(a) General Development of Business

Electronic Tele-Communications, Inc. ("ETC" or "the Company") is a Wisconsin corporation, incorporated in 1980. The Company designs, manufactures, and markets digital voice information platforms and related services for the telecommunications industry. Substantially all of the Company's products are proprietary and have been developed since 1996. Research and development activities have been and will continue to be important to the development of new products and markets.

ETC leases a facility in Waukesha, Wisconsin that includes executive offices, manufacturing, engineering, technical services, marketing, and a regional sales office. In addition, engineering, technical services, and a regional sales office are located in a leased facility in Norcross, Georgia. ETC also has five sales representatives in other locations in the United States.

(b) Narrative Description of Business

GENERAL

Electronic Tele-Communications designs, manufactures, and markets digital voice information systems and call processing systems. It also provides comprehensive services in support of these systems, including installation, training, 24-hour technical support, professional voice recording and weather forecasting. Its equipment provides a wide range of audio and computer information and call handling capabilities via telephone networks, computer networks, and the Internet. The Company's products are utilized by a variety of customers, including: (1) telephone companies which use the products to provide information to callers regarding misdialed or changed numbers, sources of assistance or calling instructions, enhanced services such as voice mail, Internet call waiting, privacy call screening, call forwarding, automatic callback, wake-up service, repeat dialing, and automated pay phone interaction; (2) public and private providers of informational announcements such as news, sports, weather, time, stock reports, or advertisements; (3) large and ses which use call handling products for applications such as voice mail and call sequencing; and (4) private reporting and information services through pay-per-call services, commonly referred to as "900 Services." The Company's systems are generally priced from $500 to $200,000.

The Company's products are primarily solid-state and are controlled by microprocessors and software. They use digital technology for voice and data storage and processing. Digital storage provides for the instant and unlimited playback of voice messages and data. Voice recordings are digitized, or encoded as data, and stored in memory in the Company's equipment. This data may then be decoded and delivered as voice messages and computer data via telephone networks, computer networks, and the Internet.

The Company's products provide 100% non-blocking operation, so that the caller always receives the announcement service without any delay, regardless of the number of telephone lines simultaneously accessing the service. This provides greater caller acceptance of the service and reduces telephone traffic by eliminating long waits for announcements and repeated calls to a busy announcement service.

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In addition to standard digital announcer equipment, ETC designs and manufactures interactive voice platforms that provide callers with a spoken menu from which to choose informational topics of interest. ETC also offers voice mail systems that provide prompt telephone answering and message-taking capabilities, eliminating annoying and time-consuming telephone tag. Finally, ETC provides a variety of special function and customized products, meeting the varied needs of telephone service providers world-wide.

TECHNOLOGY AND PRODUCT DEVELOPMENT

Most of Electronic Tele-Communications' products consist of proprietary circuit card assemblies, purchased assemblies, and purchased and proprietary software. The Company's technologies involve the design of electronic systems, including printed circuit boards and the arrangement of electronic components thereon, and the purchase, integration, and development of application software necessary to access and control the systems, messages and their formate.

The Company designs printed circuit boards for use in its systems using computer-aided design equipment. This equipment permits the design of complex multi-layered printed circuit boards. Electronic components installed on the printed circuit boards include computer memory chips, microprocessors, integrated circuits, resistors, capacitors, transformers, and switches.

Application software to operate the Company's products involves the formulation of specialized computer programs, many of which are purchased and integrated into the Company's systems. Some of the Company's software programs are proprietary and designed in-house. The application programs provide the operating equipment with the instructions necessary to access and control the messages and their format, permit diagnostic tests, and allow monitoring by reading, translating and acting upon commands and information.

ETC's products employ the concept of distributed processing. This means that each assembly contains its own microprocessor that controls the functions of that particular card. Distributed processing permits the system to be modularly expanded, allows for a variety of configurations of the systems, and increases system reliability.

All of ETC's products are equipped with self-diagnostic features that automatically alert the user to equipment malfunctions or external problems that must be corrected to maintain proper system operation.

New product development and product improvements are significant to ETC's business. The Company spent approximately $539,000, $830,000, and $1,420,000 in 2003, 2002, and 2001, respectively, on research and development activities, all of which were exclusively Company sponsored and supported. The large decreases in research and development expenses beginning in 2001 and continuing into 2003 were due to reduction of the Company's workforce by over 50% and other cost savings measures implemented to address a significant decrease in sales.

Electronic Tele-Communications owns some patents and it seeks to obtain trademarks and copyright protection on all of its proprietary systems, programs, and printed material. The Company has registered its corporate logo and the Audichron(R), Digicept(R), and USA TIME(R) trademarks to protect its products. The Company believes that its patents, trademarks, and copyrights are a significant factor in maintaining its market position, but does not believe that its business is dependent upon any single patent, copyright or trademark.

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PRODUCTS

Interactive Voice Platforms

The Company produces the Digicept Emcee(TM) voice platform and Digicept Digital Network Application ("DNA") Modules. The Emcee is a scalable, open-system network peripheral designed to meet the needs of advanced networks by offering revenue generating, custom and enhanced services for both circuit and packet-switched networks. Together, these products constitute a comprehensive line of interactive voice platforms, providing multi-message, user-selectable voice announcements. The systems feature Automatic Intercept Service, Changed Number Announcement and Automatic Number Announcement. These applications intercept erroneously dialed numbers, informing the caller of changed numbers or other dialing instructions. They also perform revenue-generating functions such as voice mail, internet call waiting, wake-up service, and privacy call screening. Each system also provides prompts and messages in support of enhanced telephone services, providing instructions for custom calling services and automated pay phone operation. In addition, the interactive voice platforms may be used to provide user selectable information regarding entertainment or transportation schedules, medical, financial and insurance data, news and sports updates, and other public information.

Voice Mail, Audiotex, Time/Weather/Temperature

Audichron Z-10(TM) provides basic time/weather/temperature functionality in a low-cost, solid-state platform.

The Audichron 410 combines voice mail, audiotex, and time/weather/temperature functions in a single system. Flexible, industry standard hardware and software allow for the continued development of additional features required by the business user or service provider. Both rack-mount and tower enclosures are available, designed to meet the varied needs of both the telephone company and business office environments.

Audichron announcers provide professionally recorded voice announcements, available with synchronous entry so that every caller hears the entire announcement from the beginning. Promotional announcements, in rotating or fixed time slots, may be added for additional revenue generation. All maintenance for weather forecast updates, message changes and time adjustment is provided remotely. Monthly call rate reporting is provided to the customer to document system usage.

Digital Recorder/Announcers

The Company's Digicept recorder/announcer stores a single announcement for playback to the telephone network. The Digicept line also includes the Extended Memory recorder/announcer, providing extended-length, single-channel messages. Calls to the recorder/announcers are generally grouped through multiple interface circuits, also manufactured by the Company, allowing simultaneous access to the recorder/announcer by hundreds of phone lines. High-speed T1 interfaces are available to connect large recorder/announcer systems directly to a 24-channel digital T1 network. The Digicept recorder/announcers are most often found in a telephone company's central office, providing informational announcements regarding incorrectly dialed or changed numbers, telephone services and weather conditions. These announcers are also used by businesses to provide information on finance, transportation, public service and education. The Messenger(TM) 612 single-channel announcer, housed in a self-contained package, provides similar functionality in a business office environment.

The Company's Digicept and Messenger product lines include multi-channel recorder/announcers designed for applications requiring the simultaneous playback of multiple messages. These multi-channel announcers provide informational announcements similar to those of the single-channel recorder/announcers. The Digicept line offers two multi-channel recorder/announcers, which are typically rack mounted in telephone company central offices or other large business applications.

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The Messenger announcers are housed in self-contained packages, ideal for use in office environments. The Messenger line offers two multi-channel announcers.

Common Equipment

Interface and trunk circuits combine hardware and software to provide the connection between the telephone central office, the calling party and the Company's announcement systems. The Company has developed interface circuits for its Digicept and Audichron product lines. By providing both the interface circuits and the announcement systems, the Company offers integrated solutions designed to meet customers' needs while providing for the modular expansion of the systems. The Company provides interface circuits that can perform a wide variety of functions and are compatible with most telephone circuitry, including T1 interfaces for direct connection to the digital telephone network.

SERVICES

Leasing Services

The Company leases and sells announcement systems in the United States and internationally. These systems form the USA TIME network of time/weather/temperature announcers. These systems primarily serve financial institutions, telephone companies, and other customers with an interest in providing community service.

Recording Services

A professional staff is available from ETC's recording studio in Norcross, Georgia to provide high quality recordings of commercial announcements and customized messages in a variety of formats. These announcements include interactive system vocabularies, call processing system prompts, information-on-hold announcements and commercial announcements for telemedia. Recordings may be provided on cassette or reel-to-reel tapes, or may be digitized and stored on floppy diskettes, CDs, DVDs, or delivered via the Internet.

Meteorological Services

Two degreed meteorologists, using state-of-the-art information services and equipment, update weather forecasts from ETC's weather center in Norcross, Georgia. A rigid quality control program ensures that forecasts are updated on a timely basis. These forecasts serve approximately 500 USA TIME sites, and are downloaded to the Company's time/weather/temperature systems via the telephone network, using computer-generated calling. Additionally, all maintenance, call rate reports, promotional messages, time adjustment and daylight savings time changes are provided remotely from the weather center.

Technical Services

The Company offers equipment installation, training, and 24-hour technical support of its various products. Maintenance and installation services include customer premise support and software and documentation updates. Classes are held in ETC's training centers and at customer sites to instruct employees and customers on the operation and use of ETC's products. Technical bulletins and software updates are also available from the Company's Web site.

Miscellaneous Services

In addition to its manufactured products, the Company offers engineering and product services to telephone companies and other equipment customers. The Company can design call processing and voice announcement systems to a customer's specifications. This includes determining equipment requirements based on the Company's standard offerings and interconnecting the cards and systems to the exact size and capability needed by the customer.

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MANUFACTURING PROCESSES

ETC's manufacturing processes involve the fabrication of products from components manufactured to specification by others or purchased as stock items from independent suppliers. Items such as memory chips, computers, disk drives, microprocessor units, certain software, integrated circuits, resistors, capacitors, transformers, switches, wire and related items are purchased as stock items from a variety of manufacturers and distributors. Some components are manufactured by single producers, but the Company believes suitable replacement components would be available from a variety of sources should the product of any producer become unavailable. The Company's printed circuit boards and product enclosures are manufactured by outside suppliers to the Company's specifications. The Company believes these products would be available from a variety of sources and that the loss of any single source would not materially affect the Company's business.

The products manufactured by ETC generally require a high degree of precision and dexterity in the assembly stage and multiple testing and quality assurance checks prior to shipment. By stressing quality and maintaining rigid testing and quality assurance procedures, the Company has been able to achieve a low product return-for-service rate.

The Company purchases computers, monitors, printers, disk drives, and other computer related accessories. These components are assembled into systems and packaged with software and sold to the customer.

In addition to hardware manufactured by the Company, software is an integral component of the Company's announcement systems. Purchased and internally generated software programs are loaded into the voice announcement systems in a variety of methods, including "burning" the programs into microprocessors, or using CDs, DVDs or floppy disks to transfer the programs onto computer hard drives or memory chips. These software programs dictate how the voice announcement systems perform, and give the products flexibility to meet many different customer specifications and needs.

SALES, MARKETING AND CUSTOMERS

ETC's manufactured products are marketed primarily through Company sales personnel, with approximately 4% being sold through independent distributors and telecommunications dealers. Sales and leases of the Company's time/weather/temperature machines and related information update services are through the Company's sales personnel. Approximately 95% of the Company's 2003 sales were in the United States, and 5% were to international customers.

During 2003, ETC's products and related services were sold and leased to approximately 750 customers, primarily operating telephone companies, competitive local exchange carriers ("CLECs"), telephone original equipment manufacturers ("OEMs"), telecommunication dealers, telephone service providers, financial institutions, and other businesses.

ETC engages in direct advertising through trade publications, direct mail communications, and the Company's Web site (www.etcia.com). The Company participates in a number of trade shows each year and is a member of many national and state telephone associations. The Company's marketing staff is headquartered in Waukesha, Wisconsin. In addition regional sales offices are located in Waukesha, Wisconsin and Norcross, Georgia, and five sales representatives are at other locations in the United States. Technical service departments exist at both regional sales offices to provide assistance with customer questions and custom application requirements.

BACKLOG

As of December 31, 2003, the amount of the Company's backlog orders believed to be firm was $62,000. This compares with $146,000 of backlog orders as of December 31, 2002. Four customers comprised 44%, 13%, 11%, and 10%, respectively, of the 2003

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backlog. Two different customers comprised 50% and 38%, respectively, of the 2002 backlog. The Company typically experiences variations in product sales that have no seasonal pattern and are caused by the timing of major equipment purchases by the operating telephone companies, CLECs and OEMs.

COMPETITION

The market as a whole for telecommunications equipment sold to operating telephone companies, CLECs and OEMs is highly competitive, primarily on the basis of quality, price, availability for delivery, and capabilities. The segment of the market in which the Company's products are sold is competitive, primarily on the basis of product capabilities and quality, and to a lesser extent on the basis of price and availability for delivery. Product capability is determined by the ability to provide the type of service required by the customer. Product quality is determined by factors such as product consistency, durability, workmanship and reliability.

Based on comparisons with competitors' products, the Company believes it offers comparable products with more features at lower prices. Most of the Company's competitors are larger than the Company and have substantially greater financial resources.

The Company's time/weather/temperature systems compete indirectly with other sources of time, weather and temperature information such as radio stations, television, and cable TV, where these services are provided to listeners and viewers free of charge on a regular basis.

EMPLOYEES

As of December 31, 2003, ETC had 38 full-time employees and 1 part-time employee. Approximately 21% of the Company's employees are engaged in research and development, 23% in sales and marketing, 23% in management and office support, 15% in service and support, and 18% in manufacturing. The Company has never experienced a work stoppage due to a labor dispute, is not a party to any labor contract, and considers its relations with employees to be excellent. The Company believes that there is an adequate supply of professional and manufacturing personnel available in the metropolitan areas where it has facilities to meet its anticipated personnel requirements.