SPECTRUM SIGNAL PROCESSING INC, 20-F, 1999-06-29

SPECTRUM SIGNAL PROCESSING INC
20-F, 1999-06-29
ELECTRONIC COMPONENTS & ACCESSORIES

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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, 1998

[ ] 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
(Translation of Registrant's name into English)

British Columbia, Canada
(Jurisdiction of incorporation or organization)

8525 Baxter Place,
Burnaby, British Columbia, Canada V5A 4V7
(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, 1998, the Registrant had outstanding _________ 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

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Beginning with the first quarter of 1998, the Company adopted a policy
of publishing its financial statements in United States dollars ("US$" or "$")
and preparing its financial statements in accordance with accounting principles
generally accepted in the United States ("U.S. GAAP"). In accordance with the
views of the SEC, the Company has restated the historical financial statements
and data contained herein to U.S. GAAP and using US$. All monetary references
throughout this Prospectus are expressed in US$ except where indicated as
Canadian dollars ("Cdn$"). All financial information presented in this
Prospectus, except where otherwise indicated, has been prepared 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
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(R), DSP-LINK(R) and VASP(R) 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 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 the
operating assets and liabilities of Alex Computer Systems, Inc., 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 that enables sophisticated processing of images and
voice is rapidly becoming commonplace. DSP chips have been behind major advances
in data transmission

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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 $1,000
to $10,000 per board for standard products (including the Company's catalog
product offerings), to up to $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 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-

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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 net assets of another DSP
company, Alex Computer Systems, Inc. ("Alex Computer"), 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: Siemens
Medical, NEC, Halliburton and Sunkist. Sales to these customers represented
13% of the Company's sales for the year ended December 31, 1998. The Company's
commercial products accounted for approximately 53%, 34% and 50% of sales
during 1996, 1997 and 1998, respectively.

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, and
the U.S. Department of Defense. Sales to these customers represented 2% of the
Company's sales for the year ended December 31, 1998. The Company's
radar/sonar products accounted for approximately 5%, 3% and 3% of sales during
1996, 1997 and 1998, respectively.

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

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improvements and enhancements will continue. DSP solutions are used 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: Hewlett-Packard, GTE, and the U.S. Department
of Defense. Sales to these customers represented 37% of the Company's sales for
the year ended December 31, 1998. The Company's signal intelligence products
accounted for approximately 40%, 60% and 45% of sales during 1996, 1997 and
1998, respectively.

Wireless. The telecommunications industry historically has been a
major user of DSP technology. Telecommunications applications such as
high-speed digital modems and cellar base stations are based on DSP, which is
instrumental in the development of digital cellular networks, 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. The Company's customers in this market include:
Motorola and Silicon Wireless. Sales to these customers represented 1% of the
Company's sales for the year ended December 31, 1998. The Company's wireless
products accounted for approximately 2%, 3% and 2% of sales during 1996, 1997
and 1998, respectively.

Customers

The Company has established a diversified base of customers for its
DSP system solutions, representing a wide range of industries and
applications. In 1998, the Company conducted business with over 400 customers.
The Company's two largest customers accounted for approximately 44% and 32% of
the Company's sales in 1997 and 1998, respectively. The Company's largest
customer, the U.S. Government (principally the U.S. Department of Defense),
accounted for approximately 25% and 24% of the Company's sales in 1997 and
1998, respectively. In addition, approximately 10% of the Company's sales
during 1997 were made to NAI Technologies and approximately 9% of the
Company's sales during 1998 were made to Siemens Medical Systems, Inc., each
of which was the Company's second largest customer during the respective
periods.

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

General Commercial Radar/Sonar Signal Intelligence Wireless
- ------------------ ----------- ------------------- --------

Siemens Medical U.S. Department of U.S. Department of Motorola
Defense Defense

Halliburton Boeing Hewlett-Packard Silicon Wireless

NEC GTE

Sunkist

Logistics, Manufacturing and Quality Control

The Company's logistics operations include manufacturing, purchasing,
quality assurance, customer service and after-sale technical support and at
March 31, 1999 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

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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 March 31,
1999, the Company employed 60 persons in the area of research and product
development, focusing on the development of next generation products for
military aerospace and commercial 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 1996, 1997 and 1998, the Company's research and development
expenditures were approximately $3,400,000, $4,233,000 and $4,851,000,
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.

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

In July 1987, the Company entered an agreement with Loughborough
Sound Images Ltd. ("Loughborough") pursuant to which the Company licenses
certain DSP technology (the "Loughborough License"). In consideration of this
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 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 1996, 1997, 1998 and the
first quarter of 1999, sales of Loughborough products accounted for
approximately 33%, 30%, 19% and 16%, 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 "Risk Factors--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.

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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.

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 1996, 1997, 1998 and the first quarter of 1999, sales of
Loughborough products accounted for approximately 33%, 30%, 19% and 16%,
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., 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, as the

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Company moves away from those product lines, 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. See "Risk Factors--Amendment of the
Loughborough License."

Sales

The Company's sales force is comprised of 24 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 Company's headquarters, 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 22 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 March 31, 1999, the Company had a total of 150 full-time
employees, of which 44 were administrative personnel, 46 were sales and
marketing personnel and 60 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 and 1998, the Company's two largest customers accounted for
approximately 44% and 32%, respectively, of the Company's sales. The U.S.
Government (principally the U.S. Department of Defense), its largest customer,
accounted for approximately 25% and 24%, respectively, of the Company's sales
during such periods. In addition, approximately 10% of the Company's sales
during 1997 were made to NAI Technologies, the Company's second largest
customer during such period, and approximately 9% of the Company's sales
during 1998 were made to Siemens Medical Systems, Inc., the Company's second
largest customer during such period. 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. In
addition, while the Company is not aware of any current plans by the
Department of Defense that may result in decreased military contract funding
which would affect the Company's operations, there can be no assurance that
U.S. military contracts will continue to be funded at the same level.

Amendment of the Loughborough License

In July 1987, the Company entered into an agreement with Loughborough
Sound Images Ltd. pursuant to which the Company licenses from Loughborough
certain DSP technology. In 1996, 1997 and 1998, sales of products based upon
technology licensed from Loughborough and products acquired from Loughborough
for resale accounted for approximately 33%, 30% and 19%, respectively, of the
Company's sales. For the three months ended March 31, 1999, sales of
Loughborough products accounted for 16% of the Company's sales. The
Loughborough License was amended in January 1997 to, among other things,
change such license to operate on a non-exclusive basis, a change which 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. The Company believes that loughborough products will
continue to account for a decreasing percentage of the Company's sales.

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

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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.

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. Sales to OEMs accounted for 71%, 86% and
89% of the Company's revenues during 1996, 1997 and 1998, respectively. 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."

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

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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 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. Revenues generated from development contracts
during 1996, 1997 and 1998 were approximately 8.5%, 6.1% and 5.9% of the
Company's revenues during such periods, respectively. 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 historically has been successful in meeting these
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,

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<PAGE>

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 "Business--Markets."

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 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.

In-Process Research and Development

Over the last two years, the Company completed two acquisitions, some
of the assets of which involved in-process research and development. Although
the Company historically has been able to accurately forecast costs associated
with research and development activities, there can be no assurance that the
Company's estimates of the costs of completing the acquired in-process
research and development initiatives will be accurate. Furthermore, unexpected
technical delays in completing these initiatives could lengthen development
schedules and result in the Company missing opportunities to generate revenues
based on the products or technologies developed from these initiatives. There
can be no assurance that the products derived from acquired in-process
research and development activities will achieve market acceptance.

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.

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<PAGE>

Intense Competition

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. In addition, following the recent 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. 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. Examples of this strain include increased cost and manpower in the
administrative and engineering areas to bring the business and accounting
practices of the acquired companies in line with Spectrum's existing
manufacturing and accounting procedures. In addition, the acquisitions of 3L
Limited and Alex Computer each resulted in a charge related to the write-off
of acquired in process research and development that substantially impacted
the Company's results of operations during the year each company was acquired.
The amount of the charge taken in 1997 relating to the acquisition of 3L
Limited was $865,000. The amount of the charge taken in 1998 relating to the
acquisition of Alex Computer was $2.6 million, which accounted for most of the
Company's net loss for 1998.

The Company manages the integration of newly-acquired operations and
mitigates this strain on its existing operations through the use of core
acquisition teams. The management team of newly-acquired operations is
typically retained to maintain operational continuity. The Company's ability
to successfully expand its operations will depend in part upon its ability to
attract and retain highly

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<PAGE>

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. The Company does not presently have plans to acquire any additional
companies.

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 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

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<PAGE>

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. To date, the recent economic difficulties being felt in parts of Asia
have not had a significant, direct impact on the Company's business, financial
condition and results of operations although the Company believes that the
Asian economic crisis has created a more conservative purchasing atmosphere in
the computer industry generally.

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 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 operating expenses have been
recognized in currencies other than the U.S. dollar, principally the Canadian
dollar. Thus, fluctuations in the exchange rates between these currencies and
the U.S. 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 U.S. dollar, the Company's reported U.S. dollar
operating expenses and net income may be materially and adversely affected.
The Company attempts to mitigate some of the risks of exchange rate
fluctuations between the U.S. dollar and the Canadian dollar by denominating
many of its payment obligations in U.S. 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. For the years ended December
31, 1997 and 1998, the Company had foreign currency translation gains of
$323,000 and $287,000, respectively.

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<PAGE>

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. Although the Company generally obtains non-competition and
confidentiality agreements from its officers and other employees, the Company
has not entered into any employment agreements with any of its employees, and
there can be no assurance that the Company's employees will continue in their
present capacity for any particular period of time. 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.

Risks of Year 2000 Noncompliance

A significant percentage of the software that runs most of the
computers worldwide relies on two-digit codes to reflect the last two digits
of a year in performing computations and decision-making functions. Commencing
on January 1, 2000, these computer programs may fail due to the inability to
interpret date codes properly, for example, misinterpreting "00" as the year
1900 rather than 2000. While the Company does not expect to incur any costs in
updating such programs, there can be no assurance that such conversion
programs will be successful at the expected cost. A number of the Company's
material suppliers have yet to return their certification to the Company that
their systems are Year 2000 compliant. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

Possible Volatility of Price of Common Shares

The market prices for the securities of high technology companies
have been volatile. In addition to the factors set forth above, any one or
more of which could adversely affect the market price of the Common Shares,
factors such as fluctuations in the market prices of the common stock of the
Company's major competitors could cause the market price of the Common Shares
to fluctuate substantially. In addition, the stock markets from time to time
have experienced extreme price and volume fluctuations that have particularly
affected the market prices for the stocks of high technology companies and
that often have been unrelated to the operating results of such companies.
These broad market fluctuations, as well as general economic, political and
market conditions such as recessions or international currency fluctuations,
could adversely affect the market price of the Common Shares. Finally, the
exercise of certain existing stock options which have exercise prices below
the then-prevailing market price of the Common Shares could have a depressive
effect on the market price of the Common Shares. There can be no assurance
that a more active trading market will develop and continue after completion
of this Offering or that the market price of the Common Shares will not
decline below the public offering price of the Common Shares.

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<PAGE>

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

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 microprocessor ........ 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 has initiated a lawsuit against Alex Informatics Inc.
seeking recovery of approximately $255,000 in expenses incurred in connection
with the acquisition of the net assets of Alex Computer reimbursable to
Spectrum under the terms of the acquisition agreement relating to the purchase
of that company.

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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 March 31, 1999 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.

Number of Shares Percentage of
Name and Address(1) Beneficially Owned(2) Ownership(2)
- ------------------- --------------------- --------------

George Henry(3)

c/o G. Howard Associates Inc.
1725 York Avenue
New York, New York 10128............... 811,454 8.1%

Kenneth A. Spencer(4)..................... 23,334 *

Barry W. Jinks(5)......................... 439,199 4.2%

Martin McConnell(6)....................... 87,000 *

Brian Lowe(7)............................. 67,100 *

Douglas Johnson(8)........................ 54,500 *

David Hobbs(9)............................ 65,500 *

Ronald Wages(10).......................... 35,334 *

Andrew Harries............................ - -

Pascal Spothelfer......................... - -

John E. Brennan(11)....................... 77,334 *

Charles C. Johnston(12)................... 317,434 3.2%

Samuel Znaimer(12)........................ 22,334 *

Andrew Talbot(13)
c/o Alex Informatics Inc.
1930 Gagnon Street
Lachine, PQ H8T 3M6
Canada................................. 61,809 *

Alex Computer(14)
c/o Alex Informatics Inc.
1930 Gagnon Street
Lachine, PQ H8T 3M6
Canada................................. 821,192 8.2%

All directors and executive officers
as a group (12 persons)(15).............. 1,189,069 11.0%

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

* Less than one percent.

(footnotes on following page)

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<PAGE>

(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 10,035,654
Common Shares outstanding as of March 31, 1999, 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 March 31, 1999.

(3) Includes 8,334 Common Shares issuable upon the exercise of options.

(4) Includes 3,334 Common Shares issuable upon the exercise of options.

(5) Includes 410,771 Common Shares issuable upon the exercise of options.

(6) Includes 84,000 Common Shares issuable upon the exercise of options.

(7) Includes 66,500 Common Shares issuable upon the exercise of options.

(8) Includes 53,500 Common Shares issuable upon the exercise of options.

(9) Includes 58,000 Common Shares issuable upon the exercise of options.

(10) Includes 33,334 Common Shares issuable upon the exercise of options.

(11) Includes 8,334 Common Shares issuable upon the exercise of options.

(12) Includes 18,334 Common Shares issuable upon the exercise of options.

(13) Represents 54,083 Common Shares acquired from Alex Computer and 7,726
Common Shares issuable upon the exercise of warrants acquired from Alex
Computer, in each case immediately following the closing of the
acquisition of Alex Computer by the Company.

(14) Includes 102,649 Common Shares issuable upon the exercise of warrants
issued in connection with the acquisition of Alex Computer.

(15) Includes 754,441 Common Shares issuable upon the exercise of options.

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<PAGE>

Item 5. NATURE OF TRADING MARKET.

The Common Shares have been traded under the symbol "SSPI" 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:

High Low High Low
---- --- ---- ---
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$7.750 US$4.750 Cdn$10.500 Cdn$6.750
Second Quarter .......... 6.125 4.375 8.500 6.400
Third Quarter ........... 9.000 4.750 11.800 6.600
Fourth Quarter .......... 8.250 4.750 11.250 6.750
Calendar Year 1998
First Quarter ........... US$7.000 US$5.250 Cdn$9.850 Cdn$7.500
Second Quarter .......... 6.563 4.625 9.200 7.000
Third Quarter ........... 5.625 2.500 7.800 4.100
Fourth Quarter .......... 4.000 2.500 6.750 3.550
Calendar Year 1999
First Quarter ........... US$3.688 US$1.875 Cdn$5.500 Cdn$2.750

At March 31, 1999, the Company had 159 shareholders of record and
10,268,954 Common Shares outstanding, including 233,300 Common Shares held in
treasury. Of these amounts, there were 131 U.S. shareholders of record holding
a total of 9,350,017 Common Shares, or 91.05% 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 investment to acquire control

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<PAGE>

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.

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

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<PAGE>

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.

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

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<PAGE>

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 $2,157.

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. 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

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<PAGE>

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

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.

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

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<PAGE>

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:

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.

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<PAGE>

Item 8. SELECTED CONSOLIDATED FINANCIAL DATA.

The selected consolidated financial data for the Company presented
below under the captions "Statements of Operations Data" for the years 1994,
1995, 1996, 1997 and 1998 and "Balance Sheet Data" as of December 31, 1994,
1995, 1996, 1997 and 1998, 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, 1997 and 1998 and for each of the years in
the three year period ended December 31, 1998 and the auditors' report thereon
are included elsewhere in this Annual Report. The "Statements of Operations
Data" for fiscal year 1994 and the "Balance Sheet Data" as of December 31,
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. For a description of the Company's unaudited
pro forma results of operations as if the acquisition of Alex Computer had
taken place on January 1, 1997, see "Pro Forma Consolidated Financial
Statements" included elsewhere in this Annual Report.

<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1994 1995 1996 1997 1998(1)
(In thousands, except per share data)
(U.S. GAAP)
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Sales $11,999 $12,904 $20,063 $26,207 $26,000
Cost of sales 5,209 5,688 8,340 11,180 10,607
------- ------- ------- ------- -------
Gross profit 6,790 7,216 11,723 15,027 15,393
General and administrative 1,635 2,068 3,049 3,146 3,417
Sales and marketing 4,283 3,198 3,880 4,769 7,204
Depreciation and amortization expenses 260 422 497 644 1,299
Research and development expense 338 1,340 2,130 2,536 4,374
Acquired in-process research and development charge -- -- -- 872 2,640
------- ------- ------- ------- -------
Earnings (loss) from operations 274 188 2,167 3,060 (3,541)
Interest and bank charges (30) (31) (23) 2 (149)
Other income 196 484 29 12 (7)
------- ------- ------- ------- -------
Earnings (loss) before income taxes and
discontinued operations 440 641 2,173 3,074 (3,697)
Income taxes (recovery) 120 365 724 1,534 (789)
------- ------- ------- ------- -------
Earnings (loss) from continuing operations 320 276 1,449 1,540 (2,908)
Earnings (loss) from discontinued operations (1,905) (1,027) 129 (535) --
------- ------- ------- ------- -------
Net earnings (loss) $(1,585) $ (751) $ 1,578 $ 1,005 $(2,908)
======= ======= ======= ======= =======

Foreign currency translation (506) 216 (108) (357) (894)
------- ------- ------- ------- -------
Comprehensive earnings (loss) (2,091) (535) 1,470 648 (3,802)
------- ------- ------- ------- -------
Basic Earnings (loss) per share from continuing operations $ 0.04 $ 0.03 $ 0.16 $ 0.17 $ (0.29)
Basic Earnings (loss) per share from discontinued (0.22) (0.11) 0.01 (0.06) --
------- ------- ------- ------- -------
operations
Basic Earnings (loss) per share $(0.18) $(0.08) $0.17 $0.11 $(0.29)
------- ------- ------- ------- -------
Weighted average number of common shares outstanding
(basic) 8,759 9,001 9,195 9,235 9,860
Diluted earnings (loss) per share from continuing
operations $ 0.04 $0.03 $0.15 $0.16 $(0.29)
Diluted earnings (loss) per share from discontinued
operations (0.21) (0.11) 0.01 (0.06) --
------- ------- ------- ------- -------
Diluted earnings (loss) per share $(0.17) $(0.08) $ 0.16 $0.10 $(0.29)
------- ------- ------- ------- -------
Weighted average number of common shares outstanding
(Diluted) 9,120 9,575 9,782 9,608 9,860

<CAPTION>
At December 31,
--------------------------------------------------------
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $ 4,964 $ 5,614 $ 7,032 $ 7,514 $ 4,970
Total assets 10,552 11,368 14,983 16,484 19,447
Long-term debt, net of current maturities 37 10 -- 75 75
Shareholders' equity 7,937 8,088 9,923 10,487 11,761
</TABLE>

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

(1) Includes results of operations of Alex Computer from March 17, 1998, the
effective date of the acquisition of substantially all the assets of Alex
Computer. The consideration paid and assets acquired in connection with
such acquisition were transferred on May 1, 1998.

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<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,
----------------------------------------------------------------------------
1994 1995 1996 1997 1998
------------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Exchange rate at end of
period ....................... US$0.7128 US$0.7323 US$0.7246 US$0.6991 US$0.6504
Average exchange rate during
period ....................... 0.7300 0.7305 0.7334 0.7223 0.6703
High exchange rate during
period ....................... 0.7632 0.7829 0.7472 0.7415 0.7105
Low exchange rate during
period ....................... 0.7103 0.7023 0.7274 0.7009 0.6341
</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. Under the terms of a typical
development contract, Spectrum is obligated to deliver a finished DSP system
or product consisting of hardware, custom chip set and software, all to meet
performance specifications established between the parties. 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.

Beginning with the first quarter of 1998, the Company adopted a
policy of publishing its financial statements in United States dollars and
preparing its financial statements in accordance with U.S. GAAP. In accordance
with the views of the Commission, the Company has re-stated the historical
financial statements and data contained herein to U.S. GAAP and using US$.

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<PAGE>

Results of Operations

Years Ended December 31,
----------------------------
1996 1997 1998
---- ---- ----
Sales 100.0% 100.0% 100.0%
Cost of sales 41.6 42.7 40.8
------ ------ -----

Gross margin 58.4 57.3 59.2
Administrative, sales and marketing expenses 34.5 30.2 40.9
Depreciation and amortization expenses 2.5 2.5 5.0
Research and development expenses 10.6 9.7 16.8
Acquired in-process research and
development charge -- 3.3 10.1
------ ------ -----

Earnings from operations 10.8 11.6 (13.6)
Interest and bank charges (0.1) 0.0 (0.6)
Other income 0.1 0.0 0.0
------ ------ -----

Earnings before income taxes and discontinued
operations 10.8 11.6 (14.2)
Income taxes (recovery) 3.6 5.8 3.0
------ ------ -----

Earnings from continuing operations 7.2 5.8 (11.2)
Earnings (loss) from discontinued operations 0.6 (2.0) 0.0
------ ------ -----

Net earnings (loss) 7.8% 3.8% (11.2)%
====== ====== =====

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

Sales. Sales from continuing operations for 1998 were relatively
constant at $26,000,000, compared to sales of $26,207,000 for 1997. Included
in sales for 1998 were development contract fees of $1,530,000, or 5.9% of
sales for the year, compared to development contract fees of $1,589,000, or
6.1% of sales, for 1997. Also included in sales for 1998 were revenues from
the Company's internally developed C3X, C4X and C6X products of $7,511,000, or
28.9%, of sales for the year, compared to $6,205,000, or 23.7%, of sales for
1997. Also included in sales for 1998 were revenues from the sale of
Loughborough products of $4,872,000, or 18.7% of sales, compared to sales of
Loughborough products of $12,234,000, or 46.7% of sales, during 1997. Sales
for 1998 also reflect the inclusion of $5,791,000, or 22.3% of sales, from
Alex Computer which was acquired in 1998.

Gross Profit. Gross profit increased to $15,393,000 for 1998 from
$15,027,000 for 1997, an increase of 2.4%. Gross margin (profit as a
percentage of sales) increased to 59.2% for 1998 from 57.3% for 1997. The
increase in gross margin was due primarily to increased sales in higher gross
margin, internally developed products as opposed to licensed products.

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 1998 were
$10,621,000, or 40.9% of sales for the year, compared to $7,915,000, or 30.2%,
of sales for 1997. AS&M expenses are net of foreign exchange gains of $287,000
for 1998, compared to foreign exchange gains of $323,000 for 1997. AS&M
expenses were higher by

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<PAGE>

$2,706,000 in 1998 due mainly to the costs associated with increased European
and Asian sales and marketing initiatives (approximately $1,016,000), an
increase in the Company's North American sales and marketing staff levels
(approximately $1,062,000) and the inclusion of AS&M expenses of Alex Computer
Systems, which was acquired in 1998 (approximately $650,000).

Amortization. Amortization consists of the depreciation of the
Company's fixed assets and amortization of goodwill and other intangibles.
Amortization expense for 1998 was $1,299,000, an increase of $655,000, or
101.7%, over 1997. The increase in amortization expense was due primarily to
the amortization of an increased investment in goodwill and other intangibles
related to the acquisition of the net assets of Alex Computer in 1998.

Acquired In-process Research and Development Charge. Acquired
in-process research and development ("IPR&D") represents the value assigned in
a purchase business combination to research and development projects of the
acquired business that were commenced but not yet completed at the date of
acquisition and which, if unsuccessful, have no alternative future use in
research and development activities or otherwise. An IPR&D charge of
$2,640,000 was expensed in 1998, compared to $872,000 in 1997. The 1998 charge
was recorded in connection with the purchase of the net assets of Alex
Computer based on management's discounted cash flow valuation. The 1997 charge
was recorded in conjunction with the purchase of 3L Limited.

Although the Company previously reported its quarterly and annual
results for 1998 in accordance with established accounting practice, in April
1999 it adjusted certain amounts stated in its 1998 consolidated financial
statements in response to new guidance recently provided by the Securities and
Exchange Commission to the accounting profession related to the valuation of
IPR&D in purchase transactions. None of these adjustments impact the Company's
net operating cash flow.

Research and Development. Research and development ("R&D") expenses
consist primarily of salaries, related personnel benefits, engineering service
costs relating to development contract fees and direct overhead costs. R&D
expenses were $4,374,000 for 1998, or 16.8% of sales for the period, compared
to $2,536,000 for 1997, or 9.7% of sales for the period. R&D expenses were
higher in 1998 than in 1997 since a significant portion of 1997 R&D expenses
qualified for capitalization, while all R&D expenses for 1998 were expensed as
incurred. Actual R&D expenditures for 1998 were $4,851,000, an increase of
$618,000 over 1997. The increase in actual expenditures resulted primarily
from an increase in R&D spending to develop the Company's Analog Devices-based
product line.

Other Income. Other income, consisting primarily of interest income
on short-term deposits and interest expense on bank indebtedness, was an
expense of $156,000 for 1998 compared to other income of $14,000 for 1997.
This change was due primarily to increased working capital borrowings under
the Company's Line of Credit during 1998.

Income Taxes. The Company's income tax provision (recovery) for 1998
was $(789,000), or (21.3%) of earnings before taxes and discontinued
operations, compared to $1,534,000, or 49.9% of earnings before taxes and
discontinued operations for 1997. The percentage for 1998 was unusually low
due to the significant impact of the acquired IPR&D charge in the first
quarter of 1998, a significant portion of which is non-deductible for tax
purposes. The Company's income tax provision (recovery) for 1998 was 74.6% of
earnings before taxes and the charge related to IPR&D.

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<PAGE>

Excluding the portion of the income tax provision related to the acquired IPR&D,
the remaining income tax provision was 30.3% of earnings before taxes and the
charge related to IPR&D.

Net Earnings. The Company had earnings (loss) from continuing
operations for 1998 of $(2,908,000), compared to earnings (loss) from
continuing operations for 1997 of $1,540,000. Earnings (loss) per share
(basic) from continuing operations in 1998 was $(0.29) per share, compared to
earnings (loss) per share (basic) from continuing operations of $0.17 per
share in 1997. Earnings (loss) from continuing operations before the charge
related to acquired IPR&D for 1998 was $(268,000), or earnings (loss) of
$(0.03) per share (basic), compared to earnings (loss) from continuing
operations before the charge related to acquired IPR&D of $2,412,000, or
earnings (loss) of $0.26 per share (basic) in 1997.

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

Sales. Sales from continuing operations in 1997 were $26,207,000, an
increase of $6,144,000, or 30.6%, over sales in 1996. Included in 1997 sales
were development contract fees of $1,589,000, or 6.1% of 1997 sales, compared
to development contract fees in 1996 of $1,700,000, or 8.5% 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 the
release of new products directed at the signal intelligence marketplace which
generated an incremental $7,699,000 in sales, as well as an increase in sales
of Loughborough products of $1,240,000. This growth in sales was offset in
part by declines in general commercial sales of approximately $2,689,000. The
Company believes the sale of Loughborough products will continue to account
for a decreasing percentage of the Company's sales. See "Business--Amendment
of the Loughborough License."

Gross Profit. Gross profit increased to $15,027,000 for 1997 from
$11,723,000 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.

Administrative, Sales and Marketing. AS&M expenses for 1997 were
$7,915,000, or 30.2% of 1997 sales, compared to $6,929,000 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 expenses in 1997 were $644,000, an
increase of $147,000, or 29.4%, 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 were
$2,536,000 in 1997, or 9.7% of 1997 sales, compared to $2,130,000 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 $3,890,000 in 1997, or 14.8% of 1997 sales, compared to
$2,753,000 in 1996, or 13.8% of 1996 sales.

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<PAGE>

Other Income. Other income, consisting primarily of interest income on
short-term deposits was $14,000 in 1997 compared to other income in 1996 of
$6,000.

Income Taxes. Deferred income taxes for 1997 were $1,534,000, or 49.9%
of earnings before taxes and discontinued operations, compared to $724,000, or
33.3% of earnings before taxes and discontinued operations for 1996.

Net Earnings. The Company had earnings from continuing operations in
1997 of $1,540,000 compared to earnings of $1,449,000 in 1996. Earnings per
share (basic) from continuing operations in 1997 was $0.17 per share, compared
to earnings per share (basic) from continuing operations of $0.16 per share in
1996.

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 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 the low gross margins prevalent in this market
segment. Sales of desktop CTI products accounted for 32.2% of sales in 1996
and 1.9% of sales in 1997. The Company's desktop CTI operations were closed
effective December 31, 1997.

Liquidity and Capital Resources

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

The Company has a credit facility with the Bank of Montreal (the
"Bank") consisting of a Cdn$5,000,000 (approximately US$3,300,000) operating
line of credit (the "Line of Credit"). The Company's US dollar borrowing
capacity under its Canadian dollar-denominated Line of Credit will vary period
to period based on exchange rate fluctuations. Borrowings under the Line of
Credit bear interest at the Bank's US base rate plus 1/2%, unless the
borrowings are denominated in Canadian dollars, in which case the rate of
interest is the Bank's prime 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 and inventories. The Line of Credit agreement requires the Company
to maintain certain financial ratios, including a current ratio of 1.50 to
1.00 and a debt to tangible net worth ratio of 1.25 to 1.00. The Company
believes it is in compliance with the terms of the Line of Credit. Borrowings
under the Line of Credit are secured by substantially all of the Company's
current assets. At March 31, 1999, the Company had net outstanding borrowings
under the Line of Credit of approximately US$233,000.

At December 31, 1998 and December 31, 1997, the Company's net cash
(overdraft) position was $(509,000) and $1,383,000 respectively. Net cash
provided by (used in) operations, financing and investments was $310,000 and
$(94,000) in the years ended December 31, 1998 and 1997 respectively. For
1998, cash used in operations, financing and investments consisted primarily
of

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<PAGE>

cash generated from the issuance of Common Shares, warrants and long-term debt.
Cash was used primarily for the acquisition of the net assets of Alex Computer
Systems, funding operations, and the purchase of property and equipment and
software and related development costs. 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 outstanding
stock options. Cash was used primarily for the acquisition of 3L Limited, to
increase inventories, fund discontinued operations, purchase treasury shares and
for the purchase of property and equipment and software and related development
costs. For 1996, cash provided by operations, financing and investments
consisted principally of cash from continuing and discontinued operations and
the proceeds from the issuance of Common Shares upon the exercise of outstanding
stock options. Cash was used primarily to increase accounts receivable and for
the purchase of property and equipment and software and related development
costs.

Accounts receivable, net at December 31, 1998 and December 31, 1997
was $5,404,000 and $6,549,000 respectively. The Company's standard collection
terms are net 30 days, subject to adjustment for certain customers.

The Company made capital expenditures of $1,036,000 and $2,433,000
during 1998 and 1997, respectively, primarily for computer equipment and
software and related development costs. In 1997, the Company invested
$1,202,000 in the purchase of treasury shares and invested $746,000 in the
acquisition of 100% of the shares of 3L Limited, net of $188,000 in cash
acquired. On March 17, 1998, the Company effectively acquired pursuant to an
acquisition agreement the net assets of Alex Computer Systems. The
consideration paid by the Company consisted of $675,000 in cash, the
assumption of $1,074,000 in liabilities, and the issuance of 772,626 Common
Shares and a two year warrant to purchase 110,375 Common Shares of an exercise
price of Cdn$9.06 (USD$6.34) per share.

In March 1999, the Company entered into an agreement with Technology
Partnerships Canada ("TPC"), an agency of the Canadian government, providing
for an investment in the Company to finance approximately one-third of the
Company's research and development costs to develop a new product line
targeted to the telecommunications market. The agreement provides for a
maximum commitment by TPC of $4.35 million through 2002. The Company plans to
use the funds to accelerate development of next-generation hardware and
software systems that can be deployed in high-end commercial applications,
such as telecommunications servers and wireless base stations. The investment
is structured as a repayable investment, with repayment beginning no earlier
than 2001, by way of a 2.5% royalty on the new products being financed by the
investment. If the Company has not paid at least $7.4 million in royalties to
TPC by December 31, 2006, royalties shall continue to be due at a rate of 2.5%
until an aggregate of $7.4 million in royalties has been paid. The investment
is also repayable immediately upon the occurrence of certain events of
default, which include bankruptcy events. Otherwise, the Company is not
required to repay the investment except by way of royalties, if any, on the
products financed by the investment. TPC did not receive an equity
participation in the Company in connection with its investment.

The Company believes that cash generated from operations and
borrowings available under the Line of Credit, as well as funds received from
TPC, will be sufficient to meet its working capital and capital expenditure
requirements for at least the next 12 months. However, the Company may in the
future require additional equity or debt financing to meet its working
capital, property and equipment and acquisition requirements. There can be no
assurance that additional financing will

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<PAGE>

not be required sooner, or, if required, that it will be available on a timely
basis or on terms satisfactory to the Company.

Charges Related to Acquired In-process Research and Development

Over the last two years, the Company completed two acquisitions, some
of the assets of which included in-process research and development. The
Company regarded its acquisition of 3L Limited as an opportunity to provide
more complete DSP software solutions. The Company regarded its acquisition of
Alex Computer as an opportunity to expand its products offerings to include
products based on the Analog Devices ("AD") processor. The acquisitions of 3L
Limited and Alex Computer were accounted for using the purchase method of
accounting. A portion of the purchase price for each acquisition was allocated
to in-process research and development, which resulted in a charge of
approximately $872,000 related to the 3L Limited acquisition in 1997 and a
charge of $2,640,000 related to the Alex Computer acquisition in 1998.

The efforts required to develop the acquired in-process research and
development into commercially viable products principally relate to the
completion of all planning, designing and testing activities that are
necessary to establish that the products can meet their design requirements,
including function, features and technical performance requirements.

The Company based its determination of the acquired in-process
research and development allocation on recently issued guidance by the
Securities and Exchange Commission and considered such factors as degree of
completion, technological and market uncertainties, costs incurred and
projected costs to complete. Other than one 3L Limited project discontinued
due to poor market conditions, acquired in-process research and development
projects continue to progress, in all material respects, consistent with
management's original assumptions used to value the acquired in-process
research and development. See Note 2 of Notes to Consolidated Financial
Statements.

Alex Computer Systems, Inc.

The acquired in-process research and development was valued using a
cash flow model, under which projected income and expenses attributable to the
purchased research and development were identified and discounted to arrive at
a present value. Cash flows related to the acquisition of Alex Computer were
discounted using discount rates ranging from 21% to 28% depending on risks,
probabilities and uncertainties, including inherent technical, market
acceptance and other risks. The Company assumed revenues would occur evenly
throughout each relevant period. and assumed direct overhead costs as
percentage of revenues of 15% for 1999, 14% for 2000 and 14% for 2001.

As of the acquisition date, Alex Computer was conducting significant
in-process research and development into five new software and hardware
projects to which a portion of the Alex Computer purchase price was allocated.
At the date of acquisition, these projects had not reached technological
feasibility and had no alternative future uses. The five in-process research
and development projects included:

Rugged Impedance Cables - an inter-processor connect scheme designed to
significantly increase the distance over which high bandwidth signals
may be reliably transmitted. At the time of the acquisition, Alex
Computer was in the design/testing stage of completion. The Company
estimated the fair value of the IPR&D at $60,000 and the cost of
completion at

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<PAGE>

$5,000. The project was completed in July 1998. At the time of the
acquisition, the Company regarded technical feasibility as the
principal risk relating to the project.

Hammerhead Development System - a development platform for generation
two-based systems, an AD processor offering an improvement in
performance to then-existing technologies. At the time of the
acquisition, Alex Computer was at the concept/pre-design stage of
completion. The Company estimated the IPR&D had nominal value and the
cost of completion at $380,000. The Company expects to complete the
project in late 1999. At the time of the acquisition, the Company
regarded technical feasibility and market acceptance as the principal
risks relating to the project.

Hammerhead VME, PCI, cPCI boards and PMC Modules - circuit board
architectures built around AD's generation two processor. At the time
of the acquisition, Alex Computer was at the concept/pre-design stage
of completion. The Company estimated the fair value of the IPR&D at
$1,570,000 million and the cost of completion at $705,000. Company
expects to complete the project in late 1999. At the time of the
acquisition, the Company regarded technical feasibility, accurately
estimating future costs and market acceptance as the principal risks
relating to the project.

Apex Software - a comprehensive programming environment which
simplifies the development of user parallel applications while
retaining efficient, optimized code. At the time of the acquisition,
Alex Computer was at the design stage of completion. The Company
estimated the fair value of the IPR&D at $590,000 and the cost of
completion at $120,000. The project was completed in late 1998. At the
time of the acquisition, the Company regarded technical feasibility as
the principal risk relating to the project.

Apex Trace Software - a visualization tool to provide developers with
accurate non-intrusive timings of system operation and multiple
processor interaction. At the time of the acquisition, Alex Computer
was at the design/testing stage of completion. The Company estimated
the fair value of the IPR&D at $430,000 and the cost of completion at
$140,000. The project was completed in late 1998. At the time of the
acquisition, the Company regarded technical feasibility and accurately
estimating future costs as the principal risks relating to the project.

3L Limited

The acquired in-process research and development was valued using a
cash flow model, under which projected income and expenses attributable to the
purchased research and development were identified and discounted to arrive at
a present value. Cash flows related to the acquisition of 3L Limited were
discounted using a 20% discount rate for risks, probabilities and
uncertainties, including inherent technical, market acceptance and other
risks. The Company assumed revenues would occur evenly throughout each
relevant period and assumed direct overhead costs as percentage of revenues of
15% for each of 1998, 1999 and 2000.

As of the acquisition date, 3L Limited was conducting significant
in-process research and development into two significant new software products
to which a portion of the 3L Limited purchase price was allocated. At the date
of acquisition, these projects had not reached technological

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<PAGE>

feasibility and had no alternative futures. Descriptions of the in-process
research and development projects are as follows:

SHARC Parallel C Software - a programming environment for the SHARC
processor which simplifies the development of user parallel
applications while retaining efficient, optimized code. At the time of
the acquisition, 3L Limited was at the concept/pre-design stage of
completion. The Company estimated the fair value of the IPR&D at
$525,000 and the cost of completion at $95,000. The project was
completed in April 1998. At the time of the acquisition, the Company
regarded technical feasibility and market acceptance as the principal
risks related to the project.

C4x 3.0 Parallel C - a multi-processor upgrade to the C compiler tools
for Texas Instruments' C4x processor. At the time of the acquisition,
3L was at the design stage of completion. The Company estimated the
fair value of the IPR&D at $347,000 and the cost of completion at
$85,000. The project was discontinued in December 1997 due to poor
market conditions. At the time of the acquisition, the Company regarded
technical feasibility and market acceptance as the principal risks
related to the project.

Inflation, Foreign Currency Fluctuations and Hedging

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 operating expenses and net income may be
materially and adversely affected. Since 1995, the Company has entered into
futures contracts to attempt to reduce a portion of its exposure to foreign
exchange rate fluctuations. Such contracts typically have maturities of no
greater than three months when entered into. The market price of such
contracts generally approaches the spot exchange rates as the contract
approaches expiration of its term. The maximum amount the Company has hedged
under such futures contracts at any one time is Cdn$3,000,000. 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
its 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. In
addition, the Company is taking steps to ensure that all relevant
non-information technology systems will be Year 2000 compliant. 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 determined
that its major internal system, the MRP system, is Year 2000 compliant, which
means that internal order processing and filling will be unaffected.

-41-
<PAGE>

The Company has committed 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. The
Company has completed its assessment of internal Year 2000 issues. The Company
does not expect to incur any costs in remediating (where required) any Year
2000 issues relating to its business, other than the time spent by employees
on ensuring compliance. In any case, total costs to the Company with respect
to its Year 2000 compliance activities are 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.

As the Company relies on third party suppliers for utilities,
transportation, and other key services, interruption of supplier operations
could affect the Company's operations, however, this risk is being assessed
and contingency plans being developed. The Company 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. The Company has yet to receive
a certificate from several of its third party suppliers stating that their
systems are Year 2000 compliant. The Company expects to complete its
assessment of third party Year 2000 risks by July 31, 1999. There can be no
assurance that the systems of such suppliers will be converted on a timely
basis.

The Company believes its worst case scenario would be the failure of
one or more of its material third party suppliers to continue to supply the
Company with products. This failure would lead to an interruption of the
Company's business for an indeterminate length of time. The Company is
continuing to monitor this situation, as well as any other potential problem
areas it is able to identify.

The Company's Year 2000 contingency plans are as follows: (i) all
"critical path" systems are being identified and testing will be continuous,
(ii) back-up systems are being put in place for alternate suppliers for all
aspects of production and delivery, and (iii) the Company already has in place
a redundant system of supply for its manufactured products. Continuing
monitoring and risk management are taking place and the Company's contingency
plans will be updated as new issues are identified. 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.

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<PAGE>

Item 10. DIRECTORS AND OFFICERS OF THE COMPANY.

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

Name Age Position
- ---- --- --------

Kenneth A. Spencer(1) ........... 55 Chair of the Board and Director

Barry W. Jinks .................. 45 President, Chief Executive Officer and
Director

Martin McConnell ................ 47 Vice President, Finance, Chief
Financial Officer and Secretary

Brian Lowe ...................... 48 Vice President, Sales

Douglas Johnson ................. 35 Vice President, Logistics

David Hobbs ..................... 43 Vice President, Engineering

Ronald Wages .................... 36 Vice President, Marketing

Andrew Harries(1) ............... 37 Director

Pascal Spothelfer(2) ............ 39 Director

John E. Brennan ................. 52 Director

Charles C. Johnston ............. 64 Director

Samuel Znaimer(2) ............... 42 Director

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

(1) Member of the Compensation Committee
(2) Member of the Audit 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.

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<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.

Andrew Harries has been a Director of the Company since 1999. Mr.
Harries is currently Vice-President, Marketing of Sierra Wireless Inc., a
wireless data modem company he co-founded in 1993.

Pascal Spothelfer has been a Director of the Company since 1999. Mr.
Spothelfer is currently the Senior Vice-President, Strategic Development at
Teekay Shipping (Canada) Ltd. From 1994 to 1998, Mr. Spothelfer served as the
Chief Operating Officer and later President and CEO of NovAtel Inc., a high
tech company specializing in global positioning 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.

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.

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<PAGE>

The Board of Directors met nine times in 1998. 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.
Spothelfer 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
twice in 1998. The Compensation Committee, whose members are Messrs. Harries
and Spencer, recommend to the Board of Directors the compensation for the
Company's key employees. The Compensation Committee met once in 1998.

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<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 1998 was $694,790. 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 1996, 1997
and 1998.

<TABLE>
<CAPTION>
Summary Compensation Table
Securities
Other Annual Underlying
Name and Principal Position Year Salary Bonus Compensation Options(#)
- --------------------------- ---- ------ ----- ------------ ----------

<S> <C> <C> <C> <C> <C>
Barry W. Jinks 1998 $158,155 $ -- $ 291 13,000
President and Chief Executive 1997 158,910 104,985 205 13,000
Officer 1996 141,684 84,622 242 --
</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, 1998.

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 Valued Year End(#) Fiscal Year End(1)
Acquired on Realized ----------------------------- -----------------------------
Name Exercise(#) (Cdn$) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ----------- ------------- ----------- -------------

<S> <C> <C> <C> <C> <C> <C>
Barry W. Jinks 0 N/A 410,771 63,401 $861,538 $ 0

</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, 1998 ($2.88 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 1998, the Board of Directors approved a fee of $670 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.

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
$13,407 per year, payable quarterly. For the last completed financial year,
Mr. Spencer received a total of $13,407 in consulting fees.

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

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<PAGE>

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 March 31, 1999, options to purchase an aggregate of 1,763,884
Common Shares were outstanding under options issued to directors, officers and
eligible employees under the Plan. Exercise prices under the foregoing options
range from $0.48 to $10.47 per share. Of such options, options to purchase
1,018,672 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.

Item 13. INTERESTS OF MANAGEMENT IN CERTAIN TRANSACTIONS.

Not applicable.

PART II

Item 14. DESCRIPTION OF SECURITIES TO BE REGISTERED.

Not applicable.

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<PAGE>

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.

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<PAGE>

Item 19. FINANCIAL STATEMENTS AND EXHIBITS.

(a) Financial Statements

Page(s)
-------

Selected Consolidated Financial Data 32
Management's Discussions and Analysis of Financial Condition
and Results of Operations 33

Index to Consolidated Financial Statements of Spectrum
Signal Processing Inc.
Auditors' Report F-3
Consolidated Balance Sheets (audited) at December 31, 1997 and 1998 F-4
Consolidated Statements of Operations (audited) for the years
ended December 31, 1996, 1997 and 1998 F-5
Consolidated Statements of Stockholders' Equity (Deficit) (audited)
for the years ended December 31, 1996, 1997 and 1998 F-6
Consolidated Statements of Cash Flows (audited) for the years
ended December 31, 1996, 1997 and 1998 F-7
Notes to Consolidated Financial Statements F-8

Index to Financial Statements of Alex Computer Systems, Inc.
(Year end)
Independent Auditors' Report F-23
Balance Sheets (audited) at July 31, 1997
and 1996 F-24
Statements of Income and Retained Earnings (audited) for the
years ended July 31, 1997 and 1996 F-25
Statements of Cash Flows (audited) for the years
ended July 31, 1997 and 1996 F-26
Notes to Financial Statements F-27

Index to Financial Statements of Alex Computer Systems, Inc.
(Interim)
Balance Sheet (unaudited) at February 28, 1998 F-33
Statements of Earnings and Retained Earnings (audited)
for the seven months ended February 28, 1998 F-34
Statements of Cash Flows (audited) for the seven months
ended February 28, 1998 F-35
Notes to Financial Statements F-36

Index to Pro Forma Consolidated Financial Statements of
Spectrum Signal Processing Inc.
Pro Forma Consolidated Statements of Operations (unaudited)
for the years ended December 31, 1997 and 1998 F-41

Notes to Pro Forma Consolidated Financial Statements F-42

F-1

<PAGE>

SPECTRUM SIGNAL PROCESSING INC.

INDEX TO FINANCIAL STATEMENTS

(PREPARED IN ACCORDANCE WITH ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE
UNITED STATES)

<TABLE>
<S> <C>
Auditors' Report........................................................................................... F-3
Consolidated Balance Sheets................................................................................ F-4
Consolidated Statements of Operations...................................................................... F-5
Consolidated Statements of Stockholders' Equity............................................................ F-6
Consolidated Statements of Cash Flows...................................................................... F-7
Notes to Consolidated Financial Statements................................................................. F-8
</TABLE>

F-2
<PAGE>

AUDITORS' REPORT TO THE SHAREHOLDERS

We have audited the consolidated balance sheets of Spectrum Signal Processing
Inc. as at December 31, 1998 and 1997 and the consolidated statements of
operations, stockholders' equity and cash flows for each of the years in the
three year period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 1998
and 1997 and the results of its operations and its cash flows for each of the
years in the three year period ended December 31, 1998 in accordance with
generally accepted accounting principles in the United States.

On February 4, 1999, we reported separately to the shareholders of the Company
on the consolidated financial statements as at and for the periods presented
above, which consolidated financial statements were prepared in accordance with
Canadian generally accepted accounting principles.

KGMG LLP
Chartered Accountants

Richmond, Canada
February 4, 1999

F-3
<PAGE>

SPECTRUM SIGNAL PROCESSING INC.

CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)

PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES.

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
------- -------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................................................. $ 1,693 $ 1,383
Accounts receivable, net of allowance for doubtful accounts of $173 (1997--$170).......... 5,404 6,549
Inventories............................................................................... 4,935 4,061
Prepaid expenses.......................................................................... 203 220
------- -------
12,235 12,213
Property and equipment (Note 3)............................................................. 2,287 2,448
Other assets (Note 4)....................................................................... 4,925 1,823
------- -------
$19,447 $16,484
------- -------
------- -------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank indebtedness (Note 5)................................................................ $ 2,202 $ --
Accounts payable.......................................................................... 3,680 2,990
Accrued liabilities....................................................................... 1,303 1,690
Deferred revenue.......................................................................... -- 19
Current portion of long-term debt (Note 5)................................................ 80 --
------- -------
7,265 4,699
Long-term debt (Note 5)..................................................................... 75 75
Deferred income taxes (Note 7).............................................................. 346 1,223
Shareholders' equity
Share capital (Note 6)
Authorized 50,000,000 common shares, no par value
Issued 10,268,954 (1997--9,459,397).................................................... 16,309 11,373
Outstanding 10,035,654 (1997--9,226,097)
Warrants (Note 6)........................................................................... 140 --
Additional paid-in capital.................................................................. 76 76
Treasury stock, at cost, 233,300 shares (1997--233,300)..................................... (1,232) (1,232)
Retained earnings (deficit)................................................................. (1,671) 1,237
Accumulated other comprehensive income
Cumulative translation adjustments........................................................ (1,861) (967)
------- -------

Commitments and contingencies (Notes 9 & 14)................................................ 11,761 10,487
------- -------
$19,447 $16,484
------- -------
------- -------
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>

SPECTRUM SIGNAL PROCESSING INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT PER SHARE AMOUNTS)
PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Sales (Note 10).................................................................. $26,000 $26,207 $20,063
Cost of sales.................................................................... 10,607 11,180 8,340
------- ------- -------
15,393 15,027 11,723
Expenses
Administrative................................................................. 3,417 3,146 3,049
Sales and marketing............................................................ 7,204 4,769 3,880
Amortization................................................................... 1,299 644 497
Acquired in-process research and development charge............................ 2,640 872 --
Research and development....................................................... 4,374 2,536 2,130
------- ------- -------
18,934 11,967 9,556
------- ------- -------
Earnings (loss) from operations.................................................. (3,541) 3,060 2,167
Other
Interest income (expense) and bank charges..................................... (149) 2 (23)
Other income (expense)......................................................... (7) 12 29
------- ------- -------
(156) 14 6
------- ------- -------
Earnings (loss) before income taxes and discontinued operations.................. (3,697) 3,074 2,173
Income tax expense (recovery) (Note 7)
Current........................................................................ 88 -- --
Deferred....................................................................... (877) 1,534 724
------- ------- -------
(789) 1,534 724
------- ------- -------
Earnings (loss) from continuing operations....................................... (2,908) 1,540 1,449
Earnings (loss) from discontinued operations (Note 11)........................... -- (535) 129
------- ------- -------
Net earnings (loss).............................................................. $(2,908) $ 1,005 $ 1,578
------- ------- -------
------- ------- -------
Earnings (loss) per share (Note 8)
Basic
From continuing operations.................................................. $ (0.29) $ 0.17 $ 0.16
After discontinued operations............................................... $ (0.29) $ 0.11 $ 0.17
Diluted
From continuing operations.................................................. $ (0.29) $ 0.16 $ 0.15
After discontinued operations............................................... $ (0.29) $ 0.10 $ 0.16
Weighted average shares (in thousands)
Basic....................................................................... 9,860 9,235 9,195
Diluted..................................................................... 9,860 9,608 9,782
------- ------- -------
------- ------- -------
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

SPECTRUM SIGNAL PROCESSING INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT NUMBER OF SHARES)
PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES.
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL WARRANTS TREASURY STOCK RETAINED OTHER
-------------------- PAID IN ---------------- ------------------ EARNINGS COMPREHENSIVE
NUMBER AMOUNT CAPITAL NUMBER AMOUNT NUMBER AMOUNT (DEFICIT) INCOME (LOSS)
---------- ------- ---------- ------- ------ -------- ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance
December 31, 1995.. 9,163,974 $9,891 $ 76 -- $ -- (16,400) $ (30) $(1,346) $ (502)
Net earnings....... -- -- -- -- -- -- -- 1,578 --
Foreign currency
translation...... -- -- -- -- -- -- -- -- (108)
Issued for cash
from share
options.......... 79,709 364 -- -- -- -- -- -- --
---------- ------- ---- ------- ---- -------- ------- -------- -------
Balance
December 31, 1996.. 9,243,683 10,255 76 -- -- (16,400) (30) 232 (610)
Net earnings....... -- -- -- -- -- -- -- 1,005 --
Foreign currency
translation...... -- -- -- -- -- -- -- -- (357)
Issued for cash
from share
options.......... 42,381 184 -- -- -- -- -- -- --
Issued for
acquisition of 3L
Limited.......... 173,333 934 -- -- -- -- -- -- --
Purchase of
treasury stock... -- -- -- -- -- (216,900) (1,202) -- --
---------- ------- ---- ------- ---- -------- ------- -------- -------
Balance
December 31, 1997.. 9,459,397 11,373 76 -- -- (233,300) (1,232) 1,237 (967)
Net loss........... -- -- -- -- -- -- -- (2,908) --
Foreign currency
translation...... -- -- -- -- -- -- -- -- (894)
Issued for cash
from share
options.......... 36,931 149 -- -- -- -- -- -- --
Issued for net
assets of Alex
Computer
Systems.......... 772,626 4,787 -- -- -- -- -- -- --
Issuance of
warrants......... -- -- -- 110,375 140 -- -- -- --
---------- ------- ---- ------- ---- -------- ------- -------- -------
Balance,
December 31, 1998.. 10,268,954 $16,309 $ 76 110,375 $140 (233,300) $(1,232) $(1,671) $(1,861)
---------- ------- ---- ------- ---- -------- ------- -------- -------
---------- ------- ---- ------- ---- -------- ------- -------- -------

COMPREHENSIVE
TOTAL INCOME (LOSS)
-------- -------------
<S> <C> <C>
Balance
December 31, 1995.. $ 8,089 $ --
-------
-------
Net earnings....... 1,578 1,578
Foreign currency
translation...... (108) (108)
Issued for cash
from share
options.......... 364 --
-------- -------
Balance
December 31, 1996.. 9,923 1,470
-------
-------
Net earnings....... 1,005 1,005
Foreign currency
translation...... (357) (357)
Issued for cash
from share
options.......... 184 --
Issued for
acquisition of 3L
Limited.......... 934 --
Purchase of
treasury stock... (1,202) --
-------- -------
Balance
December 31, 1997.. 10,487 648
-------
-------
Net loss........... (2,908) (2,908)
Foreign currency
translation...... (894) (894)
Issued for cash
from share
options.......... 149 --
Issued for net
assets of Alex
Computer
Systems.......... 4,787 --
Issuance of
warrants......... 140 --
-------- -------
Balance,
December 31, 1998.. $ 11,761 $(3,802)
-------- -------
-------- -------
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>

SPECTRUM SIGNAL PROCESSING INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)............................................................... $(2,908) $1,005 $1,578
Deduct (add) earnings (loss) from discontinued operations......................... -- 535 (129)
------- ------ ------
Earnings (loss) from continuing operations........................................ (2,908) 1,540 1,449
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities
Amortization................................................................... 1,915 781 641
Acquired in-process research and development................................... 2,640 872 --
Deferred income taxes.......................................................... (826) 1,534 724
Deferred share issue costs..................................................... -- 193 --
Changes in operating assets and liabilities
Accounts receivable............................................................ 1,154 1,882 (3,440)
Inventories.................................................................... (739) (2,311) 571
Prepaid expenses............................................................... 2 311 (230)
Accounts payable............................................................... 149 (366) 501
Accrued liabilities............................................................ 150 488 635
Deferred revenue............................................................... (18) (616) 635
------- ------ ------
Net cash provided by continuing operations.......................................... 1,519 4,308 1,486
------- ------ ------
Earnings (loss) from discontinued operations...................................... -- (535) 129
Deferred income taxes, an item not involving cash................................. -- (340) 64
------- ------ ------
Net cash provided by (used for) discontinued operations............................. -- (875) 193
------- ------ ------
Net cash provided by operating activities........................................... 1,519 3,433 1,679
------- ------ ------
Cash flows from investing activities:
Purchase of property and equipment................................................ (559) (1,040) (1,042)
Proceeds from disposition of property and equipment............................... 1 -- --
Software and related development costs............................................ (477) (1,393) (631)
Acquisition of net assets of Alex Computer, net of cash received.................. (2,204) -- --
Cash received on acquisition of 3L Limited, net of expenses....................... -- 188 --
------- ------ ------
Net cash used for investing activities.............................................. (3,239) (2,245) (1,673)
Cash flows from financing activities:
Increase in bank indebtedness..................................................... 2,036 -- --
Payment of deferred share issue costs............................................. -- -- (193)
Issue of shares from share options................................................ 149 184 364
Principal payments on long-term debt.............................................. (61) (7) (30)
Purchase of treasury shares....................................................... -- (1,202) --
------- ------ ------
Net cash provided by (used for) financing activities................................ 2,124 (1,025) 141
Effect of foreign currency exchange rates on cash and cash equivalents.............. (94) (257) (77)
------- ------ ------
Net increase (decrease) in cash and cash equivalents during the year................ 310 (94) 70
Cash and cash equivalents, beginning of year........................................ 1,383 1,477 1,407
------- ------ ------
Cash and cash equivalents, end of year.............................................. $ 1,693 $1,383 $1,477
------- ------ ------
------- ------ ------
</TABLE>

See accompanying notes to consolidated financial statements.
See supplementary information (Note 13).

F-7
<PAGE>

SPECTRUM SIGNAL PROCESSING INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
EXCEPT SHARE AMOUNTS AND NUMBERS OF SHARES)

PREPARED IN ACCORDANCE WITH UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.

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 base stations, 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 the United States.

Basis of consolidation

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary 3L Limited. All material intercompany balances
and transactions have been eliminated.

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 property and equipment and other assets, and liabilities and
the disclosure of contingent 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 cash equivalents

Cash equivalents include short term deposits, which are all highly
marketable securities with a maturity of three months or less when acquired.
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:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1997
------ ------
<S> <C> <C>
Finished goods....................................................................... $2,683 $2,185
Work in progress..................................................................... 1,132 --
Raw materials........................................................................ 1,120 1,876
------ ------
$4,935 $4,061
------ ------
------ ------
</TABLE>

Research and development costs

Research and development costs are expensed as incurred. Software
development costs related to software which will become an integral part of the
Company's products are, after the establishment of technological feasibility,
capitalized until the product is available for general release to customers.
Annual amortization is the greater of the ratio of current product revenue to
the total current and anticipated product revenue or the straight-line method
over the remaining estimated economic life, generally three years. Amortization
commences when

F-8
<PAGE>

SPECTRUM SIGNAL PROCESSING INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
EXCEPT SHARE AMOUNTS AND NUMBERS OF SHARES)

PREPARED IN ACCORDANCE WITH UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.

1. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

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:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Research and development expense
Continuing operations................................................. $4,374 $2,536 $2,130
Discontinued operations............................................... -- 304 639
Capitalized software and related development costs.................... 477 1,393 631
------ ------ ------
$4,851 $4,233 $3,400
------ ------ ------
------ ------ ------
</TABLE>

Property and equipment

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

<TABLE>
<S> <C>
Computer equipment..................................................................... 30%
Computer software...................................................................... 20%
Furniture and fixtures................................................................. 20%
Laboratory equipment................................................................... 20%
</TABLE>

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

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 1997, 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.

Employee stock plans

The Company accounts for its employee stock option plans using the
intrinsic value method.

Translation of foreign currencies

A majority of the Company's shareholders, customers, and industry analysts
are located in the United States. Accordingly, effective January 1, 1998, the
Company adopted the U.S. dollar as its reporting currency. Historical figures
previously reported in Canadian dollars have been translated into U.S. dollars
as follows: assets and liabilities are translated into U.S. dollars at the rate
of exchange in effect at the balance sheet date and revenue and expense items
are translated at the average rates for the period. Unrealized gains and losses
resulting from the translation to the reporting currency are accumulated in a
separate component of shareholders' equity, described as cumulative translation
adjustments.

The Company's functional currency is the Canadian dollar. The Company's
financial statements are prepared in Canadian dollars before translation to the
U.S. dollar reporting currency. Accordingly, foreign

F-9
<PAGE>

SPECTRUM SIGNAL PROCESSING INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
EXCEPT SHARE AMOUNTS AND NUMBERS OF SHARES)

PREPARED IN ACCORDANCE WITH UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.

1. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

currency denominated balances of the Company are measured in Canadian dollars.
Under this method, monetary assets and liabilities denominated in a foreign
currency have been remeasured in Canadian dollars at the rate of exchange in
effect at the balance sheet date. Other assets, revenue and expense items are
measured using the rate of exchange prevailing at their respective transaction
dates. Exchange gains and losses resulting from the remeasurement of foreign
denominated monetary assets and liabilities in Canadian dollars are reflected in
earnings for the period.

Financial statements of foreign operations for which the functional
currency is the local currency are translated into Canadian dollars using the
current rate at the balance sheet date. Under this method, assets and
liabilities are translated into Canadian dollars at the rate of exchange in
effect at the balance sheet date and revenue and expense items are translated at
the average rates for the period. Unrealized gains and losses resulting from the
translation of the financial statements are deferred and accumulated in a
separate component of shareholders' equity, described as cumulative translation
adjustments.

Goodwill and other intangibles

Goodwill and other intangibles are stated on the basis of cost, based on
fair value at the acquisition date, less accumulated amortization. Amortization
is recorded utilizing the straight-line method over the estimated lives of the
respective assets, generally three to six years.

Revenue recognition

Revenue is recognized upon the later of shipment or when title passes to
the customer. 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, at the time of sale.

Income taxes

The Company calculates its provision for income taxes in accordance with
Statement of Financial Accounting Standard No. 109 "Accounting for Income Taxes"
("FAS 109"), which requires an asset and liability approach to financial
accounting for income taxes. Under this method, deferred income taxes are
recognized for the future income tax consequences attributable to differences
between the financial statement carrying values and their respective income tax
basis (temporary differences). The resulting changes in the net deferred tax
asset or liability are included in income. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which temporary differences are expected to be recovered or settled.
The effect on deferred income tax assets and liabilities of a change in tax
rates is included in income in the period that includes the enactment date.
Deferred income tax assets are evaluated and if realization is not considered
"more likely than not", a valuation allowance is provided.

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.

F-10
<PAGE>

SPECTRUM SIGNAL PROCESSING INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
EXCEPT SHARE AMOUNTS AND NUMBERS OF SHARES)

PREPARED IN ACCORDANCE WITH UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.

1. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

Share issue costs

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

Foreign currency hedging instruments

The Company enters into future exchange contracts to hedge its foreign
currency risks. Such contracts must be effective at reducing the foreign
currency risk associated with the underlying transaction being hedged and must
be designated as a hedge at the inception of the contract.

The Company currently uses future exchange contracts as hedges of firmly
committed transactions. For these contracts, gains and losses are recognized as
other income or expense in the current period, generally consistent with the
period in which the gain or loss of the underlying transaction is recognized.

Impairment of long-lived assets

The Company monitors the recoverability of long-lived assets, based on
factors such as 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, at
which time the asset is written down to fair market value.

Comparative figures

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

Recent accounting pronouncements

Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("FAS") No. 130, "Reporting Comprehensive Income." FAS
No. 130 established standards for reporting and displaying comprehensive income
and its components in the financial statements. The Company adopted FAS No. 130
for its fiscal year 1998.

The FASB issued FAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." FAS No. 131 established standards for the manner in
which public companies report information about operating segments in annual and
interim financial statements. The Company adopted FAS No. 131 for its fiscal
year ended 1998.

The FASB issued FAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities". FAS No. 133 established standards relating to the
recognition and disclosure of all aspects of derivative instruments and hedging
activities. The Company is currently evaluating the impact of FAS No. 133. The
Company will be required to implement FAS No. 133 for its fiscal year ended
2000.

The American Institute of Certified Public Accountants ("AICPA") issued
Statement of Position ("SOP") 97-2, "Software Revenue Recognition." SOP 97-2
established standards relating to the recognition of all aspects of software
revenue. SOP 97-2 required the Company to modify certain aspects of its revenue
recognition policies. The adoption of SOP 97-2 did not have a material impact on
the Company's consolidated results of operations. The Company implemented SOP
97-2 for its fiscal year 1998, on a prospective basis.

F-11
<PAGE>

SPECTRUM SIGNAL PROCESSING INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
EXCEPT SHARE AMOUNTS AND NUMBERS OF SHARES)

PREPARED IN ACCORDANCE WITH UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.

1. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

The AICPA issued SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 requires certain costs related
to the development or purchase of internal-use software, including "upgrades and
enhancements," to be capitalized an amortized over the estimated useful life of
the software. SOP 98-1 is effective for transactions entered into in fiscal
years beginning after December 15, 1998. The Company does not expect the
adoption of SOP 98-1 to have a material impact on the Company's consolidated
results of operations.

2. ACQUISITION OF NET ASSETS OF ALEX COMPUTER SYSTEMS INC.

On March 17, 1998 the Company acquired the majority of the operating assets
and liabilities of Alex Computer Systems Inc, of Ithaca, New York. The
acquisition has been accounted for using the purchase method of accounting and
the results of operations have been consolidated since the date of the
acquisition. The Company's interest in the net assets acquired at assigned
values are as follows:

<TABLE>
<S> <C>
Cash........................................................................................... $ 10
Current assets................................................................................. 1,093
Property and equipment......................................................................... 229
Goodwill and other intangibles................................................................. 4,243
Acquired in-process research and development................................................... 2,640
Current liabilities............................................................................ (933)
Long-term liabilities.......................................................................... (141)
------
Acquisition cost............................................................................... $7,141
------
------
Consideration
772,626 common shares..................................................................... $4,787
110,375 warrants.......................................................................... 140
Cash...................................................................................... 675
Expenses on acquisition................................................................... 1,539
------
$7,141
------
------
</TABLE>

Each Common Share issued pursuant to the acquisition agreement was valued
at the average closing price of the Common Shares on the NASDAQ National Market
during the 30 trading days prior to the date of the acquisition agreement.

Acquired technology valued at $1,010 was acquired as part of the
acquisition of the net assets of Alex Computer Systems ("Alex"). Acquired
technology consisted of Alex's generation one product line, a two-year license
for the use of the Alex name as well as Alex's product brand names, customer
account lists, sales and distribution channels, technical development expertise,
patents, copyrights and existing technical inventory. The Company has
capitalized the value attributable to acquired technology in accordance with the
provisions of FAS No. 2 "Accounting for Research and Development Costs."
Amortization is recorded utilizing the straight-line method over the estimated
useful lives of the respective assets, generally three to five years.

Acquired in-process research and development represents the value assigned
in a purchase business combination to research and development projects of the
acquired business that were commenced but not yet completed at the date of
acquisition and which, if unsuccessful, have no alternative future use in
research and development activities or otherwise. Acquired in-process research
and development consisted of Alex's generation two research and development
projects. Such generation two research and development projects did

F-12
<PAGE>

SPECTRUM SIGNAL PROCESSING INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
EXCEPT SHARE AMOUNTS AND NUMBERS OF SHARES)

PREPARED IN ACCORDANCE WITH UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.

2. ACQUISITION OF NET ASSETS OF ALEX COMPUTER SYSTEMS INC.--(CONTINUED)

not represent an improvement of nor redesign of its generation one products. In
accordance with FAS No. 2 as interpreted by FASB interpretation No. 4, amounts
assigned to acquired in-process research and development meeting the above
criteria must be charged to expense at the date of consummation of the purchase
business combination. In this regard, a charge of $2,640 was recorded in
conjunction with the purchase of the net assets of Alex Computer Systems based
on managements' discounted cash flow valuation.

The following unaudited pro-forma results of operations assume that the
acquisition occurred as of the beginning of the respective periods presented.
The pro-forma information given below 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.

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------
1998 1997
------- -------
(UNAUDITED)
<S> <C> <C>
Revenue..................................................................................... $27,033 $29,544
Earnings (loss) from continuing operations.................................................. (2,911) 2,650
Net earnings (loss)......................................................................... (2,911) 2,115
Earnings (loss) per share
From continuing operations............................................................. $ (0.30) $ 0.29
Net.................................................................................... $ (0.30) $ 0.23
</TABLE>

3. PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Computer equipment..................................................................... $ 2,527 $ 2,103
Computer software...................................................................... 1,039 941
Furniture and fixtures................................................................. 820 753
Laboratory equipment................................................................... 619 503
Leasehold improvements................................................................. 296 296
------- -------
5,301 4,596
Less accumulated amortization.......................................................... (3,014) (2,148)
------- -------
Net book value......................................................................... $ 2,287 $ 2,448
------- -------
------- -------
</TABLE>

4. OTHER ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Software and related development costs, net of accumulated amortization
of $876 (1997--$274)................................................................. $ 1,534 $ 1,823
Goodwill and other intangibles, net of accumulated amortization of $554
(1997--nil).......................................................................... 3,391 --
------- -------
$ 4,925 $ 1,823
------- -------
------- -------
</TABLE>

F-13
<PAGE>

SPECTRUM SIGNAL PROCESSING INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
EXCEPT SHARE AMOUNTS AND NUMBERS OF SHARES)

PREPARED IN ACCORDANCE WITH UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.

5. LONG-TERM DEBT AND BANK INDEBTEDNESS

(a) Bank Indebtedness

The Company has a credit facility with the Bank of Montreal (the "Bank")
consisting of a Cdn $5,000,000 (approximately US$3,300,000) operating line of
credit (the "Line of Credit"). The Company's US dollar borrowing capacity under
its Canadian dollar denominated Line of Credit will vary period to period based
on exchange rate fluctuations. Borrowings under the Line of Credit bear interest
at the Bank's U.S. base rate plus 1/2%, unless borrowings are denominated in
Canadian dollars, in which case the rate of interest is the Bank's prime 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 and inventories. 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.

(b) Long-term debt

<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1997
---- ----
<S> <C> <C>
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........................................................ $ 75 $ 75
Capital lease

The Company leases office equipment under a capital lease expiring August 1, 1999.
Under the terms of the lease, the Company makes monthly installments of $8,
including interest at 9.58%, with a final payment of $24 on August 1, 1999......... 80 --
---- ----
155 75
Less: current portion................................................................... (80) --
---- ----
$ 75 $ 75
---- ----
---- ----
</TABLE>

Minimum principal repayments over the term of the capital lease are as
follows:

<TABLE>
<S> <C>
1999.................................................................................. $ 84
Less: amount representing interest.................................................... (4)
----
80
Less: current portion................................................................. (80)
----
$ --
----
----
</TABLE>

F-14
<PAGE>

SPECTRUM SIGNAL PROCESSING INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
EXCEPT SHARE AMOUNTS AND NUMBERS OF SHARES)

PREPARED IN ACCORDANCE WITH UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.

6. SHARE CAPITAL

(a) Stock option plan

The Company has reserved 2,650,000 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.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1998 1997
------------------------------------- -------------------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE
--------- -------------------------- --------------- --------------------------
CDN USD CDN USD
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year............... 1,657,288 $ 6.63 $4.54 1,493,896 $ 6.69 $4.58
Granted...................................... 312,200 6.80 4.42 330,353 7.74 5.30
Exercised.................................... (36,931) 5.94 3.86 (42,381) 6.03 4.13
Canceled..................................... (168,673) 7.29 4.74 (124,580) 10.22 6.99
--------- ------- ----- --------- ------- -----
Outstanding, end of year..................... 1,763,884 $ 6.62 $4.31 1,657,288 $ 6.63 $4.54
--------- ------- ----- --------- ------- -----
Exercisable, end of year..................... 975,197 $ 5.69 $3.70 918,201 $ 5.34 $3.66
Weighted-average fair value of options
granted
during the year............................ $ 4.42 $2.96 $ 2.89 $1.98

1996
-------------------------------------------
WEIGHTED AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------------- --------------------------
CDN USD
<S> <C> <C> <C>
Outstanding, beginning of year............... 1,216,646 $ 6.38 $4.37
Granted...................................... 416,556 12.50 8.56
Exercised.................................... (79,709) 6.23 4.27
Canceled..................................... (59,597) 11.72 8.03
--------- ------- -----
Outstanding, end of year..................... 1,493,896 $ 6.69 $4.58
--------- ------- -----
Exercisable, end of year..................... 709,456 $ 4.43 $3.03
Weighted-average fair value of options
granted
during the year............................ $ 6.26 $4.29
</TABLE>

Information regarding the stock options outstanding at December 31, 1998 is
summarized below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------------------------
WEIGHTED
AVERAGE
REMAINING
SHARES CONTRACTUAL
RANGE OF EXERCISE PRICES OUTSTANDING LIFE WEIGHTED AVERAGE EXERCISE PRICE
- ----------------------------------- ----------- ---------- --------------------------------
CAD USD
<S> <C> <C> <C> <C>
$ 0.70-$ 4.87...................... 391,697 2.76 years $ 2.25 $ 1.46
$ 5.75-$ 9.90...................... 1,371,731 4.41 years 7.84 5.10
$10.55-$14.75...................... 123 2.50 years 14.75 9.59
$16.10-$16.10...................... 333 2.42 years 16.10 10.47
--------- ---------- ------ ------
$ 0.70-$16.10...................... 1,763,884 4.04 years $ 6.60 $ 4.29

<CAPTION>
OPTIONS EXERCISABLE
---------------------------------------------
SHARES
RANGE OF EXERCISE PRICES EXERCISABLE WEIGHTED AVERAGE EXERCISE PRICE
- ----------------------------------- ---------- --------------------------------
CAD USD
<S> <C> <C> <C>
$ 0.70-$ 4.87...................... 324,172 $ 1.84 $ 1.20
$ 5.75-$ 9.90...................... 650,721 7.60 4.94
$10.55-$14.75...................... 82 14.75 9.59
$16.10-$16.10...................... 222 16.10 10.47
---------- ------ ------
$ 0.70-$16.10...................... 975,197 $ 5.69 $ 3.70
</TABLE>

The options outstanding at December 31, 1998 expire between April 4, 1999
and June 10, 2008.

The Company adopted only the disclosure provisions of Statement of
Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock Based
Compensation", to account for grants under the Company's existing stock based
compensation plans. All options are issued with an exercise price equal to the
market value of the stock on the date of grant. 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

F-15
<PAGE>

SPECTRUM SIGNAL PROCESSING INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
EXCEPT SHARE AMOUNTS AND NUMBERS OF SHARES)

PREPARED IN ACCORDANCE WITH UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.

6. SHARE CAPITAL--(CONTINUED)

value at the grant date for awards under those plans consistent with the
measurement provisions of FAS 123, the Company's net earnings (loss) and
earnings (loss) per share would have been adjusted as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1998 1997 1996
-------- ------ ------
<S> <C> <C> <C>
Net earnings (loss)--as reported......................................... $ (2,908) $1,005 $1,578
Net earnings (loss)--pro forma........................................... (3,848) 86 1,003
Basic earnings (loss) per share--as reported............................. (0.29) 0.11 0.17
Basic earnings (loss) per share--pro forma............................... (0.39) 0.01 0.11
Diluted earnings (loss) per share--as reported........................... (0.29) 0.10 0.16
Diluted earnings (loss) per share--pro forma............................. (0.39) 0.01 0.10
</TABLE>

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:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
--------- ---------- ----------
<S> <C> <C> <C>
Expected dividend yield.......................................... 0% 0% 0%
Expected stock price volatility.................................. 82% 27% 45%
Risk-free interest rate.......................................... 5.5% 7.5% 8%
Expected life of options......................................... 4.7 years 4.5 years 4.5 years
</TABLE>

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

(b) Warrants

As part of the consideration on the purchase at March 17, 1998 of the net
assets of Alex Computer Systems Inc., the Company issued warrants to purchase
110,375 common shares of the Company at Cdn $9.06 (USD $5.89). The warrants
expire on April 30, 2000. The fair value of the warrants was estimated to be Cdn
$1.81 (USD $1.27) per warrant, using the Black-Scholes option-pricing model.

F-16
<PAGE>

SPECTRUM SIGNAL PROCESSING INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
EXCEPT SHARE AMOUNTS AND NUMBERS OF SHARES)

PREPARED IN ACCORDANCE WITH UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.

7. INCOME TAXES

Earnings (loss) from continuing operations before provision of income taxes
consisted of:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1998 1997 1996
-------- ------ ------
<S> <C> <C> <C>
Canadian................................................................. $ (1,796) $2,462 $2,958
Foreign.................................................................. (1,901) 612 (785)
-------- ------ ------
$ (3,697) $3,074 $2,173
-------- ------ ------
-------- ------ ------
</TABLE>

The provision for income taxes consisted of the following:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Current
Canadian................................................................. $ -- $ -- $ --
Foreign.................................................................. 88 -- --
------ ------ ------
Total current............................................................ 88 -- --
------ ------ ------
Deferred
Canadian................................................................. (444) 1,115 843
Foreign.................................................................. (433) 419 (119)
------ ------ ------
Total deferred........................................................... (877) 1,534 724
------ ------ ------
Income tax provision....................................................... $ (789) $1,534 $ 724
------ ------ ------
------ ------ ------
</TABLE>

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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1998 1997 1996
-------- ------ ------
<S> <C> <C> <C>
Combined Canadian federal and
provincial income taxes at expected rate............................... $ (1,686) $1,406 $ 990
Acquired in-process research and
development, not tax deductible........................................ 300 398 --
Permanent and other differences.......................................... 111 (76) 4
Change in valuation allowance............................................ 302 (194) (270)
Foreign losses tax effected at lower rates 96 -- --
State taxes.............................................................. 88 -- --
-------- ------ ------
$ (789) $1,534 $ 724
-------- ------ ------
-------- ------ ------
</TABLE>

As at December 31, 1998 the Company, for Canadian income tax purposes, has
claimed investment tax credits of approximately $6,736 which are available to
reduce future years' income taxes payable. These investment tax credits expire
between 2000 and 2008. The potential tax benefits that may arise from the
utilization of $6,227 of these tax credits have not been recognized in these
financial statements, because their realization is not considered more likely
than not.

F-17
<PAGE>

SPECTRUM SIGNAL PROCESSING INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
EXCEPT SHARE AMOUNTS AND NUMBERS OF SHARES)

PREPARED IN ACCORDANCE WITH UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.

7. INCOME TAXES--(CONTINUED)

The Company has losses for UK income tax purposes of approximately $445
which can be carried forward indefinitely to reduce future taxable income.

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

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets
Tax loss carry forwards........................................................ $ 106 $ 30
Acquired technology and in-process research and
development................................................................. 867 --
Investment tax credits recoverable............................................. 213 229
Share issue costs.............................................................. 109 85
Other 50 25
-------- --------
Total gross deferred tax assets................................................ 1,345 369
Less: valuation allowance...................................................... (539) (237)
-------- --------
Total deferred tax assets...................................................... 806 132
-------- --------
Deferred tax liabilities
Research and development expenses.............................................. (551) (659)
Tax depreciation in excess of accounting....................................... (504) (592)
Investment tax credits......................................................... (97) (104)
-------- --------
Total deferred tax liabilities................................................. (1,152) (1,355)
-------- --------
Net deferred tax liabilities..................................................... $ (346) $ (1,223)
-------- --------
-------- --------
</TABLE>

8. EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share 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, for purposes of
computing diluted earnings per share.

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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Weighted average shares used in computation of
basic earnings per share....................................... 9,860,218 9,234,926 9,194,558
Weighted average shares from assumed conversion
of dilutive options............................................ -- 372,994 587,733
--------- --------- ---------
Weighted average shares used in computation of
diluted earnings per share..................................... 9,860,218 9,607,920 9,782,291
--------- --------- ---------
--------- --------- ---------
</TABLE>

F-18
<PAGE>
SPECTRUM SIGNAL PROCESSING INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
EXCEPT SHARE AMOUNTS AND NUMBERS OF SHARES)

PREPARED IN ACCORDANCE WITH UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.

9. COMMITMENTS

The Company has entered into various operating lease agreements with
remaining terms of up to five years, for office premises and equipment. As at
December 31, 1998, the minimum lease payments in each of the next five years are
approximately as follows:

10. SEGMENTED INFORMATION

In the opinion of management, the Company operates in the digital signal
processing systems industry, and all sales of its products and services are made
in this segment. Management of the Company makes decisions about allocating
resources based on the one operating segment. Substantially all assets and
operations are in Canada. A summary of sales by region and by major customers is
as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
By Region
United States........................................................ $21,821 $22,284 $15,690
Canada and other..................................................... 4,179 3,923 4,373
------- ------- -------
Total Sales............................................................ $26,000 $26,207 $20,063
------- ------- -------
------- ------- -------
By Major Customer
Customer A........................................................... $ 6,251 $ 6,583 $ 6,284
Customer B........................................................... -- 4,843 527
Customer C........................................................... 2,098 1,827 --
</TABLE>

11. DISCONTINUED OPERATIONS

The Company adopted a plan 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
ceased operations in this business as of December 31, 1997. Accordingly, the
results of operations have been disclosed separately from those of continuing
operations for the years presented. The financial position of these discontinued
operations was consolidated in accordance with generally accepted accounting
principles.

F-19
<PAGE>

SPECTRUM SIGNAL PROCESSING INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
EXCEPT SHARE AMOUNTS AND NUMBERS OF SHARES)

PREPARED IN ACCORDANCE WITH UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.

11. DISCONTINUED OPERATIONS--(CONTINUED)

The operating results of this business segment were as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Revenue......................................................... $ -- $ 517 $7,008
Gross margin.................................................... -- 191 1,472
Expenses........................................................ -- 1,066 1,279
Provision for taxes............................................. -- (340) 64
------- ------ ------
Earnings (loss) from discontinued operations.................... $ -- $ (535) $ 129
------- ------ ------
------- ------ ------
</TABLE>

The net assets of discontinued operations are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1998 1997
------ ----
<S> <C> <C>
Current assets............................................................... $ -- $361
Current liabilities.......................................................... -- --
------ ----
$ -- $361
------ ----
------ ----
</TABLE>

12. FINANCIAL INSTRUMENTS

a) Fair value of financial instruments

Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable, bank indebtedness,
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 risk management

The Company utilizes future exchange contracts to manage its exposure to
fluctuations in foreign exchange rates which typically expire within three
months. These instruments are used for purposes other than trading and are
employed in connection with an underlying asset or liability. At December 31,
1998, the Company had futures exchange contracts with a notional principal of
$1,061 (December 31, 1997--$1,020) maturing March 16, 1999. At December 31, 1998
and December 31, 1997, deferred gains and losses on future exchange contracts
were not material to the consolidated financial statements. The counterparties
to these contracts are major commercial financial institutions. Management
believes that losses related to credit risk are remote.

The fair values of future exchange contracts are evaluated by obtaining
quotes from brokers. At December 31, 1998 and December 31, 1997 there were no
carrying amounts related to future exchange contracts on the consolidated
balance sheets. Future exchange contracts to sell $1,061 had an estimated fair
value of $1,051 at December 31, 1998 compared to future exchange contracts to
sell $1,020 with an estimated fair value of $980 at December 31, 1997.

c) 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

F-20
<PAGE>

SPECTRUM SIGNAL PROCESSING INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
EXCEPT SHARE AMOUNTS AND NUMBERS OF SHARES)

PREPARED IN ACCORDANCE WITH UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.

12. FINANCIAL INSTRUMENTS--(CONTINUED)

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.

A substantial amount 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.

13. SUPPLEMENTARY INFORMATION

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-----------------------
1998 1997 1996
------- ---- ----
<S> <C> <C> <C>
Cash paid for
Interest paid............................................................... $ 149 $ 3 $ 3
Income taxes paid........................................................... 15 -- --
Foreign exchange gains...................................................... 287 323 5

Non-cash financing activities
Issue of shares for acquisition of the net assets of
Alex Computer Systems, net of share issue expenses....................... 4,787 -- --
Issue of warrants for acquisition of the net assets of
Alex Computer Systems.................................................... 140 -- --
Issue of shares for acquisition of
3L Limited, net of share issue expenses.................................. -- 934 --
</TABLE>

14. UNCERTAINTY DUE TO THE YEAR 2000

The Year 2000 Issues arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may recognize
the year 2000 as 1900 or some other date, resulting in errors when information
using year 2000 dates is processed. In addition, similar problems may arise in
some systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting the
entity, including those related to the efforts of customers, suppliers, or other
third parties, will be fully resolved.

F-21
<PAGE>

ALEX COMPUTER SYSTEMS, INC.

INDEX TO FINANCIAL STATEMENTS

(EXPRESSED IN UNITED STATES DOLLARS)
JULY 31, 1997 AND 1996

<TABLE>
<S> <C>
Independent Auditors' Report............................................................................... F-23

Balance Sheets............................................................................................. F-24

Statements of Income and Retained Earnings................................................................. F-25

Statements of Cash Flows................................................................................... F-26

Notes to Financial Statements.............................................................................. F-27
</TABLE>

F-22
<PAGE>

INDEPENDENT AUDITORS' REPORT

Stockholders
Alex Computer Systems, Inc.
Ithaca, New York

We have audited the accompanying balance sheets of Alex Computer Systems, Inc.,
as of July 31, 1997 and 1996, and the related statements of income and retained
earnings, and cash flows 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 our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Alex Computer Systems, Inc. as
of July 31, 1997 and 1996, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.

CIASCHI, DIETERSHAGEN, LITTLE &
MICKELSON, LLP

August 28, 1997
Ithaca, New York

F-23
<PAGE>

ALEX COMPUTER SYSTEMS, INC.

BALANCE SHEETS
(EXPRESSED IN UNITED STATES DOLLARS)
JULY 31,

<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........................................................... $ 35,451 $ 49,376
Accounts receivable................................................................. 1,175,122 471,945
Accounts receivable--shareholder.................................................... 156,690 6,160
Inventory........................................................................... 306,256 225,673
Deposits paid--purchases............................................................ 85,500 77,586
Deferred marketing costs............................................................ 105,350 --
Deferred income tax benefit......................................................... 266,505 216,077
---------- ----------
Total current assets............................................................. 2,130,874 1,046,817
Property and equipment, at cost, less accumulated
depreciation of $32,101 in 1997 and $53,626 in 1996................................. 266,406 158,472
Software development costs, less accumulated
amortization of $296,868 in 1997 and $144,531 in 1996............................... 744,471 628,049
---------- ----------
Total assets..................................................................... $3,141,751 $1,833,338
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 404,124 $ 392,131
Accounts payable--shareholder....................................................... 80,871 60,858
NY corporation tax payable.......................................................... 602 349
Deferred income tax liability--current portion...................................... 90,342 62,710
Line of credit...................................................................... 629,318 --
Lease payable--current portion...................................................... 85,617 --
---------- ----------
Total current liabilities........................................................ 1,290,874 516,048
Long-term liabilities:
Deferred income tax liability--noncurrent portion................................... 271,026 188,132
Lease payable--noncurrent portion................................................... 118,594 --
Due to shareholder.................................................................. 962,500 832,500
---------- ----------
Total liabilities................................................................ 2,642,994 1,536,680
---------- ----------
Stockholders' equity:
Common stock, $1 par value per share; 1,500 shares
authorized; 1,000 shares issued and outstanding.................................. 1,000 1,000
Paid in capital..................................................................... 254,000 254,000
Retained earnings................................................................... 243,757 41,658
---------- ----------
Total stockholders' equity....................................................... 498,757 296,658
---------- ----------
Total liabilities & stockholders' equity......................................... $3,141,751 $1,833,338
---------- ----------
---------- ----------
</TABLE>

See Independent Auditors' Report and Notes to Financial Statements

F-24
<PAGE>

ALEX COMPUTER SYSTEMS, INC.

STATEMENTS OF INCOME AND RETAINED EARNINGS
(EXPRESSED IN UNITED STATES DOLLARS)
FOR THE YEARS ENDED JULY 31,

<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Sales, net............................................................................ $2,991,677 $1,241,850
Cost of goods sold.................................................................... 1,570,413 463,919
---------- ----------
Gross profit..................................................................... 1,421,264 777,931

Other income.......................................................................... 44,036 68,580
---------- ----------
Total income..................................................................... 1,465,300 846,511
---------- ----------
Expenses:
Advertising......................................................................... 89,004 35,756
Insurance........................................................................... 10,388 4,508
Legal/accounting.................................................................... 15,152 9,279
Office expense...................................................................... 38,759 35,705
Wages............................................................................... 243,915 170,471
Payroll taxes....................................................................... 21,538 13,278
Health insurance.................................................................... 47,687 33,210
Commissions......................................................................... 4,357 1,471
Consulting.......................................................................... 187,191 144,171
Postage and shipping................................................................ 8,511 4,920
Rent................................................................................ 46,207 25,440
Telephone........................................................................... 31,475 21,524
Travel.............................................................................. 106,964 75,957
Food/entertainment.................................................................. 23,750 12,916
Exhibition costs.................................................................... 25,162 20,345
Printing............................................................................ 27,592 9,075
Miscellaneous....................................................................... 4,523 2,238
Equipment lease..................................................................... 3,762 3,731
Lease--sales tax.................................................................... 4,059 --
Interest expense.................................................................... 27,650 --
Bank charges........................................................................ 9,299 5,000
Depreciation........................................................................ 44,273 43,967
Amortization software development costs............................................. 181,319 102,494
---------- ----------
Total expenses................................................................... 1,202,537 775,456
---------- ----------
Income before provision for income tax........................................... 262,763 71,055

Provision for income tax.............................................................. (60,664) (31,189)
---------- ----------
Net income....................................................................... 202,099 39,866

Retained earnings, beginning of year.................................................. 41,658 1,792
---------- ----------
Retained earnings, end of year........................................................ $ 243,757 $ 41,658
---------- ----------
---------- ----------
</TABLE>

See Independent Auditors' Report and Notes to Financial Statements.

F-25
<PAGE>

ALEX COMPUTER SYSTEMS, INC.

STATEMENTS OF CASH FLOWS
(EXPRESSED IN UNITED STATES DOLLARS)
FOR THE YEARS ENDED JULY 31,

<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income.......................................................................... $ 202,099 $ 39,866
Adjustments to reconcile net income to net cash (used) by operating activities:
Depreciation................................................................... 44,273 43,967
Amortization--software development costs....................................... 181,319 102,494
Increase in deferred income tax benefit........................................ (50,428) (135,999)
Increase in deferred income tax liability...................................... 110,526 166,839
(Increase) decrease in:
Accounts receivable......................................................... (703,177) (378,030)
Accounts receivable--shareholder............................................ (150,530) (6,160)
Inventory................................................................... (80,583) (203,940)
Deposits paid--purchases.................................................... (7,914) (77,586)
Deferred marketing costs.................................................... (105,350) --
Increase (decrease) in:
Accounts payable............................................................ 11,993 281,690
Accounts payable--shareholder............................................... 20,013 40,744
Accrued liabilities......................................................... -- (1,355)
New York State corporation tax payable...................................... 253 --
----------- ---------
Cash used by operating activities.............................................. (527,506) (127,470)
----------- ---------

Cash flows from investing activities:
Purchase of property and equipment.................................................. (36,278) (164,122)
Capitalization of software development costs........................................ (413,670) (520,220)
----------- ---------
Net cash used by investing activities....................................... (449,948) (684,342)
----------- ---------
Cash flows from financing activities:
Proceeds from line of credit........................................................ 1,851,179 --
Repayment of line of credit......................................................... (1,221,861) --
Proceeds from sale/leaseback........................................................ 246,000 --
Payment of lease.................................................................... (41,789) --
Advances from shareholder........................................................... 130,000 832,500
----------- ---------
Net cash provided by financing activities................................... 963,529 832,500
----------- ---------
Net (decrease) increase in cash and cash equivalents........................ (13,925) 20,688
Cash and cash equivalents, beginning of year.......................................... 49,376 28,688
----------- ---------
Cash and cash equivalents, end of year................................................ $ 35,451 $ 49,376
----------- ---------
Supplemental disclosures:
Income taxes paid................................................................... $ 349 $ 349
----------- ---------
Interest paid....................................................................... $ 27,650 $ --
----------- ---------
----------- ---------
</TABLE>

See Independent Auditors' Report and Notes to Financial Statements

F-26
<PAGE>
ALEX COMPUTER SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
JULY 31, 1997 AND 1996

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business Activity

Alex Computer Systems, Inc. (the Company) was incorporated on September 15,
1994 and is located in Ithaca, New York. The sole shareholder is the Canadian
company, Alex Informatics, Inc. The Company designs and sells advanced, high
performance parallel processing systems.

Method of Accounting

The Company uses the accrual method of accounting for both financial
statement presentation and federal income tax purposes.

Revenue Recognition

Sales revenue is recognized when the product is shipped to the customer.

Use of Estimates

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results may differ from those estimates.

Cash and Cash Equivalents

For purposes of the statement of cash flows, cash equivalents include
highly liquid debt instruments purchased with original maturity of three months
or less. Cost approximates fair market value for all cash and cash equivalents.

Accounts Receivable

Accounts receivable are recorded without provision for bad debts, which are
expensed in the year in which the receivables are determined to be
uncollectible. The amounts recorded at July 31, are considered by management to
be fully collectible.

Inventories

Inventories are recorded at the lower of cost or net realizable value, with
cost being determined by a manner which approximates the first-in, first-out
method. Inventory consists primarily of assemblies and electronic components
purchased for resale.

Property and Equipment

Property and equipment are carried at cost. The cost of property and
equipment is depreciated over the estimated useful lives of the related assets.
Depreciation for both tax and financial statement purposes is provided using the
modified accelerated cost recovery system. Software is amortized on a
straight-line basis over 3 years.

Expenditures for major renewals and betterments that extend the useful
lives of property and equipment are capitalized. Expenditures for maintenance
and repairs are charged to expense as incurred.

F-27
<PAGE>

ALEX COMPUTER SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN UNITED STATES DOLLARS)
JULY 31, 1997 AND 1996

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

Deferred Marketing Costs

Deferred marketing costs represent costs incurred for signed contracts that
will begin in 1997-1998 and extend 2-5 years. These costs will be amortized over
2 years for book purposes.

Software Development Costs

Software developments costs for each product are carried on the balance
sheet at the lower of unamortized capital costs or its net realizable value.
Direct costs of producing product masters incurred subsequent to establishing
technological feasibility are capitalized. Those costs include coding and
testing performed subsequent to establishing technological feasibility.
Production costs that are to be used as an integral part of a product or process
are charged to expense until both (a) technological feasibility has been
established and (b) all research and development activities for the other
components of the product or process have been completed. Capitalization of
computer software costs is discontinued when the product is available for
general release to customers.

The realizability of these costs requires considerable judgement from
management related to the estimated useful lives and anticipated future sales.
Capitalized software costs are amortized on a product-by-product basis using the
straight-line method over the remaining estimated economic life (5 years).

Income Taxes

Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences that arise from capitalizing and amortizing
software development costs for financial statement purposes and expensing these
costs for tax purposes. Deferred tax assets are also recognized for operating
losses and the R&D tax credits that are available to offset future federal
income taxes.

Foreign Currency Translation

The Company buys its products from foreign suppliers and sells its products
to foreign customers. Foreign purchases and sales are translated at the rate of
exchange in effect on the dates they occur.

2. PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
1997
-------------------------------------
ACCUMULATED BOOK
ASSET COST DEPRECIATION VALUE
- --------------------------------------------------------------------------- -------- ------------- --------
<S> <C> <C> <C>
Furniture, fixtures and equipment.......................................... $ 52,507 $ 7,501 $ 45,006
Leased assets.............................................................. 246,000 24,600 221,400
-------- ------- --------
Totals................................................................ $298,507 $32,101 $266,406
-------- ------- --------
-------- ------- --------
</TABLE>

<TABLE>
<CAPTION>
1996
-------------------------------------
ACCUMULATED BOOK
ASSET COST DEPRECIATION VALUE
- --------------------------------------------------------------------------- -------- ------------- --------
<S> <C> <C> <C>
Furniture, fixtures and equipment.......................................... $ 90,495 $30,088 $ 60,407
Telephone system........................................................... 7,021 2,722 4,299
Demonstration equipment.................................................... 23,461 9,371 14,090
Software technology........................................................ 60,000 8,333 51,667
Research & development..................................................... 31,121 3,112 28,009
-------- ------- --------
Totals................................................................ $212,098 $53,626 $158,472
-------- ------- --------
-------- ------- --------
</TABLE>

F-28
<PAGE>

ALEX COMPUTER SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN UNITED STATES DOLLARS)
JULY 31, 1997 AND 1996

2. PROPERTY AND EQUIPMENT--(CONTINUED)

Depreciation expense for the years ended July 31, 1997 and 1996 amounted to
$44,273 and $43,967, respectively.

3. SOFTWARE DEVELOPMENT COSTS

<TABLE>
<CAPTION>
1997
--------------------------------------
BOOK
ASSET COST AMORTIZATION VALUE
- ------------------------------------------------------------------------- ---------- ------------ --------
<S> <C> <C> <C>
Software development costs............................................... $1,041,339 $296,868 $744,471
---------- -------- --------
---------- -------- --------

1996
--------------------------------------
AMORTIZATION BOOK
ASSET COST DEPRECIATION VALUE
- ------------------------------------------------------------------------- ---------- ------------ --------
<S> <C> <C> <C>
Software development costs............................................... $ 772,580 $144,531 $628,049
---------- -------- --------
---------- -------- --------
</TABLE>

Software development costs capitalized for the years ended July 31, 1997
and 1996 amounted to $413,670 and $520,220, respectively. Amortization expense
for the years ended July 31, 1997 and 1996 amounted to $181,319 and $102,494,
respectively.

On January 31, 1997 software development costs with a cost of $144,911, and
accumulated amortization of $28,982, was reclassified to property and
equipment--leased assets.

4. RELATED PARTY TRANSACTIONS

The Company entered into the following related party transactions with its
shareholder, Alex Informatics, Inc.:

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Sales to shareholder for the years ended July 31,..................... $160,530 $ 6,160
Purchases from shareholder for the years ended July 31,............... 20,013 40,744
Trade receivables due from shareholder as of July 31,................. 156,690 6,160
Trade payables due from shareholder as of July 31,.................... 80,871 60,858
Advances from shareholder for the years ended July 31,................ 130,000 832,500
Advances due shareholder as of July 31,............................... 962,500 832,500
</TABLE>

5. LEASE COMMITMENTS

The Company leased office space on Prospect Street, Ithaca, New York, at a
cost of $2,120 per month, through March 1, 1997.

Effective March 1, 1997 the Company entered into a lease for office space
at 950, Danby Road, Ithaca, New York, for a two year term, for $5,833 per month,
expiring March 1, 1999.

In addition, the Company leases a photocopier for $182 per month for
36 months expiring in November, 1997, and a postage machine for $387 per quarter
for 63 months expiring in August, 1999.

Future minimum lease payments are as follows:

F-29
<PAGE>

ALEX COMPUTER SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN UNITED STATES DOLLARS)
JULY 31, 1997 AND 1996

6. DUE TO SHAREHOLDER

As of July 31, 1997 and 1996, the Company was obligated to its shareholder
for a non-interest bearing advance, payable upon demand in the amount of
$962,500 and $832,500, respectively.

7. INCOME TAXES

The provision for income tax consists of the following:

<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Taxes currently payable................................................. $ 566 $ 349
Deferred income tax expense............................................. 60,098 30,840
------- -------
Net provision for income tax.......................................... $60,664 $31,189
------- -------
------- -------
</TABLE>

As of July 31, 1997 and 1996, the Company had net operating loss
carryforwards and research and development tax credits of $543,627 and $526,506
and $49,380 and $14,465, respectively.

8. DEFERRED INCOME TAXES

Deferred income taxes represent the tax effects of timing differences
between financial and taxable income that arise because certain transactions are
included in taxable income in different years than in financial statement
income. The sources of these differences and the tax effect of each are as
follows:

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Deferred tax asset:
Tax benefit of loss carryforward.................................... $217,125 $201,612
Tax benefit of research and development credit...................... 49,380 14,465
-------- --------
Total deferred tax asset......................................... $266,505 $216,077
-------- --------
-------- --------

Deferred tax liability:
Difference between tax and book software development costs.......... $319,292 $250,842
Deferred marketing costs............................................ 42,076 --
-------- --------
Total deferred tax liability..................................... 361,368 250,842
Less current portion............................................. 90,342 62,710
-------- --------
Noncurrent portion............................................... $271,026 $188,132
-------- --------
-------- --------
</TABLE>

9. CONCENTRATION OF CREDIT RISK

The Company's cash funds are located in one financial institution. Deposits
are federally insured up to $100,000. Deposits may exceed this amount throughout
the year.

10. LINE OF CREDIT

On August 14, 1996, the Company obtained a $1,500,000 revolving credit
facility with Chittenden Bank for short-term working capital. Interest is
payable monthly at the prime rate (as published daily in the Wall Street
Journal) plus 1%. Advances under the line of credit are based on a formula of
80% of eligible accounts receivable, as defined in the loan agreement. The bank
has first security interest in all accounts receivable, inventory, contract
rights and general intangibles. The note is guaranteed by the shareholder. The
agreement includes requirements for minimum operating ratios and prohibits
substantial changes in management or ownership and payment of dividends without
consent of the lender. As of July 31, 1997 and 1996, the balance of the line of
credit was $629,318 and $nil, respectively.

F-30
<PAGE>

ALEX COMPUTER SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN UNITED STATES DOLLARS)
JULY 31, 1997 AND 1996

11. LEASE PAYABLE

On January 31, 1997, the Company entered into a sales/leaseback agreement
with Newcourt Financial USA, Inc. The Company sold $246,000 worth of office
equipment at its book value and is leasing it back over 30 months. The agreement
calls for 30 monthly installments of $8,457, including interest at 9.58% with a
final payment of $24,600 on August 1, 1999. The balance of the lease as of July
31, was as follows:

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
$204,211 $ --
Less current portion.................................................. (85,617) --
-------- --------
Noncurrent portion.................................................. $118,594 $ --
-------- --------
-------- --------
</TABLE>

Future principal payment requirements are as follows:

F-31
<PAGE>

ALEX COMPUTER SYSTEMS, INC.

INDEX TO FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
SEVEN MONTHS ENDED FEBRUARY 28, 1998

<TABLE>
<CAPTION>
PAGE
----

<S> <C>
Balance Sheet.............................................................................................. F-33

Statements of Earnings and Retained Earnings............................................................... F-34

Statements of Cash Flows................................................................................... F-35

Notes to Financial Statements.............................................................................. F-36
</TABLE>

F-32
<PAGE>

ALEX COMPUTER SYSTEMS, INC.

BALANCE SHEET
(EXPRESSED IN UNITED STATES DOLLARS)

<TABLE>
<CAPTION>
FEBRUARY 28,
1998
-----------------
(UNAUDITED)
<S> <C>
ASSETS

Current assets
Cash and cash equivalents.................................................................... $ 67,667
Accounts receivable.......................................................................... 699,667
Accounts receivable--shareholder............................................................. 178,583
Inventory.................................................................................... 489,912
Deposits paid--purchases..................................................................... 85,500
Deferred marketing costs..................................................................... 64,380
Deferred income tax benefit (Note 4)......................................................... 153,802
-----------
1,739,511

Property and equipment, at cost, less accumulated depreciation (Note 2)........................ 301,790

Software development costs, less accumulated depreciation (Note 3)............................. 622,981
-----------
$ 2,664,282
-----------
-----------

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
Cheques issued in excess of funds on deposit................................................. $ 241,183
Accounts payable............................................................................. 308,262
Accounts payable--shareholder................................................................ 87,740
Deferred income tax liability--current portion (Note 4)...................................... 90,342
Line of credit (Note 5)...................................................................... 184,933
Lease payable--current portion (Note 6)...................................................... 91,238
Due to shareholder (Note 7).................................................................. 795,500
-----------
1,799,198
Long-term liabilities
Deferred income tax liability--non-current portion (Note 4).................................. 202,932
Lease payable--non-current portion (Note 6).................................................. 56,807
-----------
Total liabilities............................................................................ $ 2,058,937
-----------

Stockholders' equity
Common stock, $1 par value per share, 1,500 shares authorized;
1,000 shares issued and outstanding....................................................... 1,000
Paid-in capital.............................................................................. 254,000
Retained earnings............................................................................ 350,345
-----------
605,345
-----------
Commitments (Note 8) $ 2,664,282
-----------
-----------
</TABLE>

See accompanying notes to financial statements.

F-33
<PAGE>

ALEX COMPUTER SYSTEMS, INC.

STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(EXPRESSED IN UNITED STATES DOLLARS)

<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
FEBRUARY 28,
----------------------------------------
1997 1998
------------------ ------------------
(UNAUDITED)
<S> <C> <C>
Sales, net............................................................................ $1,575,308 $1,990,875
Cost of goods sold.................................................................... 879,954 868,618
---------- ----------
Gross profit.......................................................................... 695,354 1,122,257
Other income.......................................................................... 208 3,743
---------- ----------
695,562 1,126,000
Expenses
Advertising......................................................................... 58,519 57,353
Insurance........................................................................... 3,790 12,023
Legal and accounting................................................................ 11,382 11,023
Office expense...................................................................... 25,227 10,945
Wages............................................................................... 202,170 261,832
Payroll taxes....................................................................... 92,471 30,761
Health insurance.................................................................... 24,055 20,009
Commissions......................................................................... 4,358 3,880
Research and development............................................................ 243,739 197,928
Postage and shipping................................................................ 3,892 1,697
Rent................................................................................ 19,933 41,863
Telephone........................................................................... 19,112 15,346
Travel.............................................................................. 79,631 59,149
Food and entertainment.............................................................. 14,296 11,717
Exhibition costs.................................................................... 12,137 13,932
Printing............................................................................ 19,935 5,418
Miscellaneous....................................................................... 4,000 362
Equipment lease..................................................................... 2,047 3,257
Lease--sales tax.................................................................... -- 5,413
Interest expense.................................................................... 8,458 11,492
Bank charges........................................................................ 11,205 30,843
Depreciation........................................................................ 25,826 47,070
Amortization software development costs............................................. 105,769 121,490
---------- ----------
991,952 974,803
---------- ----------
Earnings (loss) before income taxes................................................... (296,390) 151,197
Deferred income taxes................................................................. (35,387) 44,609
---------- ----------
Net earnings (loss)................................................................... (261,003) 106,588
Retained earnings, beginning of period................................................ 41,658 243,757
---------- ----------
Retained earnings (deficit), end of period............................................ $ (219,345) $ 350,345
---------- ----------
---------- ----------
</TABLE>

See accompanying notes to financial statements.

F-34
<PAGE>

ALEX COMPUTER SYSTEMS, INC.

STATEMENTS OF CASH FLOWS
(EXPRESSED IN UNITED STATES DOLLARS)

<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
FEBRUARY 28,
----------------------------------------
1997 1998
------------------ ------------------
(UNAUDITED)
<S> <C> <C>
Cash flow from operating activities
Net earnings (loss)................................................................... $ (261,003) $ 106,588
Adjustments to reconcile net earnings (loss) to net cash provided by (used in)
operating activities
Depreciation....................................................................... 25,826 47,070
Amortization--software development costs........................................... 105,769 121,490
Reduction in deferred income tax benefit........................................... 49,867 112,703
Reduction in deferred income tax liability......................................... (35,387) (68,094)
(Increase) decrease in
Accounts receivable.............................................................. (389,014) 475,455
Accounts receivable--shareholder................................................. 6,160 (21,893)
Inventory........................................................................ (28,496) (183,656)
Deposits paid.................................................................... 32,086
Deferred marketing costs......................................................... -- 40,970
Increase (decrease) in
Accounts payable................................................................. (66,950) (95,862)
Accounts payable--shareholder.................................................... (60,858) 6,869
New York State corporation tax payable........................................... (314) (602)
---------- ----------
Cash provided by (used in) operating activities......................................... (622,314) 541,038
---------- ----------
Financing
Increase (decrease) in bank indebtedness.............................................. 240,389 (203,202)
Increase (decrease) in lease payable.................................................. 246,000 (56,166)
Increase (decrease) in shareholder advances........................................... 130,000 (167,000)
---------- ----------
Cash provided by (used in) financing activities......................................... 616,389 (426,368)
---------- ----------
Investments
Purchase of property and equipment.................................................... (12,574) (82,454)
---------- ----------
Cash used in investing activities....................................................... (12,574) (82,454)
---------- ----------
(Decrease) increase in cash and cash equivalents........................................ (18,499) 32,216
Cash and cash equivalents, beginning of period.......................................... 49,376 35,451
---------- ----------
Cash and cash equivalents, end of period................................................ $ 30,877 $ 67,667
---------- ----------
---------- ----------
Supplemental disclosures
Income taxes paid....................................................................... $ 314 $ 602
---------- ----------
---------- ----------
Interest paid........................................................................... $ 8,458 $ 11,492
---------- ----------
---------- ----------
</TABLE>

See accompanying notes to financial statements.

F-35
<PAGE>

ALEX COMPUTER SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)

SEVEN MONTHS ENDED FEBRUARY 28, 1998
(EXPRESSED IN UNITED STATES DOLLARS)

1. SIGNIFICANT ACCOUNTING POLICIES

(a) Business activity

Alex Computer Systems, Inc. (the "Company") was incorporated on
September 15, 1994 and is located in Ithaca, New York. The sole shareholder as
at February 28, 1998 is a Canadian company, Alex Informatics, Inc. The Company
designs and sells advanced, high performance parallel processing systems.

(b) Method of accounting

The Company uses the accrual method of accounting for both financial
statement presentation and federal income tax purposes.

Sales revenue is recognized when the product is shipped to the customer.

(d) Use of estimates

(e) Cash and cash equivalents

(f) Accounts receivable

Accounts receivable are recorded without provision for bad debts, which are
expensed in the year in which the receivables are determined to be
uncollectible. The amounts recorded at February 28, are considered by management
to be fully collectible.

(g) Inventories

(h) Property and equipment

F-36
<PAGE>

ALEX COMPUTER SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)

SEVEN MONTHS ENDED FEBRUARY 28, 1998
(EXPRESSED IN UNITED STATES DOLLARS)

1. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

(h) Property and equipment, continued

Expenditures of major renewals and betterments that extend the useful lives
of property and equipment are capitalized. Expenditures for maintenance and
repairs are charged to expense as incurred.

(i) Deferred marketing costs

Deferred marketing costs represent costs incurred for signed contracts that
will begin in 1997-1998 and extend two to five years. These costs will be
amortized over two years for book purposes.

(j) Software development costs

Software development costs for each product are carried on the balance
sheet at the lower of unamortized capital costs or its net realizable value.
Direct costs of producing product masters incurred subsequent to establishing
technological feasibility are capitalized. Those costs include coding and
testing performed subsequent to establishing technological feasibility.
Production costs that are to be used as an integral part of a product or process
are charged to expense until both (a) technological feasibility has been
established and (b) all research and development activities for the other
components of the product or process have been completed. Capitalization of
computer software costs is discontinued when the product is available for
general release to customers.

(k) Foreign currency translation

The Company buys its products from foreign suppliers and sells its products
to foreign customers. Foreign purchases and sales are translated at the rate of
exchange in effect on the dates they occur.

2. PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
1998
----------
<S> <C>
Furniture, fixtures and equipment....................................... $ 91,679
Research and development equipment...................................... 43,282
Leased assets........................................................... 246,000
----------
380,961
Less: accumulated depreciation.......................................... (79,171)
----------
Net book value.......................................................... $ 301,790
----------
----------
</TABLE>

3. SOFTWARE DEVELOPMENT COSTS

<TABLE>
<CAPTION>
1998
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
------------ ----------- --------
<S> <C> <C> <C>
Software development costs...................................... $ 1,041,339 $(418,358) $622,981
------------ --------- --------
------------ --------- --------
</TABLE>

F-37
<PAGE>

ALEX COMPUTER SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)

SEVEN MONTHS ENDED FEBRUARY 28, 1998
(EXPRESSED IN UNITED STATES DOLLARS)

3. SOFTWARE DEVELOPMENT COSTS--(CONTINUED)

Software development costs capitalized for the seven months ended
February 28, 1998 amounted to $Nil. Amortization expense for the seven months
ended February 28, 1998 amounted to $121,490.

4. DEFERRED INCOME TAXES

<TABLE>
<CAPTION>
1998
----------
<S> <C>
Deferred income tax asset
Tax benefit of loss carryforward.......................................................... $ 104,422
Tax benefit of research and development credit............................................ 49,380
----------
Total deferred income tax asset............................................................. $ 153,802
----------
----------
Deferred income tax liability
Difference between tax and book software development costs................................ $ 267,187
Deferred marketing costs.................................................................. 26,087
----------
Total deferred income tax liability......................................................... 293,274
Less current portion........................................................................ (90,342)
----------
Non-current portion......................................................................... $ 202,932
----------
----------
</TABLE>

5. LINE OF CREDIT

On August 14, 1996, the Company obtained a $1,500,000 revolving credit
facility with Chittenden Bank for short-term working capital. Interest is
payable monthly at the prime rate (as published daily in the Wall Street
Journal) plus 1%. Advances under the line of credit are based on a formula of
80% of eligible accounts receivable, as defined in the loan agreement. The bank
has first security interest in all accounts receivable, inventory, contract
rights and general intangibles. The note is guaranteed by the shareholder. The
agreement includes requirements for minimum operating ratios and prohibits
substantial changes in management or ownership and payment of dividends without
consent of the lender. As of February 28, 1998, the balance of the line of
credit was $184,933.

6. LEASE PAYABLE

On January 31, 1997, the Company entered into a sales/leaseback agreement
with Newcourt Financial USA, Inc. The Company sold $246,000 worth of office
equipment at its book value and is leasing it back over 30 months. The agreement
calls for 30 monthly instalments of $8,457, including interest at 9.58% with a
final payment of $24,600 on August 1, 1999. The balance of the lease as of
February 28, was as follows:

<TABLE>
<CAPTION>
1998
----------
<S> <C>
Lease payable........................................................... $ 148,045
Less current portion.................................................... (91,238)
----------
Non-current portion..................................................... $ 56,807
----------
----------
</TABLE>

F-38
<PAGE>

ALEX COMPUTER SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)

SEVEN MONTHS ENDED FEBRUARY 28, 1998
(EXPRESSED IN UNITED STATES DOLLARS)

6. LEASE PAYABLE--(CONTINUED)

Future principal payment requirements are as follows:

7. DUE TO SHAREHOLDER

As of February 28, 1998, the Company was obligated to its shareholder for a
non-interest bearing advance, payable upon demand in the amount of $795,500.

8. COMMITMENTS

Effective March 1, 1997, the Company entered into a lease for office space
at 950 Danby Road, Ithaca, New York, for a two-year-term, for $5,833 per month,
expiring March 1, 1999.

In addition, the Company leases a postage machine for $387 per quarter for
63 months expiring in August, 1999.

Future minimum lease payments are as follows:

9. CONCENTRATION OF CREDIT RISK

The Company's cash funds are located in one financial institution. Deposits
are federally insured up to $100,000. Deposits may exceed this amount throughout
the year.

F-39
<PAGE>

SPECTRUM SIGNAL PROCESSING INC.

INDEX TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Pro Forma Consolidated Statements of Operations........................................................... F-41
Notes to Pro Forma Consolidated Financial Statements...................................................... F-42
</TABLE>

F-40
<PAGE>

SPECTRUM SIGNAL PROCESSING INC.

PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------------------
ALEX
COMPUTER
SYSTEMS
COMPANY INC. ADJUSTMENTS PRO FORMA
------- -------- ----------- ---------
(NOTE 2)
<S> <C> <C> <C> <C>
Sales................................... $26,207 $3,293 $ -- $29,500
Cost of sales........................... 11,180 1,540 12,720
--
------- ------ ------- -------
15,027 1,753 -- 16,780

Expenses
Administrative........................ 3,146 228 -- 3,374
Sales and marketing................... 4,769 462 -- 5,231
Amortization.......................... 644 246 -- 890
Acquired in-process research and
development charge................. 872 -- -- 872
Research and development.............. 2,536 177 -- 2,713
------- ------ ------- -------
11,967 1,113 -- 13,080
------- ------ ------- -------
Earnings (loss) from operations......... 3,060 640 -- 3,700
Other revenue (expense)
Interest and bank charges............. 2 (61) -- (59)
Other income (expense)................ 12 44 -- 56
------- ------ ------- -------
14 (17) -- (3)
------- ------ ------- -------
Earnings (loss) before income taxes and
discontinued operations............... 3,074 623 -- 3,697
Income taxes (recovery)................. 1,534 156 1,690
------- ------ ------- -------
Earnings (loss) from continuing
operations............................ $1,540 $ 467 $ -- $ 2,007
------- ------ -------
------- ------ ------- -------
-------
Earnings (loss) per share (note 3)
Basic
From continuing operations......... $ 0.20
Diluted
From continuing operations......... 0.19

<CAPTION>
YEAR ENDED DECEMBER 31, 1998
--------------------------------------------------
ALEX
COMPUTER
SYSTEMS
COMPANY INC. ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ---------
(NOTE 1(B)) (NOTE 2)
<S> <C> <C> <C> <C>
Sales...................................$ 26,000 $ 1,001 $ -- $27,001
Cost of sales........................... 10,607 432 11,039
--
----------- ------- ------- -------
15,393 569 -- 15,962
Expenses
Administrative........................ 3,417 17 -- 3,434
Sales and marketing................... 7,204 223 -- 7,427
Amortization.......................... 1,299 78 -- 1,377
Acquired in-process research and
development charge................. 2,640 -- (2,640)(a) --
Research and development.............. 4,374 72 -- 4,446
----------- ------- ------- -------
18,934 390 (2,640) 16,684
----------- ------- ------- -------
Earnings (loss) from operations......... (3,541) 179 2,640 (722)
Other revenue (expense)
Interest and bank charges............. (149) (13) -- (162)
Other income (expense)................ (7) 4 -- (3)
----------- ------- ------- -------
(156) (9) -- (165)
----------- ------- ------- -------
Earnings (loss) before income taxes and
discontinued operations............... (3,697) 170 2,640 (887)
Income taxes (recovery)................. (789) 52 399 (b) (338)
----------- ------- ------- -------
Earnings (loss) from continuing
operations............................$ (2,908) $ 118 $ 2,241 $ (549)
----------- ------- ------- -------
----------- ------- ------- -------

Earnings (loss) per share (note 3)
Basic
From continuing operations......... $ (0.05)
Diluted
From continuing operations......... --
</TABLE>

See accompanying notes to pro forma consolidated financial statements.

F-41
<PAGE>

SPECTRUM SIGNAL PROCESSING INC.

NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

YEARS ENDED DECEMBER 31, 1997 AND 1998
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT NUMBER OF SHARES)

1. BASIS OF PRESENTATION

The pro forma consolidated financial statements of Spectrum Signal
Processing Inc. (the "Company") reflect, on an unaudited basis, the consolidated
results of the Company's operations from continuing operations as if the
acquisition of certain intellectual property and tangible assets and assumption
of certain liabilities of Alex Computer Systems, Inc. ("Alex") had taken place
at January 1, 1997, after giving effect to the adjustments described in note 2.
These pro forma consolidated financial statements are not necessarily indicative
of the results of operations that would have been attained had the acquisition
taken place at the beginning of the periods presented and do not purport to be
indicative of the effects that may be expected to occur in the future.

The pro forma consolidated financial statements have been compiled from
financial information in the:

(a) audited consolidated financial statements of the Company for the
years ended December 31, 1997 and 1998;

(b) the unaudited financial statements of Alex for the year ended
December 31, 1997, and for the period January 1, 1998 to
March 17, 1998, the date of acquisition; and

The pro forma consolidated financial statements are prepared in accordance
with generally accepted accounting principles ("GAAP") in the United States. The
pro forma consolidated statements of earnings (loss) exclude non-recurring
charges or credits directly attributable to the transactions set out herein.

2. PRO FORMA STATEMENTS OF EARNINGS (LOSS) ADJUSTMENTS

The pro forma consolidated statements of earnings (loss) give effect to the
following:

(a) to eliminate the acquired in-process research and development
charge that is a direct result of the acquisition.

(b) to adjust income taxes to reflect the effective rates.

3. EARNINGS (LOSS) PER SHARE

The weighted average number of shares outstanding equals the weighted
average shares outstanding as set out in the consolidated financial statements
of the Company, adjusted to give pro forma effect to the issuance of 772,626
common shares on the acquisition of Alex. Per share information is presented as
if the common shares issued were issued at the beginning of the periods
presented.

Earnings (loss) per share is calculated based on the following weighted
average number of shares:

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
Basic......................................................... 10,007,552 10,018,977
Diluted....................................................... 10,380,546 --
</TABLE>

F-42
<PAGE>

(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.

<TABLE>
<S> <C>
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)).
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 (incorporated by reference to the Company's Report on Form 20-F filed
on June 30, 1998).
10.8 -- Share Purchase Agreement, dated May 27, 1997, among the Company, 3L Limited
and the shareholders of 3L Limited (incorporated by reference to the Company's
Registration Statement on Form F-3 filed on June 30, 1998 (No. 333-58115)).
10.9 -- Asset Purchase Agreement, dated March 20, 1998, among the Company, Alex
Computer Systems, Inc. and Alex Informatics Inc. (incorporated by reference to the
Company's Registration Statement on Form F-3 filed on June 30, 1998 (No. 333-
58115)).
10.10 -- Registration Agreement, dated April 30, 1998, among the Company and Alex
Computer Systems, Inc. (incorporated by reference to the Company's Registration
Statement on Form F-3 filed on June 30, 1998 (No. 333-58115)).
</TABLE>

<PAGE>

<TABLE>
<S> <C>
10.11 -- Share Purchase Warrant Certificate to purchase 7,726 Common Shares issued to
Andrew Talbot (incorporated by reference to the Company's Registration Statement
on Form F-3 filed on June 30, 1998 (No. 333-58115)).
10.12 -- Share Purchase Warrant Certificate to purchase 102,649 Common Shares issued to
Alex Computer Systems, Inc. (incorporated by reference to the Company's
Registration Statement on Form F-3 filed on June 30, 1998 (No. 333-58115)).
10.13 -- Agreement, dated March 31, 1999, between the Company and Technology
Partnerships Canada (incorporated by reference to the Company's Amendment No.4
to its Registration Statement on Form F-3 (No. 333-58115)).
27 -- Financial Data Schedule (incorporated by reference to the Company's Amendment
No.3 to its Registration Statement on Form F-3 (No. 333-58115))

* 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.

</TABLE>

<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 28, 1999.

SPECTRUM SIGNAL PROCESSING INC.

By: /s/ Martin McConnell
----------------------------------
Martin McConnell
Vice President and
Chief Financial Officer