPECIAL RIGHTS AND THE
QUALIFICATIONS, LIMITATIONS, RESTRICTIONS,
AND OTHER DISTINGUISHING CHARACTERISTICS OF
SERIES A PREFERRED STOCK

TELECHIPS CORPORATION

We the undersigned President and Secretary of TELECHIPS CORPORATION DO
HEREBY CERTIFY:

I. The name of the corporation (hereinafter called the
"Corporation" is TELECHIPS CORPORATION.

II. The certificate of incorporation of the Corporation authorizes
the issuance of 3,000,000 shares of Preferred Stock of a par value of $1.00 per
share and expressly vests in the Board of Directors of the Corporation the
authority provided therein to issue any or all of said shares in one or more
series and by resolution or resolutions to establish the designation, number,
full or limited voting powers, or the denial of voting powers, preferences and
relative, participating, optional, and other special rights and the
qualifications, limitations, restrictions, and other distinguishing
characteristics of each series to be issued; and all previously designated and
issued shares of the Corporation's Preferred Stock has been converted to Common
Stock in the Corporation.

III. The Board of Directors of the Corporation at a special meeting
held on August 19, 1996, adopted resolutions creating a new series of Class A
Preferred Stock of the Corporation with the designation, number, powers,
preferences and relative, participating, optional and other special rights and
the qualifications, limitations, restrictions and other distinguishing
characteristics set forth in that certain Certificate of Designation, Number,
Powers, Preferences and Relative, Participating, Optional, and Other Special
Rights and the Qualifications, Limitations, Restrictions and Other
Distinguishing Characteristics of Series A Preferred Stock of Telechips
Corporation filed with the Secretary of State of the State of Nevada on August
23, 1996 ("Original Certificate of Designation").

IV. By unanimous written consent dated September 4, 1996, the
Board of Directors of the Corporation approved the amendment of the resolutions
adopted on August 23, 1996 and the description of Series A Preferred Stock of
the Corporation set forth in the Original Certificate of Designation to read in
their entirety as follows:

RESOLVED, that Seven Thousand Five Hundred (7,500) of the Three
Million (3,000,000) authorized shares of Preferred Stock of the Corporation
shall be designated Series

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RECEIVED

SEP 09 1996

[SIG]
- --------------------------
SECRETARY OF STATE

<PAGE> 2
A Preferred Stock (the "Series A Preferred Stock") and shall possess the rights
and privileges set forth below:

A. Stated Value.

1. Each share of Series A Preferred Stock shall
have a stated (face) value of $1,000.00.

B. Dividends.

1. The holder of each issued and outstanding
share of Series A Preferred Stock shall be entitled to receive, when and as
declared by the Board of Directors of the Corporation, out of the assets at the
time legally available for such purpose, dividends at a rate of four percent
(4%) per annum on the stated value, payable semi-annually at the Company's
option in cash or in shares of the Common Stock of the Corporation at a
dividend conversion price equal to the lesser of (x) three dollars ($3.00) or
(y) the average closing bid price for the five (5) trading days prior to
payment. Such dividends shall accumulate until paid to the holders. If any
dividends payable on the Series A Preferred Stock with respect to any dividend
payment period are not paid for any reason, the right of the holders of the
Series A Preferred Stock to receive payment of such dividend shall not lapse or
terminate, but said unpaid dividend or dividends shall be added to the stated
value of the Series A Preferred Stock effective at the beginning of the
semi-annual period next succeeding the semi-annual period as to which such
dividends were not paid, and shall thereafter accrue additional dividends at
the above-stated dividend rate. Any dividend payment made on the Series A
Preferred Stock shall be credited against the earliest accrued but unpaid
dividend which has been added to the stated value of the Series A Preferred
shares and shall reduce the stated value by the amount of the dividend paid.
No dividends shall be declared or paid with respect to the Corporation's Common
Stock (other than a dividend payable solely in Common Stock of the
Corporation), or upon any other class of Preferred Stock of the Corporation
with a dividend preference subordinate to the dividend preference of the Series
A Preferred Stock, unless a dividend of equal or greater amount per share (on
an as-if-converted to Common Stock basis) is first declared and paid with
respect to the Series A Preferred Stock.

2. No dividends shall be paid on the Series A
Preferred Stock if such payment would violate Nevada law.

C. Liquidation Preference.

1. In the event of any liquidation, dissolution
or winding-up of the Corporation, either voluntary or involuntary (a
"Liquidation"), the holders of shares of the Series A Preferred Stock then
issued and outstanding shall be entitled to be paid out of the assets of the
Corporation available for distribution to its shareholders, whether from
capital, surplus or earnings, before any payment shall be made to the holders
of shares of the Common Stock or upon any other series of Preferred Stock of
the Corporation with a liquidation preference subordinate to the liquidation
preference of the Series A Preferred Stock, an amount equal to one thousand
dollars ($1,000) per share, plus an amount equal to any unpaid dividends
accumulated

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<PAGE> 3
and unpaid on each such share to and including the date of distribution on such
share. If, upon any Liquidation of the Corporation, the assets of the
Corporation available for distribution to its shareholders shall be
insufficient to pay the holders of shares of the Series A Preferred Stock and
the holders of any other series of Preferred Stock with a liquidation
preference equal to the liquidation preference of the Series A Preferred Stock
the full amounts to which they shall respectively be entitled, the holders of
shares of the Series A Preferred Stock and the holders of any other series of
Preferred Stock with liquidation preference equal to the liquidation preference
of the Series A Preferred Stock shall receive all of the assets of the
Corporation available for distribution and each such holder of shares of the
Series A Preferred Stock and the holders of any other series of Preferred Stock
with a liquidation preference equal to the liquidation preference of the Series
A Preferred Stock shall share ratably in any distribution in accordance with
the amounts due such shareholders. After payment shall have been made to the
holders of shares of the Series A Preferred Stock of the full amount to which
they shall be entitled, as aforesaid, the holders of shares of the Series A
Preferred Stock shall be entitled to no further distributions thereon and the
holders of shares of the Common Stock and of shares of any other series of
stock of the Corporation shall be entitled to share, according to their
respective rights and preferences, in all remaining assets of the Corporation
available for distribution to its shareholders.

2. A merger or consolidation of the Corporation
with or into any other corporation, or a sale, lease, exchange, or transfer of
all or any part of the assets of the Corporation which shall not in fact result
in the liquidation (in whole or in part) of the Corporation and the
distribution of its assets to its shareholders shall not be deemed to be a
voluntary or involuntary liquidation (in whole or in part), dissolution, or
winding-up of the Corporation.

D. Conversion of Series A Preferred Stock.

The holders of Series A Preferred Stock shall have
the following conversion rights:

1. Right to Convert. Each share of Series A
Preferred Stock shall be convertible, on the Conversion Dates and at the
Conversion Prices set forth below, into fully paid and nonassessable shares of
Common Stock.

2. Mechanics of Conversion. Each holder of
Series A Preferred Stock who desires to convert the same into shares of Common
Stock shall provide notice ("Conversion Notice") via telecopy to the
Corporation. The original Conversion Notice and the certificate or
certificates representing the Series A Preferred Stock for which conversion is
elected, shall be delivered to the Corporation by international courier, duly
endorsed. The date upon which a Conversion Notice is properly received by the
Corporation shall be a "Notice Date."

The Corporation shall use all reasonable efforts to issue and deliver
within three (3) business days after the Notice Date, to such holder of Series
A Preferred Stock at the address of the holder on the stock books of the
Corporation, a certificate or certificates for the number of shares of Common
Stock to which the holder shall be entitled as aforesaid; provided that the

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<PAGE> 4
original shares of Series A Preferred Stock to be converted are received by the
transfer agent or the Corporation within three business days after the Notice
Date and the person or persons entitled to receive the shares of Common Stock
issuable upon such conversion shall be treated for all purposes as the record
holder or holders of such shares of Common Stock on such date. If the original
shares of Series A Preferred Stock to be converted are not received by the
transfer agent or the Corporation within three business days after the Notice
Date, the Conversion Notice shall become null and void.

3. Conversion Dates. The Series A Preferred
Stock shall become convertible into shares of Common Stock at any time
commencing forty five (45) after the last day on which there is an original
issuance of the Series A Preferred Stock (the "Conversion Date").

4. Conversion Price. In the event accrued
dividends have been paid, the shares of Series A Preferred Stock shall be
convertible into the number of shares of Common Stock according to the
following formula:

N x 1,000/
Conversion Price

N = the number of shares of the Series A Preferred
Stock for which conversion is being elected.

Conversion
Price = the lesser of (x) three dollars ($3.00) or
(y) the five (5) day average closing bid
price prior to conversion; provided, however,
that in all cases the Corporation shall pay
all accumulated but unpaid dividends with
respect to the shares of Series A Preferred
Stock being converted.

5. Automatic Conversion. Each share of Series A
Preferred Stock outstanding on August 31, 1998 automatically shall be converted
into Common Stock on such date at the Conversion Price then in effect, and
August 31, 1998 shall be deemed to be the Notice Date with respect to such
conversion. Also, upon consummation of a registered public offering with gross
proceeds of $10,000,000 or more (before underwriting, discounts and expenses),
each share of Series A Preferred Stock outstanding on the date of such
completion shall automatically be converted into Common Stock on such date at
the Conversion Price then in effect, provided that the Holders must receive
written notice 30 days prior to the first filing date of such offering and that
the offering may not close prior to 180 days from the date of issuance of the
Series A Preferred Stock.

6. Fractional Shares. No fractional share shall
be issued upon the conversion of any shares, share or fractional share of
Series A Preferred Stock. All shares of Common Stock (including fractions
thereof) issuable upon conversion of shares (or fractions thereof) of Series A
Preferred Stock by a holder thereof shall be aggregated for purposes of

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<PAGE> 5
determining whether the conversion would result in the issuance of any
fractional share. If, after the aforementioned aggregation, the conversion
would result in the issuance of a fraction of a share of Common Stock, the
Corporation shall, in lieu of issuing any fractional share, pay the holder
otherwise entitled to such fraction a sum in cash equal to the closing bid price
of the Corporation's Common Stock on the Notice Date multiplied by such
fraction.

7. Reservation of Stock Issuable Upon
Conversion. The Corporation shall at all times reserve and keep available out
of its authorized but unissued shares of Common Stock, solely for the purpose
of effecting the conversion of the shares of the Series A Preferred Stock, such
number of its shares of Common Stock as shall from time to time be sufficient
to effect the conversion of all then outstanding shares of the Series A
Preferred Stock; and if at any time the number of authorized but unissued
shares of Common Stock shall not be sufficient to effect the conversion of all
then outstanding shares of the Series A Preferred Stock, the Corporation will
take such corporate action as may be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be sufficient
for such purpose.

8. Adjustment to Conversion Price.

(a) If, prior to the conversion of all
shares of Series A Preferred Stock, the number of outstanding shares of Common
Stock is increased by a stock split, stock dividend, or other similar event,
the Conversion Price shall be proportionately reduced, or if the number of
outstanding shares of Common Stock is decreased by a combination or
reclassification of shares, or other similar event, the Conversion Price shall
be proportionately increased.

(b) If, prior to the conversion of all
shares of Series A Preferred Stock, there shall be any merger, consolidation,
exchange of shares, recapitalization, reorganization, or other similar event,
as a result of which shares of Common Stock of the Corporation shall be changed
into the same or a different number of shares of the same or another class or
classes of stock or securities of the Corporation or another entity, then the
holders of Series A Preferred Stock shall thereafter have the right to purchase
and receive upon conversion of shares of Series A Preferred Stock, upon the
basis and upon the terms and conditions specified herein and in lieu of the
shares of Common Stock immediately theretofore issuable upon conversion, such
shares of stock and/or securities as may be issued or payable with respect to
or in exchange for the number of shares of Common Stock immediately theretofore
purchasable and receivable upon the conversion of shares of Series A Preferred
Stock held by such holders had such merger, consolidation, exchange of shares,
recapitalization or reorganization not taken place, and in any such case
appropriate provisions shall be made with respect to the rights and interests
of the holders of the Series A Preferred Stock to the end that the provisions
hereof (including, without limitation, provisions for adjustment of the
Conversion Price and of the number of shares issuable upon conversion of the
Series A Preferred Stock) shall thereafter be applicable, as nearly as may be
practicable in relation to any shares of stock or securities thereafter
deliverable upon the exercise hereof. The Corporation shall not effect any
transaction described in this subsection unless the resulting successor or
acquiring entity (if not the Corporation) assumes by written instrument the
obligation to deliver to the holders of the Series A Preferred Stock such
shares of stock and/or securities as, in accordance with the

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<PAGE> 6
foregoing provisions, the holders of the Series A Preferred Stock may be
entitled to purchase.

(c) If any adjustment under this
subsection would create a fractional share of Common Stock or a right to
acquire a fractional share of Common Stock, such fractional share shall be
disregarded and the number of shares of Common Stock issuable upon conversion
shall be the next higher number of shares.

E. Voting. Except as otherwise provided below or by the
General Corporation Law of the State of Nevada, the holders of the Series A
Preferred Stock shall have no voting power whatsoever, and no holder of Series
A Preferred Stock shall vote or otherwise participate in any proceeding in
which actions shall be taken by the Corporation or the shareholders thereof or
be entitled to notification as to any meeting of the Board of Directors or the
shareholders.

F. Protective Provisions. So long as shares of Series A
Preferred Stock are outstanding, the Corporation shall not without first
obtaining the approval (by vote or written consent, as provided by law) of the
holders of at least a majority of the then outstanding shares of Series A
Preferred Stock; provided, however, that with respect to paragraph (e), holders
of Series A Preferred Stock shall vote with the holders of Common Stock on an
as converted basis and shall not vote separately as a class:

(a) alter or change the rights, preferences or
privileges of the shares of Series A Preferred Stock so as to affect adversely
the Series A Preferred Stock;

(b) create any new class or series of stock
having a preference over the Series A Preferred Stock with respect to
dividends, payments upon Liquidation (as provided for in Section B of this
Designation) or redemption except for a class of stock approved by J.P. Carey
Enterprise, Inc.;

(c) do any act or thing not authorized or
contemplated by this Designation which would result in taxation of the holders
of shares of the Series A Preferred Stock under Section 305 of the Internal
Revenue Code of 1986, as amended (or any comparable provision of the Internal
Revenue Code as hereafter from time to time amended);

(d) issue any capital stock (other than
dividends) which ranks senior to or on a parity with the Series A Preferred
Stock with respect to rights to receive distributions upon liquidation,
dissolution, or winding up of the Corporation or with respect to dividends; or

(e) enter into a merger in which the Corporation
is not the surviving corporation, and which requires approval of the common
Stockholders; provided, however, that the provisions of this subparagraph (e)
shall not be applicable to any such merger if the authorized capital stock of
the surviving corporation immediately after such merger shall include only
classes or series of stock for which no such consent or vote would have been
required pursuant to this section if such class or series had been authorized
by the Corporation immediately prior to such merger or which have the same
rights, preferences and limitations and authorized amount as a class or series
of stock of the Corporation authorized (with such consent

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<PAGE> 7
or vote of the Series A Preferred Stock) prior to such merger and continuing as
an authorized class or series at the time thereof.

G. Status of Converted Stock. In the event any shares of
Series A Preferred Stock shall be converted as contemplated by this
Designation, the shares so converted shall be canceled, shall return to the
status of authorized but unissued Preferred Stock of no designated class or
series, and shall not be issuable by the Corporation as Series A Preferred
Stock.

H. Taxes. All shares of Common Stock issued upon
conversion of Series A Preferred Stock will be validly issued, fully paid and
nonassessable. The Corporation shall pay any and all documentary stamp or
similar issue or transfer taxes that may be payable in respect of any issue or
delivery of shares of Common Stock on conversion of Series A Preferred Stock
pursuant hereto. The Corporation shall not, however, be required to pay any
tax which may be payable in respect of any transfer involved in the issue and
delivery of shares of Common Stock in a name other than that in which the
Series A Preferred Stock so converted were registered, and no such issue or
delivery shall be made unless and until the person requesting such transfer has
paid to the Corporation the amount of any such tax or has established to the
satisfaction of the Corporation that such tax has been paid or that no such tax
is payable. The Corporation shall adjust the amount of dividends paid or
accrued so as to indemnify the holders of Preferred Stock against any
withholding or similar tax in respect of such dividends.

FURTHER RESOLVED, that the statements contained in the foregoing
resolutions creating and designating the said Series A Preferred Stock and
fixing the number, powers, preferences and relative, optional, participating,
and other special rights and the qualifications, limitations, restrictions, and
other distinguishing characteristics thereof shall, upon the effective date of
said series, be deemed to be included in and be a part of the certificate of
incorporation of the Corporation pursuant to the provisions of the General
Corporation Law of the State of Nevada.

V. One Thousand Five Hundred (1,500) shares of the previously
authorized Six Thousand Eight Hundred Seventy-Five (6,875) shares of Series A
Preferred Stock of the Corporation have been issued and the holder of all of
such shares has consented to and approved the amendments reflected in Section
IV hereof.

VI. There are no classes or series of stock of the Corporation
which are senior to the Series A Preferred Stock of the Corporation as to the
payment of distributions upon dissolution of the Corporation, regardless of any
limitation or restriction on the voting power of such class or series.

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<PAGE> 8
Signed on September 9, 1996. Telechips Corporation

By: /s/ C.A. BURNS
-----------------------------------
Print Name: C.A. Burns
Title: President

By:/s/ NELSON B. CALDWELL
-----------------------------------
Print Name: Nelson B. Caldwell
Title: Secretary

STATE OF NEVADA
COUNTY OF WASHOE

This instrument was acknowledged before me on September 9, 1996, by
C.A. BURNS and NELSON B. CALDWELL, as President and Secretary, respectively, of
Telechips Corporation.

[SEAL]

/s/ Elizabeth Nicholson /s/ Elizabeth Nicholson
- ------------------------------------- ------------------------------------
Notary Public - State of Nevada Notary Public
Appointment Recorded in County My Commission Expires: Aug. 11, 1999
My Appointment Expires: Aug. 11, 1999 --------------
-------------

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<PAGE> 1

EXHIBIT 3.3

CERTIFICATE OF DESIGNATION, NUMBER, POWERS,
PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL, AND OTHER SPECIAL RIGHTS AND THE
QUALIFICATIONS, LIMITATIONS, RESTRICTIONS,
AND OTHER DISTINGUISHING CHARACTERISTICS OF
SERIES B PREFERRED STOCK

TELECHIPS CORPORATION

We the undersigned President and Secretary of TELECHIPS CORPORATION DO
HEREBY CERTIFY:

I. The name of the corporation (hereinafter called the
"Corporation" is TELECHIPS CORPORATION.

III. The Board of Directors of the Corporation, pursuant to the
authority expressly vested in it as aforesaid and pursuant to a special meeting
of the Board on February 28, 1997, has adopted resolutions creating a Series B
issue of Preferred Stock:

RESOLVED, that Eight Thousand Seven Hundred and Fifty (8,750) of the
Three Million (3,000,000) authorized shares of Preferred Stock of the
Corporation shall be designated Series B Preferred Stock (the "Series B
Preferred Stock") and shall possess the rights and privileges set forth below:

A. Stated (Face) Value.

1. Each share of Series B Preferred Stock shall
have a stated (face) value of $1,000.00.

B. Dividends.

1. The holder of each issued and outstanding
share of Series B Preferred Stock shall be entitled to receive, when and as
declared by the Board of Directors of the Corporation, out of the assets at the
time legally available for such
<PAGE> 2
purpose, dividends at a rate of four percent (4%) per annum on the stated
value, payable semi-annually at the Company's option in case or in shares of
the Common Stock of the Corporation at a dividend conversion price equal to the
lesser of (x) 110% of the closing bid price on the day of the closing of the
sale of the conversion shares of Series B Preferred Stock or (y) the average
closing bid price for the five (5) trading days prior to the delivery of the
Corporation of a Conversion Notice in accordance with Section D.2 below. Such
dividends shall accumulate until paid to the holders. If any dividends payable
on the Series B Preferred Stock with respect to any dividend payment period are
not paid for any reason, the right of the holders of the Series B Preferred
Stock to receive payment of such dividend shall not lapse or terminate, but
said unpaid dividend or dividends shall be added to the stated value of the
Series B Preferred Stock effective at the beginning of the semi-annual period
next succeeding the semi-annual period as to which such dividends were not
paid, and shall thereafter accrue additional dividends at the above-stated
dividend rate. Any dividend payment made on the Series B Preferred Stock shall
be credited against the earliest accrued but unpaid dividend which has been
added to the stated value of the Series B Preferred shares and shall reduce the
stated value by the amount of the dividend paid. No dividends shall be
declared or paid with respect to the Corporation's Common Stock (other than a
dividend payable solely in Common Stock of the Corporation), or upon any other
class of Preferred Stock of the Corporation with a dividend preference
subordinate to the dividend preference of the Series B Preferred Stock, unless
a dividend of equal or greater amount per share (on an as-if-converted to
Common Stock basis) is first declared and paid with respect to the Series B
Preferred Stock; provided, however, the dividend rights and preferences
pertaining to the Corporation's Series A Preferred Stock shall be considered
superior and preferential to the dividend rights and preferences hereby granted
to the holders of shares of Series B Preferred Stock.

2. No dividends shall be paid on the Series B
Preferred Stock if such payment would violate Nevada law.

C. Liquidation Preference.

1. In the event of any liquidation, dissolution
or winding-up of the Corporation, either voluntary or involuntary (a
"Liquidation"), the holders of shares of the Series B Preferred Stock then
issued and outstanding shall be entitled to be paid our of the assets of the
Corporation available for distribution to its shareholders, whether from
capital, surplus or earnings, before any payments shall be made to the holders
of shares of the Common Stock or upon any other series of Preferred Stock of
the Corporation with a liquidation preference subordinate to the liquidation
preference of the Series B Preferred Stock, an amount equal to one thousand
dollars ($1,000) per share,plus an amount equal to any unpaid dividends
accumulated and unpaid on each such share to and including the date of
distribution on such share. If, upon any Liquidation of the Corporation, the
assets of the Corporation available for distribution to its shareholders shall
be insufficient to pay the holders of shares of the Series B Preferred Stock
and the holders of any other
<PAGE> 3
series of Preferred Stock with a liquidation preference equal to the
liquidation preference of the Series B Preferred Stock the full amounts to
which they shall respectively be entitled, the holders of shares of the Series
B Preferred Stock and the holders of any other series of Preferred Stock with
liquidation preference equal to the liquidation preference of the Series B
Preferred Stock shall receive all of the assets of the Corporation available
for distribution and each such holder of shares of the Series B Preferred Stock
and the holders of any other series of Preferred Stock with a liquidation
preference equal to the liquidation preference of the Series B Preferred Stock
shall state ratably in any distribution in accordance with the amounts due such
shareholders. After payment shall have been made to the holders of shares of
the Series B Preferred Stock of the full amount to which they shall be
entitled, as aforesaid, the holders of shares of the Series B Preferred Stock
shall be entitled to no further distributions thereon and the holders of shares
of the Common Stock and of shares of any other series of stock of the
Corporation shall be entitled to share, according to their respective rights
and preferences, in all remaining assets of the Corporation available for
distribution to its shareholders; provided, however, anything in this Section
C.1. to the contrary notwithstanding, the Liquidation rights and preferences
hereby granted to the holders of shares of Series B Preferred Stock shall be
junior and subordinate to and shall in no way be construed to impair or be in
parity with or superior to the Liquidation rights and preferences granted to
the holders of the Corporation's shares of Series A Preferred Stock.

2. A merger of consolidation of the Corporation
with or into any other corporation, or a sale, lease, exchange, or transfer of
all or any part of the assets of the Corporation which shall not in fact result
in the liquidation (in whole or in part) of the Corporation and the
distribution of its assets to its shareholders shall not be deemed to be a
voluntary or involuntary liquidation (in whole or in part), dissolution, or
winding-up of the Corporation.

D. Conversion of Series B Preferred Stock.

The holders of Series B Preferred Stock shall have the
following conversion rights:

1. Right to Convert. Each share of Series B
Preferred Stock shall be convertible, on the Conversion Dates and at the
Conversion Price set forth below, into fully paid and nonassessable shares of
Common Stock.

2. Mechanics of Conversion. Each holder of
Series B Preferred Stock who desires to convert the same into shares of Common
Stock shall provide notice ("Conversion Notice") via telecopy to the
Corporation. The original Conversion Notice and the certificate or
certificates representing the Series B Preferred Stock for which conversion is
elected, shall be delivered to the Corporation by international courier, duly

3
<PAGE> 4
endorsed. The date upon which a Conversion Notice is properly received by the
Corporation shall be a "Notice Date".

The Corporation shall use all reasonable efforts to issue and
deliver within three (3) business days after the Notice Date, to such holder of
Series B Preferred Stock at the address of the holder on the stock books of the
Corporation, a certificate or certificates for the number of shares of Common
Stock to which the holder shall be entitled as aforesaid; provided that the
original shares of Series B Preferred Stock to be converted are received by the
transfer agent or the Corporation within three business days after the Notice
Date and the person or persons entitled to receive the shares of Common Stock
issuable upon such conversion shall be treated for all purposes as the record
holder or holders of such shares of Common Stock on such date. If the original
shares of Series B Preferred Stock to be converted are not received by the
transfer agent of the Corporation within three business days after the Notice
Date, the Conversion Notice shall become null and void.

3. Conversion Dates. The Series B Preferred
Stock shall become convertible into shares of Common Stock at any time
commencing forty five (45) days after the last day on which there is an
original issuance of the Series B Preferred Stock (the "Conversion Date").

4. Conversion Price. In the event accrued
dividends have been paid, the shares of Series B Preferred Stock shall be
convertible into the number of shares of Common Stock according to the
following formula:

N x 1,000
---------
Conversion Price

N = the number of shares of the Series B Preferred Stock
for which conversion is being elected.

Conversion
Price = the lesser of (x) 110% of the closing bid price on
the day of the closing of the sale by the Corporation
of the shares of Series B Preferred Stock for which
conversion is being requested or (y) the five (5) day
average closing bid price prior to delivery to the
Corporation of a Conversion Notice regarding the
shares of Series B Preferred Stock for which
conversion is being requested; provided, however,
that in all cases the Corporation shall pay all
accumulated but unpaid dividends with respect to the
shares of Series B Preferred Stock being converted.

4
<PAGE> 5
5. Automatic Conversion. Each share of Series B
Preferred Stock outstanding on March 10, 1997 automatically shall be converted
into Common Stock on such date at the Conversion Price then in effect, and
March 31, 1999 shall be deemed to be the Notice Date with respect to such
conversion. Also, upon consummation of a registered public offering with gross
proceeds of $10,000,000 or more (before underwriting, discounts and expenses),
each share of Series B Preferred Stock outstanding on the date of such
completion shall automatically be converted into Common Stock on such date at
the Conversion P{rice then in effect, provided that the Holders must receive
written notice 30 days prior to the first filing date of such offering and that
the offering may not close prior to 180 days from the date of issuance of the
Series B Preferred Stock.

6. Fractional Shares. No fractional share shall
be issued upon the conversion of any shares, share or fractional share of
Series B Preferred Stock. All shares of Common Stock (including fractions
thereof) issuable upon conversion of shares (or fractions thereof) of Series B
Preferred Stock by a holder thereof shall be aggregated for purposes of
determining whether the conversion would result in the issuance of any
fractional share. If, after the aforementioned aggregation, the conversion
would result in the issuance of a fraction of a share of Common Stock, the
Corporation shall, in lieu of issuing any fractional share, pay the holder
otherwise entitled to such fraction a sum in cash equal to the closing bid
price of the Corporation's Common Stock on the Notice Date multiplied by such
fraction.

7. Reservation of Stock Issuable Upon
Conversion. The Corporation shall at all times reserve and keep available out
of its authorized but unissued shares of Common Stock, solely for the purpose
of effecting the conversion of the shares of the Series B Preferred Stock, such
number of its shares of Common Stock as shall from time to time be sufficient
to effect the conversion of all then outstanding shares of the Series B
Preferred Stock; and if at any time the number of authorized but unissued
shares of Common Stock shall not be sufficient to effect the conversion of all
then outstanding shares of the Series B Preferred Stock, the Corporation will
take such corporate action as may be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be sufficient
for such purpose.

8. Adjustment to Conversion Price.

(a) If, prior to the conversion of all
shares of Series B Preferred Stock, the number of outstanding shares of Common
Stock is increased by a stock split, stock dividend, or other similar event,
the Conversion Price shall be proportionately reduced, or if the number of
outstanding shares of Common Stock is decreased by a combination or
reclassification of shares, or other similar event, the Conversion Price shall
be proportionately increased.

5
<PAGE> 6
(b) If, prior to the conversion of all
shares of Series B Preferred Stock, there shall be any merger, consolidation,
exchange of shares, recapitalization, reorganization, or other similar event,
as a result of which shares of Common Stock of the Corporation shall be changed
into the same or a different number of shares of the same or another class or
classes of stock or securities of the Corporation or another entity, then the
holders of Series B Preferred Stock shall thereafter have the right to purchase
and receive upon conversion of shares of Series B Preferred Stock, upon the
basis and upon the terms and conditions specified herein and in lieu of the
shares of Common Stock immediately theretofore issuable upon conversion, such
shares of stock and/or securities as may be issued or payable with respect to
or in exchange for the number of shares of Common Stock immediately theretofore
purchasable and receivable upon the conversion of shares of Series B Preferred
Stock held by such holders had such merger, consolidation, exchange of shares,
recapitalization or reorganization not taken place, and in any such case
appropriate provisions shall be made with respect to the rights and interests
of the holders of the Series B Preferred Stock to the end that the provisions
hereof (including, without limitation, provisions for adjustment of the
Conversion Price and of the number of shares issuable upon conversion of the
Series B Preferred Stock) shall thereafter be applicable, as nearly as may be
practicable in relation to any shares of stock or securities thereafter
deliverable upon the exercise hereof. The Corporation shall not effect any
transaction described in this subsection unless the resulting successor or
acquiring entity (if not the Corporation) assumes by written instrument the
obligation to deliver to the holders of the Series B Preferred Stock such
shares of stock and/or securities as, in accordance with the foregoing
provisions, the holders of the Series B Preferred Stock may be entitled to
purchase.

E. Voting. Except as otherwise provided below or by the
General Corporation Law of the State of Nevada, the holders of the Series B
Preferred Stock shall have no voting power whatsoever, and no holder of Series
B Preferred Stock shall vote or otherwise participate in any proceeding in
which actions shall be taken by the Corporation or the shareholders thereof or
be entitled to notification as to any meeting of the Board of Directors or the
shareholders.

F. Protective Provisions. So long as shares of Series B
Preferred Stock are outstanding, the Corporation shall not without first
obtaining the approval (by vote or written consent, as provided by law) of the
holders of at least a majority of the then outstanding shares of Series B
Preferred Stock; provided, however, that with respect to paragraph (e), holders
of Series B Preferred Stock shall vote with the holders of Common Stock on an
as converted basis and shall not vote separately as a class:

6
<PAGE> 7
(a) alter or change the rights, preferences or
privileges of the shares of Series B Preferred Stock so as to affect adversely
the Series B Preferred Stock;

(b) create any new class or series of stock
having a preference over the Series B Preferred Stock with respect to
dividends, payments upon Liquidation (as provided for in Section B of this
Designation) or redemption except for a class of stock approved by J.P. Carey
Enterprise, Inc., a Georgia corporation'

(c) do any act or thing not authorized or
contemplated by this Designation which would result in taxation of the holders
of shares of the Series B Preferred Stock under Section 305 of the Internal
Revenue Code of 1986, as amended (or any comparable provision of the Internal
Revenue Code as hereafter from time to time amended);

(d) issue any capital stock (other than
dividends) which ranks senior to or on a parity with the Series B Preferred
Stock with respect to rights to receive distributions upon liquidation,
dissolution, or winding up of the Corporation or with respect to dividends; or

G. Status of Converted Stock. In the event of any
shares of Series B Preferred Stock shall be converted as contemplated by this
Designation, the shares so converted shall be cancelled, shall return to the
status of authorized but unissued Preferred Stock of no designated class or
series, and shall not be issuable by the Corporation as Series B Preferred
Stock.

H. Taxes. All shares of Common Stock issued upon
conversion of Series B Preferred Stock will be validly issue,d fully paid and
nonassessable. The Corporation shall pay any and all documentary stamp or
similar issue or transfer taxes that may be payable in respect of any issue or
delivery of shares of Common Stock on conversion of Series B Preferred Stock
pursuant hereto. The Corporation shall not, however, be required to pay any
tax which may be payable in respect of any transfer involved in the issue and
delivery of shares of Common Stock in a name other than that

7
<PAGE> 8
in which the Series B Preferred Stock so converted were registered, and no such
issue or delivery shall be made unless and until the person requesting such
transfer has paid to the Corporation the amount of any such tax or has
established to the satisfaction of the Corporation that such tax has been paid
or that no such tax is payable. The Corporation shall adjust the amount of
dividends paid or accrued so as to indemnify the holders of Preferred Stock
against any withholding or similar tax in respect of such dividends.

FURTHER RESOLVED, that the statements contained in the foregoing
resolutions creating and designating the said Series B Preferred Stock and
fixing the number, powers, preferences and relative, optional, participating
and other special rights and the qualifications, limitations, restrictions, and
other distinguishing characteristics thereof shall, upon the effective date of
said series, be deemed to be included in and be a part of the certificate of
incorporation of the Corporation pursuant to the provisions of the General
Corporation Law of the State of Nevada.

Signed on February 28, 1997 Telechips Corporation

By:___________________________
Print Name: Nelson B. Caldwell
Title: President

By:___________________________
Print Name: Hans Junker
Title: Assistant Secretary

STATE OF NEVADA
COUNTY OF WASHOE

This instrument was acknowledged before me on February 28, 1997, by
________________________ and ______________________, as President and Assistant
Secretary, respectively, of Telechips Corporation.

______________________________
Notary Public

My Commission Expires:

_________________________

<PAGE> 1

EXHIBIT 10.3

TELECHIPS CORPORATION

1996 DIRECTORS STOCK OPTION PLAN

1. Purposes of the Plan. The purposes of this Directors
Stock Option Plan are to attract and retain the best available personnel for
service as Directors of the Company, to provide additional incentive to the
Outside Directors of the Company to serve as Directors, and to encourage their
continued service on the Board. All options granted hereunder shall be
Nonstatutory Stock Options.

2. Definitions. As used herein, and in any Option granted
hereunder, the following definitions shall apply:

(a) "Board" shall mean the Board of Directors of
the Company.

(b) "Code" shall mean the Internal Revenue Code
of 1986, as amended.

(d) "Company" shall mean Telechips Corporation,
a Nevada corporation.

(e) "Continuous Status as a Director" means the
absence of any interruption or termination of service as a Director.

(f) "Director" means a member of the Board.

(g) "Disinterested Person" shall mean a person
classified as a "disinterested person" under Rule 16b-3, promulgated under the
Exchange Act (as defined below). Notwithstanding the foregoing, a Director
shall not fail to be a Disinterested Person merely because he or she
participates in a plan meeting the requirements of Rule 16b-3(c)(2)(i)(A) or
(B).

(h) "Exchange Act" shall mean the Securities
Exchange Act of 1934, as amended.

(i) "Nonstatutory Stock Option" shall mean an
Option granted under the Plan that is subject to the provisions of Section
1.83-7 of the Treasury Regulations promulgated under Section 83 of the Code.
<PAGE> 2
(j) "Option" shall mean a stock option granted
pursuant to the Plan.

(k) "Option Agreement" shall mean a written
agreement between the Company and the Optionee regarding the grant and exercise
of Options to purchase Shares and the terms and conditions thereof as
determined by the Board pursuant to the Plan.

(l) "Optioned Shares" shall mean the Common Stock
subject to an Option.

(m) "Optionee" shall mean an Outside Director
who receives an Option.

(n) "Outside Director" means any non-employee
Director.

(o) "Parent" shall mean a "parent corporation,"
whether now or hereafter existing, as defined by Section 424(e) of the Code.

(p) "Plan" shall mean this 1996 Directors Stock
Option Plan.

(q) "Securities Act" shall mean the Securities
Act of 1933, as amended.

(r) "Share" shall mean a share of the Common
Stock subject to an Option, as adjusted in accordance with Section 11 of the
Plan.

(s) "Subsidiary" shall mean a "subsidiary
corporation," whether now or hereafter existing, as defined in Section 424(f)
of the Code.

3. Shares Subject to the Plan. Subject to the
provisions of Section 11 of the Plan, the maximum aggregate number of Shares
which may be optioned and sold under the Plan is two hundred thousand (200,000)
Shares (the "Pool") of Common Stock. The Shares may be authorized but unissued
or reacquired Common Stock. If an Option should expire or become unexercisable
for any reason without having been exercised in full, the unpurchased shares
which were subject thereto shall, unless the Plan shall have been terminated,
be returned to the Pool and become available for other Option grants under the
Plan.

4. Administration of the Plan.

(a) Administration. The Plan shall be
administered by the Board. The Board shall take all action necessary to
administer the Plan in accordance with the then effective provisions of Rule
16b-3 promulgated under the Exchange Act, provided that any amendment to the
Plan required for compliance with such provisions shall be made consistent

2.
<PAGE> 3
with the provisions of Section 12 hereof, and said regulations. No discretion
concerning decisions regarding the Plan shall be afforded to any person who is
not a Disinterested Person.

(b) Option Grants. All grants of Options
hereunder shall be automatic and non-discretionary and shall be made strictly
in accordance with the following provisions:

(i) No Options shall be granted under
the Plan until stockholder approval of the Plan has been obtained in accordance
with Section 17 hereof.

(ii) No person shall have any discretion
to select which Outside Directors shall be granted Options or to determine the
number of Shares to be covered by Options granted to Outside Directors.

(iii) As of the effective date of this
Plan, each Outside Director shall automatically be granted an Option to
purchase thirty thousand (30,000) Shares. However, notwithstanding the
foregoing, each outside Director listed on Schedule 1 shall receive the amount
set forth opposite such Outside Directors name. Each Outside Director (other
than those Outside Directors who have been granted an Option hereunder pursuant
to the preceding sentences) shall automatically be granted an Option to
purchase thirty thousand (30,000) Shares on the date (on or after the effective
date of this Plan) on which such person first becomes a Director, whether
through election by the stockholders of the Company or appointment by the Board
to fill a vacancy ("Election"); provided, however, that no Option shall become
exercisable until stockholder approval of the Plan has been obtained in
accordance with Section 17 hereof. Each option granted pursuant to this
Section 4(b)(iii) shall be referred to as an "Initial Grant Option."

(iv) Each Outside Director shall
automatically be granted an Option to purchase five thousand (5,000) Shares on
the annual anniversary of the Outside Director's Election (the "Annual Grant
Options").

(v) The terms of each Initial Grant
Option granted hereunder shall be those set forth in the Initial Grant
Directors Option Agreement attached hereto as set forth in Exhibit A to the
Plan and incorporated herein by this reference.

(vi) The terms of each Annual Grant
Option granted hereunder shall be as follows:

(A) The grant date of each Annual
Grant Option shall be the date on which it is automatically granted pursuant to
this Section 4(b).

(B) The term of the Annual Grant
Option shall be five (5) years.

3.
<PAGE> 4
(C) The Annual Grant Option shall
become exercisable upon grant.

(D) The Annual Grant Option shall
be exercisable only while the Outside Director remains a Director of the
Company, except as set forth in Section 9 hereof.

(E) The exercise price per Share
shall be 100% of the fair market value of a Share on the date of grant of the
Option, as determined pursuant to Section 8(a) hereof.

(vii) In the event that any Option granted
under the Plan would cause the number of Shares subject to outstanding Options
plus the number of Shares previously purchased upon exercise of Options to
exceed the Pool, then each such automatic grant shall be for that number of
Shares determined by dividing the total number of Shares remaining available
for grant by the number of Outside Directors entitled to an Option grant on the
automatic grant date. No further grants shall be made until such time, if any,
as additional Shares become available for grant under the Plan through action
of the stockholders to increase the number of Shares which may be issued under
the Plan or through cancellation or expiration of Options previously granted
hereunder.

(c) Powers of the Board. Subject to the
provisions of the Plan, the Board shall have the authority to: (i) determine,
upon review of relevant information and in accordance with Section 8(a) hereof,
the fair market value of the Common Stock; (ii) interpret the Plan; (iii)
prescribe, amend and rescind rules and regulations relating to the Plan; (iv)
authorize any person to execute on behalf of the Company any instrument
required to effectuate the grant of an Option previously granted by the Board;
and (v) to make all other determinations deemed necessary or advisable for the
administration of the Plan.

(d) Effect of Board's Decision. All decisions,
determinations and interpretations of the Board shall be final and binding on
all potential or actual Optionees and any other holder of an Option granted
under the Plan or the Optioned Shares acquired upon the exercise thereof.

5. Eligibility.

(a) Persons Eligible for Options. Options under
the Plan may be granted only to Outside Directors. All Options shall be
automatically granted in accordance with the terms set forth in Section 4(b)
hereof.

(b) No Right to Serve as a Director. Neither the
establishment nor the operation of the Plan shall confer upon any Optionee or
any other person any right with respect to continuation of service as a
Director or nomination to serve as a Director, with the

4.
<PAGE> 5
Company or any Subsidiary, nor shall the Plan interfere in any way with any
rights which the Director or the Company may have to terminate his or her
directorship at any time.

6. Term of Plan. The Plan shall become effective upon
its approval by the Board of Directors or its approval by the stockholders of
the Company (in accordance with the provisions of Section 17 hereof), whichever
is earlier. It shall continue in effect for a term of ten (10) years unless
sooner terminated under Section 12 hereof.

7. Term of Option. The term of each Option granted
under the Plan shall be five (5) years from the date of grant. The term of the
Option shall be set forth in the Option Agreement.

8. Option Price and Consideration.

(a) Option Price. The option price for the
Shares to be issued pursuant to any Option shall in no event be less than the
fair market value of such Shares on the date the Option is granted. Fair
market value of the Common Stock shall be determined in good faith by the
Board, using such criteria as it deems relevant; provided, however, that if
there is a public market for the Common Stock, the fair market value per Share
shall be the last reported asked price of the Common Stock on the date of
grant, as reported in The Wall Street Journal (or, if not so reported, as
otherwise reported by the National Association of Securities Dealers Automated
Quotation (NASDAQ) System) or, in the event the Common Stock is listed on a
national securities exchange (within the meaning of Section 6 of the Exchange
Act) or on the NASDAQ National Market System (or any successor national market
system), the fair market value per Share shall be the closing price on such
exchange on the date of grant of the Option, as reported in The Wall Street
Journal.

(b) Form of Consideration. The consideration to
be paid for the Shares to be issued upon exercise of an Option shall be payment
in cash or by check unless payment in some other manner, including by
promissory note, other shares of the Company's Common Stock, authorization from
the Optionee to retain from the total number of Shares as to which the Option
is exercised that number of Shares having a fair market value on the date of
exercise equal to the exercise price for the total number of Shares as to which
the Option is exercised, delivery of a properly executed exercise notice
together with irrevocable instructions to a broker to promptly deliver to the
Company the amount of sale or loan proceeds required to pay the exercise price,
any combination of the foregoing methods of payment, or such other
consideration and method of payment for the issuance of Shares as may be
permitted under Nevada Law, is authorized by the Board at the time of the grant
of the Option. Any cash or other property received by the Company from the
sale of Shares pursuant to the Plan shall constitute part of the general assets
of the Company.

5.
<PAGE> 6
9. Exercise of Option.

(a) Procedure for Exercise; Rights as a Stockholder.
Any Option granted hereunder shall be exercisable at such times as are set
forth in the option agreement consistent with Section 4(b) hereof; provided,
however, that no Options shall be exercisable until stockholder approval of the
Plan in accordance with Section 17 hereof has been obtained.

An Option may not be exercised for fractional shares
or for less than ten (10) Shares.

An Option shall be deemed to be exercised when
written notice of such exercise has been given to the Company in accordance
with the terms of the Option by the person entitled to exercise the Option and
full payment for the Shares with respect to which the Option is exercised has
been received by the Company. Upon exercise of an Option in the manner set
forth above, the Company shall issue or cause its transfer agent to issue stock
certificates representing the Shares purchased.

Until the issuance of such stock certificates (as
evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company), no right to vote or receive
dividends or any other rights as a stockholder shall exist with respect to the
Optioned Shares notwithstanding the exercise of the Option. No adjustment will
be made for a dividend or other rights for which the record date is prior to
the date of the transfer by the Optionee of the consideration for the purchase
of the Shares, except as provided in Section 11 of the Plan. The exercise of
an Option shall be subject to compliance with all applicable requirements of
Rule 16b-3 promulgated under the Exchange Act or any successor statute thereto;
the Option Agreement shall contain such additional conditions or restrictions
as may be required thereunder to qualify for the maximum exemption from Section
16 of the Exchange Act with respect to Plan transactions.

(b) Termination of Status as a Director. If an
Optionee ceases to serve as a Director for any reason, including death or
disability, he or she may, but only within ninety (90) days after the date he
or she ceases to be a Director of the Company, exercise his or her Option to
the extent that he or she was entitled to exercise it at the date of such
termination. Notwithstanding the foregoing, in no event may the Option be
exercised after its five (5)-year term has expired. To the extent that the
Optionee was not entitled to exercise an Option at the date of such
termination, or if he or she does not exercise such Option (which he was
entitled to exercise) within the same time specified herein, the Option shall
terminate.

(c) Exercise of Option With Stock. The Board may
permit an Optionee to exercise an Option by delivering shares of the Company's
Common Stock. If the Optionee is so permitted, the Option Agreement covering
such Option may include provisions authorizing the Optionee to exercise the
Option, in whole or in part, by:

6.
<PAGE> 7
(i) delivering whole shares of the Company's Common Stock previously owned by
such Optionee (whether or not acquired through the prior exercise of a stock
option) having a fair market value equal to the aggregate option price for the
Optioned Shares issuable on exercise of the Option; and/or (ii) directing the
Company to withhold from the Shares that would otherwise be issued upon
exercise of the Option that number of whole Shares having a fair market value
equal to the aggregate option price for the Optioned Shares issuable on
exercise of the Option. Shares of the Company's Common Stock so delivered or
withheld shall be valued at their fair market value at the close of the last
business day immediately preceding the date of exercise of the Option, as
determined by the Board, in accordance with the provisions of Section 8(a) of
the Plan. Any balance of the exercise price shall be paid in cash. Any shares
delivered or withheld in accordance with this provision shall not again become
available for purposes of the Plan and for Options subsequently granted
thereunder.

(d) Tax Withholding. When an Optionee is
required to pay to the Company an amount with respect to tax withholding
obligations in connection with the exercise of an Option granted under the
Plan, the Optionee may elect prior to the date the amount of such withholding
tax is determined (the "Tax Date") to make such payment, or such increased
payment as the Optionee elects to make up to the maximum federal, state and
local marginal tax rates, including any related FICA obligation, applicable to
the Optionee and the particular transaction, by: (i) delivering cash; (ii)
delivering part or all of the payment in previously owned shares of Common
Stock (whether or not acquired through the prior exercise of an Option); and/or
(iii) irrevocably directing the Company to withhold from the Shares that would
otherwise be issued upon exercise of the Option that number of whole Shares
having a fair market value equal to the amount of tax required or elected to be
withheld (a "Withholding Election"). If an Optionee's Tax Date is deferred
beyond the date of exercise and the Optionee makes a Withholding Election, the
Optionee will initially receive the full amount of Optioned Shares otherwise
issuable upon exercise of the Option, but will be unconditionally obligated to
surrender to the Company on the Tax Date the number of Shares necessary to
satisfy his or her minimum withholding requirements, or such higher payment as
he or she may have elected to make, with adjustments to be made in cash after
the Tax Date.

Any withholding of Optioned Shares with
respect to taxes arising in connection with the exercise of an Option must
comply with the provisions of Rule 16b-3 under the Exchange Act. Shares
withheld in accordance with this provision shall not again become available for
purposes of the Plan and for Options subsequently granted thereunder.

10. Non-Transferability of Options. An Option may not be
sold, pledged, assigned, hypothecated, transferred or disposed of in any manner
other than by will or by the laws of descent and distribution or pursuant to a
qualified domestic relations order as defined by the Code or Title I of the
Employee Retirement Income Security Act or the rules thereunder, and may be
exercised, during the lifetime of the Optionee, only by the Optionee.

7.
<PAGE> 8
11. Adjustments Upon Changes in Capitalization. Subject
to any required action by the stockholders of the Company, the number of shares
of Common Stock covered by each outstanding Option, and the per share price
thereof in each such Option, shall be proportionately adjusted for any increase
or decrease in the number of issued shares of Common Stock resulting from a
stock split, reverse stock split, recapitalization, combination,
reclassification, the payment of a stock dividend on the Common Stock or any
other increase or decrease in the number of such shares of Common Stock
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be
deemed to have been "effected without receipt of consideration". Such
adjustment shall be made by the Board, whose determination in that respect
shall be final, binding and conclusive. Except as expressly provided herein,
no issue by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of shares
of Common Stock subject to an Option.

If the Company dissolves, sells substantially all of
its assets, is acquired in a stock for stock or security exchange or is party
to a merger or reorganization in which it is not the surviving corporation (a
"Change of Control"), then fifty percent (50%) of the unvested portion of each
Option held at least six (6) months prior to the effective date of a Change of
Control shall immediately vest and shall be exercisable by the holder thereof
for a period of not less than thirty (30) days prior to the effective date of
such Change of Control. All Options shall terminate in their entirety to the
extent not exercised on or prior to the last day of such thirty (30)-day
period.

12. Amendment and Termination of the Plan. The Board may
amend or terminate the Plan from time to time in such respects as the Board may
deem advisable, except that, without approval of the holders of a majority of
the outstanding capital stock (or their unanimous consent if such approval is
obtained in writing), no such revision or amendment shall change the number of
Shares subject to the Plan, change the designation of the class of employees
eligible to receive Options or add any material benefit to Optionees under the
Plan. Any such amendment or termination of the Plan shall not affect Options
already granted and such Options shall remain in full force and effect as if
the Plan had not been amended or terminated. In addition, the Board shall
amend the Plan from time to time, with stockholder approval to the extent
necessary, as required to comply with the provisions of Rule 16b-3 under the
Exchange Act as then in effect.

13. Conditions Upon Issuance of Shares. Shares shall not
be issued with respect to an Option granted under the Plan unless the exercise
of such Option and the issuance and delivery of such Shares pursuant thereto
shall comply with all relevant provisions of law, including, without
limitation, the Securities Act, the Exchange Act, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange upon which
the Shares may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance. As a condition to the
exercise of an Option, the Company

8.
<PAGE> 9
may require the person exercising such Option to represent and warrant at the
time of any such exercise that the Shares are being purchased only for
investment and without any present intention to sell or distribute such Shares
if, in the opinion of counsel for the Company, such a representation is
required by any of the aforementioned relevant provisions of law.

14. Reservation of Shares. During the term of this Plan
the Company will at all times reserve and keep available the number of Shares
as shall be sufficient to satisfy the requirements of the Plan.

15. Registration of Options and Optioned Shares. The
Company shall use its best efforts to register the Options and Shares issuable
under the Plan pursuant to a registration statement on SEC Form S-8, or any
comparable or successor form or forms. The Company shall be entitled to
determine the timing of such filing and to take such actions, meet such
conditions and make such adjustments to the number of shares subject to the
reoffer prospectus as it deems reasonably necessary for compliance with the
Securities Act, the Exchange Act and the rules and regulations promulgated
thereunder.

16. Option Agreement. Options granted under the Plan
shall be evidenced by Option Agreements.

17. Stockholder Approval. The Plan shall be subject to
approval by the affirmative vote of the holders of a majority of the
outstanding capital stock of the Company entitled to vote. Such stockholder
approval shall be obtained in the degree and manner required under applicable
law.

9.
<PAGE> 10
SCHEDULE 1

<TABLE>
<S> <C>
Director Shares
- -------- ------

Howard Phillips 15,000
</TABLE>

10.
<PAGE> 11
EXHIBIT A

INITIAL GRANT DIRECTORS OPTION AGREEMENT

11.

<PAGE> 1
EXHIBIT 10.10

THE RIBEIRO CORPORATION

This Lease made and entered into this 17TH day of JULY, 1996, by and
between, McCARRAN QUAIL PARK, hereinafter called "LESSOR" and TELECHIPS
CORPORATION hereinafter called "LESSEE".

WITNESSETH:

DEMISED
PREMISES Lessor hereby leases, demises and lets unto Lessee, and Lessee
hereby leases, hires and takes from Lessor those certain
premises hereinafter called the "Demised Premises," located in
that certain building (the "Building"), described as follows:
THAT CERTAIN 5,310 SQUARE FEET OF OFFICE SPACE LOCATED AT 6490
SO. McCARRAN BLVD., RENO, NEVADA 89509 KNOWN AS UNITS #21 &
22 AS OUTLINED IN RED ON THE ATTACHED PLAT MAP MARKED EXHIBIT
"A".

This lease is made upon the following terms, covenants, and
conditions to which the parties hereby agree:

TERM 1. The term of this Lease shall commence on DECEMBER 1, 1996,
and shall continue for a term of TWELVE (12) months from and
after said date of commencement. If the Demised Premises
require improvements to be constructed by the Lessor prior to
occupancy of the said premises by the Lessee, said
improvements shall be set out in "Exhibit A" attached hereto,
consisting of plans, specifications and descriptions of the
work to be performed prior to said date of occupancy, together
with the specification as to the cost of such improvements and
the party to bear such cost of improvement. If, despite
Lessor's best efforts, said premises, as improved in
accordance with the agreement of the parties, is not delivered
by Lessor on or before N/A, 19N/A, this Lease shall have no
further force or effect and each party shall be relieved of
all obligations, each to the other, provided that said date
will be extended for a period equal to the time construction
has been delayed due to causes beyond the reasonable control
of Lessor.

RENTAL 2. (a) Lessee agrees to pay a Base Monthly Rental (plus any
excise, privilege or sales taxes or any tax levied on the
rentals or the receipt thereof, except Lessor's income tax) on
the first day of each calendar month throughout the demised
term without offset or deduction of any kind. Rental is to be
paid in lawful money of the United States of America, which
shall be legal tender at the time of payment of rents, as
follows: 12-01-96 TO 11-30-97: SEVEN THOUSAND NINE HUNDRED
SIXTY FIVE DOLLARS AND N0/100's ($7,965.00) PER MONTH
***ANNEXATION OF 20A CONSISTING OF 889 SQUARE FEET-ORIGINALLY
PART OF EVANS AND FELESINA.

(b) Lessee understands that the issuance of a check or draft
without funds or with intent to defraud is a criminal offense
punishable by impris-

- 1 -
<PAGE> 2
onment or by a fine or both fine and imprisonment.

(c) In the event the term of this Lease commences other than
on the first day of a calendar month, or if the termination
date is not the last day of a month, a pro-rated monthly
installment shall be paid for the fractional month during
which this Lease commences and/or terminates. Payment of rent
shall be made by Lessee to Lessor at such addresses as shall
from time to time be designated by Lessor to Lessee in
writing.

(d) If any payment of Base Monthly Rental is not received by
Lessor by the tenth (10th) day of the calendar month in which
it is due, then that Base Monthly Rental payment shall be
increased by five percent (5%). Accordingly, if received
after the tenth (10th) of the month, Base Monthly Rental shall
be: 12-01-96 TO 11-30-97: EIGHT THOUSAND THREE HUNDRED
SIXTY-THREE DOLLARS AND 25/100's ($8,363.25).

Nothing in this Lease shall be construed to permit the payment
of rent after the date on which it is due. The parties hereby
agree that such late charge represents a fair and reasonable
estimate of the costs Lessor will incur by reason of late
payment by Lessee. Acceptance of such late charge by Lessor
shall in no event constitute a waiver of Lessee' s default
with respect to such overdue amount, nor excuse or cure any
default by Lessee under this Lease, nor prevent Lessor from
exercising any of the other rights and remedies granted
hereunder.

(e) "Rent", "Rental", "rent" or "rental" includes the Base
Monthly Rental and other sums as may be due from Lessee
pursuant to any of the provisions of this Lease, and any other
sums, or becoming payable to Lessor under this Lease.

(f) In the event a check comes back for nonsufficient funds, a
services fee of $25.00 will be assessed to the Lessee.

DEPOSIT 3. For and as additional consideration for the making of this
Lease, Lessee shall pay to Lessor, upon execution of the
Lease, the sum of: WAIVED (WAIVED), as a security deposit to
insure Lessee's faithful performance of the terms, conditions,
covenants, and agreements of this Lease. The security deposit
may not be applied against rental payments by the Lessee. If
the Lessee fully complies with all the terms, conditions,
covenants and agreements of the Lease, then within thirty (30)
days after the expiration of the Lease term, and cleanup
completed in conjunction with Paragraph 33, the security
deposit without interest shall be refunded to Lessee (or, at
Lessor's option at the last permitted assignee of Lessee's
interests hereunder) less the reasonable value of damages
suffered by the Lessor, including but not limited to rental
delinquencies, cost of repairs, cleaning, lock and key change
charges, and other obligations of Lessee to Lessor.

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<PAGE> 3
TAXES,
INSURANCE
ASSESSMENTS 4. (a) As additional rental, Lessee agrees to pay to Lessor in
each year of the term of this lease a pro-rated amount equal
to any rate increase of liability and casualty insurance
required by the insurance company upon the building and
demised premises in addition to an amount equal to any
increases in taxes, general or special assessments,
improvements or retrofitting expenses assessed by any federal,
state or municipal authority for the real property of which
the Building and Demised Premises are a part of. The
proration of the insurance, taxes and assessments set forth
above shall be based upon the percentage of the total floor
space of the Building and Demised Premises, whether occupied
or not, to the amount of floor space being leased by Lessee.
Such additional rental shall be paid as soon as the amount
thereof shall have been determined and upon written demand
therefore by Lessor to Lessee, with the next succeeding
installment of rental. Such additional rental shall be
pro-rated for the first and last years of the demised term to
reflect periods during either or both of said years not
included within the demised term.

(b) Lessee agrees to pay or cause to be paid, before
delinquency, any and all taxes levied or assessed and which
become payable during the term hereof upon all equipment,
furniture, fixtures and other personal property located in the
Demised Premises, except that which may be owned by Lessor.

PURPOSE 5. Lessee agrees to use and occupy the Demised Premises
during the term of this Lease for the purpose of: QUALITY
CONTROL AND ADMINISTRATION and for no other purpose whatsoever
without the written consent of Lessor, Lessee shall not use,
or permit the Demised Premises, or any part thereof, to be
used, for any purpose or purposes other than the purpose for
which the said premises are hereby leased; and no use shall be
made of the Demised Premises, or acts done, which will
increase the rate of insurance upon the Building in which said
premises may be located over the standard rate of insurance
prevailing in the area in which said premises are located, or
cause a cancellation of any part thereof, or make it
impossible for Lessor to obtain an insurance policy covering
the Building or any part thereof. If the rate of any
insurance carried by Lessor is increased as a result of
Lessee's use, Lessee shall pay to Lessor, the increase within
ten (10) days after Lessor delivers to tenant a certified
statement from Lessor's insurance carrier stating that the
rate of increase was caused solely by an activity of Lessee on
the premises as permitted in this Lease. Any other provision
hereof to the contrary notwithstanding, Lessee shall not do or
permit anything to be done in or about the premises which will
in any way obstruct or interfere with the rights of other
Lessee's or occupants of the Building or injure or annoy them
or use or allow the premises to be used for any improper,
immoral, unlawful or objectionable purpose, nor shall Lessee
cause, maintain or permit any nuisance in, on or about the
premises. Lessee will not commit or suffer to be committed
any waste in or upon the pre-

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<PAGE> 4
mises.

ALTERATIONS
AND ADDITIONS 6. (a) Lessee shall not, without Lessor's prior written
consent, make any alterations, additions or utility
installations in, on, or about the Demised Premises. As used
in Paragraph 6(a), the term "utility installations" shall
include ducting, power panels, fluorescent fixtures, space
heaters, conduit and wiring. As a condition to giving such
consent, Lessor may require that Lessee agree to remove any
such alterations, additions, improvements or utility
installations at the expiration of the demised term and to
restore the Demised Premises to their prior condition. As a
further condition to giving such consent, Lessor may require
Lessee to provide Lessor, at Lessee's sole cost and expense, a
lien and completion bond in an amount equal to one and one
half (1 1/2) times the estimated cost of such improvements, to
insure Lessor against any liability for mechanics, and
materialmen's liens and to insure completion of the work.

(b) Unless Lessor requires their removal, as set forth in
Paragraph 6(a), all alterations, additions, improvements and
utility installments (whether or not such utility
installations constitute trade fixtures of Lessee), which may
be made on the Demised Premises, shall at the expiration or
earlier termination of the Lease become the property of the
Lessor and remain upon and be surrendered with the Demised
Premises. Notwithstanding the provisions of this Paragraph
6(b), personal property, business and trade fixtures,
cabinetwork, furniture, movable partitions, machinery and
equipment, other than that which is affixed to the Demised
Premises so that it cannot be removed without material damage
to the Demised Premises, shall remain the property of Lessee
and may be removed by Lessee subject to the provisions of
Paragraph 32, at any time during the term of this Lease when
Lessee is not in default hereunder.

(c) If space is equipped with air conditioning and heating
system, Lessor has designed air conditioning and heating
systems for standard office occupancy only. Such systems are
NOT designed for excessive traffic, exposure to outside
temperatures, excessive equipment, excessive personnel, nor
computer room environment. Upgrading of air conditioning and
heating systems can be done at Lessee's expense.

GLASS AND
DOORS 7. Lessee shall be responsible for all doors and glass damages
by wind, etc., on the Demised Premises, and Lessee shall
forthwith replace or repair same at Lessee's sole expense.

ABANDONMENT 8. Lessee agrees not to vacate or abandon the Demised
Premises at any time during the demised term. Should Lessee
vacate or abandon the Demised Premises or be dispossessed by
process of law or otherwise, such abandonment, vacation or
dispossession shall be a default hereunder. Lessee agrees
that any property not claimed within thirty (30) days after
the abandonment of the Demised Premises by the Lessee, or
after the expiration or earlier termination of this Lease,
becomes the property

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<PAGE> 5
of the Lessor and shall be sold by the Lessor and the Lessor
is to retain the proceeds derived therefrom as reimbursement
for costs related to storing said property, and not as a
penalty.

LESSOR'S
CONVEYANCE 9. If during the term of this Lease, Lessor shall convey its
interest in the Demised Premises, then from and after the
effective date of the conveyance, Lessor shall be released and
discharged from any and all obligations under this Lease
except those already accrued.

REPAIRS 10. Lessee, at Lessee's sole expense, shall repair and
maintain the Demised Premises and every part thereof,
including but not limited to all glazing, skylights, and signs
in good, safe and sanitary condition, except those portions
which Lessor agrees to maintain in the Paragraph 10. Lessor
shall, at Lessor's expense, repair and maintain only the
heating and air conditioning equipment and the exterior walls,
exterior roof and cement bedded or sub surface non-accessible
plumbing serving the Demised Premises, sidewalks, driveways,
landscaping and parking lots, except that Lessee shall
reimburse Lessor for any costs incurred by Lessor in repair
and maintenance of damage caused by the intentional or
negligent act of Lessee, its officers, agents, partners,
employees, tradesmen or customers. Lessor shall not be liable
to Lessee or any other party whatsoever for any damage or
injury caused by Lessor's failure to keep or maintain said
heating and air conditioning equipment, exterior walls,
exterior roof, cement-embedded or sub-surface, non-accessible
plumbing, landscaping, sidewalks, driveways, and parking lots
unless Lessee has given Lessor written notice of the need to
repair said portions of the Demised Premises and Lessor has
failed to make said repairs within a reasonable time after
receiving written notice. By entry hereunder, Lessee accepts
the Demised Premises as being in good and sanitary order,
condition and repair. It is understood and agreed that Lessor
has no obligation to alter, remodel, improve, repair,
decorate, or paint the Demised Premises or any part thereof,
except as specifically herein set forth, and no
representation's respecting the condition of the Demised
Premises have been made by Lessor to Lessee, except as
specifically herein set forth.

LAWS AND
REGULATIONS 11. (a) Lessee at its own cost and expense shall comply with
all laws, rules, and orders of all Federal, State and
Municipal Governments, or departments, which may be applicable
to the Demised Premises.

(b) Lessee shall faithfully observe and comply with the rules
and regulations adopted by Lessor from time to time and all
modifications of and additions thereto from time to time put
into effect by Lessor. Lessor shall not be responsible to
Lessee for the nonperformance by any other Lessee or occupant
of the Building of any of said rules and regulations.

INDEMNIFI- 12. Lessor shall not be liable to Lessee, its officers,
agents, employees,

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<PAGE> 6
CATION customers, invitees or third parties for any loss or damage to
property, including goods, wares and merchandise, or for any
injury or death to persons, in, on, or about the Demised
Premises. Lessee agrees to indemnify and hold Lessor harmless
of and from any and all costs, expenses, claims, demands,
obligations, and liabilities, cause or causes or action by
reason of or in connection with the condition of, state of,
repair, or use of the Building, common areas, Demised Premises
or appurtenant thereto including all adjacent sidewalks,
alleys, and parking lots.

SIGNS AND
AUCTIONS 13. Lessee shall not place or permit to be pl aced any
advertising, sign, marquee, awning, decoration or other
attachment to the common areas, or in or on the Building or
the real property on which the Building is situated or on the
roof, front, windows, doors, or exterior walls of the Demised
Premises without the prior written consent of Lessor. Lessor
may without liability, enter upon the Demised Premises or
elsewhere and remove any such advertising, sign, marquee,
awning, decoration or attachment affixed in violation of the
Paragraph 13, all at Lessee's expense. Lessee shall not
conduct any auction in the Demised Premises, the Building, or
on any portion of the real property on which the Building and
Demised Premises are situated, without Lessor's consent. Any
sign on any building must be approved by Lessor in writing.

UTILITIES 14.(a) Lessee from the time it first enters the Demised
Premises for the purpose of setting fixtures, or from the
commencement of the term of this lease, whichever date shall
first occur, and throughout the term of this lease shall be
responsible for and shall pay prior to delinquency for all
heat, light, power, telephone service and all other utilities
and services supplied to or consumed in or on the Demised
Premises, whether occupied or not, except water, sewer and gas
charges, unless separately metered.

(b) LESSOR shall not be held responsible for any interruption
in utilities whatsoever.

ENTRY BY
LESSOR 15. Lessee shall permit Lessor and its agents to enter the
Demised Premises at all reasonable times for any of the
following purposes: To inspect same; to show said premises to
prospective purchasers; to maintain the Building; to make such
repairs to the Demised Premises as Lessor is obligated or
elects to make; to make repairs, alterations, additions or
utility installations to any other portion of the Building; to
post notices of nonresponsibility for alterations, additions,
repairs or any utility installations; for the purpose of
placing upon the property in which said premises are located
any ordinary "for sale" sign. Lessee shall permit Lessor
within sixty (60) days prior to the expiration of this Lease
to place upon the Demised Premises ordinary "for lease" signs,
and to show said premises to prospective Lessees during
reasonable business hours.

PARTIAL AND 16. Lessor shall carry insurance on the Demised Premises under
a stan-

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<PAGE> 7
TOTAL
DESTRUCTION dard form of fire and extended coverage policy and in the
event of partial destruction of the Demised Premises during
the term of this Lease from any cause insured under said
policy, Lessor shall forthwith repair the same, provided such
repairs can be made within ninety (90) days from date of such
destruction, under the then applicable laws and regulations of
Federal, State, County and Municipal Authorities and in light
of the extent of such damage and the then condition of the
labor market and availability of materials and supplies, but
such partial destruction shall in no way annul or void this
Lease, except that Lessee shall be entitled to a proportionate
reduction of rent while such repairs are being made, such
proportionate reduction to be based upon the extent to which
the making of such repairs shall interfere with the business
carried on by Lessee in the Demised Premises. In the event
that the Building is destroyed to the extent of not less than
fifty percent (50%) of the replacement cost of the Building,
Lessor may elect to terminate this Lease, whether the Demised
Premises be injured or not. A total destruction of the
Building shall automatically terminate this Lease. Anything
in this Paragraph 16 to the contrary, if at the time of any
such damage there is less than two (2) months term remaining
on this Lease, then this Lease may, at the option of Lessor,
be canceled by notice in writing to Lessee within ten (10)
days from the date of such damage.

ASSIGNMENT
AND SUBLETTING 17. Lessee shall not assign this Lease or any interest herein,
nor lease or sublet the Demised Premises, or any part thereof,
or any right or privilege appurtenant thereto, nor permit the
occupancy or use of any part thereof by any other person,
without the written consent of Lessor first hand and obtained,
and a consent to one assignment, subletting, occupancy or use,
shall not be construed as a consent to any subsequent
assignment, subletting, occupancy or use. The Lessor may
refuse its consent without giving any reason whatsoever, and
such refusal shall nevertheless be binding on Lessee.

DEFAULT 18. If default shall be made in the payment of rent or any
installment thereof, or in the payment of any other amount
required to be paid by Lessee under this Lease, or any other
agreement between Lessor and Lessee, or if in default shall be
made in the performance of any of the other covenants, terms,
conditions, or agreements which Lessee is required to observe
and perform hereunder, or if the interest of Lessee in its
assets and/or this Lease shall be levied on or seized under
execution or other legal process, or if any petition shall be
filed by or against Lessee to declare Lessee bankrupt or to
delay, reduce or modify Lessee's debts or obligations or if
any petition shall be filed or other action taken to
reorganize or modify Lessee's capital structure, or if Lessee
be declared insolvent according to law, or if any assignment
of Lessee's property shall be made for the benefit of
creditors, or if a receiver or trustee is appointed for Lessee
or its property, or if Lessee shall abandon or vacate the

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<PAGE> 8
Demised Premises during the term of this Lease, and thereupon
at its option may, without notice or demand of any kind to
Lessee or any other person, have any one or more of the
remedies specified in Paragraph 19, in addition to all other
rights and remedies provided by law or in equity.

DEFAULT
REMEDIES 19. (a) Lessor may re-enter the Demised Premises with or
without the process of law and take possession of the same
and of all equipment and fixtures of Lessee therein and expel
or remove Lessee and all other parties occupying the Demised
Premises, using such force as may be reasonably necessary to
do so, without being liable to any prosecution for such
reentry or for the use of such force and without terminating
this Lease, at any time and from time to time to relet the
Demised Premises or any part thereof for the account of
Lessee, for such term, upon such conditions and at such rental
as Lessor may deem proper. In such event Lessor may receive
and collect the rent from such reletting and apply it against
any amounts due from Lessee hereunder (including without
limitation such expenses as Lessor may have incurred in
recovering possession of the Demised Premises, placing same in
good order and condition, altering or repairing the same for
reletting, and all other expenses, commissions, and charges
including attorney's fees which Lessor may have paid or
incurred in connection with such repossession and reletting).
Lessor may execute any lease made pursuant hereto in Lessor's
name or in the name of Lessee as Lessor may see fit, and
Lessee thereunder shall be under no obligation to see to the
application by Lessor of any rent collected by Lessor nor
shall Lessee have any right to collect any rent thereunder.
Whether or not the Demised Premises are relet, Lessee shall
pay Lessor all amounts required to be paid by Lessee up to the
date of Lessor's re-entry and thereafter Lessee shall pay
Lessor, until the end of the term hereof, the amount of all
rent and other charges required to be paid by Lessee
hereunder, less the proceed of such reletting during the term
hereof, if any, after payment of Lessor's expenses as provided
above. Such payments by Lessee shall be due at such times as
are provided elsewhere in this Lease, and Lessor need not wait
until the termination of this Lease to recover them by legal
action or otherwise. Lessor shall not, by any re-entry or
other act, be deemed to have terminated this Lease or the
liability of Lessee for the total rent hereunder unless Lessor
shall give Lessee written notice of Lessor's election to
terminate this Lease.

(b) Lessor may give written notice to Lessee of Lessor's
election to terminate this Lease, re-enter the Demised
Premises with or without process of law and take possession of
the same and of all equipment and fixtures therein, and expel
or remove Lessee and all other parties occupying the premises,
using such force as may be reasonably necessary to do so,
without being liable to any prosecution for such re-entry of
for the use of such force. In such event Lessor shall
thereupon be entitled to recover from Lessee the worth, at the
time of such termination, of the excess, if any, of the rent
and other charges required to be paid by Lessee hereun-

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<PAGE> 9
der for the balance of the term hereof (if this lease had not
been so terminated) over the then reasonable rental value of
the Demised Premises for the same period.

(c) Lessee hereby releases, indemnifies, and holds harmless
Lessor from any liability whatsoever for the removal of
persons and the removal and storage of property pursuant to
subparagraphs (a) and (b) of this Paragraph 19.

(d) To secure the full and timely performance of all the
Lessee's obligations under this Lease, Lessee hereby grants to
Lessor a security interest and lien in all of Lessee's
equipment, goods, fixtures, furnishings, furniture, inventory,
machinery, trade fixtures, other property, and the proceeds
therefrom, now or hereafter to be located within the Demised
Premises. In the event of default or breach by Lessee, then
with respect to that security interest, Lessor may exercise
all of the rights and remedies granted a secure party under
the Uniform Commercial Code as adopted in Nevada in effect at
the time.

(e) The remedies given to Lessor in this Paragraph 19 shall be
in addition to and supplemental to all other rights and
remedies which Lessor may have under the laws then in force.

HOLDING OVER 20. If Lessee holds possession of all or a part of the
Demised Premises after the expiration of the term of this
Lease, with or without the express or implied consent of
Lessor, Lessee shall become a tenant from month-to-month only,
upon the terms, covenants, conditions, and agreements herein
specified, so far as applicable. Such holding over shall not
constitute an extension or renewal of this Lease. During such
holding over, the Base Monthly Rental shall be increased fifty
(50%) percent over the Base Monthly Rental provided in
Paragraph 2.

WAIVER 21. No covenant, term, condition or agreement or the breach
thereof shall be deemed waived, except by written consent of
the party against whom the waiver is claimed, and any waiver
or the breach of any covenant, term, condition or agreement
shall not be deemed to be a waiver of any preceding or
succeeding breach of the same or any other covenant, term,
condition or agreement. Acceptance by Lessor of any
performance by Lessee after the time the same shall become due
shall not constitute a waiver by Lessor of the breach or
default of any covenant, term, condition or agreement unless
other wise expressly agreed to by Lessor in writing.

NOTICES 22. Except as otherwise provided in this Lease, all notices or
demands of any kind required or desired to be given by Lessor
to Lessee hereunder shall be in writing and shall be deemed
delivered when hand delivered or forty-eight (48) hours after
depositing the notice or demand in the United States Mail,
certified or registered, postage prepaid, addressed to the
Lessee at the Demised Premises, whether or not Lessee has
departed from,

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<PAGE> 10
abandoned or vacated the Demised Premises. All notices or
demands of any kind by Lessee to Lessor shall be in writing
and shall be deemed delivered when hand delivered or
forty-eight (48) hours after depositing the notice in the
United States Mail, certified or registered, postage prepaid,
addressed to the Lessor at such address as shall from time to
time be designated by Lessor to Lessee in writing.

CONDEMNATION 23. In the event any condemnation proceedings shall be
commenced affecting the Demised Premises, Lessee shall have no
right to claim any valuation for its leasehold interest or
otherwise by reason of its occupancy of or improvements to
said premises, and any condemnation award (Whether adjudicated
or by way of settlement) shall belong in its entirety to
Lessor. In the event of condemnation of a part of the Demised
Premises, the rent shall be reduced in the proportion that the
floor area taken bears to the total floor area prior to the
taking. If condemnation takes more than twenty-five percent
(25%) of the floor area of the Demised Premises or if the
amount of Lessee's parking area following condemnation is not
sufficient to meet the deed restrictions, if any, concerning
parking on real property on which the Demised Premises are
situated, or the local parking ordinances, if any, only then,
may Lessee, at Lessee's option, terminate this Lease as of the
date the condemning authority takes possession of said
condemned portion by giving written notes of termination to
Lessor within ten (10) days after the condemning authority
takes such possession. If Lessee does not terminate this
Lease as hereinabove immediately provided, then the rent
payable shall be reduced as set forth above.

SUBORDINATION 24. This Lease at Lessor's option shall be subject and
subordinate to the lien of any mortgages or deeds of trust in
any amount or amounts whatsoever now or hereafter placed on or
against the real property or improvements, or either thereof,
of which the Demised Premises are a part, or on or against
Lessor's interest or estate therein, without the necessity of
the execution and delivery of any further instruments on the
part of Lessee to effectuate such subordination. If any
mortgage or trustee shall elect to have this Lease prior to
the lien of its mortgage or deed of trust, and shall give
written notice thereof to Lessee, this Lease shall be deemed
prior to such mortgage or deed or trust, whether this Lease is
dated prior or subsequent to the date of said mortgage or deed
of trust or the date of the recording thereof. Lessee
covenants and agrees to execute and deliver upon demand,
without charge therefore, such further instruments evidencing
such subordination of this Lease to the lien of any such
mortgages or deeds of trust as may be required by Lessor.
Lessee hereby appoints Lessor as Lessee's attorney-in-fact,
irrevocably, to execute and deliver any such agreements,
instruments, releases or other documents.

PARKING 25. (a) Lessee and its customers, employees and tradesmen may
park only operative vehicles on the surfaced parking lot
adjacent to the De-

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<PAGE> 11
mised Premises only during Lessee's normal business hours on
terms and conditions as may be established by Lessor from time
to time during the term of this Lease. The parking areas
referred to in this Paragraph 25 shall be used on a
non-exclusive basis with other occupants of the Building. The
parking lot may not be used to store vehicles or to work on
vehicles. No vehicle shall be parked in a parking lot for more
than twenty four (24) consecutive hours. Any vehicles parked
in the parking lots in breach of these terms may be towed away
at Lessee's expense. Lessee releases, indemnities, and holds
harmless Lessor and Lessor's officers, employees, and agents
from any claims arising from or relating to such towing of
vehicles including any aconsequential damages or loss of
property or the use of the vehicle or other property. The
right to tow a vehicle is in addition to Lessor's rights under
the Lease for default or breach of any of the terms hereof.

(b) Other than parking, egress and ingress, Lessee has no
right to use the common area, and Lessee shall not obstruct
the common areas, including the sidewalks, landscaped areas,
paved areas, parking lots, or driveways. Animals, including
watchdogs, are not allowed on the Demised Premises or common
areas.

SUCCESSORS 26. All terms, covenants, conditions hereof shall be binding
upon and inure to the benefit of the heirs, executors,
administrators, successors, and assigns of the parties hereto,
provided that nothing in this paragraph shall be deemed to
permit any assignment, sub-letting, occupancy or use contrary
to the provisions of Paragraph 17.

ENTIRE
AGREEMENT 27. This Lease, along with any exhibits and attachments
hereto, constitutes the entire agreement between Lessor and
Lessee relative to the Demised Premises and this Lease and the
exhibits and attachments may be altered, amended or revoked
only by an instrument in writing signed by both Lessor and
Lessee. Lessor and Lessee hereby agree that all oral
agreements between and among themselves and their agents or
representatives relative to the leasing of the Demised
Premises are merged in or revoked by this Lease.

DEFAULT BY
LESSOR 28. Lessor shall not be in default under this Lease unless
Lessor fails to perform obligations required of Lessor within
a reasonable time, but in no event later than thirty (30) days
after written notice by Lessee to Lessor, specifying wherein
Lessor has failed to perform such obligation; provided,
however, that if the nature of Lessor's obligation is such
that more than thirty (30) days are required for performance,
then Lessor shall not be in default if Lessor commences
performance within such thirty (30) day period and thereafter
diligently prosecutes the same to completion.

LIABILITY 29. Lessee shall, at Lessee's sole cost and expense, obtain
and keep in

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<PAGE> 12
force during the term of this Lease a policy of comprehensive
public liability insurance insuring Lessor, Lessee and
Lessor's mortgage against any liability arising out of the
ownership, use, occupancy or maintenance of the Premises and
all areas appurtenant thereto. Such insurance shall be in the
amount of not less than $1,000,000.00 for injury or death of
one person in any one accident or occurrence and in the amount
of not less than $1,000.000.00 for injury or death of more
than one person in any one accident or occurrence. Such
insurance shall further insure Lessor and Lessee against
liability for property damage of at least $500,000.00. The
limit of any such insurance shall not, however, limit the
liability of the Lessee hereunder. Lessee may provide this
insurance under a blanket policy, provided that said insurance
shall have a Lessor's protective liability endorsement
attached thereto. If Lessee shall fail to procure and
maintain said insurance, Lessor may, but shall not be required
to, procure and maintain same, but at the expense of Lessee.
Insurance required hereunder shall be in companies approved by
Lessor which approval shall not be unreasonably withheld.
Lessee shall deliver to Lessor, upon request, copies of
policies of liability insurance required herein or
certificates evidencing the existence and amounts of such
insurance with loss payable clauses satisfactory to Lessor.
No policy shall be cancelable or subject to reduction of
coverage which Lessor may carry.

ESTOPPEL
CERTIFICATE 30. Lessee shall at any time upon not less than ten (10) days
prior written notice from Lessor execute, acknowledge and
deliver to Lessor a statement in writing; (i) certifying that
this Lease is unmodified in full force and effect, (or if
modified, state the nature of such modification and certifying
that this Lease, as so modified, is in full force and effect)
and the date to which the rent and other charges are paid in
advance, if any and (ii) acknowledging that there are not, to
Lessee's knowledge, any uncured defaults on the part of Lessor
hereunder, or specifying such defaults, if any, are claimed.
Any such statement may be conclusively relied upon by a
prospective purchaser or encumbrancer of the Demised Premises.
Lessee's failure to deliver such statement within such time
shall be conclusive upon Lessee (i) that this Lease is in full
force and effect, without modification except as may be
represented by Lessor, (ii) that there are no uncured defaults
in Lessor's performance, and (iii) that not more than one (1)
month's rent has been paid in advance. If Lessor desires to
finance or refinance the Demised Premises, or any part
thereof, Lessee hereby agrees to deliver to any lender
designated by Lessor such financial statements of Lessee as
may be reasonably required by such lender. Such statements
shall include the past three (3) years financial statements of
Lessee. All such financial statements shall be received by
Lessor in confidence and shall be used only for the purposes
herein set forth.

COSTS OF SUIT 31. (a) If Lessee or Lessor shall bring any action for any
relief against the other, declaratory or otherwise, arising
out of this Lease, including any

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<PAGE> 13
suit by Lessor for the recovery of rent or possession of the
Demised Premises, the prevailing party is entitled to an award
of reasonable attorney's fees which shall be deemed to have
accrued on the commencement of such action and shall be paid
whether or not such action is prosecuted to judgment.

(b) Should Lessor, without fault on Lessor's part, be made a
party to any litigation instituted by Lessee or by a third
party against Lessee, or by or against any person holding over
or using the Demised Premises by license of Lessee, or for the
foreclosure of any lien for labor or material furnished to or
for Lessee or any such other person or otherwise arising out
of or resulting from any act or transaction of Lessee or of
any such other person, Lessee covenants to save and hold
Lessor harmless from any judgement rendered against Lessor or
the Demised Premises or any part thereof, and all costs and
expenses, including reasonable attorney's fees, incurred in or
in connection with such litigation.

CHOICE OF LAW 32. The Lease shall be governed, construed and enforced by
the laws of the State of NEVADA.

SURRENDER 33. Upon the expiration or earlier termination of this Lease,
Lessee shall remove all its signs from the Demised Premises,
return the keys and surrender the Demised Premises in a
condition satisfactory to Lessor. Lessee, at its sole cost
and expense, agrees to repair any damage to the Demised
Premises caused by or in connection with the removal of any
articles of personal property, business or trade fixtures,
machinery, equipment, cabinetwork, furniture, movable
partitions, or permanent improvements or additions, including
without limitation thereto, repairing the floor and patching
and painting the walls where required by Lessor to Lessor's
reasonable satisfaction. Lessee shall indemnify Lessor
against any loss or liability resulting from delay by Lessee
in so surrendering the Demised Premises, including without
limitation, any claims made by any succeeding tenant founded
on such delay.

MISCELLANEOUS 34. The marginal captions of this Lease are for convenience
only and shall not in any way limit or be deemed to construe
or interpret the terms and provisions hereof. The words
"Lessor" and "Lessee" as used herein shall include the plural
as well as the singular. Words used in neuter gender include
the masculine and feminine, words in the masculine or feminine
gender include the neuter. If there be more than one Lessor
or Lessee, the obligations hereunder imposed upon Lessor or
Lessee shall be joint and several.

TIME 35. Time is of the essence of this Lease and each and all of
its provisions.

PARKING
LIMITATIONS 36. (a) Lessor shall have the right to limit the amount of
vehicles parked on the demised premises in connection with
Lessee's business during the term of this Lease

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<PAGE> 14
(b) No storage, repairs, or cleaning of vehicles, parts, or
equipment outside the units will be permitted.

PROMOTIONAL
MATERIALS 37. Lessee shall not use pictures of Lessor's properties for,
but not limited to, brochures, advertising, or promotional
activities without written consent of Lessor.

ALARM SYSTEMS 38. No alarm system shall be attached to the exterior walls of
the Building. When installing a system, the alarm box must be
inside the unit. Lessee shall, at Lessee's sole expense, be
responsible for removal of alarm system and restoring the
Demised Premises to its original condition.

USE OF
DUMPSTERS 39. "In the areas where dumpsters are provided, Lessee may
utilize the dumpsters for waste paper trash only." Packing
skids, boxes and garbage from the complex or home are not to
be placed in or around dumpsters. It is the sole
responsibility of Lessee to dispose of excessive trash and
packaging materials somewhere else or obtain their own
dumpster. "In areas where dumpsters are not provided, it is
Lessee's responsibility to dispose of their trash or provide
their own dumpster." Trash stored outside the Building, not
in dumpster, is prohibited and Lessor shall have the right to
charge a fine to Lessee for committing said storage or waste
on the premises.

______________ 40. Lessee agrees not to park vehicles in front of other
units whether vacant or occupied.

______________ 41. Lessee agrees not to store vehicles in parking lot more
than twenty-four (24) hours, or they will be towed at Owner's
expense.

______________ 42. Lessee agrees not to wash or work on vehicles outside
Demised Premises.

______________ 43. Lessee is with understanding that he is allotted one (1)
parking space per 250 square feet of office space.

N/A 44. Lessee is aware that "Park 2001" Associates have signed an
avigation easement with the Reno Cannon International Airport
Authority.

N/A 45. Lessee understands that because of the proximity of the
leased premised to Reno Cannon International Airport, the
noise levels may be experienced by reason of the operation of
the airport within FAA parameters and the Lessee agrees to
hold the Airport Authority, the City of Reno, Park 2001
Associates, and The Ribeiro Corporation harmless from any
claim or litigation stemming from normal or reasonable
operations of the airport that fall within FAA parameters of
conduct of operations.

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<PAGE> 15
IN WITNESS WHEREOF, the parties hereto have executed this Lease, or as the case
may be, have caused their officers thereunto duly authorized to execute this
Lease in duplicate, the day and year first written above.

McCARRAN QUAIL PARK TELECHIPS CORPORATION
LESSOR LESSEE

________________________________ __________________________________
EDWARD G. YUILL C. A. BURNS
VICE PRESIDENT OF LEASING, RENO

DATE: AS: PRESIDENT & C.E.O.
- -------------------------------- ---------------------

BY:
----------------------------------
HANS JUNKER

AS: VICE PRESIDENT
-------------------

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<PAGE> 16
DUTIES OWED BY A NEVADA REAL ESTATE LICENSEE

In Nevada, a real estate licensee can (1) act for only one party to a real
estate transaction, (2) act for more than one party to a real estate
transaction with written consent of each party, (3) act as a broker who assigns
different licensees affiliated with the broker's company to separate parties to
a real estate transaction. A licensee, acting as an agent, must act in one of
the above capacities in every real estate transaction. If this form is used
for a lease, the term Seller shall mean Landlord/Lessor and the term Buyer
means Tenant/Lessee.

LICENSEE: The licensee in the real estate transaction is Edward G. Yuill
("Licensee"), whose license number is 18931. The Licensee is acting for Edward
G. Yuill ('Broker'), whose company is THE RIBEIRO CORPORATION ("Company").

A NEVADA REAL ESTATE LICENSEE IN A REAL ESTATE, TRANSACTION SHALL:

1. Disclose to each party to the real estate transaction as soon as is
practicable:

(a) Any material and relevant facts. data or information which
Licensee, or which by the subject of the real estate care and
diligence licensee should have known, relating to the property
which is the subject of the real estate transaction.

(b) Each source from which Licensee will receive compensation as a
result of the transaction.

(d) Any changes in Licensee's relationship to a party to the real
estate transaction.

2. Disclose, if applicable, that Licensee is acting for more than one
party to the transaction. Upon making such a disclosure the licensee
is acting for more than on party to the transaction for whom the
Licensee is acting before Licensee may continue to act in Licensee's
capacity as an agent.

3. Exercise reasonable skill and care with respect to all parties to the
real estate transaction.

4. Provide to each party to the real estate transaction this form.

5. Not to disclose, except to the Broker confidential information
relating to a client.

6. Exercise reasonable skill and care to carry out the terms of the
brokerage agreement and to carry out Licensee's duties pursuant to the
terms of the brokerage agreement.

7. Not to disclose confidential information relating to a client for 1
year after the revocation or termination of the brokerage agreement,
unless Licensee is required to do so by order of the court.
Confidential information includes, but is not limited to the client's
motivation to purchase, sell or trade and other information of a
personal nature.

8. Promote the interest of his client by:

(a) Seeking a sale, lease or property at the price and terms
stated in the brokerage agreement or at a price acceptable to
the client.

(b) Presenting all offers made to or by the client as soon as it
is practicable.

(d) Advising the client to obtain advice from an expert relating
to matters which are beyond the expertise of the Licensee.

(e) Accounting for all money and property Licensee receives in
which the client may have an interest as soon as is
practicable.

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<PAGE> 17
9. Not deal with any party to a real estate transaction in a manner which
is deceitful, fraudulent or dishonest.

10. Abide by all duties, responsibilities and obligations required of
Licensee in chapters 119, 119A, 119B, 645, 645A and 645C of the NRS.

In the event any part of the real estate transaction is also represented by a
Licensee who is affiliated with the same Company, the Broker may assign another
Licensee to act for that party. The above Licensee will continue to act for
you. As set forth above, no confidential information will be disclosed.

I/We acknowledge receipt of a copy of this list of Licensee duties, and have
read and understand this disclosure.

Lessee__________________________Date__________Date________Time___________am/pm

Lessor__________________________Date__________Date________Time___________am/pm

CONFIRMATION REGARDING REAL ESTATE AGENT RELATIONSHIP

Property Address: 6490 So. McCarran Blvd., #21 & 22, Reno, Nevada 89509

I/We confirm the duties of a real estate Licensee, of which has been presented
and explained to me/us. My/Our representative's relationship is:

is the AGENT of is the AGENT of
Seller Exclusively* _ Both Buyer & Seller** Buyer Exclusively** _ Seller
Exclusively* @ Buyer & Seller

**IF AGENT IS ACTING FOR MORE THAN ONE PARTY IN THIS TRANSACTION, you will be
provided a Consent to Act Form for your review, consideration and approval or
injection. A Licensee can legally represent both the Lessor and Lessee in a
transaction ONLY with the knowledge and written consent of BOTH the Lessor and
Lessee.

*A Licensee who is acting for the Lessor exclusively, is not representing the
Lessee and has no duty to advocate or negotiate for the Lessee.

**A licensee who is acting for the Lessee exclusively, is not representing the
Lessor and has no duty to advocate or negotiate for the Lessor.

The Ribeiro Corporation

Telechips Corporation

Lessee guarantees that neither Lessee nor any of Lessee's employees, agents, or
visitors to his premises shall use, store, or dispose of any hazardous or toxic
materials or chemicals within the subject premises or any other area within the
Project of which the premises is a part. Any such

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<PAGE> 18
use or storage of any hazardous or toxic materials or chemicals within the
subject premises or other parts of the Project shall constitute a material
breach of this Lease, and Lessor shall be entitled to carry out all means
necessary to recover from this breach (as outlined within the Lease). In
addition, Lessee shall have sole financial and legal responsibility for the
proper and legal cleanup of any spillage or other contamination caused by any
use of toxic or hazardous materials by Lessee.

It is further agreed that if, upon written notice from Lessor that Lessee has
violated the above provisions of this Agreement, Lessee does not complete
necessary steps (as outlined in said written notice from Lessor) to achieve
satisfactory cleanup within 72 hours, Lessor shall have the right to complete
necessary cleanup and bill the entire cost (including any legal costs incurred
by Lessor) of same to Lessee.

Lessee will also bear the entire cost of any government cleanup order or any
third-party lawsuit, caused by spillage or contamination caused by any use of
toxic or hazardous materials by Lessee.

Hazardous or toxic material means any substance now, or hereafter, identified
by any government agency requiring special handling, disposal, or control
unlike regular refuse.

McCARRAN QUAIL PARK TELECHIPS CORPORATION
LESSOR LESSEE

________________________________ _____________________________
EDWARD G. YUILL C. A. BURNS
VICE PRESIDENT OF LEASING, RENO

DATE: AS: PRESIDENT & C.E.O.
- -------------------------------- ---------------------

BY:
------------------------------
HANS JUNKER

AS: VICE PRESIDENT
-------------------

COMMERCIAL RESIDENTIAL DEVELOPMENT
6490 S. McCarran, Bldg. Reno, Nevada 89509 (702)825-7979
California Contractor 237166
Nevada Contractor II 652

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<PAGE> 19
INSURANCE AGREEMENT

We, C. A. Burns, President & C.E.O., & Hans Junker, Vice President, do hereby
agree that myself or my company has or will have insurance required in our
lease, and that rider shall be given to The Ribeiro Corporation within thirty
days of the signing of my lease. This rider shall include The Ribeiro
Corporation as an additional insured for the demised premises that we lease.
At no time do we understand that insurance is not needed for leasing property
with The Ribeiro Corporation.

McCARRAN QUAIL PARK TELECHIPS CORPORATION
LESSOR LESSEE

________________________________ _____________________________
EDWARD G. YUILL C. A. BURNS
VICE PRESIDENT OF LEASING, RENO

DATE: AS: PRESIDENT & C.E.O.
- ------------------------------- ---------------------

BY:
-----------------------------
HANS JUNKER

AS: VICE PRESIDENT
-------------------

COMMERCIAL RESIDENTIAL DEVELOPMENT
6490 S. MCCARRAN, Bldg. Reno, Nevada 89509 (702)825-7979
California Contractor 237166
Nevada Contractor II 652

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<PAGE> 20
Disclaimer

All agreements and concessions between Lessor and Lessee for the property
located at 6490 So. McCarran Blvd.. Reno. Nevada-, 89509 Unit(s) & 22 are
contained within this Lease, dated July 17, 1996; Addenda or attached letters
(no verbal agreements). Any modifications, remodels or maintenance of leased
unit(s) required after Lessor and Lessee have signed this Lease that are not
specifically described in this Lease, Addenda, attached letters and
walk-through will be at no cost to the Lessor. Prior to vacating unit(s) ,
Lessee agrees to restore unit(s) to the condition in which it was received,
except for normal wear and tear, at Lessee's expense unless changes to the unit
are approved, in writing, by Lessor. Discrepancies identified during the
initial walk-through inspection that are not repaired by Lessor will be
included in the Lease file, and Lessee will not be charged for such repairs.

McCARRAN QUAIL PARK TELECHIPS CORPORATION
LESSOR LESSEE

________________________________ __________________________________
EDWARD G. YUILL C. A. BURNS
VICE PRESIDENT OF LEASING, RENO

DATE: AS: PRESIDENT & C.E.O.
- -------------------------------- ---------------------

BY:
---------------------------------
HANS JUNKER

AS: VICE PRESIDENT
-------------------

COMMERCIAL RESIDENTIAL DEVELOPMENT
6490 S. McCarran, Bldg. E, Reno, Nevada 89509 (702) 825-7979
California Contractor 237166
Nevada Contractor II 652

- 20 -

<PAGE> 1
EXHIBIT 10.16

Citrix Confidential

CLIENT SOFTWARE LICENSE AGREEMENT

This Client Software License Agreement ("Agreement") is between Citrix
Systems, Inc., a Delaware corporation, with primary offices at 210 University
Drive Suite 700, Coral Springs, FL 33071, ("Citrix"), and Telechips, a Nevada
corporation, with primary offices at 6880 S. McCarran Blvd., Reno, Nevada 89509
("Telechips"). The effective date of this Agreement is December 18, 1996
("Effective Date").

RECITALS

Citrix designs, manufactures, markets, and distributes certain computer
system software products. Telechips designs, manufactures, markets, and
distributes Telechips' Access Series products which are complementary to
the Citrix products.

Citrix and Telechips wish to cooperate such that Telechips may offer
Citrix products to its customers in combination with Telechips' existing
or planned products or technology.

These recitals are intended only to summarize the intent of this
Agreement. The actual terms and conditions of the Agreement are stated
below.

AGREEMENT
1. DEFINITIONS

1.1. "Citrix Product(s)" means the products specified in Exhibit A,
as such products may be adapted by Telechips for use in Telechips
Products pursuant to subsection 2.1 below, and includes all Product
Releases, Version Releases, and Update Releases provided by Citrix to
Telechips in connection with this Agreement.

1.2. "Non-Volatile Memory" means a storage unit which is dedicated to
storage of the Telechips Product and which retains the Telechips Product
when power is turned off, e.g., ROM or other silicon, and not including
diskettes, CD-ROM, hard disks or other general purpose peripherals.

1.3. "Telechips Product(s)" means the terminal products specified in
Exhibit B, which shall include the Citrix Product(s) in Non-Volatile
Memory, and which shall be marketed and distributed by Telechips as
approved by Citrix.

1.4. "FCS" of a Telechips Product means the first customer ship of
that Telechips Product for revenue by Telechips.

1
<PAGE> 2
Citrix Confidential

1.5. "Product Release" means a release of a Citrix Product which is
designated by Citrix in its sole discretion as a change in the digit(s)
to the left of the decimal point in the Citrix Product version number,
({x}.xx).

1.6. "Version Release" means a release of a Citrix Product which is
designated by Citrix in its sole discretion as a change in the tenths
digit in the Citrix Product version number, (x.{x}x).

1.7. "Update Release" means a release of a Citrix Product which is
designated by Citrix in its sole discretion as a change in the
hundredths digit in the Citrix Product version number, (x.x{x}).

1.8. "Documentation" means the standard user guides developed and
released by Citrix for use with the Citrix Products.

1.9. "Documentation Media" means the diskettes, CDs, or other media
containing the machine-readable data files developed by Citrix which
contain the source for the Documentation.

1.10. "Master Software Media" means the standard microcomputer
diskettes, CDs, or other media containing the object code version of the
Citrix Product(s).

1.11. "Period" means those periods of time identified in Exhibit C.

1.12. "Level 1 Support" means receipt and management of all customer
support calls, and provision of fixes for known problems.

1.13. "Level 2 Support" means reproducing and isolating problems, and
jointly developing workarounds for problems and testing software fixes
with the other party.

1.14. "Level 3 Support" means providing software fixes for correction
of isolated problems, and jointly developing workarounds for problems
and testing software fixes with the other party.

1.15. "ICA " means the Citrix architecture and proprietary protocols
which define communications between server computers and workstations or
terminals such that the intelligence and memory resident in the
workstation or terminal is efficiently exploited. ICA protocols relate
to functions including, but not limited to the following: distributed
Windows graphical user interface, full screen text, virtual channels,
data packet framing, compression, and encryption.

1.16. "Reseller" shall mean distributors and subdistributors within
Telechips' distribution channel which market and deliver Telechips
Products in the form in which the products are received from Telechips.

2
<PAGE> 3
Citrix Confidential

2. LICENSE GRANT

2.1. License to adapt software. Each Citrix Product as delivered by
Citrix may include certain software in source code form ("Source Code
Fragments"), as specified in Exhibit A. Subject to the terms and
conditions contained in this Agreement, Citrix grants to Telechips a
nonexclusive and nontransferable license to modify, delete, or replace
these Source Code Fragments within each Citrix Product or, if
applicable, to use the ICA 3.0 materials solely in order to adapt that
Citrix Product for use in Telechips Products. No other rights to any
Citrix Product source code are granted.

2.2. License to copy software. Subject to the terms and conditions
contained in this Agreement, Citrix grants to Telechips a
nontransferable and nonexclusive license to copy the Citrix Products
from the Master Software Media to Non-Volatile Memory for incorporation
into Telechips Products.

2.3. License to copy documentation. Subject to the terms and
conditions contained in this Agreement, Citrix grants to Telechips a
nontransferable and nonexclusive right to copy the Documentation Media
solely for the purpose of distributing printed copies of the
Documentation with Telechips Products to which the Documentation refers,
pursuant to subsection 2.5 below. Telechips may reproduce the
Documentation as exact copies or, subject to subsection 8.6 below,
Telechips may produce derivative works of the Documentation. In either
case, the quality of produced documentation by Telechips must be equal
to or better than the quality of Documentation produced by Citrix. Prior
to distribution Telechips will deliver to Citrix a copy of each document
it produces based on the Citrix Documentation, for review and approval
by Citrix, which approval shall not be unreasonably withheld.

2.4. Restriction on license. Telechips agrees that, except as
specified in subsection 2.1 above, it will not make modifications to,
decompile, reverse engineer or otherwise decode or alter the software
delivered on the Master Software Media.

2.5. License to distribute. During the term of, and subject to the
terms and conditions of, this Agreement, Citrix grants to Telechips, and
Telechips accepts, the nonexclusive, nontransferable right to
incorporate the Citrix Product(s) in Non-Volatile Memory, in the
Telechips Product(s), as specified in subsection 2.2 above, only in the
manner provided in Exhibit B, and to distribute such Citrix Product(s)
so incorporated in Telechips Products subject to the restrictions of
subsection 11.3 below.

2.6. Terms of Distribution. Telechips agrees that it will distribute
the Telechips Products pursuant to such license agreements as Telechips
customarily uses to distribute other similar software. Except as
permitted in this Agreement, Telechips shall contractually prohibit, and
shall require its distributors and other resellers to contractually
prohibit, end users and all entities in the chain of distribution from:
(i) using, copying (except as necessary for back-up or archival purposes
or to the extent expressly permitted

3
<PAGE> 4
Citrix Confidential

by applicable law and to the extent that Citrix is not permitted by that
applicable law to exclude or limit such rights), modifying, or
transferring the software or any copy in whole or in part, or granting
any rights in the software or accompanying documentation; (ii)
translating, reverse engineering, decompiling, disassembling, or
creating derivative works based on the software or the accompanying
documentation; (iii) renting or leasing the software; or (iv) removing
any proprietary notices, labels, or marks on the software and
accompanying documentation.

3. TERMS OF PAYMENT

3.1. Price and payment. Telechips agrees to pay Citrix the amount(s)
and within the times stated in this Section 3 and in Exhibit C.
Telechips' obligation to pay such amounts is unconditional except as is
otherwise expressly stated to the contrary herein. The royalties due to
Citrix for each Period will be paid within fifteen (15) business days
after the end of each Period. The royalties due to Citrix at the end of
a Period will be calculated by multiplying the number of copies of
Citrix Product(s) distributed by Telechips during that Period by the Per
Copy License Fee. This calculation may then be modified by Telechips as
appropriate to allow for copies exempt from royalties pursuant to
subsection 3.4 below. A finance charge of one percent per month, or, if
less, the maximum percentage allowed by applicable law, will be assessed
on all amounts that are past due.

3.2. Reports. Within fifteen (15) business days of the end of each
Period, Telechips will deliver to Citrix a certified report in a form
reasonably acceptable to Citrix that details for each Citrix Product and
each Telechips Product (i) the number of copies distributed by Telechips
during the Period, by customer zip code in a format reasonably
acceptable to Citrix, (ii) the number of such distributed copies which
are exempt from royalties per subsection 3.4 below, and (iii) the
license fee due Citrix on copies distributed during that Period.

3.3. Taxes. Prices stated are exclusive of any federal, state,
withholding, municipal or other governmental taxes, duties, licenses,
fees, excises or tariffs now or hereafter imposed on Telechips'
production, storage, licensing, sale, transportation, import, export or
use of Citrix Products or Telechips Product(s). Such charges shall be
paid by Telechips, or in lieu thereof, Telechips shall provide an
exemption certificate acceptable to Citrix and the applicable authority.
Citrix, however, shall be responsible for all taxes based upon its net
income.

3.4. Copies exempt from royalties. No royalty shall accrue to Citrix
for copies of Citrix Product(s) (i) used solely for development,
testing, and/or technical support purposes; (ii) shipped as replacement
copies for copies found to be defective in materials, manufacture, or
reproduction; (iii) which are Update Releases provided to Telechips by
Citrix pursuant to subsection 7.2 below and are shipped by Telechips as
an update of a Citrix Product copy for which Telechips has paid to
Citrix the applicable royalty; (iv) used exclusively for demonstration
or promotional purposes, such copies not to exceed

4
<PAGE> 5
Citrix Confidential

one hundred (100) copies for each Version Release; or (v) provided to
Citrix; so long as, in all cases above, such copies are provided by
Telechips for free or for Telechips' reasonable cost of goods plus
shipping and handling.

4. DELIVERY

For each Citrix Product specified in Exhibit A, at mutually agreed upon
delivery dates, Citrix will deliver to Telechips (i) two (2) copies of
the Master Software Media and two (2) copies of the Documentation Media
to use for the purposes and under the restrictions described herein.

5. ACCEPTANCE AND WARRANTY

5.1. Acceptance. Within thirty (30) days after Citrix' delivery to
Telechips of any Product Release, Version Release, or Upgrade Release of
a Citrix Product licensed hereunder, Telechips shall either accept such
Citrix Product or report material deviations from specifications in
writing. Material conformance to specifications shall solely determine
acceptability. If Telechips does not report material deviations from
Product specifications within the thirty (30) day period, or if
Telechips ships a Telechips Product to a customer for revenue, Telechips
shall be deemed to have accepted the Citrix Product.

5.2. Deviations. If Telechips reports any material deviations from
Citrix Product specifications prior to acceptance then Citrix shall have
sixty (60) days to correct such deviations. Upon delivery of a corrected
release of the Citrix Product to Telechips, Telechips shall have thirty
(30) days in which to re-evaluate the corrected release for material
conformance to specifications as provided in subsection 5.1 above. If
any material deviations from specifications reported before acceptance
are not eliminated in the sixty (60) day correction period, then, as
Telechips' sole remedy (i) the Citrix Product may be retained at an
equitable adjustment in price as may be agreed by the parties, (ii) the
correction period may be extended as may be agreed by the parties, or
(iii) failing any agreement, Telechips may reject the Citrix Product. If
Telechips rejects any Citrix Product Release or Version Release, the
parties shall renegotiate in good faith Telechips' payment obligations
therefor pursuant to Exhibit C.

5.3. Disclaimer of warranty. Apart from Citrix' obligations to
provide error corrections and support the Citrix Product(s) pursuant to
subsections 5.2 and 7.2, CITRIX DISCLAIMS ANY AND ALL OTHER WARRANTIES
AND CONDITIONS OF ANY KIND WHATSOEVER, EXPRESS, IMPLIED, STATUTORY, OR
OTHERWISE, INCLUDING THOSE FOR MERCHANTABILITY, SATISFACTORY QUALITY,
AND/OR FITNESS FOR A PARTICULAR PURPOSE, WHICH ARE EXPRESSLY EXCLUDED.

5.4. Unreleased product. Telechips shall not distribute for revenue
any release of a Citrix Product in any form until Citrix gives its
written approval of such Citrix Product for such distribution by its OEM
customers generally or until Telechips receives the final

5
<PAGE> 6
Citrix Confidential

form of the Master Software Media for such Citrix Product as declared in
writing by Citrix.

6. TRAINING

6.1. Technical training. Citrix shall provide to Telechips: one and
one half (1 1/2) days of "Train the Trainer" sales training; and two (2)
days of "Train the Trainer" technical support training. All training
shall be conducted at Citrix' facility at Citrix standard rates. Citrix
shall also provide to Telechips two (2) weeks of "on the phone" support
training to at least one Telechips Level 2 support engineer at Citrix'
facility, at Citrix standard rates.

7. SUPPORT

7.1. Telechips. Telechips shall be responsible for Level 1 and
Level 2 support for the Citrix Product(s). For a period of three months
following the first shipment of Telechips Product(s) by Telechips,
Citrix shall provide appropriate consulting support as required to
Telechips for these efforts. Citrix shall have no responsibility to deal
directly with Telechips' customers. Telechips shall keep its Citrix
Product(s) support capabilities current by attending Citrix training
classes, as appropriate, at Citrix' regular class rate.

7.2. Citrix. Citrix shall be responsible for the joint development of
workarounds and for Level 3 support for unmodified portions of Citrix
Product(s) relative to deviations from product specifications, such
support to be provided without charge to Telechips. If Telechips reports
any deviations from specifications in a Citrix Product following
acceptance and during the term of this Agreement, then, as Telechips'
sole remedy, Citrix agrees to use reasonable efforts to correct such
deviations. Notice to Citrix of any deviations from product
specifications shall be made in writing using Citrix' standard problem
reporting mechanisms as they may be updated from time to time, or using
the notice provisions of subsection 15.5 below. Citrix' obligations
under this subsection as to a particular release of a Citrix Product
shall cease ninety (90) days after delivery to Telechips of an Update
Release, Version Release, or Product Release with a higher version
number which has been accepted pursuant to Section 5 above. Any free
Update Releases provided by Citrix to its customers generally shall be
provided to Telechips without charge within thirty (30) days of the
general availability of such Update Releases.

8. ADDITIONAL OBLIGATIONS OF TELECHIPS

8.1. Telechips Products for Citrix use. As soon as possible, and at
least thirty (30) days prior to FCS of each Telechips Product, Telechips
shall deliver to Citrix, for Citrix' internal use, two (2) Telechips
computing devises containing the Telechips Products. From time to time
Telechips shall promptly upgrade or replace, as appropriate, these
Telechips Products to ensure that they are representations of the
current version of each Telechips Product.

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8.2. Quality control. Telechips agrees to exercise the highest level
of quality assurance, with regard to media, replication, and testing
procedures, generally in use in the computer software industry in
connection with Telechips' exercise of the rights granted in Section 2
above.

8.3. Copyright and patent notices. Telechips agrees not to alter or
remove any copyright and/or patent notices in the Citrix Products.
Telechips agrees to comply with the copyright and patent notice
requirements as set forth in Exhibit D.

8.4. Serialization. Telechips agrees to comply with Citrix
specifications for product serialization as provided and as amended from
time to time.

8.5. Citrix attribution. Telechips agrees to cause a screen providing
attribution to Citrix, in accordance with the requirements specified in
Exhibit D, to appear on each Telechips Product upon initiation of use of
the Telechips Product. Citrix understands that for certain Telechips'
client applications, the initiation/attribution screens will be present,
but may not appear as part of the specific application's presentation
sequence.

8.6. Product and Version release numbers. Telechips shall market each
release of each Telechips Product with reference to the ICA
version/release number assigned by Citrix to the Citrix Product,
contained in the Telechips Product. As a result of this, resellers
and/or end users must be easily able to determine correspondence between
Telechips Product releases and ICA version/release levels.

8.7. Telechips Product translation. Telechips agrees that it may
translate neither the Documentation nor the Citrix Products to languages
other than U.S. English without the prior written consent of Citrix.

9. TERM AND TERMINATION

9.1. Initial and renewal terms. The initial term of this Agreement
("Initial Term") shall run for two (2) years from the Effective Date.
This Agreement shall renew automatically each year for a one year term,
unless either party gives sixty (60) days written notice of its intent
to allow this Agreement to expire at the end of the then current term.

9.2. Termination for cause. If either party defaults in the
performance of any material provision of this Agreement, then the
non-defaulting party may give written notice to the defaulting party
that, if the default is not cured within sixty (60) days the Agreement
will be terminated. If the non-defaulting party gives such notice, and
the default is not cured during the sixty (60) day period, then the
Agreement will terminate immediately upon notice by the non-defaulting
party.

9.3. Termination for insolvency. This Agreement may be terminated by
either party upon notice, in the event that any of the following
occur(s): (i) voluntary institution by

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the other party of insolvency, receivership, bankruptcy, or any other
proceedings for the settlement of the other party's debt; (ii)
involuntary institution of insolvency, receivership, bankruptcy, or any
other proceedings for the settlement of the other party's debt; which
proceedings are not resolved within sixty (60) days, (iii) the making of
a general assignment by the other party for the benefit of creditors; or
(iv) the dissolution of the other party.

9.4. Return of materials. In addition to the Master Software Media
and the Documentation Media, all of Citrix' trademarks, marks, trade
names, patents, copyrights, designs, drawings, formulas or other data,
photographs, samples, literature, and sales aids of every kind will
remain the property of Citrix. Within thirty (30) days after the
termination or expiration of this Agreement, Telechips will prepare all
such items in its possession, and will collect such materials in
Reseller's possession, for shipment as Citrix may direct, at Citrix'
expense. Telechips will not make or retain any copies of any
confidential items or information which may have been entrusted to it.
Effective upon the termination or expiration of this Agreement,
Telechips will cease to use all trademarks and trade names of Citrix.

9.5. Destruction of inventory. Upon expiration or earlier termination
of this Agreement, Telechips shall destroy or erase (as applicable), and
shall certify to Citrix the destruction or erasure of: (i) all copies of
the Citrix Product(s) and Telechips Product(s) in any form in the
possession of Telechips or any Reseller, including all Master Software
Media, Documentation and Documentation Media, and (ii) all other
materials related to the Citrix Product(s) or Documentation in
Telechips' possession or control not otherwise dealt with under
subsection 9.4 above.

9.6. Survival of certain terms. The provisions of Sections 3 (as to
payment for distribution and copying prior to termination or
expiration), 5.3, 9.4, 9.5, 10, 11, 13, 14, and 15, as well as end user
licenses properly granted by Telechips, will survive the termination or
expiration of this Agreement for any reason. All other rights and
obligations of the parties will cease upon termination or expiration of
this Agreement.

10. AUDITS

10.1 Record keeping. Telechips agrees to maintain and to ensure that
any Reseller maintains, until two (2) years after the termination of
this Agreement, complete books, records and accounts regarding all
copying and distribution activities pursuant to Section 2 above and the
payments due to Citrix thereon.

10.2. Audit rights. Telechips agrees to allow Citrix the right to
audit and examine such books, records and accounts during Telechips' or
Reseller's (as applicable) normal business hours to verify the accuracy
of the reports made to Citrix under subsection 3.2 above. In the event
such examination leads to a determination that Telechips has made more
than the authorized number of copies and/or has not paid for all of the
copies of Citrix Products made, Telechips agrees to pay, in addition to
any damages (including

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direct, indirect and consequential) to which Citrix might be entitled,
all unpaid royalties which should have been paid, plus interest thereon
from the date the royalty payment should have been made, at the rate of
one percent per month (or, if less, the maximum allowed by applicable
law); provided, however, that if the audit reveals underpayment of five
percent (5%) or more of the amount that should have been paid for the
period audited, then, in addition to the above payments, Telechips shall
pay Citrix' auditing expense for such examination. Citrix will credit to
Telechips any overpayments discovered in the audit.

11. PROPERTY RIGHTS AND CONFIDENTIALITY

11.1 Property rights. Telechips agrees that Citrix owns all right,
title, and interest in the Citrix Product(s), including, without
limitation, the Master Software Media and the Documentation Media, now
or hereafter subject to this Agreement, and in all of Citrix' patents,
trademarks, trade names, inventions, copyrights, know-how, and trade
secrets relating to the design, manufacture, operation or service of the
Citrix Product(s).

11.2. Confidentiality. Telechips acknowledges that by reason of its
relationship to Citrix hereunder it will have access to certain
information and materials concerning Citrix' business, plans, customers,
technology, and Citrix Products that are confidential and of substantial
value to Citrix, which value would be impaired if such information were
disclosed to third parties. Telechips agrees that it will not use the
confidential information for any purpose other than the development and
support of the Telechips Product in accordance with the terms of this
Agreement and shall not use the confidential information in any other
way for its own account or the account of any third party, nor disclose
to any third party, any such confidential information revealed to it by
Citrix (including, but not limited to, the Source Code, the Source Code
Fragments and the ICA 3.0 Protocol specifications). Telechips shall take
every reasonable precaution to protect the confidentiality of such
information. Upon request by Telechips, Citrix shall advise whether or
not it considers any particular information or materials to be
confidential. Telechips shall not publish any technical description of
the Product beyond the description published by Citrix. In the event of
termination of this Agreement, there shall be no use or disclosure by
Telechips of any confidential information of Citrix, and Telechips shall
not manufacture or have manufactured any Products utilizing any of
Citrix' confidential information. The provisions of this Section shall
not apply to information: which is (or becomes) available to the public
other than by breach of this Agreement or of any other duty; which is
already in Telechips' possession prior to disclosure by Citrix or is
independently obtained by Telechips in circumstances under which
Telechips is free to disclose it; or which is trivial or obvious.

11.3. International distribution. Telechips shall not distribute
Products outside of the geographical boundaries of the following
countries without Citrix' prior written consent: United States, Canada,
Australia, Japan, the European Union, Sweden, Norway and Finland. In the
event Telechips desires to distribute Products outside of the
geographical boundaries set forth above, Citrix and Telechips shall
negotiate in good faith regarding

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the expansion of the list to include additional countries that provide
adequate protection for Citrix' and its suppliers' proprietary rights
through copyright, trade secret, patent or other laws.

12. TRADEMARKS AND TRADE NAMES

12.1. Use of trademarks and trade names. Telechips is obligated to use
the applicable Citrix trademarks and trade names with respect to the
Telechips Product(s) in accordance with the requirements and guidelines
specified in Exhibit E. In accordance with Exhibit E, Telechips shall
submit to Citrix for prior approval any advertising, packaging,
promotional, or other materials prepared by or for Telechips which
include any Citrix trademarks or trade names. Citrix shall have the
right to make reasonable updates to the requirements and guidelines in
Exhibit E from time to time. Notwithstanding the foregoing, Citrix shall
not attempt to cause Telechips to adopt any particular advertising,
promotional or marketing plan.

12.2. ICA certification process. In the event that Citrix implements
an ICA certification process, all subsequent Telechips Products will be
developed so as to meet the certification requirements and will be
labeled in accordance with the program's specifications. Certification
shall be performed at no charge to Telechips.

12.3. Attribution. Telechips agrees to make explicit mention of the
Citrix company name and the ICA and WinFrame trademarks in all press
releases and product announcements related to the licensed products.
Telechips also agrees to make its best reasonable effort to ensure that
the Citrix company name and the ICA and WinFrame trademarks are
mentioned in all press articles related to the licensed products.

13. INDEMNIFICATION

13.1. Defense or settlement of claims. Telechips agrees that Citrix
has the right to defend, or at its option to settle, and Citrix agrees,
at its own expense to indemnify or at its option to settle, any claim,
suit or proceeding brought against Telechips or its customer based on a
claim that a Citrix Product infringes upon any United States patent or
copyright or violates the trade secret rights of any United States
party, (hereinafter "Infringement Claims"); provided Citrix is notified
promptly in writing of an Infringement Claim and has sole control over
its defense or settlement, and Telechips and/or its customer provides
reasonable assistance in the defense of the same.

13.2. Infringement cures. Following notice of an Infringement Claim,
or if Citrix believes such a claim is likely, Citrix may at its sole
expense and option, (i) procure for Telechips the right to continue to
market, use and have others use, the alleged infringing Citrix
Product(s), (ii) replace or modify the appropriate Citrix Product(s) to
make them non-infringing, or (iii) accept return of the Citrix
Product(s) and refund as appropriate payments made therefor by
Telechips.

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13.3. Limitation. Citrix shall have no liability for any infringement
claim based on Telechips' (i) use or distribution of any product after
Citrix' notice that Telechips should cease use or distribution of such
product due to an infringement claim, or (ii) modification of the Citrix
Product other than by Citrix, or combination of a Citrix Product with
non-Citrix programs, data, hardware, or other materials, if such
infringement claim would have been avoided by the exclusive use of the
unmodified Citrix Product alone. For all infringement claims to which
this subsection is applicable, Telechips agrees to indemnify and defend
Citrix, provided Telechips is notified promptly in writing of an
infringement claim and has sole control over its defense or settlement,
and Citrix and/or its customer provides reasonable assistance in the
defense of the same.

13.4. Entire liability. THE FOREGOING PROVISIONS OF THIS SECTION 13
STATE THE ENTIRE LIABILITY AND OBLIGATIONS OF CITRIX, AND THE EXCLUSIVE
REMEDY OF TELECHIPS AND ITS CUSTOMERS, WITH RESPECT TO ANY ALLEGED
INTELLECTUAL PROPERTY INFRINGEMENT BY THE CITRIX PRODUCT(S), OR ANY PART
THEREOF.

13.5. Other third party claims. Except for Infringement Claims which
Citrix is obliged to settle or defend under this Section 13 Telechips
agrees to indemnify and hold Citrix harmless against any cost, loss,
liability, or expense (including attorneys' fees) arising out of third
party claims against Citrix as a result of Telechips' or Reseller's
copying, use or distribution of the Telechips Product(s) and Telechips'
exercise of the license rights granted under this Agreement.

14. LIMITATION OF LIABILITY

CITRIX' TOTAL LIABILITY ARISING OUT OF THIS AGREEMENT, THE TERMINATION
THEREOF, AND/OR LICENSE OF THE PRODUCTS AND DOCUMENTATION HEREUNDER,
SHALL BE LIMITED TO THE AMOUNT HAVING THEN ACTUALLY BEEN PAID BY
TELECHIPS TO CITRIX UNDER THIS AGREEMENT. IN NO EVENT SHALL CITRIX BE
LIABLE FOR COSTS OF SUBSTITUTE PRODUCTS OR SERVICES. IN NO EVENT SHALL
CITRIX BE LIABLE TO TELECHIPS OR ANY OTHER ENTITY FOR ANY SPECIAL,
CONSEQUENTIAL, INCIDENTAL OR OTHER DAMAGES, HOWEVER CAUSED AND ON ANY
THEORY OF LIABILITY, AND WHETHER OR NOT FOR BREACH OF CONTRACT,
NEGLIGENCE OR OTHERWISE, AND WHETHER OR NOT CITRIX HAS BEEN ADVISED OF
THE POSSIBILITY OF SUCH DAMAGE. THESE LIMITATIONS WILL APPLY
NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY
PROVIDED HEREIN. CITRIX' LIMITATION OF LIABILITY IS CUMULATIVE, WITH ALL
CITRIX' EXPENDITURES BEING AGGREGATED TO DETERMINE SATISFACTION OF THE
LIMIT. THE EXISTENCE OF CLAIMS OR SUITS AGAINST MORE THAN ONE CITRIX
PRODUCT LICENSED UNDER THIS AGREEMENT WILL NOT ENLARGE OR EXTEND THE
LIMIT. IN NO EVENT SHALL ANY LICENSORS OR

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SUPPLIERS OF CITRIX BE LIABLE FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL OR
OTHER DAMAGES ARISING OUT OF THIS AGREEMENT.

15. GENERAL PROVISIONS

15.1. Entire agreement; modifications. This Agreement, including the
attached Exhibits, sets forth the entire agreement and understanding of
the parties relating to the subject matter herein and merges all prior
discussion between them. No modification or amendment to this Agreement
shall be effective unless in writing and signed by both parties. The
terms and conditions on any Telechips purchase orders or similar
documents shall not apply. Any restrictive endorsement on any check or
any instrument of payment to Citrix which purports to alter this
Agreement or any of the parties' rights shall be of no force and effect,
and the payee party shall be free to negotiate such checks
notwithstanding such void endorsement.

15.2. Confidentiality of agreement. The parties agree that the terms
and conditions of this Agreement shall be treated as confidential
information, provided, however, that each party may disclose the terms
and conditions of this Agreement: (i) as required by any court or other
governmental body; (ii) as otherwise required by law; (iii) to legal
counsel of the parties; (iv) in confidence, to accountants, banks,
investors and other financing sources and their advisors; (v) in
confidence, in connection with the enforcement of this Agreement or
rights under this Agreement; or (vi) in confidence, in connection with
an actual or proposed merger, acquisition, or similar transaction.

15.3. Independent contractors. The relationship between Citrix and
Telechips established by this Agreement is that of independent
contractors, and nothing contained in this Agreement shall be construed
as creating a partnership, joint venture or agency relationship, or as
granting a franchise.

15.4. Governing law and jurisdiction. This Agreement shall be governed
by and construed under the laws of the State of Florida without regard
to conflict of law principles, and Telechips consents to personal and
exclusive jurisdiction and venue in the state and federal courts sitting
in Broward and Dade counties, Florida. Process may be served on either
party by using the notice provisions of subsection 15.5 below.

15.5. Notices. Any notice required or permitted by this Agreement will
be in writing and will be sent by prepaid registered or certified mail,
return receipt requested, or by overnight courier, charges prepaid, with
a confirming fax; to the appropriate address set forth at the beginning
of this Agreement, or to such other address for which the relevant party
gives appropriate notice. Notice shall be deemed to have been given when
delivered or, if delivery is not accomplished by some fault of the
addressee, when tendered.

15.6. Force majeure. Nonperformance of either party will be excused to
the extent that performance is rendered impossible by strike, fire,
flood, governmental acts or orders or

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restrictions, failure of suppliers, or any other reason where failure to
perform is beyond the control of, and not caused by the negligence of,
the non performing party.

15.7. Successors and assigns. Neither this Agreement nor any of the
rights or obligations of Telechips arising under this Agreement may be
assigned or transferred, by operation of law or otherwise, without
Citrix' prior written consent, such consent not to be unreasonably
withheld. Any attempted such assignment or transfer shall be void and
shall result in the immediate and automatic termination of this
Agreement. Subject to this restriction, this Agreement will be binding
upon and inure to the benefit of the parties hereto, their successors
and assigns.

15.8. Severability; waiver. If any provision of this Agreement is held
to be invalid by a court of competent jurisdiction, the remaining
provisions will nevertheless remain in full force and effect. Citrix and
Telechips agree to replace any invalid provision with a valid provision
which most closely approximates the intent and economic effect of the
invalid provision. The waiver by either party of a breach of any
provision of this Agreement by the other will not operate or be
interpreted as a waiver of any other or subsequent breach. All waivers
must be in writing.

15.9. Government End-Users. Citrix Products and Documentation are
"commercial items" as that term is defined in 48 C.F.R. 2.101 (October
1995) consisting of "commercial computer software" and "commercial
computer software documentation" as such terms are used in 48 C.F.R.
12.212 (September 1995). Consistent with 48 C.F.R. 12.212 and 48 C.F.R.
227.7202-1 through 227.7202-4 (June 1995), if the Citrix Products which
Telechips licenses or acquires hereunder are for or on behalf of the
U.S. Government or any agency or department thereof, the software and
the documentation are licensed hereunder (i) only as a commercial item,
and (ii) with only those rights as are granted to all other end users
pursuant to the terms and conditions of this Agreement.

15.10. xport controls. Telechips agrees to comply with all United
States export regulations and restrictions in connection with this
Agreement.

15.11. Headings. The headings used in this Agreement and the attached
Exhibits are intended for convenience only and shall not be deemed to
supersede or modify any provisions.

15.12. ounterparts. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original and all of which
together will constitute one instrument.

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IN WITNESS WHEREOF, this Agreement is executed as of the Effective Date
set forth above.

CITRIX SYSTEMS, INC. TELECHIPS CORPORATION
University Drive, Suite 700 6880 S. McCarran Blvd.
Coral Springs, FL 33071 Reno, NV 89509

By: By:
- -------------------------- --------------------------
Name: Name:
- -------------------------- --------------------------
Title: Title:
- -------------------------- --------------------------

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EXHIBIT A
CITRIX PRODUCTS

Citrix Products shall be the Citrix Windows Client ("Client") Software in binary
format for ICA 3.0 Protocol support.

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Citrix Confidential

EXHIBIT B
TELECHIPS PRODUCTS

Telechips' Access Model products.

Telechips Products must not implement any modifications or extensions to the ICA
Protocol. They must connect to and communicate with Citrix and Citrix based
application server technology in accordance with the appropriate ICA product and
Version Release number specifications as defined in the ICA 3.0 Protocol
specifications.

The operating environment which may run on the Telechips Products concurrently
with the ICA Protocol is the Windows 3.1 compatible environment ("Authorized
Environment"). In the event that Telechips desires to add additional operating
environments to the Authorized Environment, the parties agree to negotiate in
good faith to expand the definition of the Authorized Environments.

Citrix reserves the right to require Telechips to go through a reasonable
certification to ensure quality and complete ICA compatibility for Telechips
Products.

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EXHIBIT C
PAYMENT SCHEDULE

A. Nonrefundable Initial Design Consultation, Training, and Ongoing Support
Fees (for the services described in Sections 6 and 7 of the Agreement)

[ * ] payable upon execution of the Agreement.

Source Code and/or Full ICA Protocol Specification (ICA 3.0 Materials)
(if applicable)

[ * ] payable upon execution of the Agreement or payable within five (5)
days of written request for ICA 3.0 Materials.

B. Per Copy License Fees

First 10,000 units: [ * ] per copy

Next 50,000 units: [ * ] per copy.

All additional units:[ * ] per copy.

These fees shall be computed separately for each Citrix Product.

C. Period

Each three (3) month period after FCS shall be a "Period."

D. Minimum Royalties.

During the first twelve (12) months after FCS of the first Telechips
Product, Telechips shall pay to Citrix nonrefundable minimum royalties
of [ * ], as follows:

1. [ * ] upon execution of this Agreement.

2. [ * ] upon FCS, for the first Period.

3. [ * ] for the second Period after FCS.

4. [ * ] for the third Period after FCS.

5. [ * ] for the fourth Period after FCS.

* Portions of this exhibit have been excluded pursuant to a confidential
treatment request.

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Payments 2 - 5 shall be made on or before the first day of the Period
and shall be credited toward the regular royalty payment for that Period
made in accordance with subsection 3.1 of this Agreement. If such
credits exceed actual accrued royalties for that Period, the excess
shall constitute prepaid royalties creditable against future actual
accrued royalties.

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EXHIBIT D
CITRIX ATTRIBUTION, NOTICES, TRADEMARKS
FOR CITRIX CLIENT PRODUCTS

The Citrix OEM Client Splash Screen Logo: "Citrix(R) ICA(R)"

Attribution
The "Citrix(R) ICA(R)" logo must be displayed on the client's initial
load screen as a graphic image.

Sizing and Placement Requirements
The "Citrix(R)ICA(R)" logo must be a minimum of 32 x 32 pixels on the
initial load screen.

Copyright and Patent Notices
Copyright and/or patent notices must be incorporated into Telechips's
product packaging as follows:

On initial load screen:
Citrix copyright notice.

Logo Artwork
The "Citrix(R) ICA(R)" logo must never be altered and must be reproduced
from the supplied Citrix reproduction sheet or from diskette using the supplied
EPS file. Citrix will provide authorized OEMs with camera-ready artwork of the
"Citrix(R) ICA(R)" Splash Screen. Telechips may not alter this artwork in any
way. The words "Citrix(R) ICA(R)" as they appear in the logo are the only words
and the only typeface approved for use and may not be modified. The (R) must
appear immediately following the words Citrix and ICA .

Color Scheme
The following Splash Screen colors are the be used:
<TABLE>
<S> <C>
ICA text 100% PMS Reflex Blue
Distributed Windows text 100% Black
Citrix Logo Text 80% Black
Citrix Logo Dots 100% Warm Red
Window 100% Warm Red
Globe 70% PMS Reflex Blue
Laptop 100% Black with White outline and
White monitor screen
Border 100% Black
</TABLE>

The logo must always be self-contained within a white background.

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Spacing

The "Citrix(R) ICA(R)" logo must stand alone. A minimum amount of space,
1/4 inch, must be left between the logo and any other object such as type,
borders, edges, etc.

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EXHIBIT E

ADVERTISING GUIDELINES

1. TRADEMARK AND LOGO GUIDELINES

All references to Citrix products or to the ICA protocol shall include the
appropriate Citrix trademarks and shall be in accordance with these
guidelines. All marketing materials and other publications or press releases
referencing the Citrix products or the ICA protocol shall be submitted to
Citrix for its prior approval. Approved marketing materials may be reused
without Citrix' prior approval if the use of the Citrix trademarks is
exactly as previously approved and if the context and contents of the new
materials are substantially similar to the approved materials.

The Citrix and WinFrame names, logos and trademarks can only be used by
authorized OEMs and Resellers in connection with the sales and marketing of
Citrix Products.

The Citrix name and Citrix logos may not be used to promote other
Resellers' products. Nor may the Citrix name and logo be used for general
dealer promotions not specifically related to Citrix Products.

If any of the Trademarks are to be used in conjunction with another
trademark on or in relation to the Citrix Product, then Citrix' mark shall
be presented equally legibly, equally prominently, and of equal size to the
other, but nevertheless separated from the other so that each appears to be
a mark in its own right, distinct from the other mark.

2. TRADEMARK AND LOGO USAGE

Advertisements, collateral materials, direct mail materials, and other
printed materials (with exception of Telechips signage) should include the
credit line:

Citrix WinView and ICA are registered trademarks of and WinFrame is a
trademark of Citrix Systems, Inc.

3. DESIGN STANDARDS

The following is a general outline of design rules governing the use of the
company name, Citrix Product's names and logos:

In text usage, the first time the company name is used it should be
"Citrix Systems, Inc.", thereafter "Citrix" is acceptable.

Citrix Systems, Citrix WinView and other Citrix Products should have
"Citrix" in upper and lower case, with "WinView" spelled as one word
with the "W" and "V" capitalized and WinFrame spelled as one word with
the "W" and "F" capitalized. Additional proper names will be covered at
the time of their use.

Artwork for the Citrix corporate logo and product logos is available and
will be supplied to Telechips. The corporate logo must be of the same
design, color and other details or should be exact copies of those used
by Citrix. The corporate logo should appear as one

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color (preferably black) on two-color materials, or on full color
artwork as PMS 403 for the body of the logo, and PMS Warm Red for the
dots. Color samples are available from Citrix. Citrix Product logos
should be one color, in Black or in the text color of document.

<PAGE> 1
EXHIBIT 11.1

TELECHIPS CORPORATION
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
Years ended
December 31,
------------------
1996 1995
--------- -------

<S> <C> <C>
Weighted average common shares outstanding 139 40

Shares, warrants and options treated as common
share equivalent pursuant to SEC Staff Accounting
Bulletin Topic 4d 113 113
------- -------
Total common and common equivalent shares 252 153
======= =======

Net loss $(6,111) $(3,388)
======= =======
Loss per common and common
equivalent shares $(27.65) $(22.15)
======= =======
</TABLE>
Net loss per common share and common equivalent share is computed by
dividing net loss, after increasing the net loss by the discount on issuance of
Series A 4% cumulative convertible preferred stock, by the weighted average
number of common and common equivalent shares outstanding during each period.
The discount on the Series A Preferred Stock amounted to $837,500 for 1996.

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996 AS FILED ON FORM
10-KSB WITH THE SEC AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 289,993
<SECURITIES> 0
<RECEIVABLES> 68,673
<ALLOWANCES> 0
<INVENTORY> 675,660
<CURRENT-ASSETS> 1,108,625
<PP&E> 841,427
<DEPRECIATION> 81,936
<TOTAL-ASSETS> 2,183,539
<CURRENT-LIABILITIES> 1,015,296
<BONDS> 0
0
2,047,150
<COMMON> 3,780
<OTHER-SE> (882,687)
<TOTAL-LIABILITY-AND-EQUITY> 2,183,539
<SALES> 107,797
<TOTAL-REVENUES> 107,797
<CGS> 131,587
<TOTAL-COSTS> 131,587
<OTHER-EXPENSES> 2,507,677
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 51,337
<INCOME-PRETAX> (6,111,069)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,111,069)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,111,069)
<EPS-PRIMARY> (27.65)
<EPS-DILUTED> (27.65)

</TABLE>