<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

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

                  FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1997

                                       OR

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

                    FOR THE TRANSITION PERIOD FROM N/A TO N/A

                         COMMISSION FILE NUMBER: 0-26472

                             SMARTFLEX SYSTEMS, INC.
--------------------------------------------------------------------------------
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

          DELAWARE                                               33-0581151
(STATE OR OTHER JURISDICTION OF                               (I.R.S. EMPLOYER
 INCORPORATION OR ORGANIZATION)                              IDENTIFICATION NO.)


       14312 FRANKLIN AVENUE, P.O. BOX 2085, TUSTIN, CALIFORNIA 92781-2085
--------------------------------------------------------------------------------
              (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 838-8737

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                                      NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                         COMMON STOCK, $.0025 PAR VALUE
                         ------------------------------
        RIGHTS TO PURCHASE SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
        ----------------------------------------------------------------
                                (TITLE OF CLASS)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

The aggregate market value of the Registrant's Common Stock held by
non-affiliates on March 16, 1998 (based on the last reported price of the Common
Stock on the Nasdaq Stock Market on such date) was $49,794,213

The number of shares outstanding of the registrant's Common Stock as of March
16, 1998 was 6,372,952

                       DOCUMENTS INCORPORATED BY REFERENCE

The Registrant's Annual Report to Stockholders for the fiscal year ended
December 31, 1997, is incorporated by reference in this Form 10-K to the extent
stated herein. The Registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on or about May 20, 1998, and to be filed
with the Commission not later than April 28, 1998, is incorporated by reference
in Part III of this Form 10-K to the extent stated herein.


<PAGE>   2

                             SMARTFLEX SYSTEMS, INC.
                          1997 FORM 10-K ANNUAL REPORT
                                TABLE OF CONTENTS

                                     PART I
<TABLE>
<CAPTION>
                                                                          PAGE
                                                                          ----
<S>                                                                       <C>
ITEM 1.   BUSINESS                                                          3

ITEM 2.   PROPERTIES                                                       19

ITEM 3.   LEGAL PROCEEDINGS                                                19

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS              19

                                     PART II

ITEM 5.   MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
            RELATED STOCKHOLDER MATTERS                                    20

ITEM 6.   SELECTED FINANCIAL DATA                                          20

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
            CONDITION AND RESULTS OF OPERATIONS                            20

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                      20

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
            ACCOUNTING AND FINANCIAL DISCLOSURE                            20

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT               21

ITEM 11.  EXECUTIVE COMPENSATION                                           21

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
            AND MANAGEMENT                                                 21

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                   21

                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
            REPORTS ON FORM 8-K                                            22
</TABLE>


        The Company operates and reports financial results on a 52- or 53-week
year, ending on the Saturday nearest December 31 each year, and follows a
four-four-five week quarterly cycle. For clarity of presentation, the Company
has described all periods presented as if the fiscal year ended December 31.

                                       2
<PAGE>   3

                                     PART I

ITEM 1. BUSINESS

        The information contained in this Annual Report on form 10-K, other than
historic information, is comprised of forward-looking statements relating to
future events or the future financial performance of the Company, and the
Company intends that such forward-looking statements be subject to the
safeharbors created within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. Readers are
cautioned that such forward-looking statements, which may be identified by words
such as "anticipates," believes," "intends," "estimates," "expects," and similar
expressions, are only predictions or estimations and are subject to known and
unknown risks and uncertainties. In evaluating such statements, readers should
consider the various factors identified in this Annual Report on Form 10-K,
including matters set forth in "Risk factors," which could cause actual events,
performance or results to differ materially from those indicated by such
statements.


                           DESCRIPTION OF THE COMPANY

        Smartflex Systems, Inc. ("Smartflex" or the "Company") provides custom
design and turnkey manufacturing of interconnect solutions to customers who are
driven by market demands to design and manufacture compact, high-performance
electronic products. The Company's assemblies enable its customers to respond to
these demands by providing advanced performance and the physical flexibility to
accommodate motion, contour and size constraints. The Company's sophisticated
electronic assemblies and sub-assemblies, provide comprehensive interconnect
solutions, which feature precision surface mount and direct chip attach ("DCA")
technologies on multiple circuit substrates. The Company believes it is a
leading supplier of advanced surface mount technology ("SMT"), Chip-On-Flex
("COF"), and Flip-Chip-On-Flex ("FCOF") assemblies to the hard disk drive
("HDD") and non-HDD markets. The Company's principal HDD customers include
International Business Machines Corporation ("IBM"), Samsung Corporation
("Samsung"), Seagate Technology, Inc. ("Seagate") and Western Digital
Corporation ("Western Digital"). The Company's principal non-HDD customers
include Iomega Corporation ("Iomega"), Hewlett-Packard Company ("H-P"), and
Quantum Corporation ("Quantum"). The Company's net revenues have grown from $31
million in fiscal 1991 to $133 million in fiscal 1997.

        The Company's manufacturing services consist of product design and
prototyping, materials procurement and management, high-volume automated
assembly and subassembly test. Smartflex utilizes complex assembly techniques
and believes it was one of the first to commercialize the COF and FCOF process
technology for the computer industry. COF and FCOF technologies, in which a bare
silicon die (without the standard lead frame package) is mounted directly on
substrate material, enable improved performance, a greater density of components
and reduced size when compared with traditional assembly technologies. Smartflex
currently serves its customers from four locations, one in each of Tustin,
California ("Tustin"); Singapore; Monterrey, Mexico ("Monterrey"); and Cebu, the
Philippines ("Cebu").

                               INDUSTRY BACKGROUND

        Manufacturers of electronic products, including computers, communication
devices and consumer electronics, are continually innovating and redesigning
these products to make them smaller and lighter, at lower cost and with higher
performance. Facilitating this process has required advances in integrated
circuits, increased use of miniaturized components and new packaging methods.
These trends have been particularly pronounced in the HDD industry, where rapid
technological advances and intense competition have contributed to the
proliferation of smaller form factor, higher capacity, higher performance
drives. Development of new products in the HDD market has been enabled in part
by advances in flexible interconnect assemblies ("flex assemblies"), which
provide an intelligent interface between the read/write heads and the
electronics in the disk drive. Also see "Risk Factors."



                                       3
<PAGE>   4
        An electronic interconnect is used to provide electrical connections
between components in electronic systems. Substrates used for interconnects
include primarily rigid printed circuit boards and flexible circuits. Advances
in technology have enabled the placement of integrated circuits and other
components on a flexible substrate to create a flex assembly. Although only a
small percentage of the flexible circuits produced today are incorporated into
flexible assemblies, the Company believes that the forces which have driven the
use of flex assemblies in the HDD market, including the need for rapid product
development, miniaturization and increased performance, will create additional
opportunities for flex assemblies in other markets. Also see "Risk Factors."

        Flex assemblies provide the physical flexibility to accommodate motion,
contour and size constraints. In HDD applications, for example, flexible
interconnect assemblies must flex hundreds of millions of times throughout the
life of the drive. Flex assemblies also enhance performance in HDD's by allowing
components to be positioned closer to the read/write heads, thereby improving
signal-to-noise ratios, allowing increased transfer rates and reducing the
number of interconnections. Examples of flex assemblies used in non-HDD
applications include read/write head assemblies in tape drives and removable
personal storage products, and flex assemblies in miniaturized packaging for
gene chips and fluid analyzers.

        In recent years, COF technology has been used to produce flex assemblies
for high-performance, high-capacity (greater than 4 gigabyte) HDDs where
performance and size constraints are especially critical. Eliminating the
standard package from the integrated circuit enables improved performance,
reduced size and a greater density of components on the flex assembly. These
characteristics are expected to become increasingly important as
magneto-resistive ("MR") read/write heads, which require twice the number of
interconnections as do other head technologies, become more prevalent. MR head
technology is now being used in very high end disk drives and is expected to
become more widely utilized as new HDD products come to market.

        The outsourcing of flex assemblies is part of a larger trend in the
electronics industry toward the outsourcing of manufacturing services.
Electronics original equipment manufacturers ("OEMs") increasingly choose to
access leading manufacturing processes from third parties and focus on their
core competencies, such as product development and marketing. Also see "Risk
Factors." This allows the OEM to reduce capital investment and product costs,
while reducing time to market. The complex process of assembling integrated
circuits on flexible substrates requires special processes and skills due to the
flexibility and thinness of the substrate material and, in the case of COF and
FCOF, the delicate nature of the bare silicon die. These processes and skills
include advanced automation and tooling for surface mount assembly,
semiconductor assembly for COF and FCOF attachment, and semiconductor test
capabilities. The know-how required to master these assembly processes has
helped to establish companies, such as Smartflex, which specialize in providing
contract manufacturing services in this area.

                                    STRATEGY

        The Company's objective is to combine leading precision assembly
technology with high-volume manufacturing expertise to serve its target markets.
Also see "Risk Factors." The key elements of the Company's strategy are as
follows:

Focus on High-Volume, Precision Manufacturing Services

        The Company focuses on providing precision manufacturing of high-volume
precision assemblies on a turnkey basis. This process involves the exact
placement of miniaturized components on rigid and flexible circuit boards and
requires the design and effective implementation of fine tooling, extensive
automation and advanced vision systems capable of reliable, high-volume
throughput, and sophisticated semiconductor test capabilities. The Company
believes that focusing on precision, high-volume requirements 

                                       4
<PAGE>   5

allows it to maximize value to the customer while achieving optimum utilization
of its equipment and facilities. Also see "Patents."

Extend Technology Leadership

        Smartflex focuses on assemblies that are based on advanced, complex
assembly techniques. To date, these techniques have generally been based on
automated fine-pitch SMT, advanced COF and advanced FCOF. Smartflex believes
that its focus on advanced assembly processes is critical to maintaining and
building market share and to preserving its profitability. Also see "Patents."

Target Leading Customers

        Smartflex directs its efforts toward OEMs which have established leading
market share in the Company's target markets and with which the Company can work
closely in the design and development of future products. In particular,
Smartflex intends to become the leading supplier to OEM customers who hold a
significant share of their respective markets. These customers presently include
H-P, IBM, Iomega, Quantum, Samsung, Seagate, and Western Digital. Smartflex
seeks to establish long-term partnering relationships with its major OEM
customers.

Expand in Growing Market Segments

        Smartflex has applied the technology and processes it developed for the
HDD industry to other storage devices, such as disk array storage systems,
removable personal storage, tape drives and optical drives, other computer
peripherals, scanners, portable computers and communications products. The
Company expects that the technological characteristics of its precision
assemblies will help accommodate the trend toward smaller, lighter and more
powerful electronics products. The Company plans to increase revenues from these
non-HDD products by following its traditional strategy of affiliating with
leading OEMs in its target markets.

Exploit Global Manufacturing Presence

        Smartflex currently has operations in California, Singapore, Monterrey,
and Cebu. The Company believes that its facilities in these diverse geographic
locations enable it to better address its customers' objectives regarding cost,
shipping location and frequency of interaction with manufacturing specialists,
as well as local content requirements of end-market countries. In order to
better align the Company's capabilities with business opportunities and to
increase operational efficiencies, the Company realigned its operations in 1997.
Volume manufacturing was moved from Singapore to Cebu. The Tustin, California
and Singapore facilities are designated as the Regional Technology and Services
Centers for the regions they support (the Americas and Asia, respectively),
providing state-of-the-art prototype and low-volume production capabilities.
Similarly, the Monterrey and Cebu facilities serve as major volume production
facilities in the Americas and Asia, respectively.

                             MANUFACTURING SERVICES

        The Company's manufacturing services consist of design, procurement,
assembly and test.

        Design--Working interactively with the OEM customer and the substrate
fabricator, the Company designs a specific packaging configuration to satisfy
the customer's requirements for functionality, manufacturability and
reliability. In the selection of substrate materials, the Company advises its
customers with respect to a number of factors, including cost, mechanical
strength, electrical performance and thermal characteristics. In the selection
of integrated circuits, the Company provides assistance to its customers with
respect to critical issues such as size, power requirements and package type.
The Company believes that its understanding of the interaction of flex
substrates and integrated circuits is crucial to success at the design stage.

                                       5
<PAGE>   6

        Procurement--Early involvement in the design process allows the Company
to assist in the selection of suppliers and components in order to enhance
manufacturability and logistical support of volume programs. As part of the
procurement process, the Company offers its customers material planning and
procurement, and inventory management and handling services. From time to time,
the Company's suppliers allocate components among their customers in response to
supply shortages. By assuming responsibility for procurement, the Company may be
required to bear the risks of fluctuations in component price and availability.
In certain cases, the Company can leverage its position as a manufacturing
partner to large OEMs to receive more favorable price and volume allocations
from its key suppliers.

        Assembly--Precision assembly involves the exact placement of
miniaturized components on multiple substrate types. The Company's current
assembly techniques are highly automated and based almost exclusively on
advanced SMT and Direct Chip Attach ("DCA"). SMT is a method of affixing
electronic components, including integrated circuits, onto the surface of the
substrate. Components mounted in SMT assemblies can be of relatively small size
due to the use of fine lead-to-lead spacings ("pitch"), which currently can be
as small as 4 mils. The Company's SMT assembly process has become increasingly
complex because of these smaller dimensions and tighter tolerances, and
accordingly requires the use of expensive automated assembly equipment and
engineering expertise.

        Following a multi-year development program, the Company expanded COF
production in 1993. COF involves mounting a semiconductor die (which lacks the
standard lead frame package) directly onto the flex substrate. This is
accomplished by wire bonding directly from the silicon die onto conductors in
the flex. This elimination of the semiconductor package enables improved
performance and a greater density of components, thus reducing size.

        High-performance, high-capacity (greater than 4 gigabyte) HDDs were the
first products to benefit from the use of COF assemblies. COF enables improved
product performance while simultaneously producing a much smaller design. This
is particularly beneficial for MR head technology, which requires twice as many
leads to the head as do competitive head technologies.

        COF has enjoyed significant customer acceptance. The Company has
increased its shipments of assemblies which include COF to more than 150,000
units, on average, per week. COF assemblies have been manufactured in volume for
certain of the Company's customers, including IBM, Seagate, and Western Digital.
Assemblies incorporating COF technology accounted for approximately 50%, 44%,
and 51% of net revenues in fiscal 1997, 1996, and 1995, respectively.

        As electronic designs require increasingly smaller circuitry, the
attachment of integrated circuits to flex substrates is expected to require
greater precision. The Company has invested in the development of advanced
integrated circuit assembly technologies which offer higher precision and thus
greater component densities. Also see "Risk Factors."

        The Company also utilizes the Chip-On-Ceramic ("COC") assembly process
in which one or more semiconductor die(s), without the standard lead frame
package is/are attached directly on ceramic substrates.

        In 1997, Smartflex began volume production using the FCOF process.
Flip-Chip mounting eliminates wire bonding, permitting a smaller semiconductor
"footprint." FCOF uses the flex circuit as part of the integrated circuit
leadframe structure, thereby greatly reducing the surface area required on the
flex. This can also result in thinner cross section profiles of the flex
assemblies, which permits further reduction in package size.

        In addition to FCOF, these advanced integrated circuit assembly
technologies include Tape Automated Bonding ("TAB"), both on the flex
("TAB-on-Flex") and within the flex structure ("TAB-in-Flex"). TAB technology
utilizes a very thin gold lead frame attached directly to the flex, which
replaces the need for wire bonding.

        Test--Using sophisticated integrated circuit test systems, the Company
tests complex assemblies in order to assure that each assembly performs to
customer specifications. This is especially important in DCA 



                                       6
<PAGE>   7

technologies, because the Company is essentially performing the final test of
integrated circuits, a process that is normally performed by the integrated
circuit component supplier. Also, the Company's investment in manufacturing
defect analyzers enables customers to specify a range of test options to meet
their needs.

                     INTERNATIONAL MANUFACTURING CAPABILITY

        The Company presently serves its major markets from four manufacturing
facilities strategically located to support both U.S. and international markets.
In 1997, the Company realigned its operations such that the California and
Singapore facilities, where most of the customer design activities take place,
would operate as Regional Technology and Services Centers, offering development,
engineering and quick-turn manufacturing capabilities to the two regions they
support, namely, the Americas and Asia. As soon as a customer's product is
established in the marketplace and volume production begins, the Company
transfers manufacturing from Tustin and Singapore to one of its international
volume manufacturing facilities, located in Monterrey, or Cebu.

        The Company's state-of-the-art facilities in Monterrey and Cebu, serve
as high-volume, lower-cost manufacturing centers supporting the Americas and
Asia. The Monterrey facility, with approximately 65,000 square feet of
manufacturing space, is capable of producing over 400,000 interconnect
assemblies per week. Similarly, the Cebu facility, with approximately 30,000
square feet of manufacturing space, is capable of producing 300,000 interconnect
assemblies per week, when fully equipped. Also see "Risk Factors."

        The chart below outlines the services of these facilities.

<TABLE>
<CAPTION>
                                     SUPPORTS
                                  THE AMERICAS
                                   AND EUROPE              SUPPORTS ASIA
                              -------------------        -----------------
                              TUSTIN    MONTERREY        SINGAPORE    CEBU
                              ------    ---------        ---------    ----
<S>                           <C>       <C>                 <C>       <C>
Design Services                  .                           o
Prototyping                      .                           .
New Technologies/Processes       .          o                o          o
Procurement                      .                           .
Volume SMT                                  .                           .
COF Capable                      .          .                .          .
FCOF Capable                     .          o                o

Test Services                    .          .                .          .
Distribution                     .          .                .          .
ISO 9002 Registered              .          .                .          .

Customer Service                 .                           .
</TABLE>

----------
 . -- Currently available

o -- Planned within 6-18 months


                                     MARKETS
HDD Market

        To date, the rapid advance of technology in HDDs has driven the market
for precision flex assemblies. High-performance flex assemblies have found the
most significant application in the small form 


                                       7
<PAGE>   8

factor (3.5" and smaller), high-capacity (4 gigabyte and greater) portion of the
HDD market. The Company believes that COF technology is the predominant
interconnect technology in this portion of the HDD market. Also see "Risk
Factors."

        Intense competition, relatively short product life cycles and rapid
technological change have characterized the HDD market in the recent past. As a
result, HDD manufacturers have been forced to aggressively pursue technologies,
which improve performance and cost. The Company has focused its efforts to meet
the needs of this demanding market. The Company is a leading supplier of
automated fine-pitch SMT flex assemblies and was one of the first to
commercialize the COF process as an enabling technology for high-end drives. The
Company is able to manufacture advanced flex assemblies at low cost due to high
manufacturing yields and to spread the high capital costs necessary to perform
high-volume, precision manufacturing of these assemblies across a large number
of units. The Company therefore should be able to capitalize on the competitive
pressures affecting the HDD market. Also see "Risk Factors."

        At the end of 1997, the Company changed the way it classifies its
markets. The removable storage business, which was previously reported as hard
disk drive business, will be reported as non-hard disk drive business, combined
with the tape and optical storage business. Under this modified method of
reporting, the Company's hard disk drive business represented 55%, 50% and 65%
of net revenues in fiscal 1997, 1996 and 1995, respectively. Under the old
method of reporting, the hard disk drive business would have represented 75%,
61% and 71% for fiscal 1997, 1996 and 1995. In addition, sales to the HDD market
have generally been concentrated among a few large customers, including IBM,
Maxtor, Samsung, Seagate and Western Digital.

        The Company primarily manufactures advanced flexible assemblies for
products with high-storage (currently greater than 4 gigabyte) capacities. The
Company's flex assemblies incorporate SMT techniques, and also utilize COF
processes for the highest capacity markets, particularly in drives incorporating
emerging MR head technology.

        The following diagram depicts the key components of a typical HDD,
including a COF assembly. The head stack assembly travels across the spinning
disk storage media to read and write information. The flex assembly accommodates
this motion and incorporates preamp circuitry as close as possible to the
read/write heads, thereby improving signal-to-noise ratios, allowing increased
transfer rates and reducing the number of interconnections.


                            [HARD DISK DRIVE DIAGRAM]


                                       8
<PAGE>   9
        The following table lists the markets served by the Company, describes
the function of the flex assembly supplied by the Company to each market and
lists representative customers for each market.

<TABLE>
<CAPTION>
APPLICATION SEGMENT      FLEXIBLE ASSEMBLY FUNCTION         REPRESENTATIVE CUSTOMERS
-------------------      --------------------------         ------------------------
<S>                      <C>                                <C>                   
Hard Disk Drives         Read/write head assemblies         IBM, Samsung, Seagate,
                                                            Western Digital

Removable Storage        Read/write head assemblies         Iomega

Disk Arrays              SCSI interface assemblies          H-P, Sequent Computer
                                                            Xyratex

Optical Drives           RF/Laser optics and carriage       H-P
                         assemblies

Tape Drives              Head preamp assemblies             Quantum

Scanners                 Charge-coupled device (CCD)        H-P
                         control assemblies

Printers                 Printhead assemblies               Topaz,
                                                            Rastergraphics

Communications           Headset interconnect assemblies,   Motorola, Plantronics
                         cellular battery and control 
                         panel assemblies

Biomedical               DNA analyzer cartridge             Nanogen
</TABLE>

Emerging Markets

        The Company believes that the forces that have driven the HDD market,
including rapid product development, miniaturization and increased performance,
will increasingly affect other markets, creating additional opportunities for
providers of advanced SMT and DCA services. Also see "Risk Factors." The Company
is in various stages of developing prototype assemblies for applications in the
following markets:

        Communications--Demand for communications products such as cellular
phones, paging systems and other mobile communications devices, and satellite
communication applications has increased significantly in recent years.
Increasingly, flex substrates are replacing rigid printed circuit boards,
connectors and cables in these products in order to reduce space, weight and
cost. For example, the Company anticipates that flex assemblies will be used in
smart batteries in order to increase battery life and reduce weight.

        Computers--Portable computers, such as notebooks and personal digital
assistants, are other applications where the Company anticipates growth in
demand for flex assemblies. In addition to growth in the number and types of
portable computers, the Company believes that the number of flex-based
interconnects per notebook is increasing.

        PCMCIA Peripherals--Communications and computer peripheral devices that
adhere to the PCMCIA (Personal Computer Memory Card Industry Association) format
can take advantage of advanced assembly techniques such as DCA to increase
package densities and conform to difficult size constraints. The Company
anticipates that demand for portable computers utilizing the PCMCIA format will
continue to experience significant growth.

        Other Emerging Markets--Significant opportunities for flex assemblies
may also exist in other computer products, such as CD-ROMs and virtual reality
headsets and in medical electronics, such as inter-dermal blood gas analyzers
and drug dispensers, and inter-uterine fetal monitors.

                                       9
<PAGE>   10

                                  RISK FACTORS

Important Factors Related to Forward-Looking Statements and Associated Risks

        This Annual Report on Form 10-K and the Company's Annual Report to
Stockholders contain forward-looking statements that are based on current
expectations and involve a number of risks and uncertainties. Factors that may
materially affect revenues, expenses and operating results include, without
limitation, the impact of competitive products and pricing, the transition of
volume manufacturing operations from Singapore to the Philippines, efficient
utilization of manufacturing facilities, interruption of the flow of components
from a limited number of suppliers, subsequent changes in business strategy or
plan, timely qualification of, and commencement of volume production at the
Company's new facilities in Cebu and Monterrey, and structural and strategic
changes affecting certain of the Company's existing customers, suppliers and
competitors.

        The forward-looking statements included herein are based on current
assumptions that the Company will continue to develop, market, manufacture and
ship new products on a timely basis, that competitive conditions within the
Company's market will not change materially or adversely, that demand for the
Company's products and services will remain strong, that the market will accept
the Company's new products and services, that the Company will retain existing
key management personnel, that inventory risks due to shifts in market demand
will be minimized, that the Company's forecasts will accurately anticipate
market demand, and that there will be no material adverse change in the
Company's operations or business. Assumptions relating to the foregoing involve
judgments that are difficult to predict accurately and are subject to many
factors that can materially affect results. Budgeting and other management
decisions are subjective in many respects and thus susceptible to
interpretations and periodic revisions based on actual experience and business
developments, the impact of which may cause the Company to alter its marketing,
capital expenditure, or other budgets, which may in turn affect the Company's
results. In light of the factors that can materially affect the forward-looking
information included herein, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved.

        Because of these and other factors affecting the Company's operating
results, past financial performance should not be relied upon as an indicator of
future performance, and investors should not overly rely upon historical trends
to anticipate results or trends in future periods.

        The following factors also may materially affect results and therefore
should be considered. Also see "Backlog," "Patents," "Competition" and "Year
2000 Issue."

Limited Independent Operating History

        The Company was incorporated in September 1993 to acquire all of the
assets and business of Smartflex Systems, which was founded in November 1985 as
a general partnership (the "Smartflex Partnership") jointly owned by Silicon
Systems, Inc. ("Silicon Systems"), a supplier of mixed signal integrated
circuits to the HDD market, and Rogers Corporation ("Rogers"), a supplier of
flex circuits to the HDD market. Until its acquisition by the Company, the
Smartflex Partnership was provided with financial assistance and significant
support in sales and personnel functions by Silicon Systems and Rogers. Although
the business of the Company has been in existence since November 1985, the
Company has only a limited history as an independent operating company, and
there can be no assurance that the Company will not experience problems
associated with young, growing companies. Although the Company operated
profitably from 1990 through 1996, it experienced operating losses in fiscal
1997. There can be no assurance that the Company will be able to achieve and
improve its profitability in future periods. Also see "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on pages 13
through 17 of the Company's Annual Report to Stockholders for the fiscal year
ended December 31, 1997.

                                       10
<PAGE>   11

Substantial Fluctuations in Future Operating Results

        The Company has experienced substantial fluctuations in its annual and
quarterly operating results, and such fluctuations are expected to continue in
future periods. The Company's operating results are affected by a number of
factors, many of which are beyond the Company's control. All products
manufactured by the Company are custom designed and assembled for a specific
customer's requirement in anticipation of the receipt of volume production
orders from that customer, which may not always materialize. The Company
typically incurs significant start-up costs in the production of a particular
product, which costs are expensed as incurred. Accordingly, the Company's level
of experience in manufacturing a particular product and its efficiency in
minimizing start-up costs will affect the Company's operating results during the
periods in which production begins and ramp-up occurs. The efficiencies of the
Company in managing inventories and fixed assets, shortages of components or
labor, the degree of automation used in the assembly process, fluctuations in
material costs and the mix of materials, labor, manufacturing and overhead costs
are also significant factors affecting annual and quarterly operating results.
Other factors contributing to fluctuations in the Company's operating results
include price competition, the inability to pass on cost overruns, the timing of
expenditures in anticipation of increased sales, customer product delivery
requirements and the range of services provided. In addition, the amount and
timing of orders placed by a customer may vary due to a number of factors,
including inventory balancing, changes in manufacturing strategy and variation
in product demand attributable to, among other things, product life cycles,
competitive factors and general economic conditions. Any one of these factors,
or a combination thereof, could adversely affect the Company's annual and
quarterly results of operations. Also see "Management's Discussion and Analysis
of Financial Condition and Results of Operations" on pages 13 through 17 of the
Company's Annual Report to Stockholders for the fiscal year ended December 31,
1997. Also see "Competition."

        The Company's customers generally require short delivery cycles, and a
substantial portion of the Company's backlog is typically scheduled for delivery
within 90 days. Quarterly sales and operating results therefore depend in large
part on the volume and timing of bookings received during the quarter, which are
difficult to forecast. The short lead time for the Company's backlog also
affects its ability to accurately plan production and inventory levels. In
addition, a significant portion of the Company's operating expenses are
relatively fixed in nature and planned expenditures are based in part on
anticipated orders. Any inability to adjust spending by a sufficient amount or
quickly enough to compensate for any revenue shortfall may magnify the adverse
impact of such revenue shortfall on the Company's results of operations.

Dependence on Hard Disk Drive Industry

        The Company's principal market is the HDD industry, which is
characterized by intense competition, relatively short product life cycles,
rapid technological change, significant fluctuations in product demand and
significant pressure on vendors to reduce or minimize costs. The HDD industry is
also highly cyclical and has experienced periods of increased demand and rapid
growth followed by periods of oversupply and contraction. The impact of cyclical
trends on suppliers to this industry has been exacerbated by the tendency of HDD
manufacturers to order components in excess of their needs during growth
periods, followed by a sharp reduction in demand for components during periods
of contraction. The Company's operating results have been adversely affected
from time to time during HDD industry slowdowns and could be materially
adversely affected in the event of significant slowdowns in this industry now or
in the future. Although the Company is attempting to reduce its dependence on
the HDD industry, the Company expects revenues attributable to this market to
continue to represent a majority of its revenues for the foreseeable future.
Also see "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 13 through 17 of the Company's Annual Report to
Stockholders for the fiscal year ended December 31, 1997 and "Markets."

Customer Concentration

        The Company's customer base is highly concentrated. During fiscal 1997
and 1996, the Company's five largest customers (which include, in some cases,
multiple divisions) accounted for approximately 90% 


                                       11
<PAGE>   12

and 89% of net revenue, respectively. Although the Company is attempting to
reduce its dependence on a limited number of customers, the Company expects that
sales to a relatively small number of OEMs will continue to account for a
substantial portion of net revenues for the foreseeable future, and the loss of,
or a decline in orders from, one of the Company's key customers would have a
material adverse effect on the Company's financial and operating results.

Component Supply and Sources

        Substantially all of the Company's manufacturing services are provided
on a turnkey basis in which the Company, in addition to providing design,
assembly and testing services, is responsible for the procurement of the
components which are assembled by the Company for the customer. In certain
circumstances, the Company is required to bear the risk of component price
fluctuations, which could adversely affect the Company's gross margins. In
addition, in order to assure an adequate supply of certain key components which
have long procurement lead times, such as integrated circuits, the Company often
must order such components prior to receiving customer purchase orders for the
assemblies which require such components. Failure to accurately anticipate the
volume or timing of customer orders can result in component shortages or excess
component inventory, which in either case could adversely affect the Company's
financial and operating results.

        Some of the assemblies manufactured by the Company require one or more
components that are ordered from, or which may be available from, only one
source or a limited number of sources. In particular, the Company relies on the
timely supply of components from ADFlex Solutions, Inc. ("ADFlex"), IBM, Mektec
Corporation ("Mektec"), Texas Instruments, Inc. ("TI"), Silicon Systems, Inc. (a
wholly owned subsidiary of TI), Toshiba America, Inc., and VTC, Inc. ADFlex is
also one the Company's competitors. During fiscal 1997, 1996 and 1995, the
Company purchased a majority of its flex components from either ADFlex or
Mektec, a majority of its integrated circuits from IBM, TI and VTC, Inc.
Delivery problems relating to components purchased from any one of these or the
Company's other key suppliers could have a material adverse impact on the
financial performance of the Company. From time to time, the Company's suppliers
allocate components among their customers in response to supply shortages. In
some cases, supply shortages will substantially curtail production of all
assemblies using a particular component. In addition, at various times there
have been industry-wide shortages of electronic components, such as servo or
read/write circuits. The Company has experienced shortages of components in the
recent past. For example, in the first quarter of 1997, the Company experienced
a shortage of ceramic substrates for its COC program. During the second quarter
of 1997 this issue was resolved since all three of the Company's ceramic
substrate suppliers were able to reach their planned production goals. However,
there can be no assurance that such shortages will not recur in the future. Any
such shortages could have a material adverse effect on the Company's operating
results. Also see "Manufacturing Services" and "Competition."

International Operations

        The Company maintains international operations in Singapore, Mexico, and
the Philippines. In September 1997, the Company announced a restructuring plan
to streamline worldwide operations. As part of this restructuring, the Company
is in the process of moving its volume manufacturing from Singapore to its
lower-cost manufacturing facility in Cebu. The Singapore operations are intended
to become the focal point of Smartflex customer support in Asia as the Company's
Far East Regional Services and Technology Center. In light of the continued
growth of offshore facilities on the part of the Company's customers, Smartflex
anticipates that it will be required to increase its presence overseas through
internal growth, acquisitions, or a combination of both. Manufacturing and sales
operations outside the United States are accompanied by a number of risks
inherent in international operations, including but not limited to imposition of
governmental controls, compliance with a wide variety of foreign and United
States export laws, currency fluctuations, unexpected changes in trade
restrictions, tariffs and barriers, political and economic instability, longer
payment cycles typically associated with foreign sales, difficulties in
administering business overseas, labor union issues and potentially adverse tax
consequences. The Company historically has denominated all export sales in
United States dollars, and accordingly, if the relative value of the U.S. dollar
in comparison to 


                                       12
<PAGE>   13

the currency of the Company's foreign customers or competitors should increase,
the resulting effective price increase of the Company's products to such foreign
customers could result in decreased sales. The Company's production employees at
the Mexico facility are represented by a labor union and covered by a collective
bargaining agreement that is subject to revision annually under Mexican law. The
current agreement is subject to revision in February 1999. While the Company
believes that it has established good relationships with its labor force in
Mexico, there can be no assurance that such relationships will continue in the
future.

Variability of Customer Requirements and Customer Financing

        The level and timing of orders placed by customers vary due to the
customers' attempts to balance their inventory, changes in customers'
manufacturing strategies and variations in demand for the customers' products.
Due in part to these factors, most of the Company's customers do not commit to
firm production schedules for more than three months in advance of requirements.
The Company's inability to forecast the level of customer orders with certainty
makes it difficult to schedule production and optimize utilization of
manufacturing capacity. In the past, the Company has been required to increase
staffing and incur other expenses in order to meet the anticipated demand of its
customers. From time to time, anticipated orders from some of the Company's
customers have failed to materialize and delivery schedules have been deferred
as a result of changes in a customer's business needs, both of which have
adversely affected the Company's operating results. On other occasions,
customers have required rapid increases in production which have placed an
excessive burden on the Company's resources. Such customers' order fluctuations
and deferrals have had an adverse effect on the Company's operating results in
the past, and there can be no assurance that the Company will not experience
such effects in the future. In addition, the Company incurs significant accounts
receivable in connection with providing manufacturing services to its customers.
If one or more of the Company's principal customers were to become insolvent, or
otherwise were to fail to pay for the services and materials provided by the
Company, the Company's operating results and financial condition would be
adversely affected. Also see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 13 through 27 of the Company's
Annual Report to Stockholders for the fiscal year ended December 31, 1997.

Rapid Technological Change

        The Company and the Company's customer base competes in markets that are
characterized by rapid technological change and short product life cycles. In
particular, the HDD, computer and communications markets are prone to rapid
product obsolescence by new technologies. The flexible interconnect industry
could experience future competition from new or emerging technologies that
render existing technology less competitive or obsolete. The inability of the
Company to develop technologies to meet the evolving market requirements of its
customer base could have a material adverse effect on the Company's business,
financial condition and results of operations, including the Company's ability
to maintain its revenue base. Also see "Competition," " Industry Background,"
"Manufacturing Services" and "Markets."

Management of Growth

        The Company has experienced certain periods of rapid growth which has
placed, and is expected to continue to place, a significant strain on the
Company's management, operational and financial resources. The Company expects
that continued growth would require the addition of new management personnel and
the development of additional expertise by existing management personnel. The
Company's ability to manage growth effectively, particularly given the
increasingly international scope of its operations, will require it to continue
to implement and improve its operational, financial and management information
systems as well as to develop the management skills of its managers and
supervisors and to train, motivate and manage its employees. The Company's
failure to effectively manage growth could have a material adverse effect on the
Company's results of operations. Also see "Management."

                                       13
<PAGE>   14

Dependence on Key Employees

        The Company is highly dependent on its Chief Executive Officer, William
L. Healey, and other principal members of its management team, the loss of whose
services could have a material adverse effect upon the business and financial
condition of the Company, as well as the ability of the Company to achieve its
development objectives. None of such persons has an employment contract with the
Company. The Company is also dependent on other key personnel, and on its
ability to continue to attract, retain and motivate highly skilled personnel.
The competition for such employees is intense, and there can be no assurance
that the Company will be successful in attracting, retaining or motivating key
personnel or that personnel cost increases will not have an adverse effect on
the Company's net income or results of operatins. Also see "Management."

Environmental Compliance

        The Company is subject to a variety of environmental regulations
relating to the use, storage, discharge and disposal of hazardous chemicals and
substances used in its manufacturing process. While the Company believes that it
is in material compliance with all existing applicable environmental statutes
and regulations, any failure by the Company to comply with statutes and
regulations presently existing or enacted in the future could subject it to
liabilities or the suspension of production. In addition, compliance with such
statutes and regulations could restrict the Company's ability to expand its
facilities or require the Company to acquire costly equipment or to incur other
significant expenses. Also see "Environmental Concerns."

Control by Existing Stockholders

        The Company's officers, directors and existing holders of more than 5%
of the Company's Common Stock, in the aggregate, own beneficially approximately
48% of the outstanding Common Stock. As a result, any substantial portion of
these stockholders, acting together, are able to effectively control most
matters requiring approval by the stockholders of the Company. Approximately 18%
of the Company's Common Stock is held by TDK U.S.A. Corporation ("TDK"), which
holds the shares formerly owned by Silicon Systems, Inc.

Anti-Takeover Provisions

        On July 17, 1996, the Board of Directors approved the adoption of a
Shareholder Rights Plan for the Company, which is intended to protect
stockholder interests in the event of an unsolicited attempt to acquire the
Company on terms that the Board of Directors determines are not in the best
interests of the stockholders. The Plan provides for a dividend of one Right for
each share of outstanding common stock. Each Right entitles the holder, on the
occurrence of certain events, to purchase shares of a newly created class of the
Company's preferred stock. The Company may redeem each Right, on terms spelled
out in the Plan, if approved by the Board of Directors.

        The Board of Directors has the authority to issue up to 5,000,000 shares
of Preferred Stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of those shares without any future vote
or action by the stockholders. The rights of the holders of the Common Stock
will be subject to, and may be adversely affected by, the rights of the holders
of any Preferred Stock that may be issued in the future. The issuance of
Preferred Stock could have the effect of making it more difficult for a third
party to acquire a majority of the outstanding voting stock of the Company,
thereby delaying, deferring or preventing a change in control of the Company.
Furthermore, such Preferred Stock may have other rights senior to the Common
Stock, which could have a material adverse effect on the market value of the
Common Stock. The Company has no present plans to issue shares of Preferred
Stock other than pursuant to the Rights Plan. In addition, Section 203 of the
General Corporation Law of Delaware restricts the Company from engaging in
certain business combinations with interested stockholders, as defined by
statute.

                                       14
<PAGE>   15

        These provisions may have the effect of delaying or preventing a change
in control of the Company and therefore could adversely affect the price of the
Company's Common Stock, or the ability of stockholders to receive a premium
price for their shares upon an acquisition.

                           SALES AND CUSTOMER SUPPORT

        The Company uses both field sales personnel and internal customer
service and marketing support personnel to facilitate its sales efforts. As of
December 31, 1997, the Company employed 28 sales, support and marketing
personnel. In addition, the Company has agreements with 18 sales representatives
who are assigned geographic territories within North America. The sales
activities of these representatives are managed by the Company's regional sales
managers, who also have some key direct account responsibilities. The Company
also uses sales representatives in Japan, Singapore, Malaysia, Thailand, Hong
Kong and Korea, whose activities are managed from the Company's Tustin
headquarters. The Company presently has no sales personnel in Europe.

        The Company's customer support function consists of both customer
service and program management. Employees in these functions form the nucleus of
customer account teams that deal with specific customer technical and order
activities. The customer account teams are multi-functional teams from program
management, customer service, materials planning, manufacturing engineering and
quality engineering, which provide focused attention to the key activities
concerning the customer's account. These teams are responsible for addressing
all customer issues to ensure continuity from program development through
distribution. This focused attention is designed to enable the Company to
respond rapidly and efficiently to each customer's specialized precision
manufacturing needs. Also see "Risk Factors."

                                     BACKLOG

        The Company's backlog was approximately $53 million and $52 million at
December 31, 1997 and 1996, respectively. The Company does not have any
long-term agreements with its customers which require the customers to purchase
products. Backlog consists of purchase orders received by the Company for
shipment within up to 180 days. Because customer orders generally require
shipment within the following 90 days and may be rescheduled or canceled by the
customer, the Company does not believe that backlog is a meaningful predictor of
future revenue performance.

                                     PATENTS

        The Company does not have, nor does it generally intend to apply for,
patent protection on any aspect of its technology. The Company believes that
patents require public disclosure of information which may otherwise be subject
to trade secret protection. The Company's reliance upon protection of some of
its technology as "trade secrets" will not necessarily protect the Company from
the use by other persons of its technology. No assurances can be made that the
Company will be able to maintain the confidentiality of its technology,
dissemination of which could have a materially adverse effect on the Company's
business. Also see "Risk Factors."

                             ENVIRONMENTAL CONCERNS

        In the past, electronic assembly specialists have typically used
chlorofluorocarbon ("CFC") cleaners, which are believed to contribute to
depletion of the ozone layer in the atmosphere. In 1992 the Company developed an
internal aqueous cleaning process which has completely eliminated the use of
CFC-based chemicals in its facilities worldwide.

        The Company uses various hazardous chemicals and substances in its
manufacturing processes. Although the amounts of these materials used by the
Company are not substantial, procedures have nevertheless been implemented to
facilitate compliance with all environmental laws and regulations relating to
the use, storage, discharge and disposal of these materials. The Company
believes that it is in material 


                                       15
<PAGE>   16

compliance with all environmental laws and regulations to which it is subject.
Also see "Risk Factors--Environmental Compliance." 

                                  COMPETITION

        The Company operates in a highly competitive industry and competes
against several domestic and foreign providers of electronics manufacturing
services. The principal competitors in the high-end segment of the flex assembly
market include Solectron Corporation, CTS Corporation, and ADFlex Solutions,
Inc. The Company also faces competition from the manufacturing operations of its
current and potential OEM customers, which the Company believes continue to
evaluate the merits of manufacturing flex assemblies internally, and from
offshore contract manufacturers, which, because of their lower labor rates,
enjoy a comparative advantage over the Company with respect to labor-intensive,
high-volume production. The Company has also experienced competition from head
stack assemblers, who primarily assemble products that attach to flex
assemblies. The Company expects to encounter future competition from other large
electronics manufacturers that currently provide or may begin to provide
contract manufacturing services. A number of the Company's competitors have
substantially greater manufacturing, financial, technical, marketing and other
resources, and offer a broader line of services, than does the Company. In
addition, many of the Company's competitors have a broader scope and presence of
operations on a worldwide basis.

        Significant competitive factors in the high-end flexible assembly market
include quality, price, responsiveness, the ability to manufacture fine-pitch
assemblies in volume, and test capabilities. While the Company believes that it
currently competes favorably with respect to these factors, there can be no
assurance that the Company will be able to continue to do so in the future. The
trend toward increasingly shorter product life cycles, particularly in the HDD
industry, is expected to result in more intense competition as each new customer
program is generally open to bidding by the Company and its competitors.
Furthermore, the Company is often only one of two or more contract manufacturers
supplying a particular customer requirement and is therefore subject to
continuing competition on existing programs. In order to remain competitive, the
Company must continually provide timely technologically advanced manufacturing
services, ensure the quality of its products and compete favorably with respect
to price. If the Company were to fail to compete favorably with respect to the
principal competitive factors in its industry, the Company's business and
operating results would be adversely affected.

                                 YEAR 2000 ISSUE

        The "Year 2000 issue" variously known as "Y2K issue" or the "Millennium
Bug" arises out of the fact that many existing computer programs use only two
digits to identify a year in the date field, and if uncorrected, would fail or
create erroneous results before or at the Year 2000.

        Early in 1997, the Company evaluated the Y2K issue and its impact on the
Company's operations. Currently, the Company uses IBM AS400 applications and
various desktop applications in its operations, which are commercially
available, and are utilized for the most part with little modification or
customization. The applications are Y2K compliant with the exception of one,
which expects to be Y2K compliant by early 1998.

        A project to implement the latest versions of the above-mentioned
applications was approved in 1997 and launched in late 1997. The project team
consists of both dedicated resources and key functional participants.
Maintenance or modification costs will be expensed as incurred, while the costs
of new software will be capitalized and amortized over the software's useful
life. The project is estimated to take between twelve and eighteen months to
complete at a cost of approximately $750,000 (also see "Cash Flow").

                                    PERSONNEL

        As of December 31, 1997 the Company had a total of 1,169 employees,
including 1,011 in manufacturing and operations support, 67 in engineering, 28
in marketing, sales and program management and 63 in administration. The Company
considers its relations with employees to be good. The Company's 

                                       16
<PAGE>   17

employees at its Monterrey facility are represented by a labor union and are
covered by a collective bargaining agreement that is subject to annual revision
under Mexican law.

                                   MANAGEMENT

        The executive officers and key employees of the Company are as follows:

<TABLE>
<CAPTION>
        NAME                AGE    POSITION
        ----                ---    --------
<S>                         <C>    <C>                                 
EXECUTIVE OFFICERS
William L. Healey           53     President, Chief Executive Officer and Chairman of the Board of Directors
Anthony R.W. Richardson     53     Executive Vice President and Chief Operating Officer
Richard D. Bell             53     Vice President of Marketing and Sales
John W. Hohener             42     Vice President, Chief Financial Officer and Treasurer
Christopher J. Rollison     39     Vice President of Operations

KEY EMPLOYEES
Marilyn A. Gosz             49     Director of Strategic Marketing and Business Development
Cheryl L. Moreno            42     Director of Human Resources
Joe L. Pendergrass          43     Director of Logistics and Information Technology
Hal Schoenberg              45     Director of Quality
</TABLE>

EXECUTIVE OFFICERS

        William L. Healey has served as President and Chief Executive Officer of
the Company since July 1989, as a director since its incorporation in September
1993 and was elected Chairman in January 1996. Prior to joining Smartflex, Mr.
Healey worked at Silicon Systems, where he was responsible for all manufacturing
operations in California and Singapore and held several senior executive
positions, including Senior Vice President of Operations, Vice President of
Manufacturing and Director of Wafer Fabrication Operations. Mr. Healey also sits
on the Board of privately held Bell Technologies, Inc., a leading provider of
electronics products and services to the high technology segment of the
electronics industry.

        Anthony R.W. Richardson joined Smartflex in February 1998 as Executive
Vice President and Chief Operating Officer. Prior to joining Smartflex, Mr.
Richardson spent twenty-four years in senior management roles at Raychem
Corporation ("Raychem"), a material sciences company. Mr. Richardson's positions
at Raychem included Director of Operations, Director of Sales and Marketing, and
General Manager for businesses in Asia, North America, South America, Europe and
the Middle East.

        Richard D. Bell joined Smartflex in 1987, and has served as Vice
President of Marketing and Sales of the Company since 1993. Prior to joining
Smartflex, Mr. Bell spent nine years in senior technical marketing and sales
management positions with Scientific-Atlanta, Inc., a manufacturer of
communications and electronics equipment, and Rogers Corporation. Mr. Bell
served as a member of the Board of Directors during September and October 1993.

        John W. Hohener has served as Vice President, Chief Financial Officer
and Treasurer since August 1997. From May 1988 through July 1997, Mr. Hohener
served as the Company's Corporate Controller and Treasurer. Prior to joining
Smartflex, Mr. Hohener spent eight years with Silicon Systems, where he held
numerous financial management positions, including Director of Corporate
Accounting. Mr. Hohener served as a member of the Board of Directors during
September and October 1993.

                                       17
<PAGE>   18

        Christopher J. Rollison has served as Vice President of Operations since
July 1995 and served as Director of Operations of the Company from October 1992
to July 1995. Mr. Rollison joined Smartflex at its inception in August 1985 as a
senior process engineer. Subsequently, he held a series of positions of
increasing responsibility culminating in his current role as Vice President of
Operations.

KEY EMPLOYEES

        Marilyn A. Gosz joined Smartflex as Director of Strategic Marketing and
Business Development in June 1996. Prior to joining the Company, Ms. Gosz
performed technology management and business planning projects on a contract
basis for technology clients for six years. From 1982 to 1989, Ms. Gosz held
various management positions in product marketing, program management and new
business development with Unisys Corporation, Burroughs Corporation and Fujitsu
Corporation.

        Cheryl L. Moreno, joined Smartflex in November 1997 as Director of Human
Resources. Prior to joining Smartflex, Ms. Moreno held senior level human
resources positions at Beckman Instruments, MAI Systems Corporation, and
divisions of Ball Corporation and Alps Electric, Ltd.

        Joe L. Pendergrass joined Smartflex as Director of Materials in May 1995
and was promoted to Director of Logistics and Information Technology in 1998.
From October 1993 until May 1995, Mr. Pendergrass was self employed as a
materials logistics consultant. From January 1992 until October 1993, he was
Director of Materials at International Rectifier Corporation, a semiconductor
manufacturer. Prior to January 1992, Mr. Pendergrass held a variety of materials
management positions at Rockwell International Corporation for over twelve
years.

        Hal Schoenberg has served as Director of Quality Assurance of the
Company since June 1997. Prior to joining the Company, Mr. Schoenberg was a
quality management consultant and educator. Prior to 1995, Mr. Schoenberg was
Director of Quality and Customer Satisfaction for International Rectifier
Corporation, and Region Quality Manager for Hewlett-Packard Company.

                                       18
<PAGE>   19

ITEM 2.  PROPERTIES

        The Company's Tustin, California facility comprises approximately 44,000
square feet, and is held under operating lease arrangements extending through
2002. The Company's Singapore facility comprises approximately 21,000 square
feet. The Mexico facility comprises approximately 65,000 square feet, which was
completed in 1997. The Singapore and Mexico facilities are held under lease
arrangements extending through 2000 and 2004, respectively. The Company's
manufacturing line in Cebu, the Philippines, comprises approximately 35,000
square feet and is held under a lease agreement extending through 1999.

        The description under "Business - International Manufacturing
Capability" is incorporated herein by reference.


ITEM 3.  LEGAL PROCEEDINGS

        Not applicable.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.

                                       19
<PAGE>   20

                                     PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
        MATTERS

        The information required by Item 5 of Form 10-K is incorporated herein
by reference to the information contained in the section captioned "Common Stock
Data" on the inside back cover of the Company's Annual Report to Stockholders
for the fiscal year ended December 31, 1997.

ITEM 6. SELECTED FINANCIAL DATA

        The information required by Item 6 of Form 10-K is incorporated herein
by reference to the information contained in the section captioned "Financial
Highlights" on page 1 of the Company's Annual Report to Stockholders for the
fiscal year ended December 31, 1997.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

        The information required by Item 7 of Form 10-K is incorporated herein
by reference to the information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 13 through 17 of the Company's Annual Report to Stockholders for the
fiscal year ended December 31, 1997.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The information required by Item 8 of Form 10-K is incorporated herein
by reference to the Company's consolidated financial statements and related
notes thereto, and the report of the independent auditors, presented on pages 18
through 30 of the Company's Annual Report to Stockholders for the fiscal year
ended December 31, 1997.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

        None.

                                       20
<PAGE>   21

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        The information appearing in the "Information Concerning Nominees"
section of the Company's Proxy Statement to be filed in connection with the
Annual Meeting of Stockholders to be held on or about May 20, 1998, is hereby
incorporated by reference. Information concerning the current executive officers
of the Company is contained in Item 1 of this Annual Report on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

        The information appearing in the "Executive Compensation," "Summary
Compensation Table," "Employment Contracts and Termination of Employment and
Change-in-Control Arrangements," "Option Grants in Last Fiscal Year," "Aggregate
Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values,"
sections of the Company's Proxy Statement to be filed in connection with the
Annual Meeting of Stockholders to be held on or about May 20, 1998, is hereby
incorporated by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The information appearing in the "Security Ownership of Management and
Certain Beneficial Owners" section of the Company's Proxy Statement to be filed
in connection with the Annual Meeting of Stockholders to be held on or about May
20, 1998, is hereby incorporated by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information appearing in the "Compensation Committee Interlocks and
Insider Participation" and "Certain Transactions" sections of the Company's
Proxy Statement to be filed in connection with the Annual Meeting of
Stockholders to be held on or about May 20, 1998, is hereby incorporated by
reference.

                                       21
<PAGE>   22

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

        (A)    1.  FINANCIAL STATEMENTS.
               The financial statements listed in the accompanying Index to
               Consolidated Financial Statements are filed as part of this
               Annual Report on Form 10-K.

               2.  FINANCIAL STATEMENT SCHEDULES.
               The financial statement schedules listed in the accompanying
               Index to Consolidated Financial Statement Schedules are filed as
               part of this Annual Report on Form 10-K.

               3.  EXHIBITS.
               The exhibits listed in the accompanying Index to Exhibits are
               filed as part of this Annual Report on Form 10-K.

        (B)    CURRENT REPORTS ON FORM 8-K.
               No reports on Form 8-K were filed during the quarter ended
               December 31, 1997.

               A current report on Form 8-K, announcing under Item 5 the
               appointment of Anthony R.W. Richardson as the Executive Vice
               President and Chief Operating Officer was filed in the first
               quarter of fiscal 1998.

                                       22
<PAGE>   23

                                   SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Tustin,
State of California, on the 26th day of March, 1998.

                                            SMARTFLEX SYSTEMS, INC.
                                            (Registrant)


                                            By: /s/ William L. Healey
                                                --------------------------------
                                                    William L. Healey President,
                                                    Chief Executive Officer and
                                                    Chairman of the Board

                                POWER OF ATTORNEY

        We, the undersigned directors and officers of Smartflex Systems, Inc. do
hereby constitute and appoint William L. Healey and John W. Hohener, or either
of them, our true and lawful attorneys and agents, to do any and all acts and
things in our name and behalf in our capacities as directors and officers and to
execute any and all instruments for us and in our names in the capacities
indicated below, which said attorneys and agents, or either of them, may deem
necessary or advisable to enable said corporation to comply with the Securities
Exchange Act of 1934, and any rules, regulations, and requirements of the
Securities and Exchange Commission, in connection with this Report, including
specifically, but without limitation, power and authority to sign any and all
amendments hereto; and we do hereby ratify and confirm all that the said
attorneys and agents, or either of them, shall do or cause to be done by virtue
hereof.

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

<TABLE>
<CAPTION>
       SIGNATURE                              TITLE                             DATE
       ---------                              -----                             ----
<S>                            <C>                                         <C>           
/s/ William L. Healey          President, Chief Executive                  March 27, 1998
----------------------------   Officer and Chairman of the Board
William L. Healey              (Principal Executive Officer)

/s/ John W. Hohener            Vice President, Chief Financial             March 27, 1998
----------------------------   Officer, Treasurer (Principal Financial
John W. Hohener                and Accounting Officer)

/s/ William E. Bendush         Director                                    March 27, 1998
----------------------------
William E.Bendush

/s/ Alan V. King               Director                                    March 27, 1998
----------------------------
Alan V. King

/s/ William A. Klein           Director                                    March 27, 1998
----------------------------
William A. Klein

/s/ Gary E. Liebl              Director                                    March 27, 1998
----------------------------
Gary E. Liebl
</TABLE>

                                       23
<PAGE>   24

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULES


        The following consolidated financial statements of Smartflex Systems,
Inc., included in the Company's Annual Report to Stockholders for the fiscal
year ended December 31, 1997, are incorporated by reference:


<TABLE>
<CAPTION>
                                                                         Annual Report
                       Description                                       Page Reference
                       -----------                                       --------------
<S>                                                                        <C>       
Consolidated Statements of Operations for the years ended
  December 31, 1997, 1996 and 1995                                              18

Consolidated Balance Sheets as of December 31, 1997 and 1996                    19

Consolidated Statements of Stockholders' Equity
  for the years ended December 31, 1997, 1996 and 1995                          20

Consolidated Statements of Cash Flows for the years ended
  December 31, 1997, 1996 and 1995                                              21

Notes to Consolidated Financial Statements                                      22-29

Report of Independent Auditors                                                  30
</TABLE>


        The following consolidated financial statement schedule of Smartflex
Systems, Inc. and the Consent of Independent Auditors are included herein:

<TABLE>
<CAPTION>
               Description                                               Page Reference
               -----------                                               --------------
<S>                                                                       <C>
Schedule II - Valuation and Qualifying Accounts                                   28
</TABLE>

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

<TABLE>
<S>                                                                       <C>
Consent of Independent Auditors                                           Exhibit 23.2
</TABLE>

                                       24
<PAGE>   25

                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit
  No.                                Description
-------                              -----------
<C>       <S>                                                                   
  3.3     Restated Certificate of Incorporation of the Registrant. (1)

  3.4     Bylaws of the Registrant. (1)

  4.1     Form of Founders Restricted Stock Purchase Agreement dated as of
          September 28, 1993, entered into between the Registrant and each of
          William L. Healey, John W. Hohener, Richard D. Bell, Christopher J.
          Rollison and Merle J. Ihrman. (1)

  4.2     Stock Purchase Agreement dated as of March 30, 1994, between the
          Registrant and AMP Incorporated. (1)

  4.3     Registration Rights Agreement dated as of March 30, 1994 among the
          Registrant, J.V. Acquisition Corporation, Silicon Systems, Inc. and
          AMP Incorporated. (1)

  4.4     Rights Agreement dated as of July 17, 1996 between the Registrant and
          The First National Bank of Boston, which includes as Exhibit A thereto
          a form of Certificate of Designation for the Preferred stock, as
          exhibit B thereto the Form of Rights Certificate and as Exhibit C
          thereto a Summary of Terms of Shareholders Rights Plan. (6)

 10.1+    Smartflex Systems, Inc. 1993 Equity Incentive Plan, as amended. (1)

 10.2+    Smartflex Systems, Inc. 1994 Equity Incentive Plan for Officers,
          Directors and Consultants. (1)

 10.3+    Smartflex Systems, Inc. 1995 Equity Incentive Plan. (1)

 10.4+    Smartflex Systems, Inc. 1995 Employee Stock Purchase Plan. (1)

 10.5+    Smartflex Systems, Inc. Amended and Restated Profit Sharing Bonus
          Plan. (2)

 10.9     Master Lease Agreement dated as of March 9, 1994 between the
          Registrant and General Electric Capital Corporation, and Addendum No.
          1 thereto dated as of March 9, 1994. (1)

 10.10    Volume Purchase Agreement dated August 16, 1989 between Registrant and
          Silicon Systems, Inc. (1)

 10.13    Facilities and Services Agreement dated October 1, 1995, between
          Smartflex Systems Singapore Pte, Ltd. ("Smartflex Singapore") and
          Silicon Systems Singapore Pte, Ltd. (2)

 10.14    Tenancy of Flatted Factory Unit made November 29, 1994, between
          Smartflex Singapore and Jurong Town Corporation. (1)

 10.15    Standard Industrial Lease - Net, and addendum thereto, dated February
          1, 1996 between the Registrant and Roy G.G. Harris and Patricia S.
          Harris, as co-trustees of the Harris Family Trust dated November 2,
          1979 and Glyn P. Harris and Ginger M. Harris, Husband and Wife (14312
          Franklin). (2)

 10.16    Standard Industrial Lease - Net, and addendum thereto, dated February
          1, 1996 between the Registrant and Roy G.G. Harris and Patricia S.
          Harris, as co-trustees of the Harris Family Trust dated November 2,
          1979 and Glyn P. Harris and Ginger M. Harris, Husband and Wife (14312
          Franklin - parking lot). (2)

 10.17    Facilities and Services Agreement entered into on April 5, 1995
          between the Registrant and Silicon Systems, Inc. (1)

 10.18    Reorganization Agreement dated July 31, 1995 between the Registrant
          and J.V. Acquisition Corporation. (1)

 10.19+   Form of Indemnification Agreement for Officers and Directors of the
          Registrant. (1)

 10.20    Loan Agreement dated December 29, 1995 between Smartflex Singapore and
          GE Capital Services Pte. Ltd. (2)

10.21     Promissory Note dated October 11, 1996, from the Registrant in favor
          of Union Bank of California, N.A. (term loan). (4)
</TABLE>

                                       25
<PAGE>   26

                             INDEX TO EXHIBITS (continued)
<TABLE>
<CAPTION>
Exhibit
  No.                                Description
-------                              -----------
<C>       <S>                                                                   
 10.22    Debenture dated March 13, 1996 between Smartflex Singapore and GE
          Capital Services Pte. Ltd. (2)

 10.23+   First Amendment to Smartflex Systems, Inc. 1995 Employee Stock
          Purchase Plan (2)

 10.24+   Executive Involuntary Termination Policy of the Registrant. (2)

 10.25    Corporate Guaranty dated December 29, 1995 between the Registrant and
          GE Capital Services Pte. Ltd. (2)

 10.26    Contract of Lease dated May 24, 1996, between Smartflex Systems
          Philippines, Inc. ("Smartflex Philippines") and Joe & Larry Active
          Wears Co., Inc. (3)

 10.27    Registration Agreement dated May 25, 1996 between Smartflex
          Philippines and Philippine Economic Zone Authority. (3)

 10.29    Lease Agreement entered into on November 17, 1996 between Inmobiliaria
          Nuevo Aeropuerto, S.A. de C.V. and Smartflex Systems de Mexico, S.A.
          de C.V. (5)

 10.30    Amendment to the Facilities and Services Agreement dated February 28,
          1997, between the Registrant and Silicon Systems, Inc. (5)

 10.32+   Second Amendment to Smartflex Systems, Inc. 1995 Employee Stock
          Purchase Plan (8)

 10.33    Restated Loan Agreement, dated September 26, 1997, amending and
          restating the Loan Agreement dated September 29, 1995 between the
          Registrant and Union Bank of California, N.A. (9)

 10.34    Promissory note dated September 18, 1997, made by the Registrant in
          favor of Union Bank of California, N.A. (9)

 10.35    Notice of Waiver dated January 26, 1998, addressed to the Registrant
          from Union Bank of California (10)

 13       Portions of the Company's Annual Report to Stockholders for the year
          ended December 31, 1997 (10)

 21.1     Subsidiaries of the Registrant. (10)

 23.2     Consent of Independent Auditors. (10)

 27.1     Financial Data Schedule (Filed electronically)

 27.2     Restated Financial Data Schedule (Filed electronically)

 27.3     Restated Financial Data Schedule (Filed electronically)
</TABLE>

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

  +   A management contract or compensatory plan or arrangement required to be
      filed as an exhibit to this report pursuant to Item 14(c) of Form 10-K.

 (1)  Incorporated herein by reference to the referenced exhibit number to the
      Registrant's Form S-1 Registration Statement Number 33-93426, dated July
      27, 1995.

 (2)  Incorporated herein by reference to the referenced exhibit number to the
      Registrant's Annual Report on Form 10-K for the Year Ended December 31,
      1995.

 (3)  Incorporated herein by reference to the Registrant's Quarterly Report on
      Form 10-Q for the Quarter Ended June 29, 1996

 (4)  Incorporated herein by reference to the Registrant's Quarterly Report on
      Form 10-Q for the Quarter Ended September 28, 1996

 (5)  Incorporated herein by reference to the referenced exhibit number to the
      Registrant's Annual Report on Form 10-K for the Year Ended December 31,
      1996


                                       26
<PAGE>   27

 (6)  Incorporated herein by reference to exhibit 1 to Registrant's Registration
      Statement on Form 8-4, dated July 24, 1996

 (7)  Incorporated herein by reference to the Registrant's Quarterly report on
      Form 10-Q for the Quarter Ended March 29, 1997

 (8)  Incorporated herein by reference to the Registrant's Quarterly report on
      Form 10-Q for the Quarter Ended June 28, 1997

 (9)  Incorporated herein by reference to the Registrant's Quarterly report on
      Form 10-Q for the Quarter Ended September 27, 1997

(10)  Filed with this Form 10-K.

                                       27
<PAGE>   28

                             SMARTFLEX SYSTEMS, INC.

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS


<TABLE>
<CAPTION>
                                                            Additions
                                                       ----------------------
                                         Balance at    Charged to  Charged to                 Balance at
                                        beginning of   costs and     other                      end of
              Description                 period        expenses    accounts    Deductions      period
              -----------               ----------     ----------  ----------  -----------    ----------
                                                              (in thousands)
<S>                                     <C>            <C>         <C>         <C>           <C>     
Year ended December 31, 1995:
    Allowance for doubtful accounts     $    285       $    721      $   35 (1)  $  116 (2)     $    925
    Reserve for excess and obsolete     
      inventory                              670            628           -         127 (3)        1,171
                                        --------       --------      ------      ------         --------
            Total                       $    955       $  1,349      $   35      $  243            2,096
                                        ========       ========      ======      ======         ========
Year ended December 31, 1996:
    Allowance for doubtful accounts     $    925       $      -      $    -      $    5 (2)     $    920
    Reserve for excess and obsolete
      inventory                            1,171           (115)          -         190 (3)          866
                                        --------       --------      ------      ------         --------
            Total                       $  2,096       $   (115)     $    -      $  195            1,786
                                        ========       ========      ======      ======         ========
Year ended December 31, 1997:
    Allowance for doubtful accounts     $    920       $     11      $  477      $   24 (2)        1,384
    Reserve for excess and obsolete
      inventory                              866            910           -         160 (3)        1,616
                                        --------       --------      ------      ------         --------
            Total                       $  1,786       $    921      $  477      $  184         $  3,000
                                        ========       ========      ======      ======         ========
</TABLE>
---------------------

 (1)  Write off of credit balances in accounts receivable. 
 (2)  Uncollectible accounts written off, net of recoveries.
 (3)  Inventory written off.

                                       28