SPECTRUM SIGNAL PROCESSING INC, 20-F, 1998-06-30

SPECTRUM SIGNAL PROCESSING INC
20-F, 1998-06-30
ELECTRONIC COMPONENTS & ACCESSORIES

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<PAGE>
FORM 20-F
(Mark One)

[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934

[ X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1997

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from __________ to __________
Commission file number 0-19906

SPECTRUM SIGNAL PROCESSING INC.
-----------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)

Not Applicable
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(Translation of Registrant's name into English)

British Columbia, Canada
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(Jurisdiction of incorporation or organization)

8525 Baxter Place,
Burnaby, British Columbia, Canada V5A 4V7
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(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

Names of each exchange
on which registered Title of each class

Not Applicable None
- - -------------------------------- --------------------------------------

Securities registered or to be registered pursuant to Section 12(g) of the Act.

Common Shares, without par value
-----------------------------------------------------
(Title of Class)

Securities for which there is a reporting obligation pursuant
to Section 15(d) of the Act.

None
-----------------------------------------------------
(Title of Class)

Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the Annual
Report.

As of December 31, 1997, the Registrant had outstanding 9,459,397 common
shares, without par value (the "Common Shares").

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

Indicate by check mark which financial statement item the Registrant has
elected to follow. Item 17 Item 18 X
--- ---

<PAGE>

The Company publishes its financial statements in Canadian dollars.
All monetary references throughout this Annual Report are expressed in Canadian
dollars ("Cdn$" or "$") except where indicated as United States dollars
("US$"). All financial information presented, except where otherwise indicated,
has been prepared in accordance with accounting principles generally accepted
in Canada ("Canadian GAAP"). Canadian GAAP as applied to the Company conforms
in all material respects with accounting principles generally accepted in the
United States ("U.S. GAAP"), except as otherwise presented in the Company's
financial statements. Beginning with the first quarter of 1998, the Company
adopted a policy of publishing its financial statements in US$ and preparing
all such statements in accordance with U.S. GAAP.

When used in this Annual Report, the words "believes," "anticipates,"
"expects," and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties
which could cause actual results to differ materially from those projected. In
addition to quarterly fluctuations, the Company's operating results are
affected by a wide variety of other factors that could materially and adversely
affect actual results, including: general economic conditions; dependence on
significant customers, suppliers and licenses; success of and requirements of
original equipment manufacturers; revenues from development contracts; rapid
changes in technology; competition; ability to manage growth and integrate
acquisitions; actions by governmental authorities; and foreign currency and
exchange rate fluctuations. As a result of these and other factors, the Company
may experience material fluctuations in future operating results on a quarterly
or annual basis, which could materially and adversely affect its business,
financial condition, operating results and stock price. Furthermore, this
document and other documents filed by the Company with the U.S. Securities and
Exchange Commission (the "SEC") contain certain forward looking statements with
respect to the business of the Company, including prospective financing
arrangement. These forward-looking statements are subject to certain risks and
uncertainties, including those mentioned above, which may cause actual results
to differ significantly from these forward- looking statement. The Company
undertakes no obligation to publicly release the results of any revisions to
these forward-looking statements which may be to reflect events or
circumstances after the date hereof or to reflect events or circumstances after
the date hereof or to reflect the occurrence of unanticipated events. An
investment in the Company involves various risks, including those mentioned
above and those which are detailed from time to time in the Company's SEC
filings.

MEDIA-LINK(Registered), DSP-LINK(Registered) and VASP(Registered) are
registered marks in Canada and the U.S.; DSP and Office F/X are registered
trademarks of the Company in Canada only. This Annual Report also contains
trade names and trademarks of other companies.

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PART I

Item 1. BUSINESS.

Spectrum Signal Processing Inc., a corporation organized under the
laws of the Province of British Columbia, Canada ("Spectrum" or the "Company"),
designs, develops and markets programmable digital signal processing ("DSP")
solutions which are incorporated into high performance applications used
primarily in commercial, wireless and military markets. Commercial
off-the-shelf DSP solutions currently offered by the Company are used in a wide
range of applications, including avionics, medical diagnostic imaging,
communications, control, test and measurement, machine vision and wireless.
Spectrum's solutions incorporate proprietary and licensed DSP software,
hardware and application specific integrated circuits ("ASICs") integrated with
leading manufacturers' programmable DSP microprocessors. The Company recently
acquired 3L Limited, a Scotland-based company specializing in operating systems
for DSP systems with multiple DSPs in the system, and Alex Computer Systems,
Inc. ("Alex Computer"), a New York-based company specializing in DSP hardware
and software solutions based on Analog Devices' SHARC processor.

Industry Background

DSP involves the conversion of analog signals, including sound and
light, into a stream of digital values that are then processed, manipulated,
exchanged or stored by computing systems. DSP provides several advantages over
analog signal processing, including: (i) higher degrees of audio and video
compression, resulting in greater storage and communication capacity; (ii) a
greater ability to process and manipulate data, resulting in enhanced product
performance; and (iii) the ability to process and adapt to changing signals in
real time. In addition, DSP permits easier development and upgrades of
multi-functional products through the use of programmable software/ hardware
combinations, thus shortening time-to-market for new products. Although the
theoretical foundation of DSP technology existed for many years, broad
applications for DSP technology did not exist until high-speed microprocessors
became available at a reasonable cost. The foundation of a DSP system is the
DSP microprocessor, or chip, first introduced in the early 1980s by a number of
semiconductor companies, including AT&T, Texas Instruments and Motorola.
Initial advances in DSP technology using DSP chips took place in military and
commercial applications where high performance and speed were of paramount
importance and cost was a secondary consideration. In the mid-1980s, very large
scale integration ("VLSI") design and manufacturing processes developed for
central processing units ("CPUs") and memories were applied to general purpose
DSP chips, driving down costs and increasing performance exponentially. These
trends, combined with the superior processing capabilities of DSP, have led to
rapid growth in DSP applications.

DSP technology is part of the foundation of the telecommunications and
multimedia revolutions of the 1990s, much as VLSI computer chips and memories

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enabled the PC revolution in the 1980s. DSP technology that enables
sophisticated processing of images and voice is rapidly becoming commonplace.
DSP chips have been behind major advances in data transmission speeds, which
have dramatically reduced the cost of wireless communications (including
cellular communications), and emerging voice, audio and image manipulation
technologies.

Products

DSP Systems. The Company's DSP product line ranges from development,
off-the-shelf and customer boards, to a broad range of DSP software and ASICs
capabilities and products. The Company currently offers DSP boards and hardware
modules based on a variety of floating and fixed-point programmable DSP
microprocessors (such as Analog Devices' SHARC DSP and Texas Instruments' C6x
DSPs). The Company has also begun developing a series of chips or ASICs
designed specifically to increase the performance of its products - the first
in this series is the "Hurricane" PCI-to-DSP bridge chip. On the software side,
Spectrum also provides operating system software (e.g., Spectrum's Prism, 3L
Limited's Diamond and Alex Computers' APEX-Pro), software algorithms and
libraries, and debugging tools. The Company's broad line of DSP microprocessors
(developed by Texas Instruments, Analog Devices, NEC and Motorola), hardware
interfaces, modular product architectures, ASICs capabilities and software
development tools allow customers to tailor Spectrum products to a wide variety
of applications.

The prices for the over 100 products for commercial, wireless and
military markets currently offered by the Company generally range from US$1,000
to US$10,000 per board for standard products (including the Company's catalog
product offerings), to up to US$30,000 for the Company's customized DSP boards.

A complete DSP system involves a number of hardware and software
components that are integrated onto a single DSP board. At the core, all
solutions start with a DSP chipset. A chipset consists of one or more DSP
microprocessors which are bundled with other chips such as ASIC, memory and
audio chips. The chipset along with numerous other components are mounted on a
circuit board which is then installed into a computer system. In addition to
this specialized hardware, these boards require specialized software to provide
instructions for specific applications. The software typically includes DSP
algorithms, DSP operating system software and host software. Other than the DSP
microprocessor, the Company has the capability to design and develop all the
DSP hardware and software for each DSP system.

Software. In June 1997, Spectrum acquired a Scotland-based software
company, 3L Limited, in order to provide more complete DSP software solutions
to its customers. 3L Limited specializes in real-time operating systems
specifically for applications requiring multiple DSPs. 3L Limited operates on
an independent basis under the name of 3L Limited so that it can effectively
sell its standard DSP software products through its traditional channels to DSP
systems vendors and in-house developers. Spectrum's head office directs 3L
Limited's product development activities in Scotland and supports

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its sales activities with marketing and promotional support. 3L Limited's
software is relatively unique in the DSP market and allows Spectrum to gain a
competitive advantage by enabling the Company to offer a real-time-operating
system, designed specifically for DSP systems with multiple processors (typical
Spectrum products), to its customers as part of its standard DSP system
solution.

In March 1998, Spectrum acquired the assets of another DSP company,
Alex Computer Systems, Inc., a company with strong software and hardware
solutions based on Analog Devices' SHARC-based processors. This acquisition
allows Spectrum to become a strong competitor in the floating-point DSP
marketplace, with the large SHARC-based product line Alex Computer brought to
Spectrum. One of Alex Computer's key strengths is its software capability. On
the software side, Alex Computer contributes an outstanding software
combination to complement the software Spectrum had for the SHARC-based product
line. The software and hardware product line which Alex Computer contributes to
Spectrum allows the Company to offer a truly SHARC-based suite of system level
solutions.

Markets

General Commercial. The Company's commercial products historically
have been general purpose in nature and targeted to a wide range of
applications. The Company believes there is significant opportunity in the
commercial market due in part to the constant introduction of new ways to
implement DSP technology into traditionally non-DSP commercial applications.
Typical applications in this market include: medical diagnostic imaging (e.g.,
MRI and ultrasound), to test and measurement, control, audio, machine vision
and image processing. The Company's customers in this market include: Sunkist,
DCA, Nortel, Hewlett-Packard and Ford Motor Company.

Radar/Sonar. Applications for the military and the aerospace market
generally attract the newest, most sophisticated DSP system solutions. The
market is driven by a demand for sophisticated commercial (rather than custom)
off-the-shelf DSP hardware solutions supported by time-saving software
development tools from reliable, quality DSP system suppliers. The balance of
hardware and software sophistication, together with reliable supply, is key to
differentiating the Company's solutions from those of its competitors. The
leading-edge position of the Company's customers in this market forces them to
adopt new technology whenever it offers even a modest increase in capability.
This causes rapid product cycle updates (requiring new hardware) and increases
the development and integration costs and schedules, requiring improved
software tools. The Company's customers in this market include: Boeing,
Raytheon, Jet Propulsion Labs and the U.S. Department of Defense (Naval
Undersea Warfare Center).

Signal Intelligence. Multiprocessing DSP often is required in military
applications, including electronic countermeasures, surveillance and
encryption. While overall defense spending has been decreasing, the Company
believes that spending for technological improvements and enhancements will
continue. DSP solutions are used

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to satisfy communications and intelligence requirements of the U.S. Department
of Defense. Spectrum has developed custom digital receiver hardware modules for
the U.S. Department of Defense that complement certain Spectrum off-the-shelf
products and provide a cost effective and short time-to-market product for
electronic surveillance and intelligence applications. The Company began
shipping its first production volumes of these systems in the third quarter of
1996. The Company's customers in this market include: NAI, the U.S. Department
of Defense and Hewlett-Packard.

Wireless. The telecommunications industry historically has been a
major user of DSP technology. Telecommunications applicantions such as
high-speed digital modems and cellar base stations are based on DSP, which is
instrumental in the development of digital cellular networks, including
subscriber sets and base stations. The Company is dedicated to providing
complete solutions to companies in the wireless industry which, the Company
believes, will need to incorporate DSP technology into next generation cellular
base station and other wireless technologies.

Customers

The Company has established a diversified base of customers for its
DSP system solutions, representing a wide range of industries and applications.
In 1997, the Company conducted business with over 400 customers. The Company's
two largest customers accounted for approximately 44% of the Company's sales in
1997. The Company's largest customer, the U.S. Government (principally the U.S.
Department of Defense), accounted for approximately 25% of the Company's sales
in 1997 and the Company's second largest customer, NAI Technologies accounted
for 18% of sales in 1997.

The following chart shows several of the Company's representative
customers for each of the Company's targeted markets:

<TABLE>
<S> <C> <C> <C>
Commercial Radar/Sonar Signal Intelligence Wireless

Sunkist Growers U.S. Department U.S. Department of Defense Motorola
of Defense

Siemens Medical Lockheed Martin Watkins-Johnson Silicon
Wireless

Halliburton Boeing Hewlett-Packard

Ford Motors Westinghouse Applied Signal Technologies

Integrated Northrup Gruman E-Systems
Systems

Raytheon E-Systems Raytheon

NAI Technologies
</TABLE>

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Logistics, Manufacturing and Quality Control

The Company's logistics operations include manufacturing, purchasing,
quality assurance, customer service and after-sale technical support and at May
5, 1998 employed 28 persons. The Company employs an outsourcing model for
substantially all product manufacturing. Product manufacturing consists of
board-level products, cable assemblies and some silicon manufacturing. The
Company believes that outsourcing most of its manufacturing allows it to focus
more of its resources on research and product development, marketing, sales and
customer support while producing a flexible, cost effective source of
manufacturing capacity. Standards for assembly, testing and quality assurance
have been established and documented and are monitored through a quality
control program throughout the assembly and final inspection process.
Additionally, the Company must meet certain specified quality goals under
several of its customer supply agreements. The Company achieved ISO 9002
certification in January 1994 and ISO 9001 certification in December 1994.

The Company supports its ISO 9001 quality standards with after-sale
technical support, which is especially desired by customers relying on the
Company's design engineers rather than an in-house engineering capability. The
Company's support hotline is staffed with application engineers who are
experienced in a broad variety of hardware and software products. The
application engineers document all problems or questions reported by customers
creating a database that assists in the timely resolution of future questions.
This database also serves as a tool to the product managers for redefinition
and improvements to the Company's product line.

Suppliers

The Company's DSP solutions include a number of products and
components that are sourced from third-party suppliers, including Texas
Instruments, Motorola, AT&T and Analog Devices. The Company attempts to use
standard parts and components which are available from multiple vendors in its
DSP solutions, although certain DSP solutions are based upon
manufacturer-specific DSP microprocessors. The Company believes that each
supplier has a manufacturing capability in more than one location which reduces
the risk of an interruption in product availability. The Company does not have
long-term agreements with any of these suppliers. The availability of many of
these components is dependent in part on the Company's ability to accurately
forecast its future requirements. While the Company has from time to time
experienced shortages of these components, such shortages to date have not had
a material adverse effect on operating results.

Research and Product Development

The Company believes that continued investment in research and
development will be critical to the Company's future success. At May 5, 1998,
the Company employed 80 persons in the area of research and product
development, focusing on the development of next generation products for
military aerospace and commercial

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applications and new multimedia products and ongoing enhancement of existing
ASICs, DSP and Windows software and modules. The Company generates a
significant percentage of its total revenues from development contracts,
primarily with key customers. These development contracts have provided the
Company with partial funding for the development of certain of its products and
sometimes provide for a production commitment. Under these contracts, the
Company receives payments upon reaching certain development milestones. The
Company is currently conducting development work under development contracts
with several of its customers. The Company intends to continue to seek
development contracts with strategic partners.

During 1995, 1996 and 1997, the Company's research and development
expenditures were approximately $3,612,000, $4,637,000 and $5,888,000,
respectively.

Engineering

Building on its expertise in developing DSP solutions, the Company
provides a broad range of off-the-shelf and custom programmable DSP products
for a variety of applications. To help its customers build better products
using DSP technology, Spectrum's own team of engineers uses a broad array of
proprietary and licensed DSP technologies to identify the appropriate hardware
and/or software solution for each application. The Company's engineers work
with their customers' counterparts early in the design process to ensure that
the benefits of DSP are fully realized in the customer's end product.
Established DSP design components are utilized to create solutions that meet
unique processing and input/output expansion requirements. The engineering team
will then conduct pre-production tests to give customers the opportunity to
observe how a product functions in an application so that necessary adjustments
can be made before final production. When a DSP design has been approved by the
customer, the Company will manufacture the product in the quantity desired by
the customer. The Company's engineers also assist customers with project
management, test software developments, board layout and manufacture, and
system integration and testing.

Intellectual Property

The Company believes that its success is dependent to a large extent
upon its proprietary technology. The Company has acquired expertise in
developing, and has developed, a number of proprietary DSP technologies,
including: board designs from consumer-focused single processor DSP solutions
to military/aerospace-focused multi-processing DSP systems, DSP audio and
telephony software, industry standard application interface software,
user-interface application software, ASICs and operating systems. The Company
seeks to maintain the proprietary nature of its technology through copyright
protection, embedded software and confidentiality agreements with parties who
have access to proprietary information. The Company historically has not sought
patent protection of its products in Canada, the United States or abroad and it
does not hold any patents on any of its current products. With respect to its
own products, the Company claims copyright protection for every circuit board,
ASIC or

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software developed internally. The Company has registered in Canada and
the United States trademarks for MEDIA-LINK(Registered), DSP-LINK(Registered)
and VASP(Registered).

In July 1987, the Company entered an agreement with Loughborough
pursuant to which the Company licenses certain DSP technology (the
"Loughborough License"). In consideration of the license, the Company issued to
Loughborough 1,000,000 Common Shares, which were subsequently sold by
Loughborough. In addition, the Company is required to pay Loughborough a 5%
royalty on certain of the products for the military/aerospace and commercial
markets based upon technology licensed from Loughborough and products acquired
from Loughborough for resale (collectively, "Loughborough Products") and must
pay a flat fee on a per product basis for certain other Loughborough Products
purchased by the Company pursuant to such license. In 1995, 1996 and 1997,
sales of Loughborough Products accounted for approximately 46%, 33%, and 30%,
respectively, of the Company's sales. In 1997, the Company and Loughborough
agreed to extend the term of the Loughborough License on a non-exclusive basis
through 2004 with respect to Loughborough Products originally released prior to
January 1997 and through December 1998 with respect to Loughborough Products
originally released subsequent to January 1997. Under the terms of the
Loughborough License, as amended, the Company is not permitted to sell any
product supplied by a third party which is equivalent to a Loughborough Product
unless the Company and Loughborough are unable to agree on competitive terms
for the supply of such product by Loughborough. See "Certain Risks--Amendment
of the Loughborough License."

The Company has entered into several licensing agreements pursuant to
which a third-party vendor licenses software or know-how to the Company. The
Company then typically pays a per unit sale royalty to the licensor at an
amount sometimes subject to renegotiation. Under the agreements, the licensed
material remains the sole property of the third-party and there is no right to
the material after termination of the respective agreement. The agreements are
generally non-exclusive and have an indefinite or a three to five year term and
are terminable either for cause or for convenience, upon proper notice.

There can be no assurance that any steps taken by the Company to
protect its intellectual property will be adequate to prevent misappropriation.
Furthermore, there can be no assurance that others will not independently
develop technologies that are similar to or superior to the Company's
technology and obtain patents or copyrights thereon. In such event, the Company
may not be able to license such technology on reasonable terms, or at all.
Although the Company does not believe that its products and technologies
infringe upon the proprietary rights of others, there can be no assurance that
third parties will not assert infringement claims in the future.

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Competition

The market for DSP hardware and software products is intensely
competitive. Competitors vary in size and in the scope and breadth of the
products and services offered. Because the Company competes in diverse markets
with a wide range of products, certain competitors may have a technology or
market advantage with respect to products which relate primarily to such
competitor's specific area of expertise. Certain of the Company's competitors
have significantly greater financial, research and development, technical and
marketing resources than the Company.

The principal competitive factors in the markets in which the Company
competes include product performance, product development capabilities,
after-sale technical support, access to new technologies and price. In the
commercial market, the Company faces competition in certain targeted markets
from companies that offer more complete solutions. As a result, in some
segments of these markets, the Company's growth rate has remained relatively
flat.

Other companies participating in the DSP industry may enter the
markets in which Spectrum competes. Competitive pressures and other factors,
such as new product introductions by the Company or its competitors, may result
in significant pricing pressures that could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"--Intellectual Property." In addition, there can be no assurance that certain
trends in DSP technology, such as native signal processing and silicon
integration, will not displace certain of the Company's products, or that in
response to such trends the Company will be able to develop new products that
achieve market acceptance.

Amendment of the Loughborough License

In 1995, 1996 and 1997, sales of Loughborough Products accounted for
approximately 46%, 33% and 30%, respectively, of the Company's sales. The
recent amendment to the Loughborough License which, among other things, changed
such license to operate on a non-exclusive basis, could result in increased
competition. In particular, early in 1998, Loughborough merged with Mizar, Inc.
("Mizar"), a Texas- based company engaged in the development and marketing of
multi-processor DSP computing subsystems, thereby providing Loughborough with a
means to rapidly enter the North American market by taking advantage of Mizar's
existing North American sales force and presence in the industry. While the
Company believes that Loughborough Products will continue to account for a
decreasing percentage of the Company's sales in 1998 and thereafter, there can
be no assurance that the terms of the amended Loughborough License and any such
increase in competition will not have a material adverse effect on the
Company's business, financial condition and results of operations.

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See "--ASICs and Software" and "Certain Risks--Amendment of the
Loughborough License."

Sales

The Company's sales force is comprised of 28 persons and headed by the
Vice President-Sales. The department is divided into two separate groups: (i)
military/aerospace; and (ii) commercial, and ASICs and software.

The military/aerospace and commercial group is made up of inside sales
personnel, field applications engineers, field sales managers and a channel
sales director. The sales group is organized into five main geographic regions:
the Eastern Region, managed from the sales office in Westborough,
Massachusetts, the federal region, managed from the sales office in Landover,
Maryland, the Western Region, managed from the sales office in Mountainview,
California, the Central Region, managed from the Company's headquarters and the
Canadian and overseas markets, also managed from the Company's headquarters.
The Company also makes use of third-party sales representative firms which have
a technical sales force experienced with similar product lines and an
established customer base. ASICs and DSP software sales are managed primarily
from the Company's headquarters.

The Company currently has distribution agreements in place with
international distributors in Canada, Israel, Japan, Sweden, Germany, Korea,
Taiwan, Australia, South Africa and Denmark.

Marketing

The marketing department, comprised of 23 persons, is divided into
four groups: product marketing, market development, marketing communications
and 3L Limited marketing.

The product marketing group focuses on developing new product ideas
and assessing market demand for products that are developed internally or
sourced externally. As a new product approaches production, the product
managers coordinate the product roll out process. This includes writing data
sheets and press releases, ensuring that the product is complete (hardware,
software, documentation) and conducting sales training. Ongoing activities in
product management include generating sales forecasts, pricing analysis for
volume contracts, competitive analysis and product catalog updates.

The market development group handles forward looking market trends and
makes recommendations to the product marketing group regarding required product
features for new product development. The group also develops business cases
for new product proposals, researches new technologies, and provides direction
to the Company regarding key and target markets areas.

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The 3L Limited marketing group helps define new products, and provides
product development and feature direction, competitive product and company
research, and promotional and collateral support.

The key objectives in the Company's marketing communications program
are to increase awareness of the company externally, handle public relations,
increase, product awareness and generate leads through promotional activities.
These objectives are pursued by a comprehensive program that includes press
releases, press tours, applications articles, direct mail, advertising, catalog
and brochure production, prospect and customer database use, trade shows, and
joint marketing programs with chip vendors and strategic partners.

Employees

As of May 5, 1998, the Company had a total of 177 full-time employees,
of which 46 were administrative personnel, 51 were sales and marketing
personnel and 80 were members of the engineering team. None of the Company's
employees are represented by labor unions or collective bargaining units. The
Company believes that its relationship with its employees is good.

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CERTAIN RISKS

Significant Customers

In 1997, the Company's two largest customers accounted for
approximately 44% of the Company's sales and the U.S. Government (principally
the U.S. Department of Defense), its largest customer, accounted for
approximately 25% of the Company's sales. In addition, approximately 18% of the
Company's sales were made to NAI Technologies. A significant reduction of
purchases by any of the Company's largest customers could have a material
adverse effect on the Company's business, financial condition and results of
operations.

Amendment of the Loughborough License

In 1995, 1996 and 1997, sales of Loughborough Products accounted for
approximately 46%, 33% and 30%, respectively, of the Company's sales. The
recent amendment to the Loughborough License which, among other things, changed
such license to operate on a non-exclusive basis, could result in increased
competition for the Company. In particular, early in 1998, Loughborough merged
with Mizar, Inc. ("Mizar"), a Texas-based company engaged in the development
and marketing of multi-processor DSP computing subsystems, thereby providing
Loughborough with a means to rapidly enter the North American market by taking
advantage of Mizar's existing North American sales force and presence in the
industry. While the Company believes that Loughborough Products will continue
to account for a decreasing percentage of the Company's sales in 1998 and
thereafter, there can be no assurance that the terms of the amended
Loughborough License and any such increase in competition will not have a
material adverse effect on the Company's business, financial condition and
results of operations.

Variability of Customer Requirements; Nature and Extent of Customer
Commitments on Orders

The level and timing of orders placed by the Company's OEM customers
vary due to customer attempts to manage inventory, changes in the OEM's
manufacturing and distribution strategies and variations in demand for customer
products due to, among other things, introduction of new products, product life
cycles, competitive conditions or general economic conditions. The Company
generally does not obtain long-term purchase orders or commitments but instead
works with its customers to anticipate the future volume of orders. Based on
such anticipated future volumes, the Company makes other significant
commitments regarding the levels of business that it will seek and accept, the
timing of production schedules and the levels and utilization of personnel and
other resources. From time to time, the Company will purchase components that
require a long lead time without a customer commitment to pay for them.
Generally, customers may cancel, reduce or delay purchase orders
and commitments with limited or no penalty. Significant cancellations,
reductions, or delays in orders by a customer or group of customers could
adversely affect the Company's business, financial condition and results of
operations.

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Reliance on Original Equipment Manufactures

A significant component of the Company's strategy is to continue to
increase high volume product sales to OEMs. The Company's results of operations
thus will depend to a significant extent on the success achieved by its OEM
customers in developing and marketing their products. There can be no assurance
that such customers will continue to rely, or expand their reliance, on the
Company as an external source of supply for their DSP solutions, that other
OEMs will become customers of the Company or that any such customers will not
terminate supply contracts or cancel purchase orders or reschedule or decrease
their level of purchases. Any development that would result in a substantial
decrease or delay in sales to one or more significant customers, including
actions by competitors or technological changes, could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Sales and Marketing."

Dependence on Third-Party Suppliers

The Company purchases DSP microprocessors and certain other components
from IBM, AT&T, Analog Devices, Motorola and Texas Instruments, each of which
manufactures and is the sole supplier of the DSP microprocessors upon which
specific Spectrum products have been developed. The Company does not have
long-term agreements with IBM or any other supplier. While the Company has from
time to time experienced shortages of components supplied by third parties,
such shortages to date have not had a material adverse effect on operating
results. Inability to obtain adequate supplies of DSP chips or components could
delay the Company's ability to ship its products, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.

Because certain of the Company's products incorporate software
developed and maintained by third parties, the Company relies to a certain
extent upon such third parties' ability to enhance their current products, to
develop new products on a timely and cost-effective basis that will meet
changing customer needs, and to respond to emerging industry standards and
other technological changes. There can be no assurance that the Company would
be able to replace the functionality provided by the third-party software
currently offered in conjunction with the Company's products in the event that
such software becomes unavailable to the Company or obsolete or incompatible
with future versions of the Company's products. The absence of, or any
significant delay in, the replacement of that functionality could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, if any of such third-party software fails
or fails to be supported by their respective vendors, it could be necessary for
the Company to redesign certain of its products. The occurrence of any of these
events could have a material adverse effect on the Company's business,
financial condition and results of operations. Furthermore, should new releases
of such third-party software prove to be incompatible with the current version
of the Company's product lines, the resulting decline in demand for the

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<PAGE>

affected products could have a material adverse effect on the Company's
business, financial condition and results of operations.

Revenues from Development Contracts

The Company generates a significant percentage of its total revenues
from development contracts. These development contracts generally provide the
Company with partial funding for the development of products that meet customer
specifications. Under these contracts, the Company receives payments upon
reaching certain development milestones. The Company intends to continue to
enter into development contracts with strategic partners. The Company's failure
to achieve the milestones specified in its existing development contracts, the
termination of any of these contracts or the Company's inability to secure
future development contracts could have an adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Research and Product Development."

Rapid Changes in Technology

The market for the Company's products is characterized by rapidly
changing technologies, evolving industry standards and frequent new product
introductions and enhancements. Accordingly, the Company's future performance
will be dependent on a number of factors, including its ability to identify
emerging technological trends in its target markets, enhance its existing
products and introduce new products and features to meet and adapt to changing
customer requirements and emerging technologies, differentiate its products
from those of its competitors and manufacture and bring products to market
quickly at cost-effective prices. There can be no assurance that the Company's
competitors will not develop future generations of competitive products that
will offer superior price, features or performance which would render the
Company's products uncompetitive or obsolete. There can also be no assurance
that the Company will successfully develop, complete, introduce and market new
systems or system enhancements, or that systems or system enhancements
currently in development or that may be developed by the Company in the future
will meet industry requirements and achieve market acceptance. Any significant
delay or failure to develop, manufacture or ship new or enhanced products
could also have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Research and Product
Development." In addition, there can be no assurance that certain trends in DSP
technology, such as native signal processing and silicon integration, will not
displace certain of the Company's products, or that the Company will be able to
develop new products in response to such trends that achieve market acceptance.
See "Business--Products and Markets" and "Business--ASICs and Software."

From time to time, the Company and others may announce new products,
capabilities or technologies that have the potential to replace or shorten the
lifecycles of certain of the Company's products. There can be no assurance that
announcements

-14-

<PAGE>

of currently planned or other new products will not cause
customers to defer purchasing existing Company products. Delays or difficulties
associated with new product introductions or product enhancements could have a
material adverse effect on the Company's business, financial condition and
results of operations.

Variability of Quarterly and Annual Operating Results

The Company's revenues and operating results may vary significantly
from quarter to quarter as a result of a number of factors, many of which are
outside the Company's control. These factors include the general demand for
computers, computer sub-systems and high performance DSP solutions, the success
achieved by the Company's OEM customers in developing and marketing their
products, the volume and timing of orders received, the mix of products and
development fees, the timing of new product introductions by both the Company
and its competitors, pricing by both the Company and its competitors, the
Company's ability to develop and market new products, the Company's ability to
manufacture its products at high quality levels and at commercially reasonable
costs, the availability and cost of DSP microprocessors, the timing and levels
of sales and marketing expenditures and general economic conditions, and
changes in the customer's financial condition or budget. As a result of the
foregoing and other factors, the Company may experience material fluctuations
in its future operating results on a quarterly or annual basis that could have
a material adverse effect on the price of the Common Shares and the Company's
business, financial condition and results of operations.

Competition

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<PAGE>

amendment to the Loughborough License, the Company may experience competition
with respect to products subject to the Loughborough License from Loughborough
and/or any future Loughborough licensees or distributors. See
"Business--Competition" and "--Amendment of the Loughborough License."

Ability to Manage Growth and Ability to Integrate Recent Acquisitions

The Company is currently experiencing a period of growth and
expansion, due in part to its recent acquisition of 3L Limited and its
acquisition of substantially all the assets of Alex Computer (the "Alex
Computer Acquisition"). This growth has placed, and could continue to place, a
significant strain on the Company's services and support operations, sales and
administrative personnel and other resources. The Company's ability to
successfully expand its operations will depend in part upon its ability to
attract and retain highly qualified employees. The Company's ability to manage
its planned growth effectively also will require the Company to continue
improving its operational, management and financial systems and controls, to
train, motivate and manage its employees and to significantly increase its
operating expenses. There can be no assurance that the Company's revenues will
increase or that the Company will be able to effectively manage such growth and
maintain adequate systems and controls.

Availability of Licenses

The Company currently licenses a wide variety of intellectual
property, such as various software and development tools, from others for use
in its products and expects to incorporate such intellectual property owned by
others into the products it develops in the future. There can be no assurance
that the Company's present licenses grant, or that its future licenses will
grant, the Company adequate rights for a sufficient period of time or that the
Company will be able to renew expired licenses on commercially reasonable
terms. The inability to obtain, maintain or renew adequate licenses could have
an adverse effect on the Company. See "Business--Intellectual Property."

Reliance on Proprietary Technology; Lack of Patent Protection

The Company believes that its success is dependent to a large extent
upon its proprietary technology. The Company seeks to maintain the proprietary
nature of its technology through copyright protection and confidentiality
agreements with parties who have access to proprietary information. The Company
has not historically sought patent protection of its products in Canada, the
United States or abroad and it does not hold any patents on any of its current
products. Accordingly, the Company would not be able to avail itself of the
protection afforded by the patent laws in the event that a competitor infringed
upon the Company's proprietary rights. There can be no assurance that any steps
taken by the Company to protect its intellectual property will be adequate to
prevent misappropriation. Furthermore, there can be no assurance that others
will not independently develop technologies that are similar to or superior to
the

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<PAGE>

Company's technology and obtain patents or copyrights thereon. In such
event, the Company may not be able to license such technology on reasonable
terms, or at all. Although the Company does not believe that its products and
technologies infringe upon the proprietary rights of others, there can be no
assurance that third parties will not assert infringement claims in the future.
See "Business--Intellectual Property."

Contract Manufacturing

The Company currently uses non-affiliated contract manufacturers for
substantially all of its manufacturing processes. The Company intends to use
contract manufacturers to procure components, and to assemble and test the
majority of its printed circuit board assemblies. The Company's internal
manufacturing operations consist primarily of production of prototypes, test
engineering, materials purchasing and inspection, and quality control. Although
the Company has not experienced any material difficulties in obtaining
manufactured products to date, any reduction or interruption in product
manufacturing by such third-party contractors would adversely affect the
Company's ability to continue to deliver its products and its business,
financial condition and results of operations. See "Business--Logistics,
Manufacturing and Quality Control."

Potential Undetected Errors

Hardware and software products as complex and new as some of those
offered by the Company may contain undetected errors or failures when first
introduced or as new versions are released. Although the Company extensively
tests its products prior to their introduction, design errors may be discovered
after initial product sampling, resulting in delays in volume production or
recalls of products sold. Although the Company has not experienced any
significant errors to date, the occurrence of such errors could have a material
adverse effect on the Company's business, financial condition and results of
operations.

International Operations and Foreign Currency Exchange Rate Fluctuations

Sales outside Canada account for substantially all of the Company's
revenue. The Company expects that international sales, and sales
to the United States in particular, will continue to represent a substantial
amount of its revenue.

Certain risks are inherent in international operations, such as
difficulties in management, unexpected changes in regulatory requirements,
tariffs and other trade barriers, unique local technical requirements, risk of
political instability, longer accounts receivable collection cycles,
potentially adverse tax consequences and the burdens of complying with a wide
variety of foreign legislation. There can be no

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<PAGE>

assurance that such factors will not have an adverse effect on the Company's
business, financial condition and results of operations.

Substantially all of the Company's revenue has been recognized in
currencies other than the Canadian dollar, principally the US dollar. Thus,
fluctuations in the exchange rates between these currencies and the Canadian
dollar could have a material effect on the Company's business, financial
condition and results of operations. In addition, if the Canadian dollar rises
relative to the US dollar, the Company's reported Canadian dollar sales and net
income may be materially and adversely affected. The Company attempts to
mitigate some of the risks of exchange rate fluctuations between the US dollar
and the Canadian dollar by denominating many of its payment obligations in US
dollars and, to a lesser extent, through the use of over-the-counter or
exchange-traded contracts. There can be no assurance that these strategies will
substantially reduce the potential adverse effect of exchange rate fluctuations
on the Company's business, financial condition and results of operations.

Dependence on Key Personnel

The success of the Company is dependent in large part on certain key
management and technical personnel, the loss of one or more of whom could
adversely affect the Company's business. The Company believes that its future
success depends significantly upon its ability to attract, retain and motivate
highly skilled technical, sales and management employees and consultants. Due
to the high level of competition in the computer industry generally, and in the
DSP segment of the computer industry in particular, there can be no assurance
that the Company will be successful in these efforts, and, if unsuccessful, the
Company's business and operating results will be materially and adversely
affected. The Company does not maintain key man insurance on any of its key
management and technical personnel and has no present intention of obtaining
any such insurance.

Change of Control; Investment Canada Act; Majority of Directors to be
Canadian

An investment in the Common Shares which results in a change of
control of the Company may be subject to review and approval under the
Investment Canada Act, as amended (the "Investment Act"), if the person
acquiring control is not a Canadian person. This Canadian regulatory environment
may have the effect of delaying or preventing a change of control of the
Company. In addition, pursuant to the BC Act, a majority of the Board
of Directors must be resident Canadians and at least one member of the Board of
Directors must ordinarily be resident in the Province of British Columbia.

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<PAGE>

GLOSSARY

<S> <C>
Algorithm............ A defined procedure for solving a problem or performing an
operation. Algorithms are implemented on a computer through
a stored sequence of instructions.
Analog signal...... A continuously-varying electrical representation of
natural phenomena such as temperature, pressure,
sound and light.
ASIC................... Application-specific integrated circuit. A broad term that refers
to integrated circuits that are custom, semi-custom or user-
programmable.
Chipset................ One or more DSP microprocessors which are bundled with other
chips such as ASIC, memory and audio chips.
Digital signal....... The representation of information as discrete values (e.g., a
stream of digits in the form 1s and 0s). Modern electronic
equipment uses digital rather than analog techniques so that
computer technology may be employed.
DSP micro-
processor........... A specialized microprocessor optimized for the unique processing
and data flow requirements of DSP algorithms and software.
DSP microprocessors differ from most microprocessors in two
respects: (i) the primary function of the microprocessor is to
mathematically process continuous external signals rather than
manipulate stored data; and (ii) the data is processed in real time
rather than in the 'batch' approach often used in general data
processing.
Modem................ A modulator/demodulator circuit pair that provides a means of
sending digital information over analog links such as the public
telephone network.
PC........................ An IBM compatible Personal Computer generally designed with
an Intel or Intel compatible X86 microprocessor.
Real time............. Processing that can be done with minimal or no perceptible delay
between the user's action and the computer's response.

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<PAGE>

Item 2. DESCRIPTION OF PROPERTIES.

The Company's head office is located in a facility it leases in
Burnaby, British Columbia, Canada and consists of approximately 32,000 square
feet. The lease on this facility expires in 2002. The lease provides for annual
rental payments of $450,000. The head office facility houses sales, marketing,
engineering, logistics, and administration, with development and test
facilities. The Company intends to sign a lease with its current landlord for
significantly expanded space in a new facility near its present location.

As a result of its acquisition of 3L Limited, the Company now operates
from a 2,000 square feet facility located in Edinburgh Scotland. As a result of
its acquisition of Alex Computer, the Company now operates from a 5,000 square
foot facility located in Ithaca, New York.

The Company also leases sales office space in Massachusetts,
California, Maryland, Texas and the United Kingdom.

Item 3. LEGAL PROCEEDINGS.

The Company knows of no material litigation or proceeding pending,
threatened or contemplated to which the Company is or may become a party.

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<PAGE>

Item 4. CONTROL OF THE COMPANY.

The following table sets forth certain information regarding the
beneficial ownership of the Common Shares as of May 5, 1998 by (i) each person
known to the Company to be the beneficial owner of more than five percent of
the outstanding Common Shares, (ii) each of the Company's directors and
executive officers, and (iii) all directors and executive officers of the
Company as a group. Unless otherwise indicated below, the persons named below
have sole voting and investment power with respect to the number of shares set
forth opposite their names, subject to community property laws where
applicable.

</TABLE>
<TABLE>
<CAPTION>

Number of Shares Percentage of
Beneficially Owned(2) Ownership(2)
Name and Address(1) -------------------------- ----------------------
- - -------------------
<S> <C> <C>
George Henry(3)........................................... 811,454 8.1%
c/o G. Howard Associates Inc.
1725 York Avenue
New York, New York 10128
Kenneth A. Spencer........................................ 10,000 *
Barry W. Jinks(4)......................................... 357,199 3.6%
Martin McConnell(5)....................................... 79,500 *
Brian Lowe(6)............................................. 59,600 *
Douglas Johnson(7)........................................ 47,000 *
David Hobbs(8)............................................ 55,000 *
Ronald Wages(9)........................................... 16,666
Joseph Abrams(9).......................................... 46,000 *
Dr. Karl H. Brackhaus(10)................................. 31,000 *
John E. Brennan(11)....................................... 69,000 *
Charles C. Johnston(12)................................... 329,100 3.3%
Samuel Znaimer(12)........................................ 34,000 *
Alex Computer(13)........................................ 821,192 8.1%
c/o Alex Informatics Inc.
1930 Gagnon Street
Lachine, PQ H8T 3M6
Canada
All directors and executive officers
as a group (12 persons)(14).............................. 1,134,065 11.3%
</TABLE>

- - ---------------------------------------
* Less than one percent.

(1) Except as otherwise noted, the address of the named shareholder is c/o
Spectrum Signal Processing Inc., 8525 Baxter Place, Burnaby, British
Columbia, Canada V5A 4V7.

(2) Percentages of outstanding Common Shares are based upon 10,009,621
Common Shares outstanding as of May 5, 1998, net of 233,300 Common
Shares held in treasury. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange
Commission which attribute beneficial ownership of securities to
persons who possess sole or shared voting power and/or investment
power with respect to those securities. Options included in the table
are exercisable within 60 days of May 5, 1998.

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<PAGE>

(3) Includes 5,000 Common Shares issuable upon the exercise of options.

(4) Includes 330,771 Common Shares issuable upon the exercise of options.

(5) Includes 76,500 Common Shares issuable upon the exercise of options.

(6) Includes 59,000 Common Shares issuable upon the exercise of options.

(7) Includes 46,000 Common Shares issuable upon the exercise of options.

(8) Includes 50,500 Common Shares issuable upon the exercise of options.

(9) Amount reflects Common Shares issuable upon the exercise of options.

(10) Includes 15,000 Common Shares issuable upon the exercise of options.

(11) Includes 5,000 Common Shares issuable upon the exercise of options.

(12) Includes 30,000 Common Shares issuable upon the exercise of options.

(13) Includes 102,649 Common Shares issuable upon exercise of a warrant.

(14) Includes 680,437 Common Shares issuable upon the exercise of options.

Item 5. NATURE OF TRADING MARKET.

The Common Shares have been traded under the symbol "SSPIF" on the
Nasdaq National Market since June 1993, and under the symbol "SSY" on The
Toronto Stock Exchange since September 1993. The following table sets forth the
high and low closing prices of the Common Shares on the Nasdaq National Market
and The Toronto Stock Exchange for the periods indicated:
<TABLE>
<CAPTION>

High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
Calendar Year 1996
First Quarter.......................... US$13.750 US$8.750 Cdn$18.500 Cdn$12.250
Second Quarter......................... 12.375 7.625 16.500 10.125
Third Quarter.......................... 9.875 5.500 12.800 7.700
Fourth Quarter......................... 9.125 5.875 11.900 8.000
Calendar Year 1997
First Quarter.......................... US$7.75 US$4.750 Cdn$10.500 Cdn$6.750
Second Quarter......................... 6.125 4.375 8.500 6.400
Third Quarter.......................... 9.00 4.750 11.800 6.600
Fourth Quarter......................... 8.25 4.750 11.250 6.750
</TABLE>

At May 5, 1998, the Company had approximately 163 shareholders of
record and 10,242,921 Common Shares outstanding, including 233,300 Common
Shares held in treasury. Of these amounts, there were 134 U.S. shareholders of
record holding a total of 9,391,450 Common Shares, or 92% of the Common Shares
outstanding.

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<PAGE>

Item 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS
AFFECTING SECURITYHOLDERS.

In accordance with the laws of the Province of British Columbia,
Canada, under the Company Act (British Columbia) (the "BC Act"), the amendment
of certain rights of holders of a class of shares, including Common Shares,
requires the approval of not less than three-quarters of the votes cast by the
holders of such shares voting at a special meeting of such holders. Pursuant to
the Company's Articles, a quorum for a special meeting of the holders of the
Common Shares is two persons, present in person or by proxy, representing not
less than 5% of the shares entitled to vote at the meeting. Therefore, it is
possible for the rights of the holders of Common Shares of the Company to be
modified otherwise than by the affirmative vote of the holders of a majority of
the then issued and outstanding Common Shares. In certain circumstances where
the rights of the Common Shares may be amended, however, holders of Common
Shares, as applicable, have the right under the BC Act to dissent from such
amendment and require that the Company pay them the then fair value of their
Common Shares.

There is no law or government decree or regulation in Canada that
restricts the export or import of capital, or that affects the remittance of
dividends, interest or other payments to a non-resident holder of Common
Shares, other than withholding tax requirements. See "Taxation."

There is no limitation imposed by Canadian law or by the Articles of
the Company (the "Articles") or other charter documents of the Company on the
right of a non-resident to hold or vote Common shares of the Company, other
than as provided in the Investment Canada Act (the "Investment Act").

The Investment Act generally prohibits implementation of a reviewable
investment by an individual, government or agency thereof, corporation,
partnership, trust or joint venture that is not a "Canadian" as defined in the
Investment Act (a "non-Canadian"), unless, after review, the minister
responsible for the Investment Act is satisfied that the investment is likely
to be a net benefit to Canada.

An investment in Common Shares of the Company by a "WTO investor" (an
individual or other entity that is a national of, or has the right of permanent
residence in, a member of the World Trade Organization, current members of
which include the European Community, Germany, Japan, Mexico, the United
Kingdom and the United States, or a WTO investor-controlled entity, as defined
in the Investment Act) would be reviewable under the Investment Act if it were
an investment to acquire direct control of the Company and the value of the
assets of the Company equalled or exceeded $160 million in 1995 dollars, as
indicated on the Company's most recent financial statements. In subsequent
years, such threshold amount may be increased or decreased in accordance with
the provisions of the Investment Act.

An investment in Common Shares of the Company by a non-Canadian (other
than a WTO investor) would be reviewable under the Investment Act if it were an

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<PAGE>

investment to acquire control of the Company and the value of the assets were
$5.0 million or more, as indicated on the Company's most recent financial
statements.

A non-Canadian, whether a WTO investor or otherwise, would acquire
control of the Company for the purposes of the Investment Act if he, she or it
acquired a majority of the Common Shares. The acquisition of less than a
majority, but one-third or more of the Common Shares, would be presumed to be
an acquisition of control of the Company unless it could be established that
the Company was not controlled in fact by the acquiror through the ownership of
Common Shares.

Certain transactions in relation to Common Shares would be exempt
from the Investment Act, including:

(a) an acquisition of Common Shares if the acquisition were
made in connection with the person's business as a trader or dealer in
securities;

(b) an acquisition of control of the Company in connection
with the realization of a security interest granted for a loan or
other financial assistance and not for any purpose related to the
provisions of the Investment Act; and

(c) an acquisition of control of the Company by reason of an
amalgamation, merger, consolidation or corporate reorganization
following which the ultimate direct or indirect control in fact of the
Company, through the ownership of voting interests, remains unchanged.

In addition, the Investment Act sets out other restrictions, including
notification requirements, which could impact on the acquisition of control of
the Company by a non-Canadian.

Item 7. TAXATION.

Certain U.S. Federal Income Tax Considerations

The following summary describes certain of the material U.S. federal
income tax consequences to U.S. Holders (as defined below) arising from the
purchase, ownership and disposition of Common Shares. This summary is based on
the provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
final, temporary and proposed U.S. Treasury Regulations promulgated thereunder,
and administrative and judicial interpretations thereof, all as in effect as of
the date hereof, and all of which are subject to change, possibly with
retroactive effect.

This summary does not deal with all aspects of U.S. federal income
taxation that may be relevant to particular U.S. Holders in light of their
particular circumstances, or to U.S. Holders subject to special rules,
including, without limitation, certain retirement plans, insurance companies,
U.S. Holders of securities held as part of a "straddle," "synthetic security,"
"hedge," "conversion transaction" or other integrated investment, persons that
enter into "constructive sales" involving Common Shares or substantially
identical property with other investments, U.S. Holders whose functional
currency is not the United States dollar, certain expatriates or former
long-term residents of the United States, financial institutions,
broker-dealers, tax-exempt organizations and U.S. Holders who own (directly,
indirectly or through attribution) 10% or more of the Company's outstanding
voting stock. The following discussion does not address the effect of any
applicable state, local or foreign tax laws. This summary does not consider the
tax treatment of persons who own Common Shares through a partnership or other
pass-through entity, and deals only with Common Shares held as "capital assets"
as defined in Section 1221 of the Code.

This discussion is addressed only to "U.S. Holders." A U.S. Holder is a
holder of Common Shares that is a U.S. citizen, an individual resident in the
United States for U.S. federal income tax purposes, a domestic corporation, an
estate the income of which is includible in its gross income for U.S. federal
income tax purposes without regard to its source, or a trust if either: (i) a
U.S. court is able to exercise primary supervision over the administration of
the trust and one or more U.S. persons have the authority to control all the
substantial decisions of the trust or (ii) the trust was in existence on August
20, 1996 and, in general, would have been treated as a U.S. Holder under rules
applicable prior to such time, provided the trust elects to continue such
treatment thereafter.

U.S. HOLDERS OF COMMON SHARES ARE ADVISED TO CONSULT WITH THEIR OWN TAX
ADVISORS WITH RESPECT TO THE U.S. FEDERAL, STATE AND LOCAL TAX CONSEQUENCES, AS
WELL AS THE TAX CONSEQUENCES IN OTHER JURISDICTIONS, OF THE PURCHASE, OWNERSHIP
AND SALE OF COMMON SHARES APPLICABLE IN THEIR PARTICULAR TAX SITUATIONS.

<PAGE>

Sale or Exchange of Common Shares

A U.S. Holder's sale or exchange of Common Shares generally will result
in the recognition of capital gain or loss by such U.S. Holder in an amount
equal to the difference between the amount realized and the U.S. Holder's tax
basis in the Common Shares sold. If a U.S. Holder's holding period on the date
of the sale or exchange is more than one year, such gain or loss will be
long-term capital gain or loss. The Taxpayer Relief Act of 1997 (the "1997 Act")
includes substantial changes to the federal income taxation of capital gains by
non-corporate U.S. Holders. Under the 1997 Act, long-term capital gains realized
on the sale of Common Shares by non-corporate U.S. Holders will be subject to a
maximum 28% federal income tax rate if the Common Shares sold have been held for
more than one year but not more than 18 months at the time of the sale or
exchange, or a maximum 20% federal income tax rate if the Common Shares sold
have been held for more than 18 months at such time. U.S. Holders who are
corporations would be subject to a maximum federal income tax rate of 35%
regardless of their holding period. If the U.S. Holder's holding period on the
date of the sale or exchange was one year or less, such gain or loss will be
short-term capital gain (generally subject to the same effective federal income
tax rates as ordinary income) or loss. See "Certain Canadian Federal Income Tax
Considerations-Taxation of Capital Gains on Sale of Common Shares" for a
discussion of taxation by Canada of capital gains realized on the sale or
exchange of Common Shares. In general, any capital gain recognized by a U.S.
Holder upon the sale or exchange of Common Shares will be treated as U.S. source
income for U.S. foreign tax credit purposes. Under current law, the source of
any loss on the sale, exchange or other disposition of Common Shares is
uncertain. Under proposed regulations, which may be applied retroactively, any
such loss may be allocated against foreign source income. Capital losses
realized upon the sale, exchange or other disposition of Common Shares generally
are deductible only against capital gains and not against ordinary income,
except that in the case of noncorporate taxpayers, a capital loss is deductible
only to the extent of capital gains plus ordinary income of up to $3,000.

A U.S. Holder's tax basis in his, her or its Common Shares generally
will be the purchase price paid therefor by such U.S. Holder. The holding period
of each Common Share owned by a U.S. Holder will commence on the day following
the date of the U.S. Holder's purchase of such Common Share and will include the
day on which the Common Share is sold by such U.S. Holder.

Treatment of Dividend Distributions

For U.S. federal income tax purposes, the gross amount of any
distribution made with respect to, or in some cases a partial purchase or
redemption of, Common Shares (including the amount of any Canadian taxes
withheld therefrom) will be included in a U.S. Holder's income as ordinary
dividend income to the extent that the dividends are paid out of current or
accumulated earnings and profits of the Company, as determined based on U.S. tax
principles. Such dividends will not be eligible for the dividends received
deduction allowed to U.S. corporations under Section 243 of the Code.

<PAGE>

Dividend distributions in excess of the Company's current and accumulated
earnings and profits will be treated first as a non-taxable return of the U.S.
Holder's tax basis in his, her or its Common Shares to the extent thereof and
then as a gain from the sale of Common Shares. Dividends paid in Canadian
dollars will be includible in income in a U.S. dollar amount based on the
exchange rate at the time of their receipt. Any gain or loss resulting from
currency fluctuations during the period from the date a dividend is paid to the
date such payment is converted into U.S. dollars generally will be treated as
ordinary income or loss.

Dividends paid to a U.S. Holder with respect to Common Shares will be
treated as foreign source dividend income for U.S. foreign tax credit limitation
purposes. Subject to certain conditions and limitations, any Canadian
withholding tax imposed on such dividends generally will be eligible for credit
against such U.S. Holder's U.S. federal income tax liability or, at the U.S.
Holder's election, may be claimed as a deduction against income in determining
such tax liability. The limitations on claiming a foreign tax credit include
computation rules under which foreign tax credits allowable with respect to
specific classes of income cannot exceed the U.S. federal income taxes otherwise
payable with respect to each such class of income. Dividends with respect to the
Common Shares generally will be classified as "passive income" for purposes of
computing the foreign tax credit limitation. Foreign income taxes exceeding the
credit limitation for the year of payment or accrual may be carried back for two
taxable years and forward for five taxable years in order to reduce U.S. federal
income taxes, subject to the credit limitation applicable in each of such years.
Other restrictions on the foreign tax credit include a prohibition on the use of
the credit to reduce liability for the U.S. individual and corporation
alternative minimum taxes by more than 90%. In addition, a U.S. Holder generally
will not be entitled to claim a credit for Canadian tax withheld unless the U.S.
Holder has held the Common Shares for at least 16 days within the 30 day period
beginning 15 days before the applicable ex-dividend date. The calculation of
allowable foreign tax credits and, in the case of a U.S. Holder that elects to
deduct foreign taxes, the availability of deductions for foreign taxes paid
involve the application of rules that depend on a U.S. Holder's particular
circumstances. Accordingly, U.S. Holders should consult their own tax advisors
regarding their eligibility for foreign tax credits or deductions.

Information Reporting and Backup Withholding

Any dividends paid on the Common Shares to U.S. Holders may be subject to
U.S. information reporting requirements and the 31% U.S. backup withholding tax.
In addition, the proceeds of a U.S. Holder's sale of Common Shares may be
subject to information reporting and the 31% U.S. backup withholding tax. Backup
withholding will not apply if the holder (i) is a corporation or other exempt
recipient or (ii) the holder provides a U.S. taxpayer identification number,
certifies as to no loss of exemption from backup withholding and otherwise
complies with any applicable backup withholding requirements. Any amounts
withheld under the U.S. backup withholding tax rules will be allowed as a refund
or a credit against the U.S. Holder's U.S. federal

<PAGE>

income tax, provided the required information is furnished to the U.S.
Internal Revenue Service.

-27-

<PAGE>

Certain Canadian Federal Income Tax Considerations

The following discussion summarizes the material Canadian Federal
income tax considerations relevant to an investment in the Common Shares by a
holder who, for income tax purposes, is resident in the United States and not
in Canada, holds the Common Shares as capital property, deals at arm's length
with the Company, does not use or hold the Common Shares in carrying on a
business through a permanent establishment or in connection with a fixed base
in Canada and, in the case of an individual investor, is also a United States
citizen. The tax consequences of an investment in the Common Shares by an
investor who is not as described above may be expected to differ from the tax
consequences discussed herein.

-28-

<PAGE>

This discussion is based upon the provisions of the Income Tax Act
(Canada) (the "Tax Act"), regulations under the Tax Act, specific proposals to
amend the Tax Act publicly announced prior to the date hereof, the
Canada-United States Income Tax Convention (1980), as amended (the
"Convention"), and administrative practices published by Revenue Canada, all of
which are subject to change. Any such change, which may or may not be
retroactive, could alter the tax consequences to a holder as otherwise
described herein. The discussion does not take in account the tax laws of the
various provinces or territories of Canada.

Taxation of Distributions from the Company

Dividends paid or credited on the Common Shares to U.S. residents will
be subject to a Canadian withholding tax. Under the Convention, the rate of
withholding tax generally applicable is 15% of the gross amount of the
dividends, including stock dividends and payments deemed to be dividends upon
the repurchase of Common Shares by the Company, as described below. The rate of
withholding tax is reduced if the beneficial owner of the dividend is a company
which owns at least 10% of the voting stock of the Company at the time the
dividend is paid. In this case, the rate is 5% of the gross amount of the
dividends.

If Common Shares are purchased by the Company, a holder will be deemed
to have received a dividend to the extent that the amount paid on the
repurchase exceeds the paid-up capital, as defined in the Tax Act, of the
Common Shares acquired. The portion, if any, of the acquisition proceeds that
are deemed to be a dividend will be subject to Canadian withholding tax on
dividends, as described above. Further, the holder will be deemed to have
disposed of the Common Shares for the amount paid by the Company for the Common
Shares less the amount deemed to have been received as a dividend. If this
results in a capital gain to a holder, the tax consequences will be as
described below.

Taxation of Capital Gains on Sale of Common Shares

Under the Tax Act, a holder will not be subject to Canadian tax on any
capital gain realized on an actual or deemed disposition of a common share,
including a deemed disposition at death, provided that he did not hold the
Common Share as capital property used in carrying on a business in Canada, or
that neither he nor persons with whom he did not deal at arm's length alone or
together owned 25% or more of the issued shares of any class of the Company at
any time in the five years immediately preceding the disposition.

A holder who otherwise would be liable for Canadian tax in respect of
a capital gain realized on an actual or deemed disposition of a Common Share
will be relieved under the Convention from such liability unless:

-29-

<PAGE>

A. the Common Share formed part of the business property of a permanent
establishment in Canada that the Holder had within the twelve-month
period preceding the disposition; or

B. the holder

1. was resident in Canada for 120 months during any 20-year
period preceding the disposition, and

2. was resident in Canada at any time during the 10 years
immediately preceding the disposition, and

3. owned the Common Share when he ceased to be a
resident of Canada.

-30-

<PAGE>

Item 8. SELECTED FINANCIAL DATA.

The selected financial data for the Company presented below under the
captions "Statements of Operations Data" for the years 1996 and 1997 and
"Balance Sheet Data" as of December 31, 1996 and 1997, is derived from the
Company's financial statements which have been audited by KPMG, independent
auditors. The Company's financial statements as of December 31, 1996 and 1997
and for each of the years in the two year period ended December 31, 1997 and
the auditors' report thereon are included elsewhere in this Annual Report. The
"Statements of Operations Data" for fiscal years 1993, 1994 and 1995 and the
"Balance Sheet Data" as of December 31, 1993, 1994 and 1995 are derived from
audited financial statements that are not included herein. This selected
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and notes thereto included elsewhere in this Annual Report.

-31-

<PAGE>

US$ Equivalent(1)
-------------------
Year Ended
Year Ended December 31, December 31,
-------------------
-----------------------------------------------------------
1993 1994 1995 1996 1997 1997
---- ---- ---- ---- ----
(In thousands, except per share data)

<S> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:

(Canadian GAAP)

Sales....................... $12,743 $16,389 $17,712 $27,358 $36,452 US$25,484
Cost of sales............... 6,470 7,115 7,807 11,373 15,548 10,870
-------- -------- -------- -------- -------- --------
Gross profit................ 6,273 9,274 9,905 15,985 20,904 14,614
Administrative, sales and
marketing expenses.......... 4,950 8,033 7,228 9,449 11,006 7,694
Depreciation and amortiza-
tion expenses............... 229 355 579 678 944 660
Research and development
expenses(2)................. 570 462 1,839 2,905 3,528 2,466
------ ---- ------- ----- ----- -----
Earnings (loss) from
operations.................. 524 374 259 2,953 5,426 3,794
Interest and bank charge.... (21) (41) (42) (31) 4 3
Other income................ 366 268 664 39 15 10
------ ------ ------ ------ ------ ------
Earnings (loss) before income
taxes and discontinued
operations.................. 869 601 881 2,961 5,445 3,807
Income taxes (recovery)..... 386 164 501 987 2,138 1,495
------ ----- ------- ------ ----- -----
Earnings from continuing 483 437 380
operations.............. 1,974 3,307 2,312
Earnings from discontinued -- (2,602) (1,410)
operations.............. 176 (737) (515)
------ ----- -----
Net earnings (loss)......... $ 483 $ (2,165) $(1,030) $2,150 $2,570 US$1,797
===== ======= ======= ===== ===== =====
Basic Earnings (loss) per
share from continuing
operations.............. $ 0.06 $0.05 $0.04 $ 0.21 0.36 US$ 0.25
Basic Earnings (loss) per
share from discontinued
operations.............. -- (0.30) (0.15) 0.02 (0.08) (0.05)
----- -------- -------- ------ ------- -------
Basic Earnings (loss) per
share....................... $ 0.06 $ (0.25) $ (0.11) $ 0.23 $ 0.28 US$ 0.20
====== ======== ======== ====== ====== =====
Weighted average number of
common shares outstanding
(basic)..................... 8,024 8,759 9,001 9,195 9,235 9,235
Fully diluted earnings (loss)
per share from continuing
operations................ $ 0.06 $ 0.05 $ 0.04 $ 0.21 $ 0.34 US$ 0.24
Fully diluted earnings (loss)
per share from discontinued
operations................ - (0.30) (0.15) 0.02 (0.07) (0.05)
------ -------- --------- ------ ------- ------
Fully diluted earnings (loss)
per share................... $ 0.06 $ (0.25) $ (0.11) $ 0.23 $ 0.27 US$ 0.19
====== ======== ========= ====== ====== =====
Weighted average number of
common shares outstanding
(fully diluted)............. 8,338 9,080 9,343 9,528 10,146 10,146
<CAPTION>

At December 31,
----------------------------------------------------------- US$ Equivalent(1)
At December 31,
1993 1994 1995 1996 1997 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:

(Canadian GAAP)

Working capital............. $12,048 $6,964 $7,668 $9,705 US$10,748 $ 7,514
Total assets................ 15,486 14,804 15,525 20,678 24,733 17,291
Long-term debt, net of
current maturities.......... 196 52 13 -- 107 75
Shareholders' equity........ 13,090 11,136 11,048 13,694 16,155 11,294
</TABLE>

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

(1) Solely for the convenience of the reader, Canadian dollar amounts have been
translated into US dollars using the relevant period-end rate. These
translations are not necessarily representative of the amounts that would
have been reported if the Company historically had reported its financial
statements in US dollars. In addition, the rates used are not necessarily
indicative of the rates in effect at any other time.

(2) Amounts shown for the year 1993 are net of tax credits and governmental
grants in the amount of $142,000.

-32-

<PAGE>

Exchange Rate Information

The following table sets forth, for the periods indicated, the high
and low exchange rates for Canadian dollars expressed in US dollars, the
average of such exchange rates on the last day of each month during such period
and the exchange rate at the end of such period, based on the inverse of the
noon buying rate in New York City for cable transfers in foreign currencies as
certified for customs purposes by the Federal Reserve Bank of New York (the
"Noon Buying Rate").
<TABLE>
<CAPTION>

Years ended December 31,
-------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
---------------- ---------------- -------------- ---------------- ----------
<S> <C> <C> <C> <C> <C>
Exchange rate at end of
period........................... US$0.7544 US$0.7128 US$0.7323 US$0.7246 US$0.6991
Average exchange rate
during period.................... 0.7729 0.7300 0.7305 0.7334 0.7223
High exchange rate during
period........................... 0.8046 0.7632 0.7527 0.7472 0.7415
Low exchange rate during
period........................... 0.7439 0.7103 0.7023 0.7274 0.7009

</TABLE>

Item 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis should be read in conjunction
with the Company's financial statements and the notes thereto included
elsewhere in this Annual Report.

General

The Company was founded in 1987 to manufacture and market products for
the military/aerospace and commercial market in North America using DSP
technologies licensed from Loughborough.

The Company devotes significant resources toward product development
and related research and development activities. In recent years, the Company
has sought to enter into agreements with its OEM customers and others under
which the Company receives fees in connection with the development of products
in anticipation of production ("development contract fees"), and uses these
fees to fund such product development. The Company first derived revenues from
development contract fees in 1994. Development contract fees are recognized as
revenue upon the achievement of predetermined development milestones, which
also typically coincide with invoicing and payments. See Note 1 of the Notes to
the Company's financial statements. Costs associated with development contract
fees are generally included in research and development expenses. The timing
and amount of development contract fees and the relative mix between products
sold to the military/aerospace and commercial markets has affected and will
continue to affect period-to-period comparisons of gross profit and income from
operations

-33-

<PAGE>

The Company publishes its financial statements in Canadian dollars. All
financial information, except where indicated otherwise, has been prepared in
accordance with Canadian GAAP, which conforms in all material respects to U.S.
GAAP, except as otherwise presented in the Company's financial statements.
Beginning with the first quarter of 1998, the Company adopted a policy of
publishing its financial statements in US$ and preparing all such statements in
accordance with U.S. GAAP.

Results of Operations

Years Ended December 31,
-----------------------------------------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Sales.................................................. 100.0% 100.0% 100.0%
Cost of sales.......................................... 44.1 41.6 42.7
----- ----- -----

Gross margin........................................... 55.9 58.4 57.3
Administrative, sales and marketing 40.8 34.5 30.2
expenses............................................... 3.3 2.5 2.6
Depreciation and amortization expenses................. 10.4 10.6 9.7
----- ----- -----
Research and development expenses......................

Earnings (loss) from operations........................ 1.4 10.8 14.9
Interest and bank charges.............................. 10.2 (0.1) 0.0
Other income........................................... 3.7 0.1 0.0
----- ----- -----

Earnings (loss) before income taxes and
discontinued operations................................ 4.9 10.8 14.9
Income taxes (recovery)................................ 2.8 3.6 5.8
----- ----- -----

Earnings from continuing operations.................... 2.1 7.2 9.1
Earnings from discontinued operations.................. 7.9 0.6 (2.0)
----- ----- -----

Net earnings (loss).................................... (5.8)% 7.8% 7.1%
====== ====== ======

</TABLE>

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

Sales. Sales from continuing operations in 1997 were $36,452,000, an
increase of $9,094,000, or 33.2%, over sales in 1996. Included in 1997 sales
were development contract fees of $2,210,000, or 6.1% of 1997 sales, compared
to development contract fees in 1996 of $2,642,000, or 9.7% of 1996 sales.
Development contract fees included fees generated in 1997 and 1996 from the
development of ASICs for applications in the Company's ASICs and software
business. The growth in the Company's 1997 sales was due primarily to increased
sales in its traditional markets.

Gross Profit. Gross profit increased to $20,904,000 for 1997 from
$15,985,000 for 1996, an increase of 30.8%. Gross margin (gross profit as a
percentage of sales) decreased to 57.3% in 1997 from 58.4% in 1996. The
decrease in gross margin was due primarily to the reduction in development
contract fees in 1997 over 1996 and increased royalties on certain licensed
products.

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<PAGE>

Administrative, Sales and Marketing. Administrative, sales and
marketing ("AS&M") expenses consist primarily of salaries, sales commissions
and benefits related to the Company's sales, marketing and administrative
personnel and independent sales representatives. AS&M expenses for 1997 were
$11,006,000, or 30.2% of 1997 sales, compared to $9,449,000 in 1996, or 34.5%
of 1996 sales. AS&M expenses as a percentage of sales were lower in 1997
compared to 1996 due to the increase in sales without a commensurate increase
in the level of AS&M expenses.

Amortization. Amortization consists of the depreciation of the
Company's fixed assets and amortization of acquired technology. Amortization
expenses in 1997 were $944,000, an increase of $266,000, or 39.2%, over 1996.
The increase in depreciation and amortization was due primarily to increased
investment in fixed assets and acquired technology.

Research and Development. Research and development expenses consist
primarily of salaries, related personnel benefits, engineering service costs
relating to development contract fees and direct overhead costs. Research and
development expenses were $3,528,000 in 1997, or 9.7% of 1997 sales, compared
to $2,905,000 in 1996, or 10.6% of 1996 sales. The expenses in 1997 consisted
primarily of costs associated with development contract fees relating to ASICs
and software and military/aerospace projects. Total research and development
expenditures for continuing operations and those capitalized as software and
related development costs were $5,459,000 in 1997, or 15.0% of 1997 sales,
compared to $3,765,000 in 1996, or 13.8% of 1996 sales.

Other Income. Other income, consisting primarily of interest income
on short-term deposits was $15,000 in 1997 compared to other income in 1996 of
$39,000.

Income Taxes. Deferred income taxes for 1997 were $2,138,000, or 39.3%
of earnings before taxes and discontinued operations, compared to $987,000, or
33.3% of earnings before taxes and discontinued operations for 1996.

Net Earnings. The Company had earnings from continuing operations in
1997 of $3,307,000 compared to earnings of $1,974,000 in 1996. Earnings per
share (basic) from continuing operations in 1997 was $0.36 per share, compared
to earnings per share (basic) from continuing operations of $0.21 per share in
1996.

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

Sales. Sales from continuing operations in 1996 were $27,358,000, an
increase of $646,000, or 54.5%, over sales in 1995. Included in 1996 sales were
development contract fees of $2,318,000, or 8.5%, of sales, compared to
development contract fees in 1995 of nil. Development contract fees included
fees

-35-

<PAGE>

generated in 1996 by the development of ASICs for a multimedia application in
the Company's new ASICs and software market segment. The growth in the
Company's 1996 sales was due primarily to increased sales in its traditional
market.

Gross Profit. Gross profit increased to $15,985,000 for 1996 from
$9,905,000 for 1995, an increase of 61.3%. Gross margin increased to 58.4% in
1996 from 55.9% in 1995. The increase in gross margin was due primarily to the
increase in development contract fees in 1996 over 1995.

Administrative, Sales and Marketing. AS&M expenses in 1996 were
$9,449,000, or 34.5% of sales, compared to $7,228,000, or 40.8%, of sales in
1995. AS&M expenses as a percentage of sales were significantly lower in 1996
compared to 1995 due to the increase in sales of products and development
contract fees.

Amortization. Amortization expenses in 1996 were $678,000,
an increase of $99,000, or 17.1% over 1995. The increase in amortization was
due primarily to increased investment in fixed assets.

Research and Development. Research and development expenditures were
$2,905,000 in 1996, or 10.6% of sales, compared to $1,839,000, or 10.4%, of
sales in 1995. The expenditures in 1996 consisted primarily of costs associated
with development contract fees relating to ASICs and software and
military/aerospace projects.

Other Income. Other income for 1996 was $39,000 compared to other
income in 1995 of $664,000, which consisted primarily of a gain arising from
the sale of securities issued by QSound Labs, Inc. in connection with the
formation of a 50/50 joint venture. The remainder of other income consisted
primarily of interest income on short-term deposits.

Income Taxes (Recovery). Deferred income taxes for 1996 were
$987,000 which resulted from the drawing down of a portion of the deferred
income taxes previously recorded. Income tax provison for continuing operations
was 501,000 in 1995.

Net Earnings (Loss). The Company had earnings from continuing
operations in 1996 of $1,974,000 compared to earnings of $380,000 in 1995.
Earnings per share from continuing operations in 1996 was $0.21 per share,
compared to earnings per share of $0.04 per share in 1995.

Discontinued Operations

In 1993, the Company introduced its first Computer Telephony ("CTI")
products for sale to OEMs and to consumers directly through retail distribution
channels. In 1994, the Company developed a new release of its CTI product for
high volume production targeted to leading OEM customers such as IBM and OMRON.
In 1994, the

-36-

<PAGE>

Company recorded a charge against inventory relating to its first generation
retail CTI product, and in 1995 the Company terminated its retail distribution
efforts due to high marketing costs and a failure to achieve significant market
penetration, which resulted in operating losses. In 1997, the Company initiated
plans to discontinue the operations of its desktop CTI business due to low
gross margins prevalent in this market segment. The Company expects to close
operations in this business in 1998. Sales of desktop CTI products accounted
for 31.2% of sales in 1995, 32.2% of sales in 1996 and 1.9% of sales in 1997.

Sales of the Company's desktop CTI products in 1997 were $719,000, a
decrease of $8,837,000, or 92.5% over sales from this business in 1996. Gross
profit from discontinued operations in 1997 was $265,000, a decrease of
$1,742,000, or 86.8%, from gross profit from this business in 1996. Operating
expenses from discontinued operations in 1997 totaled $1,475,000, a decrease of
$269,000, or 15.4%, from operating expenses from this business in 1996. In
1997, the net loss from discontinued operations totaled $737,000, or $0.08 per
share (basic), compared to net earnings of $176,000, or $0.02 per share
(basic), in 1996.

Liquidity and Capital Resources

The Company historically has met its operating and capital
requirements from cash flow from operations and funds generated by sale of its
equity securities.

The Company has a credit facility with the Bank of Montreal (the
"Bank") consisting of a $5,000,000 operating line of credit (the "Line of
Credit"). Borrowings under the Line of Credit bear interest at the Bank's prime
rate plus 1/2%, unless the borrowings are denominated in US dollars, in which
case the rate of interest is the Bank's US base rate plus 1/2%. Borrowings are
due on demand and interest is to be paid monthly. Borrowings may not exceed
certain percentages of a specified borrowing base consisting of domestic and
foreign accounts receivable. The Line of Credit agreement requires the Company
to maintain certain financial ratios and limits capital expenditures.
Borrowings under the Line of Credit are secured by substantially all of the
Company's current assets. At May 5, 1998, the Company has outstanding
borrowings under the Line of Credit of approximately $2,470,000.

At December 31, 1996 and December 31, 1997, the Company's cash
position was $2,038,000 and $1,979,000, respectively. Net cash provided by (used
in) operations, financing and investments was $116,000 and ($59,000) in 1996 and
1997, respectively. For 1997, cash used in operations, financing and investments
consisted primarily of cash from operations, and proceeds from the issuance of
Common Shares upon the exercise of options which was used primarily for the
acquisition of 3L Limited, to increase inventories, fund discontinued
operations, purchase of treasury shares and for the purchase of capital assets
and software and related development costs. In 1996, cash provided by
operations, financing and investments consisted principally of cash from
continuing and discontinued operations and the receipt of funds upon the
exercise of outstanding stock

-37-

<PAGE>

options. This was used primarily to increase accounts receivable, and for the
purchase of capital assets and software and related development costs.

Accounts receivable, net, at December 31, 1996 and 1997 was
$11,493,000 and $9,367,000, respectively. The Company's standard collection
terms are net 30 days, subject to adjustment for certain customers.

The Company made capital expenditures of $2,085,000 during the year
ended December 31, 1996 and $3,195,000 during the year ended December 31, 1997,
primarily for computer equipment and software and related development costs. In
1997, the Company invested $1,665,000 in the purchase of treasury shares and
invested $1,039,000 in the acquisition of 100% of the shares of 3L Limited, net
of $268,000 in cash acquired.

The Company believes that cash generated from operations and
borrowings available under the Line of Credit agreement will be sufficient to
meet its working capital and capital expenditure requirements in 1998. However,
the Company may in the future require additional equity or debt financing to
meet its working capital, fixed asset and acquisition requirements. There can
be no assurance that additional financing will not be required sooner or, if
required, that it will be available on a timely basis or on terms satisfactory
to the Company.

Recent Acquisitions

In June 1997, Spectrum acquired a Scotland-based software company, 3L
Limited, in order to provide more complete DSP software solutions to its
customers. 3L Limited specializes in real-time operating systems specifically
for applications requiring multiple DSPs. 3L Limited operates on an independent
basis under the name of 3L Limited so that it can effectively sell its standard
DSP software products through its traditional channels to DSP systems vendors
and in-house developers. Spectrum's head office directs 3L Limited's product
development activities in Scotland and supports its sales activities with
marketing and promotional support. Total consideration paid for 3L Limited was
173,333 Common Shares. The acquisition was accounted for under the purchase
method.

On March 17, 1998, Spectrum effectively acquired pursuant to an
acquisition agreement the assets of another DSP company, Alex Computer Systems,
Inc., a company with strong software and hardware solutions based on Analog
Devices' SHARC-based processors. The consideration paid and assets acquired in
connection with such acquisition were transferred on May 1, 1998. This
acquisition allows Spectrum to become a strong competitor in the floating-point
DSP marketplace, with the large SHARC-based product line Alex Computer brought
to Spectrum. The software and hardware product line which Alex Computer
contributes to Spectrum allows the Company to offer a truly SHARC-based suite of
system level solutions. Total consideration paid for the assets of Alex Computer
was $961,000 cash, the assumption of $1,525,000 in liabilities, 772,626 Common
Shares and a two year warrant to purchase 110,375 Common Shares at an

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<PAGE>

exercise price of Cdn$9.06 per share. The acquisition was accounted for under
the purchase method.

Effects of Inflation and Foreign Currency Fluctuations

The Company believes that inflation and other changes in prices have
not had a material effect on the Company. The Company intends to continue to
sell the majority of its products in US dollars while incurring costs in
varying proportions in Canadian dollars, US dollars and other currencies. Thus,
the Company's operations are susceptible to fluctuations in currency exchange
rates. In addition, if the Canadian dollar rises relative to the US dollar, the
Company's reported Canadian dollar sales and net income may be materially and
adversely affected. While the Company does attempt to mitigate some of the
risks of exchange rate fluctuations between the US dollar and the Canadian
dollar by denominating many of its payment obligations in US dollars and, to a
lesser extent, through the use of exchange-traded or over-the-counter
contracts, there can be no assurance that these strategies will substantially
reduce the potential adverse effect of exchange rate fluctuations on the
Company's business, financial condition or results of operations.

Year 2000 Issue

The Company has established a Year 2000 program to coordinate and
monitor the assessment, conversion or replacement, and testing of computer
systems throughout the Company to ensure key business information and process
control systems will function successfully after December 31, 1999. Potential
Year 2000 risks could include, without limitation, a temporary inability to
engage in normal business activities such as conducting general banking tasks,
invoicing, and materials planning and purchasing. The Company has therefore
committed internal and external resources to address its potential Year 2000
problems. Progress on Year 2000 issues is centrally coordinated, with regular
reporting to the Audit Committee and the full Board of Directors. Costs related
to hardware and software replacements and/or modifications will be capitalized
and amortized at standard rates. Other costs will be expensed as they occur.
The total known cost to the Company of these Year 2000 compliance activities
has not been and is not anticipated to be material to the Company's financial
condition or results of operations in any given year. These costs and the date
on which the Company plans to complete Year 2000 modification and testing
processes are based on management's best estimates, which were derived
utilizing numerous assumptions. However, there can be no guarantee that these
estimates will prove to be accurate and actual results could differ
significantly.

The Company also has initiated communications with suppliers with
which it does significant business to determine the extent to which the Company
may be vulnerable to such parties' failure to remedy their own Year 2000
problems. There can be no assurance that the systems of such suppliers will be
converted on a timely basis. Based on its current assessment, management
believes the Year 2000 issue will not have a material adverse effect on the
Company's business, financial conditions, or results of operations.

-39-

<PAGE>

Item 10. DIRECTORS AND OFFICERS OF THE COMPANY.

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

Name Age Position
- - ---- --- --------
<S> <C> <C>
Kenneth A. Spencer....................................... 54 Chair of the Board and Director

Barry W. Jinks(1)(2)..................................... 44 President, Chief Executive Officer and
Director

Martin McConnell......................................... 46 Vice President, Finance, Chief Financial
Officer and Secretary

Brian Lowe............................................... 47 Vice President, Sales

Douglas Johnson.......................................... 34 Vice President, Logistics

David Hobbs.............................................. 42 Vice President, Engineering

Ronald Wages............................................. 35 Vice President, Marketing

Joseph Abrams(3)......................................... 62 Director

Dr. Karl H. Brackhaus(1)(2).............................. 51 Director

John E. Brennan.......................................... 51 Director

Charles C. Johnston(2)................................... 63 Director

Samuel Znaimer(1)(2)(3).................................. 41 Director

- - ------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of the Acquisition Committee

Dr. Kenneth A. Spencer has been Chair of the Board since December 1997
and a Director since October 1997. In 1983, Dr. Spencer co-founded Creo
Products Inc. ("Creo"), a Burnaby, British Columbia based high tech company
supplying digital pre- press systems. Dr. Spencer stepped down from an active
role in Creo in 1995 and is currently a Director of that company. Previous
posts held by Dr. Spencer include Vice President and General Manager at
MacDonald Dettwiler, and General Manager of Glenayre Technologies Inc.

Barry W. Jinks has been President of the Company since 1991 and Chief
Executive Officer since 1992. Mr. Jinks has been a Director since 1989 and
served as Vice President Marketing, Engineering for the Company from 1989 to
1991. From 1986 to 1989, Mr. Jinks held several senior positions with LSI Logic
of Canada, a company engaged in the semiconductor industry, most recently as
Director of Marketing.

Martin McConnell has been Vice President, Finance, Chief Financial
Officer and Secretary of the Company since 1993. From 1985 to 1993, Mr.
McConnell was associated with Epic Data Inc., a company involved in factory
data collection systems, in several management positions, most recently serving
as Executive Vice President.

-40-

<PAGE>

Brian Lowe has been Vice President, Sales of the Company since 1992.
From 1977 to 1992, Mr. Lowe held several management positions with Epic Data
Inc., most recently serving as Vice President, Sales.

Douglas Johnson has been Vice President, Logistics of the Company
since 1994. From 1990 to 1994, Mr. Johnson served as Director of Logistics for
the Company. From 1987 to 1990, Mr. Johnson was Corporate Materials Manager
with LSI Logic of Canada.

David Hobbs has been a Vice President, Engineering of the Company
since 1994. From 1990 to 1994, Mr. Hobbs held several senior management
positions with the Company in engineering. From 1987 to 1990, Mr. Hobbs held
several lead positions with Gemini Technology Inc., an ASIC design company,
most recently serving as Senior Engineer.

Ronald Wages has been Vice President, Marketing of the Company since
April of 1997. From 1987 to 1997, Mr. Wages held several positions with Texas
Instruments, most recently as Marketing Manager responsible for worldwide DSP
marketing programs and strategic DSP marketing in North America.

Joseph Abrams has been a Director of the Company since 1993. From 1980
to 1990, Mr. Abrams was President of AGS Computers Inc., a computer software
consulting and products company. Since 1990, Mr. Abrams has been a member of
the board of directors of Merisel Inc., a computer products distribution
company. Since 1995, Mr. Abrams has been a member of the board of directors of
Phonetel, a pay telephone company.

Dr. Karl H. Brackhaus has been a Director of the Company since 1990.
Since 1976, Mr. Brackhaus has been President and CEO of Dynapro Systems Inc., a
company involved in the design and manufacture of computer based industrial
display systems.

John E. Brennan has been a Director of the Company since 1995. Since
1992, Mr. Brennan has been President and a Director of Activated Communications
Inc., a communications company. Since 1991, he has been President of Paging
Dimensions, Inc., a paging company, and President of RCS, Inc., a leasing
company. Since 1990, he has also served as Vice Chairman of Southern Union
Company, a natural gas distribution company. From 1986 until its merger with
Bell Atlantic Corporation in 1992, he served as President and Chief Operating
Officer of Metro Mobile CTS, Inc., a cellular telephone company of which he was
a co-founder.

Charles C. Johnston has been a Director of the Company since 1992. Mr.
Johnston is presently an active private investor. From 1990 to 1992, Mr. Johnston
was Chairman of Teleglobe Inc., a computer services company. Since January 1990,
Mr. Johnson has been a member of the Board of Directors of Teleglobe Inc. From
1969 to 1989, he was Chairman and Chief Executive Officer of ISI Systems Inc., a
computer service company.

-41-

<PAGE>

Samuel Znaimer has been a Director of the Company since 1990. Since
1983, Mr. Znaimer has been Senior Vice President of Ventures West Capital Ltd.,
a venture capital company.

There is no family relationship between any Director or executive
officer. There are no arrangements or understandings between any Director or
executive officer.

The Board of Directors met eight times in 1997. Under the BC Act, a
majority of the Board of Directors must be resident Canadians and at least one
member of the Board of Directors must ordinarily be resident in the Province of
British Columbia. All directors hold office until the next meeting of the
shareholders of the Company and until their successors are elected and
qualified. Officers are appointed to serve, at the discretion of the Board of
Directors, until their successors are appointed.

The Board of Directors established an Audit Committee and a
Compensation Committee. The Audit Committee, whose members are Messrs.
Brackhaus, Jinks and Znaimer, is charged with reviewing the Company's annual
audit and meeting with the Company's independent accountants to review the
Company's internal controls and financial management practices. The Audit
Committee met once in 1997. The Compensation Committee, whose members are
Messrs. Brackhaus, Johnston and Jinks, recommend to the Board of Directors the
compensation for the Company's key employees. The Compensation Committee met
twice in 1997.

The Acquisition Committee, whose members are Messrs. Znaimer and
Abrams, formed to make recommendations to the Board of Directors on acquisition
opportunities, met twice in 1997.

-42-

<PAGE>

Item 11. COMPENSATION OF DIRECTORS AND OFFICERS.

Aggregate compensation paid to all directors and officers as a group
for services in all capacities during 1997 was Cdn$1,390,000. The following
table sets forth information concerning all cash and non-cash compensation
awarded to, earned by or paid to the Company's Chief Executive Officer in 1997.

Summary Compensation Table

</TABLE>
<TABLE>
<CAPTION>
Other
Annual Securities
Salary Bonus Compensation Underlying
Name and Principal Position Year (Cdn$) (Cdn$) (Cdn$) Options(#)
- - ---------------------------- -------- ----------- ---------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Barry W. Jinks..................... 1997 $221,025 $146,023 $ 286 13,000
President and Chief Executive 1996 193,200 115,391 330 --
Officer 1995 168,000 -- 330 --

</TABLE>

The following table sets forth certain information with respect to the
aggregate number and value of options exercisable by the Company's Chief
Executive Officer at December 31, 1997.

Aggregated Option Exercises in Last Fiscal Year
And Year-end Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal In-The-Money Options
Shares Value Year End(#) Fiscal Year End (Cdn$)(1)
Acquired on Realized --------------------------------- ----------------------------------
Name Exercise(#) (Cdn$) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ -------- ----------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Barry W. Jinks..... 0 N/A 328,171 133,001 $1,596,420 $60,000
</TABLE>

- - ---------------------------------------
(1) Total value of 'in-the-money' unexercised options is based on the
difference between the last sales price of the Common Shares on The Toronto
Stock Exchange on December 31, 1997 (Cdn$7.50 per share) and the exercise price
of the 'in-the-money' options, multiplied by the number of 'in-the-money'
option shares.

Directors' Compensation

In 1997, the Board of Directors approved a fee of Cdn$1,000 for each meeting
attended in person. The Board also approved the grant of an annual option to
each member of the Board of Directors to purchase 3,000 Common Shares.
Additionally, the Chair of Board, the Chair of a committee of the Board and
each member of a committee of the Board will be granted an annual option to
purchase 1,000 Common Shares. All options will have an exercise price equal to
the market price of the Common Shares on the date of grant.

-43-

<PAGE>

In addition to the above, Kenneth Spencer, a Director of the Company, also
acts as a consultant for the Company and receives a consulting fee of $20,000
per year, payable quarterly. For the last completed financial year, Mr. Spencer
received a total of $5,000 in consulting fees.

No other compensation was paid to directors of the Company during the last
completed fiscal year.

Executive Compensation Plan

Under the Company's Executive Compensation Plan, cash bonuses may be earned
by officers based upon the achievement of targets relating to key strategic
objectives, financial performance of the Company and individual performance.
These bonuses are reported in the year they were earned, based upon Company and
individual performance. Bonuses earned in any particular year are paid out in
the first quarter of the following year.

Item 12. OPTIONS TO PURCHASE SECURITIES FROM COMPANY.

Stock Option Plan

In June 1995, the Company adopted a stock option plan (the "Plan") which
permits the granting of options to acquire Common Shares to the directors,
senior officers and employees of the Company. It is the Company's intention to
grant options under the Plan to all employees. The purpose of the Plan is to
attract and retain the services of the directors, officers and employees and to
provide added incentive to such persons by encouraging share ownership in the
Company. Under the Plan, the exercise price must be not less than the market
price of the Common Shares at the time the option is granted, and the option
term may not exceed ten years. Other terms and conditions of the options
granted under the Plan are determined by the Board of Directors or by a
committee appointed to administer the Plan. Options granted under the Plan are
nontransferable and generally terminate on cessation of employment with the
Company.

The maximum number of Common Shares which may be issued under the Plan is
2,650,000 shares and no individual may hold options to purchase Common Shares
exceeding 5% of the number of Common Shares outstanding from time to time.

At May 5, 1998, options to purchase an aggregate of 1,644,990 Common Shares
were outstanding under options issued to directors, officers and eligible
employees under the Plan. Exercise prices under the foregoing options range
from Cdn$0.70 to Cdn$16.10 per share. Of such options, options to purchase
1,043,172 Common Shares have been granted to directors and officers of the
Company. Option grants by the Board of Directors prior to the adoption of the
Plan were ratified on an annual basis by the Company's shareholders.
Substantially all such shares so granted are now deemed to have been granted
pursuant to the Plan and count toward the 2,650,000 shares reserved for
issuance under the Plan.

-44-

<PAGE>

Item 13. INTERESTS OF MANAGEMENT IN CERTAIN TRANSACTIONS.

Not applicable.

-45-

<PAGE>

PART II

Item 14. DESCRIPTION OF SECURITIES TO BE REGISTERED.

Not applicable.

PART III

Item 15. DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

Item 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY
FOR REGISTERED SECURITIES.

Not applicable.

PART IV

Item 17. FINANCIAL STATEMENTS.

Not applicable.

Item 18. FINANCIAL STATEMENTS.

See Item 19.

-46-

<PAGE>

Item 19. FINANCIAL STATEMENTS AND EXHIBITS.

(a) Index to Consolidated Financial Statements
Page(s)
------

Selected financial data.............................................. 29

Management's discussions and analysis of financial conditions
and results of operations..................................... 31

Report of Independent Public Accountants.............................F-2

Consolidated Balance Sheets..........................................F-3

Consolidated Statements of Operations and Retained
Earnings (Deficit)..................................................F-4

Consolidated Statements of Changes in Financial Position.............F-5

Notes to Consolidated Financial Statements...........................F-6

(b) Exhibits

All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.

2.1 -- Share Purchase Agreement, dated May 27, 1997, among the
Company, 3L Limited and the shareholders of 3L Limited.

3.1 -- Certificate of Incorporation (incorporated by reference to
the Company's Report on Form 20-FR filed on February 26,
1992).

3.2 -- Articles of the Company (incorporated by reference to the
Company's Report on Form 20-FR filed on February 26, 1992)).

4 -- Specimen Share Certificate (incorporated by reference to
the Company's Registration Statement on Form F-1 (No.
333-4820)).

10.1 -- License Agreement, dated July 31, 1987, between Loughborough
Sound Images Ltd. and the Company (incorporated by reference
to the Company's Report on Form 20-FR filed on February 26,
1992).

10.2 -- Distribution and Manufacturing Agreement, dated January 17,
1997, between Loughborough Sound Images PLC and the Company
(incorporated by reference to the Company's Report on Form
20-F filed on June 30, 1997).*

10.3 -- Stock Option Plan (incorporated by reference to the Company's
Registration Statement on Form F-1 (No. 333-4820).

10.4 -- Lease agreement, as amended, between KAB Properties Inc. and
the Company (incorporated by reference to the Company's
Registration Statement on Form F-1 (No. 333-4820)).

-47-

<PAGE>

10.5 -- General Security Agreement, dated March 8, 1991, between the
Bank of Montreal and the Company; Agreement dated January 31,
1995 executed by the Company (incorporated by reference to
the Company's Registration Statement on Form F-1 (No.
333-4820)).

10.6 -- Lending Agreement dated March 12, 1991, as amended, between
the Bank of Montreal and the Company; Commitment Letter dated
January 4, 1995 between the Company and the Bank of Montreal
(incorporated by reference to the Company's Registration
Statement on Form F-1 (No. 333-4820)).

10.7 -- Commitment Letter dated November 14, 1997 between the Company
and the Bank of Montreal.

* Confidentiality requested. Confidential portions have been omitted and
filed separately with the Commission, as required by Rule 24b-2 of the
Securities Exchange Act of 1934.

-48-

<PAGE>

SPECTRUM SIGNAL PROCESSING INC.

Consolidated Financial Statements

December 31, 1997 and 1996

INDEX

Page
----

Auditors' Report 2

Consolidated Financial Statements

Consolidated Balance Sheets 3

Consolidated Statements of Operations and Retained Earnings 4

Consolidated Statements of Changes in Financial Position 5

Notes to Consolidated Financial Statements 6

<PAGE>

[KPMG LETTERHEAD]

AUDITORS' REPORT TO THE SHAREHOLDERS

We have audited the consolidated balance sheets of Spectrum Signal Processing
Inc. as at December 31, 1997 and 1996 and the consolidated statements of
operations and retained earnings and changes in financial position for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonalbe assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosure 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.

In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31,
1997 and 1996 and the results of its operations and the changes in its
financial position for the years then ended in accordance with generally
accepted accounting principles. As required by the Company Act of British
Columbia, we report that, in our opinion, these principles have been applied
on a consistent basis.

/s/ KPMG
Chartered Accountants

Richmond, Canada
February 5, 1998

<PAGE>

SPECTRUM SIGNAL PROCESSING INC.

CONSOLIDATED BALANCE SHEETS
(Expressed in thousands of Canadian dollars)

<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------

- - --------------------------------------------------------------------------------------------------------------
December 31,
1997 1996
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets

Cash and short term deposits $ 1,979 $ 2,038
Accounts receivable, net of allowance for doubtful accounts of $243 9,367 11,493
(1996 - $321)

Inventories 5,809 2,396
Prepaid expenses 315 707
- - --------------------------------------------------------------------------------------------------------------
17,470 16,634

Capital Assets (note 3) 3,501 2,920
Other assets (note 4) 3,762 1,124
- - --------------------------------------------------------------------------------------------------------------

$ 24,733 $ 20,678
=============================================================================================================

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities 6,722 6,916
Current portion of long-term debt (note 5) --- 13
- - -------------------------------------------------------------------------------------------------------------
6,722 6,929

Long-term debt (note 5) 107 ---
Deferred income taxes 1,749 55
Shareholders' Equity
Share capital (note 6) 13,259 13,368
Contributed surplus (note 6) 106 106
Retained earnings 2,790 220
- - --------------------------------------------------------------------------------------------------------------
16,155 13,694
Commitments (note 9)
- - --------------------------------------------------------------------------------------------------------------
$ 24,733 $ 20,678
=============================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.

On behalf of the Board

_________________________ Director _________________________ Director

<PAGE>

SPECTRUM SIGNAL PROCESSING INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (Expressed in
thousands of Canadian dollars, except per share amounts)

<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------

- - --------------------------------------------------------------------------------------------------------------
Years ended December 31,
1997 1996
- - --------------------------------------------------------------------------------------------------------------

<S> <C> <C>
Sales $ 36,452 $ 27,358
Cost of sales 15,548 11,373
- - --------------------------------------------------------------------------------------------------------------

20,904 15,985

Expenses
Administrative 4,372 4,158
Sales and marketing 6,634 5,291
Amortization 944 678
Research and development 3,528 2,905
- - --------------------------------------------------------------------------------------------------------------

15,478 13,032
- - --------------------------------------------------------------------------------------------------------------

Earnings from operations 5,426 2,953

Other revenue (expense)
Interest and bank charges 4 (31)
Other income 15 39
- - --------------------------------------------------------------------------------------------------------------

19 8
- - --------------------------------------------------------------------------------------------------------------

Earnings before income taxes and discontinued
operations 5,445 2,961

Deferred income taxes (note 7) 2,138 987
- - --------------------------------------------------------------------------------------------------------------
Earnings from continuing operations 3,307 $ 1,974
Earnings (loss) from discontinued operations (note 11) (737) 176
- - --------------------------------------------------------------------------------------------------------------
Net earnings 2,570 2,150

Retained earnings (deficit), beginning of year 220 (1,930)
- - --------------------------------------------------------------------------------------------------------------

Retained Earnings, end of year $ 2,790 $ 220
==============================================================================================================

Earnings per share (note 8)
Basic
From continuing operations $ 0.36 $ 0.21
After discontinued operations $ 0.28 $ 0.23
Fully diluted
From continuing operations $ 0.34 $ 0.21
After discontinued operations $ 0.27 $ 0.23
==============================================================================================================

See accompanying notes to consolidated financial statements.

<PAGE>

SPECTRUM SIGNAL PROCESSING INC.

CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(Expressed in thousands of Canadian dollars)

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

<S> <C> <C>
Operations
Earnings from continuing operations $ 3,307 $ 1,974
Items not involving cash
Amortization 944 678
Deferred income taxes 2,138 987
Changes in non-cash operating working capital
Accounts receivable 2,270 (4,818)
Inventories (3,394) 754
Prepaid expenses 419 (322)
Accounts payable and accrued liabilities (446) 2,491
- - --------------------------------------------------------------------------------------------------------------

Cash from continuing operations 5,238 1,744
- - --------------------------------------------------------------------------------------------------------------

Earnings (loss) from discontinued operations (737) 176
Deferred income taxes, an item not involving cash (473) 87
- - --------------------------------------------------------------------------------------------------------------
Cash from discontinued operations (1,210) 263
- - --------------------------------------------------------------------------------------------------------------
4,028 2,007
- - --------------------------------------------------------------------------------------------------------------
Financing

Deferred share issue costs 263 (263)
Issue of shares, net of share issue expenses 1,556 496
Decrease in long-term debt (8) (39)
- - --------------------------------------------------------------------------------------------------------------

1,811 194
- - --------------------------------------------------------------------------------------------------------------

Investments
Purchase of treasury shares (1,665) ---
Purchase of capital assets (1,447) (1,421)
Software and related development costs, net (1,747) (664)
Acquisition of the shares of 3L Limited, net of cash acquired of (1,039) ---
$268

- - --------------------------------------------------------------------------------------------------------------
(5,898) (2,085)
- - --------------------------------------------------------------------------------------------------------------

Increase in cash and short term deposits (59) 116

Cash and short term deposits, beginning of year 2,038 1,922
- - --------------------------------------------------------------------------------------------------------------

Cash and short term deposits, end of year $ 1,979 $ 2,038
==============================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>

SPECTRUM SIGNAL PROCESSING INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, 1997 (Amounts expressed in thousands of Canadian
dollars, except per share amounts and numbers of shares)
- - --------------------------------------------------------------------------------

The Company was incorporated under the laws of British Columbia and its
principal business activities include the design, manufacture and
marketing of digital signal processing systems for incorporation into
high performance applications for original equipment manufacturers for
commercial markets such as surveillance and wireless basestations, remote
sensing, and multi-channel modems and for military and aerospace markets.

1. Significant accounting policies

The financial statements have been prepared in accordance with accounting
principles generally accepted in Canada, which, in the case of the
Company, generally conform with those established in the United States,
except as explained in Note 13.

Basis of consolidation

The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary 3L Limited.

Use of estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, particularly the
recoverability of capital and other assets, and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
the estimates.

Cash and short term deposits

Cash includes short term deposits, which are all highly marketable
securities with a maturity of three months or less. Short term deposits
are valued at cost.

Inventories

The Company uses the average cost method of accounting for its inventory.
Inventories are valued at the lower of cost and net realizable value and
consist of:

1997 1996
----------------- ------------------
Finished Goods $ 3,125 $ 1,011
Raw Materials 2,684 1,385
================= ==================
$ 5,809 $ 2,396
================= ==================

<PAGE>

SPECTRUM SIGNAL PROCESSING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Year Ended December 31, 1997 (Amounts expressed in thousands of Canadian
dollars, except per share amounts and numbers of shares)
- - -------------------------------------------------------------------------------

Research and development costs

Research costs are expensed as incurred. Development costs are expensed
as incurred unless they meet certain criteria under generally accepted
accounting principles for deferral and amortization. Software and related
development costs, after the establishment of technological feasibility
and commercial viability, are capitalized until the product is available
for general release to customers. Amortization is provided on a product
by product basis over the estimated economic life of the product, not to
exceed three years. Amortization commences when the product is available
for general release to customers. Research and development costs and
capitalized software and related development costs can be summarized as
follows:

1997 1996
============= =============
Research & development expense
Continuing operations $ 3,528 $ 2,905
Discontinued operations 423 872
Capitalized software and related
development costs 1,937 860
------------- -------------
$ 5,888 $ 4,637
============= =============

Capital assets

Capital assets are initially recorded at cost. Amortization is
subsequently provided on the following assets using the declining balance
basis at the following annual rates:

Computer equipment 30%
Computer software 20%
Furniture and fixtures 20%
Laboratory equipment 20%

Amortization of leasehold improvements is provided on a straight-line
basis over the lesser of their estimated useful lives or five years.

License

The Company has the North American license to manufacture and distribute
computer peripherals for digital signal processing systems designed by
Loughborough Sound Images Ltd. The license was recorded at a nominal
value of $1 and expired in July 1997. During the year, the Company
negotiated a non-exclusive extension of manufacturing rights to 2002 and
distribution rights to January 17, 1999. Both the manufacturing and
distribution rights may be extended under certain conditions.

<PAGE>

Translation of foreign currencies

All monetary assets and liabilities denominated in foreign currency have
been translated into Canadian dollars at the rate of exchange in effect
at the balance sheet date. Other assets, revenue and expense items are
translated at the rates prevailing at their respective transaction dates.
Gains and losses resulting from foreign exchange translation are
reflected in earnings for the year.

Acquired Technology

The excess of the cost of acquisitions over the value assigned to
identifiable net tangible assets acquired is allocated to acquired
technology. The acquired technology is stated on the basis of cost less
accumulated amortization of $49 (1996 - nil), and is amortized on a
straight line basis over 7 years with one half of the annual rate in the
year of addition.

Revenue Recognition

DSP Products revenue is recognized upon shipment. Computer telephony
integration ("CTI") product revenue, which is included in discontinued
operations, is recognized upon the later of shipment or transfer of
title. Revenue from product development contracts is recognized upon
reaching certain development milestones which are generally correlated to
the timing of payments.

Warranty

The Company generally provides a one year warranty to the original
purchaser. Warranty costs are accrued based on a best estimate, with
reference to past experience.

Income taxes

The Company follows the allocation method for accounting for income
taxes. Under this method, recognition is given in the financial
statements to the tax effects of timing differences between income and
expenditures for financial statement and income tax purposes.

The Company follows the cost reduction method of accounting for
investment tax credits whereby the benefit of tax credits is recognized
as a reduction in the cost of the related asset or expenditure when there
is reasonable assurance the tax credits will be realized.

Share issue costs

The costs of issuing common shares, net of income tax recoveries thereon,
are applied to reduce the stated value of such shares.

<PAGE>

Deferred share issue costs

The majority of the costs incurred in the 1996 form F-1 registration and
preliminary prospectus process were expensed in 1996. The process was
abandoned in 1997 and therefore all the remaining deferred costs were
expensed to operations.

Concentration of credit risk

Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily accounts receivable. Credit
risk in receivables is limited to original equipment manufacturers and to
dealers and distributors of hardware and software products. The Company
performs on-going credit evaluations of its customers' financial
condition and requires letters of credit or other guarantees whenever
deemed necessary.

Substantially all of the Company's revenues have been recognized in
currencies other than the Canadian dollar, principally the United States
dollar. Fluctuations in the exchange rates between these currencies and
the Canadian dollar could have a material effect on the Company's
business, financial condition and results of operations. The Company
attempts to mitigate some of this risk by denominating many of its
payment obligations in United States dollars, and, to a lesser extent,
through the use of future exchange contracts.

Technological risks

The market for the Company's products is characterized by rapidly
changing technologies, evolving industry standards and frequent new
product introductions and enhancements. There can be no assurance that
the Company will successfully develop, complete, introduce, and market
new products or product enhancements, or that the products or product
enhancements currently in development or that may be developed by the
Company in the future will meet industry requirements and achieve market
acceptance. Any significant delay or failure to develop, manufacture or
ship new or enhanced products could have a material adverse effect on the
Company's business, financial condition and results of operation.

Impairment of Long-Lived Assets

The Company monitors the recoverability of long-lived assets, based on
factors such as current market value, future asset utilization, business
climate and future undiscounted cash flows expected to result from the
use of the related assets. The Company's policy is to record an
impairment loss in the period when it is determined that the carrying
amount of the asset may not be recoverable.

Comparative figures

Certain comparative figures have been reclassified to conform with the
presentation adopted in the current year.

<PAGE>

2. Acquisition of 3L Limited

On June 20, 1997 the Company acquired all of the outstanding shares of 3L
Limited. The acquisition has been accounted for using the purchase method
of accounting and the results of operations have been consolidated since
the date of acquisition. The Company's interest in the net assets
acquired at assigned values are as follows:

Cash $ 268
Current assets 190
Capital Assets 27
Acquired technology 1,204
Current liabilities (382)
================================================================
Acquisition cost $ 1,307
================================================================

Consideration

173,333 common shares $ 1,300
Expenses on acquisition 7
----------------------------------------------------------------
$ 1,307
----------------------------------------------------------------

The following unaudited pro-forma results of operations assume that the
acquisition occurred as of the beginning of the respective periods
presented:

----------------------------------------------------------------------
Years ended December 31,
1997 1996
----------------------------------------------------------------------
Revenue $ 36,973 $ 28,346
Earnings from continuing operations 3,283 2,029
Net earnings $ 2,546 $ 2,205
Earnings per share
From continuing operations $ 0.36 $ 0.22
After discontinued operations $ 0.28 $ 0.24
----------------------------------------------------------------------

The unaudited pro-forma information given above does not purport to be
indicative of the results that actually would have been obtained if the
operations were combined during the periods presented, and is not
intended to be a projection of future results or trends.

<PAGE>

3. Capital assets

- - -----------------------------------------------------------------------------
1997 1996
- - -----------------------------------------------------------------------------

Computer equipment $ 3,007 $ 2,432
Computer software 1,346 1,020
Furniture and fixtures 1,077 837
Laboratory equipment 719 469
Leasehold improvements 424 349
- - -----------------------------------------------------------------------------
6,573 5,107

Less accumulated amortization (3,072) (2,187)
- - -----------------------------------------------------------------------------

Net book value $ 3,501 $ 2,920
=============================================================================

4. Other assets

- - -----------------------------------------------------------------------------
1997 1996
- - -----------------------------------------------------------------------------
Software and related development costs $ 2,607 $ 860
Acquired technology, net of accumulated
amortization of $49 1,155 ---
Deferred share issue costs --- 263
License --- 1
- - -----------------------------------------------------------------------------
$ 3,762 $ 1,124
=============================================================================

5. Long-term debt

Development loan
The company has received a loan from Lothian
and Edinburgh Enterprise Limited ("LEEL") for
the purpose of product development. There are
no formal terms of repayment, and royalty
payments are to be made to LEEL based on
gross sales revenue of the particular product.
If the company does not meet all the terms of
the loan it becomes repayable on demand 107 ---
- - -----------------------------------------------------------------------------
107 13
Less: current portion --- (13)
- - -----------------------------------------------------------------------------
$ 107 $ 0
=============================================================================

<PAGE>

6. Share capital
(a) Authorized
The authorized capital of the Company consists of 50,000,000 common
shares with no par value

(b) Issued and outstanding:

Number of Stated
Shares Values
- - --------------------------------------------------------------------------------
Outstanding, December 31, 1995 9,163,974 $ 12,910
Issued for cash from share options 79,709 496
- - --------------------------------------------------------------------------------
Outstanding, December 31, 1996 9,243,683 13,406
Issued for cash from share options 42,381 256
Issued for acquisition of 3L Limited 173,333 1,300
- - --------------------------------------------------------------------------------
Outstanding, December 31, 1997 9,459,397 $ 14,962
- - --------------------------------------------------------------------------------

- - --------------------------------------------------------------------------------
1997 1996
- - --------------------------------------------------------------------------------
Share Capital $ 14,962 $ 13,406
less 233,300 shares held in treasury (1996 - 16,400) (1,703) (38)
================================================================================
$ 13,259 $ 13,368
================================================================================

The Company has reserved 2,250,000 common shares for issuance under its
stock option plan. The plan provides for the granting of stock options to
directors, officers and eligible employees at the fair market value of
the Company's stock at the grant date.

Options generally vest over three years in equal amounts at the
anniversary date of the grant. Options generally have a five year term
with ten years being the maximum. Stock option activity for 1996 and 1997
is presented below:

Number of Exercise price
Shares per share
- - ----------------------------------------------------------------------------
Outstanding, December 31, 1995 1,216,646 $0.70-$17.00
Granted 416,556 $8.00-$16.10
Exercised (79,709) $2.14-$9.00
Cancelled (59,597) $4.80-$17.00
- - ---------------------------------------------------------------------------
Outstanding, December 31, 1996 1,493,896 $0.70-$17.00
Granted 330,353 $7.00-$8.50
Exercised (42,381) $1.86-$9.90
Cancelled (124,580) $2.38-$17.00
============================================================================
Outstanding, December 31, 1997 1,657,288 $0.70-$16.10
============================================================================

- - ----------------------------------------------------------------------------
Exercisable at:
December 31, 1996 731,898
December 31, 1997 902,491
============================================================================

<PAGE>

Stock option plan con't

The options outstanding at December 31, 1997 expire between August 6,
1998 and June 11, 2007.

(d) Escrow shares

There are 42,985 shares, related to the 3L Limited acquisition, held in
escrow at December 31, 1997 which will be released on June 20, 2000.

(e) Contributed surplus

During 1994, the Company purchased and sold 248,000 of its common shares
for proceeds in excess of cost of $106.

7. Income taxes

Income tax expense varies from the amounts that would be computed by
applying the Canadian federal and provincial income tax rate of 45.6%
(1996-45.6%) to earnings before income taxes and discontinued operations
as shown in the following table:

- - ----------------------------------------------------------------------------
1997 1996
- - ----------------------------------------------------------------------------

Combined Canadian federal and
provincial income taxes at expected rate $2,483 $1,350
Permanent and other differences 7 5
Reduction of income taxes from use of
unrecorded tax benefits (352) (368)
- - ----------------------------------------------------------------------------
2,138 987
- - ----------------------------------------------------------------------------

As at December 31, 1997 the Company has earned investment tax credits of
approximately $300 and claimed an additional $4,100 which are available to
reduce future years' income taxes payable. These investment tax credits
expire between 2000 and 2007. The potential tax benefits that may arise
from the utilization of the $4,100 have not been recognized in these
financial statements.

The Company has losses for UK income tax purposes of approximately $180
which can be carried forward indefinitely to reduce future taxable
income.

8. Earnings per share

Basic earnings per share is calculated based upon the weighted average
number of shares outstanding during the year, which was 9,234,926 (1996 -
9,194,558).

<PAGE>

8. Earnings per share cont.

Fully diluted earnings per share reflect the dilutive effect of the
conversion of the stock options outstanding at the end of the year or
those options exercised during the year, as if they had been exercised at
the beginning of the year or the date granted, if later. The number of
shares used for the calculation of the fully diluted earnings per share
is 10,146,238 (1996 - 9,527,772). Interest on the funds which would have
been received had the options been exercised, in the amount of $180 (1996
- $24) net of income tax, has been imputed at a rate of 4% (1996 - 4%)
per annum.

9. Commitments

The Company has entered into various operating lease agreements with
remaining terms of up to five years, for office premises and equipment.
The minimum lease payments in each of the next five years are
approximately as follows:

1998 $ 774
1999 671
2000 665
2001 658
2002 259
------------------------------------
$ 3,027

====================================

10. Segmented information

In the opinion of management, the Company operates in one industry
segment, being the design, manufacture and marketing of digital signal
processing systems. Substantially all assets and operations are in
Canada. A summary of sales by region and by major customers is as follows:

- - ------------------------------------------------------------------------------
1997 1996
- - ------------------------------------------------------------------------------
By Region
United States $ 30,995 $ 21,395
Canada and other 5,457 5,963
- - ------------------------------------------------------------------------------

Total Sales $ 36,452 $ 27,358
- - ------------------------------------------------------------------------------

By Major Customer
United States Government and related subcontractors $ 9,156 $ 8,569
NAI Technologies 6,736 718
IBM, substantially all from discontinued operations 415 8,689
- - ------------------------------------------------------------------------------

<PAGE>

11. Discontinued Operations

The Company initiated plans during 1997 to discontinue the operation of
its desktop Computer Telephony board business (CTI). The CTI division is
in the business of developing boards which integrate telephone, fax, and
modem functions into computers and selling them to OEMs and end users.
The Company expects to close operations in this business in 1998.
Accordingly, the results of operations and changes in financial position
have been disclosed separately from those of continuing operations for
the years presented. The financial position of these discontinued
operations continues to be consolidated in accordance with generally
accepted accounting principles.

The operating results of this business segment were as follows:

-------------------------------------------------------------------------
1997 1996
-------------------------------------------------------------------------

Revenue $ 719 $ 9,556
Gross Margin 265 2,007
Expenses 1,475 1,744
Provision for taxes (473) 87
-------------------------------------------------------------------------
Earnings (loss) from discontinued operations $ (737) $ 176
-------------------------------------------------------------------------

The net assets of discontinued operations
are as follows:

-------------------------------------------------------------------------
1997 1996
-------------------------------------------------------------------------

Current assets $ 517 $ 1,240
Current liabilities --- (258)
-------------------------------------------------------------------------
$ 517 $ 982
-------------------------------------------------------------------------

12. Financial Instruments

a) Fair value of financial instruments

Carrying amounts of certain of the Company's financial instruments,
including accounts receivable and accounts payable and accrued
liabilities approximate fair value due to their short maturities. Based
on borrowing rates currently available to the Company for loans with
similar terms, the carrying value of its long-term debt approximates fair
value.

b) Foreign exchange hedging

The Company utilizes future exchange contracts to manage its exposure to
fluctuations in foreign exchange rates. These instruments are used for
purposes other than trading and are employed in connection with an
underlying asset, liability or anticipated transaction. At December 31,
1997, the Company had a futures exchange contract with a notional
principal of $1,500 (1996 - nil) Canadian dollars maturing March 15,
1998.

<PAGE>

13. United States Accounting Principles

The Company's financial statements presented herein have been prepared in
accordance with Canadian generally accepted accounting principles
("GAAP"). There are no material reconciling items between United States
GAAP and Canadian GAAP that affect net earnings or total assets or
liabilities and shareholders' equity except as follows:

Earnings

- - ----------------------------------------------------------------------------
Years ended December 31,
1997 1996
- - ----------------------------------------------------------------------------
Earnings from continuing operations
under Canadian GAAP $ 3,307 $ 1,974
Acquired in-process research and development (1,155) ---
- - ----------------------------------------------------------------------------
Earnings from continuing operations under
U.S. GAAP $ 2,152 $ 1,974
Earnings (loss) from discontinued operations (737) 176
============================================================================
Net earnings under U.S. GAAP $ 1,415 $ 2,150
============================================================================

Earnings per share

- - ---------------------------------------------------------------------------
1997 1996
- - ---------------------------------------------------------------------------
Basic
From continuing operations 0.23 0.21
After discontinued operations 0.15 0.23

Diluted
From continuing operations 0.22 0.20
After discontinued operations 0.15 0.22
===========================================================================

During 1997, the Company adopted Statement of Financial Accounting
Standard No.128 ("FAS 128"), Earnings Per Share. Accordingly, historical
earnings per share have been re-stated under FAS 128. Basic earnings per
share is the same under Canadian and U.S. GAAP. Diluted earnings per
share under United States GAAP is based on the weighted average number of
common shares outstanding. When dilutive, stock options and warrants are
included as share equivalents using the Treasury Stock method.

The following weighted average number of shares were used for the
computation of diluted earnings per share:

- - --------------------------------------------------------------------------------
1997 1996
- - --------------------------------------------------------------------------------

Weighted average shares used in computation 9,234,926 9,194,558
of basic earnings per share
Weighted average shares from assumed conversion 372,994 587,733
of dilutive options
- - --------------------------------------------------------------------------------
Weighted average shares used in computation
of diluted earnings per share 9,607,920 9,782,291
- - -------------------------------------------------------------------------------

16
<PAGE>

13. United States Accounting Principles, continued

Statement of cash flows

Under United States GAAP, cash flows provided by financing and used in
investing would decrease by $1,300, which represents the share
consideration paid for the acquisition of 3L Limited, which is a non-cash
transaction which would not be reflected in the statement of cash flows.

Acquisition of 3L Limited

Under United States GAAP, amounts paid for in-process process research
and development acquired through a business combination are expensed at
the time of acquisition.

Accounts payable and accrued liabilities

---------------------------------------------------------------
1997 1996
---------------------------------------------------------------
Accounts payable $ 4,277 $ 4,525
Accrued liabilities 2,418 1,515
Deferred revenue 27 876
---------------------------------------------------------------
$ 6,722 $ 6,916
---------------------------------------------------------------

Income taxes

Under United States GAAP, deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for
income tax purposes. Temporary differences are tax-effected at current
rates whereas under Canadian GAAP, temporary differences are tax-effected
at historic rates. There was no deferred tax effect of changes in tax
rates during 1997.

The tax effect of the temporary differences that give rise to deferred
tax assets and deferred tax liabilities are presented below:

-----------------------------------------------------------------------
1997 1996
-----------------------------------------------------------------------
Deferred tax assets

Tax loss carry forwards $ 43 $ ---
Research and development expenses --- 834
Investment tax credits recoverable 327 330
Share issue costs 121 247
Other 37 3
-----------------------------------------------------------------------
Total gross deferred tax assets 528 1,414

Less: Valuation allowance (339) (615)
-----------------------------------------------------------------------
Total deferred tax assets 189 799
-----------------------------------------------------------------------

<PAGE>

13. United States Accounting Principles, continued

Deferred tax liabilities
Research and development expenses (943) ---
Tax depreciation in excess of accounting (847) (706)
Investment tax credits (148) (148)
------------------------------------------------------------------------
Total deferred tax liabilities (1,938) (854)
------------------------------------------------------------------------

Net deferred tax liabilities $(1,749) $(55)
------------------------------------------------------------------------

Management is of the opinion that it is more likely than not that the
results of future operations will generate sufficient taxable income to
realize the deferred tax asset. The Company's ability to realize its
deferred tax assets is based on several factors, including a presumption
of future profitability, and is subject to some degree of uncertainty.

Stock Based Compensation

The Company adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123 ("FAS 123"), Accounting for Stock-Based
Compensation, for United States GAAP purposes, to account for grants
under the company's existing stock based compensation plans. Accordingly,
no compensation cost has been recognized for the stock option plan. Had
compensation cost for the Company's stock option plan been determined
based on the fair value at the grant date for awards under those plans
consistent with the measurement provisions of FAS 123, the Company's net
earnings and earnings per share under United States GAAP would have been
adjusted as follows:

1997 1996
-------------------------
Net earnings - as reported $1,415 $2,150
Net earnings - pro forma $119 $1,368
Basic earnings per share - as reported $0.15 $0.23
Basic earnings per share - pro forma $0.01 $0.15
Diluted earnings per share - as reported $0.15 $0.22
Diluted earnings per share - pro forma $0.01 $0.14

Pro-forma amounts reflect options granted after 1994 and may not be
representative of amounts in future years.

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

1997 1996
-------------------------
Expected dividend yield 0% 0%
Expected Stock Price Volatility 27% 45%
Risk-free interest rate 7.5% 8%
Expected life of options 4.5 years 4.5 years

<PAGE>

13. United States Accounting Principles, continued

The weighted average fair value of the options granted is $2.89 (1996 -
$6.26) per option.

Recent United States accounting standards
Statement of Financial Accounting Standards FAS 130, "Reporting
Comprehensive Income" and FAS 131, "Disclosures about Segments of an
Enterprise and Related Information" are required to be implemented by the
company effective for the year ending December 31, 1998. The Company does
not expect the effect of these pronouncements to be material to the
financial statements.

<PAGE>

SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant certifies that it meets all of the requirements for
filing on Form 20-F and duly caused this Annual Report to be signed on its
behalf by the undersigned, thereunto duly authorized, in Vancouver, British
Columbia, Canada, on June 29, 1998.

SPECTRUM SIGNAL PROCESSING INC.

By: /s/ Barry Jinks
-----------------------------
Barry Jinks
President and Chief Executive Officer