SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON D. C. 20549

                                   FORM 10-KSB

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

                     For the fiscal year ended June 30, 1998

                         Commission File Number 0-10683

                                 HYDROMER, INC.
             (Exact name of registrant as specified in its charter)

       New Jersey                                               22-2303576
(State of incorporation)                                     (I.R.S. Employer
                                                            Identification No.)

35 Columbia Road, Branchburg, New Jersey                        08876-3518
(Address of principal executive offices)                        (Zip Code)

Registrant's telephone number, including area code: (908) 526-2828


Securities registered pursuant to Section 12 (b) of the Act:      None

Securities registered pursuant to Section 12 (g) of the Act:

                         Common Stock Without Par Value
                         ------------------------------
                                (Title of class)

     Check whether the issuer (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  report(s,)  and (2) has been subject to such filing  requirements  for the
past 90 days. Yes (X) No( )

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

     The aggregate  market value of the voting stock held by  non-affiliates  of
the Registrant at August 25, 1998 was approximately $5,186,985.

     The number of shares of Registrant's Common Stock outstanding on August 25,
1998 was 4,367,987.

     Portions of the Audited  Financials  Statements for the year ended June 30,
1998 are  incorporated  by reference in Part II of this report.  Portions of the
Proxy  Statement of  Registrant  dated  September 12, 1998 are  incorporated  by
reference in Part III of this report.


<PAGE>


PART I

Item 1. BUSINESS

General

     Hydromer,  Inc.  (the  "Company")  is a polymer  research  and  development
company  organized  as a New  Jersey  Corporation  in 1980  for the  purpose  of
developing  polymeric  complexes  for  commercial  markets  in the  medical  and
industrial fields. The Company owns several process and applications patents for
Hydromer(R)  ("Hydromer"),  which is both a  polymeric  substance  that  becomes
extremely  lubricious  (slippery)  when  contacted  by water and a technique  of
grafting or applying this  substance  onto surfaces  which may consist of a wide
variety of materials,  including  polyurethane,  polyvinyl chloride, and metals.
"Hydromer(R)"  is a trademark of the  Company.  The Company has also been issued
patents for a permanent  anti-fog  material,  a hydrophilic  polyurethane  foam,
hydrophilic  polyurethane blends,  hydrophilic  polyvinylbutyral alloys, several
different  biocompatible  hydrogels and an anti-bacterial  medical material, and
owns a trademark Sea-Slide(R), a hull coating for water craft, which the Company
is marketing.  Two additional  patents for contact  allergen  barriers have been
approved and will issue shortly.  Other patent applications have been filed. See
"Patents and Trademarks" below.

     From its inception in 1980 to mid 1984,  the Company was engaged  primarily
in research  and  development  activities  relating to  Hydromer  coatings.  The
Company  believes  that the polymer and water  interface of Hydromer  provides a
surface  lubricity   superior  to  the  quality  of  other  presently   marketed
silicone-based  lubricants  used to treat  medical  devices.  When  treated with
Hydromer  coating,  a medical device  becomes highly  slippery upon contact with
water,  facilitating  its insertion into any orifice of the body, in particular,
the nasal/oral,  rectal and urinary orifices,  or penetration  through the skin,
thus reducing  discomfort for the patient.  Hydromer  coatings are bonded to the
medical device unlike  silicone-based  lubricants which must be re-applied after
each use of the medical device.  During its fiscal year ended June 30, 1997, the
Company entered into three license agreements for the use of Hydromer.  Hydromer
has license  agreements with eight different  companies covering the application
of Hydromer coatings to heart pacemaker leads,  enteral feeding products,  guide
wires;  certain urological  devices,  central venous catheters,  ear prostheses,
guiding   catheters,   razor  cartridges  and  angioplasty   balloon  catheters,
embolization delivery devices, pancreatic stents, umbilical catheters,  infusion
catheters for peripheral and neurological uses and certain  urological  devices.
See "Option and License Agreements" below.

     The Company believes that Hydromer  technology may have further application
both in connection with medical products and products outside the medical field.
See "Potential Applications" below.

     During the 1986  fiscal  year,  the  Company was granted a U. S. Patent for
hydrophilic  polyurethane  foam and dental and  biomedical  products  fabricated
therefrom.  This  foam has  been  independently  tested  and  exhibits  superior
absorptivity,  high tensile  strength  when wet and reduced peel adhesion to the
skin.

     In addition to its  foregoing  activities,  the  Company is  marketing  the
following products based on its polymer technology:

     Anti-Fog  - a  coating  for  plastics  (e.g.  ski and swim  goggles)  which
prevents the accumulation of  vision-obscuring  condensation under high humidity
conditions.  A more advanced  version of anti-fog coating was patented in August
1984 and is being sold in bulk to  manufacturers  of industrial  safety and swim
goggles,  aircraft windows and meter covers.  Condensation control coatings have
been  developed for use on  greenhouses  and food packaging and are currently in
extended field testing with several customers.

     Sea-Slide(R)- a  Hydromer-based  drag reducing marine coating which reduces
friction between hull and water, and can be used over most anti-fouling  paints.
A U. S. Patent  covering  this  coating and other  potential  uses was issued in
February 1987.

     Cosmetic  formulations -  aqueous-based  polymer  blends,  were  introduced
during 1988 and are  protected by the polymer  blends  patent issued in February
1987. These  formulations are being sold to major cosmetic firms for use in hair
dyes, hair  conditioners,  mascaras,  eye shadows and body 


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lotions and are being tested for use in shampoos and sunscreens and agricultural
barrier products.

     HYDROMER(TM)  Poison Oak and Ivy Barrier, is a barrier lotion that protects
the wearer from the effects of poison ivy,  poison oak,  and poison  sumac plant
allergens. Two patents will be issued shortly covering this technology.

     Until September 1982,  approximately  99% of the outstanding  common stock,
without par value (the  "Common  Stock"),  of the Company was owned by Biosearch
Medical Products Inc. ("BMP"),  which in turn was controlled by Manfred F. Dyck,
who is Chief Executive  Officer, a Director and the Chairman of the Board of the
Company. On September 16, 1982, BMP distributed its shareholdings in the Company
pro  rata  to  the  holders  of  its  common  stock.  In  connection  with  this
distribution,  the Company  granted to BMP an exclusive,  world-wide  perpetual,
royalty-free  license to use the  Hydromer  technology  in  connection  with the
development, manufacture and marketing of biomedical devices for enteral feeding
applications.

Option and License Agreements

     A substantial  portion of the  Company's  revenues in prior years have been
derived  from  option and  license  agreements.  The option  agreements  have in
general  provided  that the  customers pay to the Company a flat fee in exchange
for the right during a limited period of time (i) to use the Hydromer process to
determine whether the customer's  products lend themselves to treatment with the
process and (ii) to test market such products.  The option  agreements have also
given the customers  the right  subsequently  to enter into a license  agreement
with the Company.  At the customer's option, a license agreement with respect to
the  marketing  of a product  treated with  Hydromer  may then be entered  into,
providing  for  payment  to the  Company  of an initial  flat fee,  followed  by
periodic royalty payments based on sales.

     The  Company  has  previously  reported  license  agreements  in effect and
expiring relating to applications of the Hydromer as follows: (See Annual Report
on Form 10-K for the fiscal  years  ended June 30,  1983  through  1996 and Form
10KSB for fiscal year ended 1997.)

Licensee/Application

Arrow International, Inc. polyurethane-jacketed guidewires.

Axiom Medical, Inc. wound drains. - expired 3/98

Licensed Medicell for medical uses in US to Bioderm

Biosearch Medical Products Inc. enteral feeding systems

Boston Scientific - jacketed guidewires - expired 3/98

Cordis Endovascular Systems infusion microcatheters.

CR Bard  (formally  St. Jude  Medical,  Inc.)  intra-aortic  balloon  catheters,
introducer systems and introducer needles.

Film  Specialties,  Inc.  use  anti-fog  on  adhesive  backed  film and  certain
non-adhesive backed sheets.

Medispo (formally Cosmo Ikko) certain urological devices. - expired 3/98

Johnson & Johnson Orthopaedics Inc. casting gloves. - expired 3/98

Kendall HealthCare Products certain urological devices.

Ohmeda (formally U. S. Viggo, Inc.) central venous catheters. - expired 3/98

Smith & Nephew (formally Richards Medical) ear prostheses. - expired 3/98

Schneider Stent USA delivery devices for expandable stents. - expired 3/98

Circon Surgitek  (Division of Circon Corporation and formally Surgitek which was
a Division of Cabot Medical) guidewires, urinary stents.

Boston Scientific (Van-Tec) guide wires and certain urological devices.

Wilkinson Sword Ltd. razor cartridges.

Piolax (formally Katoh Hatsujyo Kaisha, LTD) polyurethane  jacketed guidewires -
cancelled

Products

     Coating  solutions for use on medical devices are  manufactured and sold by
the  Company to its 


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<PAGE>

licensees  and  others.  The Company  has  received a United  States and foreign
patents for a  permanent  type  anti-fog  coating.  The Company is selling  bulk
quantities of anti-fog  solution to  manufacturers  of swim goggles,  industrial
safety  equipment,  aircraft  windows  and meter  covers,  both in the U. S. and
foreign countries.

     The  Company  has  developed  a  condensation  control  coating  for use on
structured  greenhouse  coverings.  Which it sells to a major  corporation  that
manufactures this material in the U. S. and Europe.

     A food packaging  coating has been formulated using only materials that are
generally  recognized  as safe  for  food  contact  and  independent  laboratory
extraction tests of the coating have demonstrated that the extractibles are well
within levels specified by the FDA.

     Another  product  introduced  in 1984 was  "Sea-Slide(R)",  a drag reducing
overcoating  for boats and ships.  This  product  is  designed  to improve  fuel
efficiency by lowering the friction between hull and water. It is being marketed
through  a  repackager  and  distributor  who  services  the  marine   industry.
Sea-Slide(R)  has been shown at major marine  shows.  Bulk  quantities  are also
being sold to distributors in Europe who package the product for local markets.

     In the 1988 fiscal year, the Company introduced aqueous-based  formulations
for use as a component in beauty aids.  This product is being  marketed  through
distributors  in the U.S.  and  abroad  and is  currently  being sold for use in
mascaras,  hair dyes,  hair  conditioners,  hair  shampoos,  eye  shadows,  hair
colorings, hair sprays, body lotions and perfumes.

     The Company is also marketing its patent-pending  allergen barrier products
and its Aquatrix Cosmetics and medical hydrogels  directly to the cosmetic,  OTC
drug and medical device industry.

     The Company's  processes utilize various chemicals  purchased from a number
of companies. The Company's primary suppliers are Elco Solvents, Inc. Avenel, NJ
and TR Metro  Chemical,  Inc. of  Ridgefield,  NJ. The Company has no  long-term
contracts  with any of its  suppliers  and  believes  that  there  are  adequate
alternative  sources of supply available for all raw materials that it currently
uses.

Dependence Upon Customers

     The Company  derives  substantially  all of its revenues  from one business
segment, i.e. polymer research and products derived therefrom. During the fiscal
year  ended  June 30,  1998,  the  Company  recognized  revenues  from two major
customers.

     The Company sold products and collected  royalty income  representing  more
than 10% of its total  revenues  for the year ended  June 30,  1997 and June 30,
1998, from Johnson & Johnson, Cordis Division and Warner Lambert.

Potential Applications

     The Company  continues  to explore  other  applications  of the  complexing
capabilities of polymeric substances,  such as antimicrobial agents. The Company
currently is working on further  applications  of its patented  technologies  to
existing  products of other  companies,  including  cosmetics,  wound dressings,
personal  care  and a wide  variety  of  medical  devices.  These  products  and
applications  are in the  preliminary  development  stage  and  are  subject  to
substantial further development before their feasibility can be verified.

     On the basis of its market  analyses,  as well as  laboratory  and in-vitro
testing  of  certain  applications  of  Hydromer,   the  Company  believes  that
Hydromer's potential product applications,  classified with reference to salient
Hydromer characteristics, are as follows:

1. Low  Coefficient  of Friction.  Hydromer is a hydrophilic  coating which when
contacted by water becomes extremely lubricious.  The Company believes that this
unique  feature would prove  beneficial  to any medical  device that is inserted
into the body. Medical products that would so benefit include:

urinary products -                    urethral  catheters  and urinary  drainage
                                      systems;

rectal  products -                    enemas,  rectal tubes,  examination gloves
                                      and proctoscopy devices (disposable);

nasal/oral  products -                suction  catheters,  oxygen  catheters and
                                      endotracheal tubes;


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<PAGE>

cardiovascular and  -                 grafts,  cardiac assist catheters   heart-
related products                      lung tubing.


2.  Ability  to be  Complexed  with Other  Functional  Chemicals.  The  Hydromer
hydrophilic polymer coating can be complexed with other chemicals.  For example,
Hydromer coating complexed with iodine forms an effective antimicrobial barrier.
The Company  believes that this unique  feature would lend itself to application
on a wide  variety of  currently  marketed  medical  products,  including  Foley
catheters,  wound drains, wart and corn dressings,  burn dressings,  intravenous
catheters, surgical dressings and adhesive bandages.

3.  Cross-link  Density Can be  Controlled.  The  Hydromer  hydrophilic  polymer
coating,  through  controlled  cross-linking,  has been further developed into a
special  anti-fog  coating.  Such a coating is (a)  resistant to fogging under a
wide  range  of  temperature/humidity   conditions;   (b)  transparent  and  has
heat/light stability;  (c) long lasting,  i.e., will not chip or peel and offers
more scratch  resistance  than do most  commercial  plastics;  (d) inert to most
commercial  glass  cleaners;  (e) less  prone to  static  dirt  pickup;  and (f)
applicable by dip,  spray or roll coating.  A U. S. Patent for this material was
issued to the Company in August 1984.  This  anti-fog  product has use on sports
goggles, windows, mirrors and other products, either by direct application or by
coating of an adhesive  backed  film.  Food grade  versions  are  available  for
packaging of fresh ready-to-eat produce, meats and deli-foods.

Research and Development

     The Company's research and development activities presently are, and during
the next year are  expected to be,  devoted  primarily  to the  development  and
enhancement of the products described above and to the design and development of
new products.  All of such activities  were sponsored by the Company.  The major
portion of such  expenses  was applied  toward  salaries  and other  expenses of
personnel employed on a regular basis in such work. See "Employees" below.

Competition

     The  Company  considers  the most  significant  competitive  factors in its
market for its  patented  coatings  to be  product  capability  and  performance
(including  reliability  and ease of use),  in  addition  to price  and terms of
purchase.

     The Company owns both process patent and applications  patents for Hydromer
coatings  (see  "Patents and  Trademarks"  below) two of which expired in Fiscal
1998,  one U.S.  patent  remaining  in effect  until 2005.  Although the medical
products market is highly  competitive,  the Company does not believe that there
is any other product available which performs functions significantly comparable
to those which are  performed by  Hydromer,  in terms of  lubricity,  complexing
capabilities, durability and cost.

     While management believes the Company has a dominant position in the market
for medical device coatings in which it competes, and that its hydrophilic foam,
anti-fog  coatings and hydrogel products are  technologically  superior to other
products  in the  market,  there can be no  assurance  that  alternatives,  with
similar properties and applications,  could not be developed by other companies.
The Company is aware that there are other similar technologies  available and/or
being  developed  by others.  The  industry  in which the  Company  competes  is
characterized  by rapid  technological  advances and includes  competitors  that
possess significantly greater financial resources and research and manufacturing
capabilities,   larger  marketing  and  sales  staffs  and  longer   established
relationships  with  customers  than the Company does at present or will for the
foreseeable future.

Marketing

     The Company markets its products and services through five principal means:

1. Commercialization of its existing  technologies:  The Company will expand its
efforts to market its currently marketed  technology to the medical,  industrial
and  personal  care  markets.  The  Company has  expanded  its  capabilities  to
prototype for customers to  demonstrate  the value of Hydromer  technology.  The
Company will also seek opportunities to apply its technology in new applications
where the  technology  will  offer a benefit.  Further,  the  Company  will seek
customers  for  technologies  that have  been  developed  but are not  currently
generating  revenue  capitalize on the 


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<PAGE>

technology  that has been  created  through its R&D  efforts,  and to expand the
application of current technologies.

2. Sale of  Development  Services:  The Company  intends to move its effort away
from straight  technology  licensing and toward contract product development and
contract  manufacturing.  The  Company  has  significant  expertise  in  polymer
development  and  applications.  By  exhibiting  at selected  trade shows in the
medical device and cosmetic fields,  the Company expects to generate interest in
its  technology  and products,  with a view toward acting as an outside  product
development arm and development supplier for companies in these fields.

3. Joint  Development:  The  Company  will  continue  to seek joint  development
programs,  co-marketing  programs and other business arrangements with potential
partners.

4. Licensing:  The Company will continue its endeavors to license its technology
to current  market  leaders in the  medical  device,  pharmaceutical,  and other
fields, whereby the Company will grant exclusive or non-exclusive rights for the
Hydromer coating  treatment of existing or new products,  and the development of
specific products utilizing its foam and hydrogel  technology under its patents.
In return,  the Company  generally  would earn royalties  based on sales of such
treated  or new  products.  Such  licenses  will  usually  be very  narrow.  The
activities  leading to the  consummation  of a license  agreement  normally  are
lengthy and require establishing a scientific dialogue with potential customers,
treating samples supplied by that customer with Hydromer  coatings,  determining
if the treatment is feasible and cost effective,  testing the coated products in
a laboratory and then negotiating a mutually  acceptable  option  agreement.  An
option fee may be paid by the customer  which would give the customer  exclusive
rights to use the Hydromer  treatment on the  specified  product for a specified
period.  During such period,  the  optionee  can test market the coated  product
and/or  determine  its  ability to treat the  product  in its own  manufacturing
process.  If the customer  determines that the subject product should be treated
with Hydromer coating on a commercial  basis, it may either perform the Hydromer
coating  treatment  itself under a license  agreement with the Company or it may
have the a third party perform the Hydromer coating treatment.

     5. Coating  Services The Company will serve the customer who needs products
coated  with  lubricious  or  anti-fog  coatings  in  production  runs  that are
economically   feasible  without   substantial   investments  in  fixturing  and
automation. Typically this would be prototypes or runs of low volume, high value
products.  Higher volume  products could be accommodated if they were physically
small and did not require  extensive  fixturing or because for technical reasons
they could not be  automated  and were of high enough value to warrant the added
cost.  The  company  will  pursue  large  volume  projects if they fall within a
technical area where Hydromer has particular expertise.

Business  segments  which  are  of  particular  interest  are  medical  devices,
(catheters and guide wires), and transparencies (lenses, face shields). Contacts
will be pursued in  conjunction  with marketing of Hydromer  coatings,  at trade
shows, in mass mailings and advertisement in appropriate trade publications. The
company  will  endeavor  to become a "one  stop"  supplier  of high  performance
coatings and services.

Patents and Trademarks

     The Company owns both a United States  process  patent and an  applications
patent for  Hydromer,  which have  expired in August  1997 and March  1998.  The
Company has granted to BMP an  exclusive,  royalty-free  license of the Hydromer
process  with  respect to  enteral  feeding  products.  In  addition,  there are
currently 9 US patents,  3 US  applications  and various  foreign counter parts.
Management  believes that the protection  afforded by the Hydromer  patents goes
well  into the  year  2000 and will be a  significant  factor  in the  Company's
ability to market its products.  Anticipating patent expiration, the Company has
focused on licensing and developing  products based upon its newer technologies.
The  Company  has also been  issued  United  States and  foreign  patents  for a
permanent anti-fog.  A U. S. patent was issued in October 1985 for a hydrophilic
polyurethane  foam  that is  expected  to have  numerous  medical  applications.
Foreign  patents  covering this material issued in July 1990. A U. S. patent for
hydrophilic polymer blends, which covers the Company's 


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coating for boats and the cosmetic formulations,  was issued in February 1987. A
U. S.  Patent has been  received  for  Hydrophilic  Polyvinylbutyral  Alloys was
issued in July 1989 and foreign  applications are pending.  This patent protects
the  condensation  control coatings that have been developed for greenhouses and
food  packaging.  U. S.  and  foreign  patents  have  also  been  issued  for an
anti-bacterial  medical  material  that  can be  incorporated  in a foam or as a
coating.  The Company  has  recently  received  notice of approval of two United
States patents in respect of its new  composition,  barrier film, and method for
preventing   contact   dermatitis   developed  by  the  company's  research  and
development staff. The Company has recently received a patent for Chitosan gels,
which  expires  in 2014.  This  patent  is part of the new gel  technology  with
applications in medical, industrial, cosmetic and personal care markets. Two new
patent  applications  from composition to prevent mastitis and for non-leachable
biostatic coatings have been filed.

     The Company owns the registered  trademark  "Hydromer" in the United States
and other countries.

Employees

     As of  June  30,  1998,  the  Company  had  fourteen  full-time  employees,
consisting  of nine engaged in research  and  development,  quality  control and
assurance,  coating  of  products  for others and  manufacturing  the  Company's
products,  one in marketing  and four in general  administrative  and  executive
functions.  The chief executive  officer duties were assumed by Manfred F. Dyck,
Chairman  of the Board,  who agreed to serve the  Company  for a minimum of five
days per month. The Company does not have a collective bargaining agreement with
any of its employees and  considers  its  relationship  with its employees to be
excellent.

Government Regulations

     The uses of the  Company's  medical and  cosmetic  products  come under the
jurisdiction of the FDA, as well as other federal, state and local agencies, and
similar agencies in other countries.

     In connection with the Company's  license  agreements,  it is generally the
obligation   of  the  licensee  to  conform  to  any  required  FDA   pre-market
notification  or  other  regulations.  To  the  Company's  knowledge,  all  such
licensees  who  are  marketing  FDA  regulated  licensed  products  are in  such
compliance.   The  Company  may  in  the  future  desire  to  market  additional
applications  of Hydromer to existing  products,  or products  introduced by it,
which may be  subject  to such FDA  approval  procedures  as proof of safety and
effectiveness of the applications or products, or adherence to prescribed design
standards. There can be no assurance that such approvals would be forthcoming or
of  compliance  with such  standards.  Any such  failure to obtain  approvals or
non-compliance might have a significant adverse effect on the Company.  However,
the Company  intends to make every effort to obtain all necessary  approvals and
to comply with such standards, and in the case of its licensed applications,  to
require the licensees to obtain such approvals.

     The  Company  does not  manufacture  medical  products  and  therefore  its
activity does not come under the jurisdiction of the FDA nevertheless, it is the
policy  of  the  Company  to  use  the  FDA  regulations  as  guidelines  during
manufacturing of Hydromer coatings.

     The Company is also subject to federal and state  regulations  dealing with
occupational health and safety and environmental protection. It is the policy of
the  Company  to  comply  with  these  regulations  and  be  responsive  to  its
obligations to its employees and the public.

Executive Officers

     The executive officers of the Company are as follows:

Name                                       Position with Company
----                                       ---------------------

Manfred F. Dyck                       Chairman  of  the  Board  Chief  Executive
                                      Officer  and  President
                                      Age at August 31, 1998 - 63

Kenneth P. Brice                      Chief  Financial  Officer  Vice  President
                                      Finance & Administration
                                      Age at August 31, 1998 - 52

Joseph A. Ehrhard, Jr.                Vice President,  New Business  Development
                                      and R&D. 
                                      Age at August 31, 1998 - 32


Robert D. Frawley                     Secretary 
                                      Age at August 31, 1998 - 50


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<PAGE>

Robert J. Moravsik                    Vice-President  and General Counsel 
                                      Age at August 31, 1998 - 56


     Manfred F. Dyck has been  Chairman of the Board of the  Company  since June
1983 and a Director of the Company since its inception. Mr. Dyck served as Chief
Executive  Officer of the Company from its inception  until October 1986, and as
of August 1989,  reassumed the duties of Chief Executive  Officer.  Mr. Dyck has
been President and a Director of Biosearch Medical Products Inc. since 1975.

     Kenneth P. Brice has been  Vice-President,  Chief  Financial  Officer since
September  1997.  Prior to joining  Hydromer,  Mr.  Brice was  President  of CFO
Resources, Inc., a company that provides financial resources to other companies.
Mr. Brice previously was  Vice-President  and Chief Financial Officer of Digital
Solutions,  Inc., a NJ based Professional Employer Organization.  From September
1992 to February  1995,  he was  Vice-President  and  Corporate  Controller  for
Interim Services, Inc., a large international temporary help firm located in Ft.
Lauderdale, Fl.

     Joseph A.  Ehrhard,  Jr., has been  Vice-President  of New Business and R&D
since February 1998. Prior to joining Hydromer,  Mr. Ehrhard was Director of R&D
for the Golden Cat Division of  Ralston-Purina in St. Louis, Mo. Mr. Ehrhard was
previously  Director  of R&D  in  Worldwide  Absorbent  Products  and  Materials
Research  for Johnson & Johnson in New Jersey.  From June 1987  through  January
1995, he was in R&D at Procter & Gamble  Company,  most recently as Section Head
of Global New Technology Development in Personal Cleansing in Cincinnati, OH.

     Robert D. Frawley has been Secretary of the Company since January 1984. Mr.
Frawley has been an attorney in private  practice  since  December  1985.  He is
employed by the law firm of Smith, Stratton, Wise, Heher and Brennan, Princeton,
New Jersey since February 1994. From December 1983 to December 1985, Mr. Frawley
was Vice  President  - Corporate  Counsel and  Secretary  of  Biosearch  Medical
Products Inc.

Robert J. Moravsik has been Vice-President and General Counsel since April 1998.
He also serves in the same capacity for  Biosearch  Medical  Products,  Inc. and
affiliated  company since 1987. Prior to that he was  Vice-President and General
Counsel to Fisher Stevens, Inc., a subsidiary of the Bureau of National Affairs.

Item 2. PROPERTIES

     The  Company  currently  has two  facilities  located  in New  Jersey.  The
manufacturing and quality  assurance  functions of the Company are located at 35
Columbia Road, Branchburg, New Jersey. The Company signed a five year lease with
a party not affiliated with the Company for the Branchburg facility.

     In June 1998, the company  purchased the building and land at 35 Industrial
Parkway for expansion. The new facility is secured by a mortgage with a bank and
is partially  occupied by Biosearch Medical  Products,  Inc., the prior owner of
the facility.  The Company will move its Research and Development as well as its
administrative staff to the new facility.  See the financial statements included
herein for the terms of the agreements.

     The  facilities  will be  adequate  for the  Company's  operations  for the
foreseeable future.

Item 3. LEGAL PROCEEDINGS

     Not applicable

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

     Not applicable.

                                     PART II

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

     Prior to January  9, 1986,  the  Company's  Common  Stock was traded in the
over-the-counter  market on the  National  Association  of  Securities  Dealer's
Automated Quotation System (NASDAQ) under the symbol HYDI. Subsequent to January
9, 1986,  reporting of trading was  transferred to the National Daily  Quotation
Service  (commonly  


                                      7
<PAGE>

known as the "Pink Sheets"). For the past twelve years, trading in the Company's
stock has been limited. The Company has been informed by individual investors of
trades at prices  ranging  between $1.875 and $.1875 in the fiscal year 1998 and
between  $.50 and $.0625 in fiscal  year 1997.  Prices for the 1996  fiscal year
ranged between  $.1875 and $.0625  according to the National  Quotation  Bureau.
These prices may not include retail  mark-ups or mark-downs or any commission to
the broker dealer.

The  approximate  number of holders of record of the Common  Stock on August 25,
1998 was 323. There are approximately 723 individual  shareholders of the common
stock.

Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

The below discussion  analyzes major factors and trends regarding the results of
operations  and the financial  condition of the Company as of June 30, 1998, and
its results of  operations  for the prior  fiscal  period.  It should be read in
conjunction with the Financial Statements and Notes thereto.

Revenues  for the year  ended  June 30,  1998 were  $2,360,570  as  compared  to
$2,062,026 for the same period last year or a growth of 14.48%

Product  sales were  $989,527 for the 1998 fiscal year compared to $1,062,772 in
the prior fiscal year.  Anti-fog  coating  solutions,  which  represented 19% of
product sales in 1998,  were slightly ahead of last year,  finishing the year at
$188,472 vs. $186,180 for the same period last year. Coating  Solutions,  29% of
product  sales were up 5.8% over last year at $286,553  vs.  $270,917 for fiscal
1997.  Cosmetics  sales  were down 22.6%  over last year  finishing  the year at
$153,557 from $198,401 last year.  Technology  transfers to two major licensees,
representing 32.6% of product sales were down 6.5% to $322,470 in fiscal 1998 as
compared to $344,892 in fiscal 1997. There were no sales in condensation control
in fiscal 1998, down from $62,382 in fiscal 1997.

License  royalties  were  $1,371,043 in fiscal 1998, up 37.2% over fiscal 1997's
results of $999,254.

Management  Comment: In fiscal 1998, the Company focused on defining its markets
and  technologies  for  commercialization.  This  focusing  into the four  major
markets  (medical,  industrial,   cosmetic  and  personal  care)  redefined  the
Company's  strategies opening larger markets and accordingly,  longer lead times
for new sales.  These longer lead times,  while  having a  short-term  impact on
product  sales,  will lead to more  significant  sales gains in the future.  Our
licensee's sales with our products are increasing at a dramatic rate, indicating
their  continued  acceptance  and  approval  of  Hydromer's  technologies.  This
increase is through existing  licensees only as only one new license  agreements
was signed last year,  with revenues  forecasted to begin in fiscal 1999.  (Even
though 12 license  agreements expired (or were cancelled) with the expiration of
a patent in March 1998,  the Company has  replaced a  significant  amount of the
loss license  revenue with new pricing on the solutions to reflect the technical
support it still gives its  clients.)  To counter  balance the trend in cosmetic
sales, we have expanded our cosmetic  distributor  network in fiscal 1998 to 11.
We expect to be able to reverse the trend in cosmetic  sales with this  expanded
focus.

Gross  Profit for the year ended June 30,  1998 was  $2,156,935  up 18.51%  over
fiscal year 1997's results of $1,820,001.

     Direct costs, as a percentage of product sales,  were 20.6% for fiscal 1998
as  compared  to 22.7% for the fiscal year ended June 30,  1997.  Overall  gross
profit, including royalty income, was 91.3% for fiscal 1998 as compared to 88.3%
for fiscal 1997, or an increase of $336,934, 18.6%.

Management Comment: The majority of the increase in overall gross profit was the
increase in license  revenues,  which have no direct  costs,  were up  $371,789.
Profits  from product  sales  (revenues  minus  direct  costs) were down $34,855
reflecting the effect of lower than anticipated product sales.



                                      8
<PAGE>

Operating Income for the year ended June 30, 1998, was $502,467 vs. $298,723 for
the same period last year, or an increase of 68.2%.

Selling,  general and  administrative  and research and  development  costs were
$1,654,468  for the year ended June 30, 1998 as compared to  $1,521,278  for the
same period last year or an increase of 8.8%.

Management  Comment:  The  increase in SG&A is primarily  due to  upgrading  the
company's  senior  management  and bonuses paid to staff members  according to a
plan  agreed  at  the  beginning  of  the  year  for  over  budget  achievement.
Additionally,  the company has invested in its facility by building a clean-room
environment for prototyping coating samples, upgraded its computer systems to be
Y2K compatible and Microsoft based, and expanded its analytical  capabilities by
purchasing  state-of-the art equipment for the labs. Finally,  the interest that
is being  generated in the Company's  products by direct  marketing,  trade show
participation and its website have required an increase in the volume of samples
being prepared and distributed.

Income before taxes is $534,022 for the current year, up 70.7% over prior year's
results of $312,770.

Other  Income and  expense is $31,555 for fiscal 1998 as compared to $14,047 for
the same period last year.

Management  Comment:  The Company's strong cash position has generated  interest
income of $33,394 for the fiscal year ended June 30, 1998 as compared to $14,047
for the same period last year.

Net Income for the fiscal year 1998 was $375,535 compared to $344,394 for fiscal
year 1997, or an increase of 9.0%.

Income taxes were $158,487 for the current fiscal year compared to a tax benefit
of $31,624 for the prior fiscal year.

Management  Comment:  All of the Company's  loss carry forwards were utilized in
1997  requiring  the Company to book a tax  liability  for the fiscal year ended
June 30, 1998.  This compares  unfavorably to 1997 when the company booked a tax
benefit  of  $31,624.  The  company  has a  deferred  tax  asset on the books of
$236,235 which will be applied to this liability in FY 1999.

Liquidity and Capital Resources

Working Capital as of June 30, 1998 was $1,360,049, up $123,648 from prior year.

During the year ended June 30,  1998,  the Company  generated  $399,798  through
operating activities. The Company paid $131,368 in dividends and, purchased land
and buildings for a net cash adjustment of $201,000.  Cash balances,  at the end
of the fiscal year, are $783,475, up $67,430 from the prior year.

Management Comment:  Management believes that its current cash position plus its
projections  will  generate  sufficient  funds to maintain its current  level of
operations.

Fiscal  year  1998  was a year  of  focusing  for  the  Company  - in  products,
technology and management.  Hydromer is poised to take advantage of its patented
technologies by focusing on commercialization  and licensing its technologies to
companies that offer significant revenue  opportunities for the Company, now and
in the future.

Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     For  information  concerning  this  item,  see  pages 2  through  12 of the
"Audited  Financial  Statements  for  the  year  ended  June  30,  1998,"  which
information is incorporated herein by reference.

Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
        FINANCIAL DISCLOSURE

     Not applicable.


                                       9
<PAGE>

                                    PART III

Item 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      For  information  concerning  this item, see "Item 1. Business - Executive
Officers" and pages 1 through 3 of the Proxy Statement filed with respect to the
1997 Annual Meeting of shareholders (the "Proxy  Statement"),  which information
is incorporated herein by reference.

Item 10. EXECUTIVE COMPENSATION

      For information  concerning this item, see page 3 of the Proxy  Statement,
which information is incorporated herein by reference.

Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      For  information  concerning this item, see pages 2 through 4 of the Proxy
Statement, which information is incorporated herein by reference.

Item 12. CERTAIN RELATIONSHIPS AND  RELATED TRANSACTIONS

      For  information  concerning this item, see pages 2 through 4 of the Proxy
Statement, which information is incorporated herein by reference.


                                     PART IV

Item 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) 1. Financial Statements:

     The financial  statement of the Company  incorporated  by reference in this
Report  are  listed  in the  attached  Index  to the  Financial  Statements  and
Supplementary Data.

(a) 2. Financial Statement Schedules:

     The financial  statement  schedules of the Company filed in this Report are
listed in the attached Index to Financial Statements and Supplementary Data.

(a) 3. Exhibits (not included)

     The exhibits  required to be filed as part of this Report are listed in the
attached Index to Exhibits.

(b) Current Reports on Form 8-K:

     The  Company  has not filed any  Current  Reports  on Form 8-K  during  the
quarter ended June 30, 1997.



                                       10
<PAGE>

POWER OF ATTORNEY

     The Company and each person whose  signature  appears below hereby  appoint
Manfred F. Dyck and Robert D.  Frawley as  attorneys-in-fact  with full power of
substitution,  severally, to execute in the name and on behalf of the registrant
and each such person,  individually  and in each capacity  stated below,  one or
more  amendments to the annual report which  amendments may make such changes in
the report as the attorney-in-fact acting deems appropriate and to file any such
amendment to the report with the Securities and Exchange Commission.

                                   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.

<TABLE>
<S>                                   <C>                                                       <C>
HYDROMER, INC.

/s/ Manfred F. Dyck                   President, Principal Executive Officer,                   September 11 ,1998
------------------------              Chairman of the Board of Directors
Manfred F. Dyck                       

/s/ Kenneth P. Brice                  Vice President Finance &                                  September 11, 1998
------------------------              Administration Chief Financial Officer
Kenneth P. Brice                            


      Pursuant to the  requirements  of the Securities and 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:

/s/ Manfred F. Dyck                   President, Principal Executive Officer,                   September 11, 1998
------------------------              Chairman of the Board of Directors
Manfred F. Dyck                             

/s/ Ursula M. Dyck                    Director                                                  September 11, 1998
------------------------
Ursula M. Dyck

/s/ Dieter Heinemann                  Director                                                  September 11, 1998
------------------------
Dieter Heinemann

/s/ Maxwell Borow                     Director                                                  September 11, 1998
------------------------
Maxwell Borow

/s/ Robert H. Bea                     Director                                                  September 11, 1998
------------------------
Robert H. Bea
</TABLE>


                                       11
<PAGE>


                                INDEX TO EXHIBITS

     3.a Certificate of Incorporation of the Company, as amended to date

     3.b By-Laws of the Company, as amended to date

     10.a  Minutes of Meeting of the Board of  Directors  of the Company held on
March 5,  1981  with  respect  to stock  options  granted  to  Manfred  F.  Dyck
(Incorporated by reference to Exhibit 10.i to the Registration Statement).

     10.b Agreement  dated August 11, 1981 between Horizon  Concepts,  Inc., and
the Company  (Incorporated  by  reference  to Exhibit  10.c to the  Registration
Statement).

     10.c  Agreement  dated  January 27, 1982  between  Reliable  Pharmaceutical
Company,  Inc. and the Company (Incorporated by reference to Exhibit 10.d to the
Registration Statement).

     10.d  License  Agreement  dated July 14,  1982  between  Biosearch  Medical
Products Inc. and the Company  (Incorporated by reference to Exhibit 10.g to the
Registration Statement).

     10.e Management  Services  Agreement dated July 14, 1982 between  Biosearch
Medical Products Inc. and the Company (Incorporated by reference to Exhibit 10.h
to the Registration Statement).

     10.f  Amendment  dated October 7, 1982 to Agreement  dated January 27, 1982
between Reliable  Pharmaceutical  Company,  Inc. and the Company,  together with
letter dated October 14, 1982 from Reliable  Pharmaceutical Company, Inc. to the
Company (Incorporated by reference to Exhibit 10.f to the 1983 Annual Report).

     10.g Hydromer Coating agreement dated February 11, 1983 between  Pacesetter
Systems,  Inc. and the Company (Incorporated by reference to Exhibit 10.g to the
1983 Annual Report).

     10.h Lease  Agreement  dated  April 5, 1983  between  Salem  Realty and the
Company (Incorporated by reference to Exhibit 10.h to the 1983 Annual Report).

     10.i License  Agreement dated April 25, 1983 between  CardioSearch Inc. and
the  Company  (Incorporated  by  reference  to Exhibit  10.i to the 1983  Annual
Report).

     10.j Trademark License Agreement dated April 25, 1983 between  CardioSearch
Inc.  and the Company  (Incorporated  by  reference  to Exhibit 10.j to the 1983
Annual Report).

     10.k Agreement  dated August 31, 1983 between  Becton,  Dickinson & Company
and the Company  (Incorporated  by  reference to Exhibit 10.l to the 1983 Annual
Report).

     10.l Current Report on Form 8-K filed May 30, 1986

     10.m Hydromer  Coating  License  Agreement dated September 30, 1984 between
Axiom Medical,  Inc. and the Company  (Incorporated by reference to Exhibit 10.m
to the 1984 Annual Report).

     10.n 1982 Stock  Option Plan of the Company  (Incorporated  by reference to
Exhibit 10.m to the 1983 Annual Report).

     10.o  Amendment  dated  June 26,  1984 to  Agreement  dated  August 3, 1983
between Becton,  Dickinson & Company and the Company  (Incorporated by reference
to Exhibit 10.o to the 1984 Annual Report).

     10.p License  Agreement dated July 31, 1984 between Kendall Company and the
Company (Incorporated by reference to Exhibit 10.p to the 1984 Annual
Report).

     10.q License  Agreement  dated March 1, 1985  between  Van-Tec Inc. and the
Company and Letter of Amendment  thereto  dated June 13, 1985  (Incorporated  by
reference to Exhibit 10.o to the 1985 Annual Report).

     10.r  Telex  dated  June  24,  1985  terminating   License  Agreement  with
CardioSearch Inc.  (Incorporated by reference to Exhibit 10.p to the 1984 Annual
Report).

     10.s  Amendment  dated  as of  December  31,  1984 to  Management  Services
Agreement dated July 14, 1982 between  Biosearch  Medical  Products Inc. and the
Company (Incorporated by reference to Exhibit 10.q to the 1985 Annual Report).

     10.t Lease Renewal  Agreement dated April 15, 1985 between Salem Realty and
the  Company 


                                       12
<PAGE>

(Incorporated by reference to Exhibit 10.r to the 1985 Annual Report).

     10.u Lease  Agreement  dated  December 4, 1984  between  Biosearch  Medical
Products Inc. and the Company  (Incorporated by reference to Exhibit 10.s to the
1985 Annual Report).

     10.v License Agreement dated April 11, 1986 between Axiom Medical, Inc. and
the  Company  (Incorporated  by  reference  to Exhibit  10.i to the 1986  Annual
Report).

     10.w License Agreement dated September 13, 1985 between U. S. Viggo and the
Company (Incorporated by reference to Exhibit 10.c to the 1986 Annual Report).

     10.x License Agreement dated March 27, 1986 between Wilkinson Sword Limited
and the Company  (Incorporated  by  reference to Exhibit 10.f of the 1986 Annual
Report).

     10.y Lease Renewal  Agreement dated April 15, 1987 between Salem Realty and
the  Company  (Incorporated  by  reference  to Exhibit  10.y to the 1987  Annual
Report).

     10.z License  Agreement dated April 30, 1986 between HPK  International and
the  Company  (Incorporated  by  reference  to Exhibit  10.j to the 1986  Annual
Report).

     10.aa License Agreement dated August 1, 1986 between Film Specialties, Inc.
and the Company  (Incorporated  by reference to Exhibit 10.aa to the 1987 Annual
Report).

     10.ab Lease Renewal Agreement dated April 15, 1988 between Salem Realty and
the  Company  (Incorporated  by  reference  to Exhibit  10.ab to the 1988 Annual
Report).

     10.ac  License  Agreement  dated June 30,  1987  between  Richards  Medical
Company and the Company  (Incorporated by reference to Exhibit 10.ac to the 1988
Annual Report).

     10.ad License Agreement dated December 1, 1987 between  Mallinckrodt,  Inc.
and the Company  (Incorporated  by reference to Exhibit 10.ad to the 1988 Annual
Report).

     10.ae Option  Agreement  dated January 28, 1988 between Cordis  Corporation
and the Company  (Incorporated  by reference to Exhibit 10.ae to the 1988 Annual
Report).

     10.af  Lease  Agreement  dated  April 15, 1988  between  Biosearch  Medical
Products Inc. and the Company (Incorporated by reference to Exhibit 10.ag of the
1988 Annual Report).

     10.ag  Letters  dated June 11, 1987 and  September 22, 1987 to U. S. Viggo,
Inc. modifying License Agreement dated September 13, 1985, to cover only central
venous catheters  (Incorporated by reference to Exhibit 10.ag to the 1988 Annual
Report).

     10.ah Lease Renewal Agreement dated April 15, 1989 between Salem Realty and
the  Company  (Incorporated  by  reference  to Exhibit  10.ah to the 1989 Annual
Report).

     10.ai Amendment dated October 1, 1988 to License  Agreement dated September
13,  1985,  between U. S. Viggo and the Company  (Incorporated  by  reference to
Exhibit 10.ai to the 1989 Annual Report).

     10.aj License Agreement dated October 20, 1988 between Cordis Corp. and the
Company (Incorporated by reference to Exhibit 10.aj to the 1989 Annual Report).

     10.ak License  Agreement dated March 31, 1989 between Cathlab Corp. and the
Company (Incorporated by reference to Exhibit 10.ak to the 1989 Annual Report).

     10.al Amendment dated December 1, 1988 to License Agreement dated August 1,
1986 between Film Specialties,  Inc. and the Company  (Incorporated by reference
to Exhibit 10.al to the 1989 Annual Report).

     10.am Finders  Agreement  dated August 20, 1987 between  Phoenix  Chemical,
Inc. and the Company  (Incorporated  by  reference to Exhibit  10.am to the 1989
Annual Report).

     10.an License Agreement dated September 10, 1989 between the Stent Division
of Schneider and the Company  (Incorporated by reference to Exhibit 10.an to the
1990 Annual Report).

     10.ao License Agreement dated March 30, 1990 between Cosmo Ikko Company and
the  Company  (Incorporated  by  reference  to Exhibit  10.ao to the 1990 Annual
Report).

     10.ap  License  Agreement  dated  April  12,  1990  between  Interventional
Therapeutics,  Inc.  and the  Company  and  amendment  dated  May 7, 1990 to the
Agreement dated April 12, 1990 between Interventional Therapeutics, Inc. and 


                                       13
<PAGE>

the  Company  (Incorporated  by  reference  to Exhibit  10.ap to the 1990 Annual
Report).

     10.aq Amended License Agreement dated January 1, 1990 between the Wilkinson
Sword group of companies and the Company  (Incorporated  by reference to Exhibit
10.aq the 1990 Annual Report).

     10.ar Lease  Agreement  dated April 15, 1990  between  Salem Realty and the
Company (Incorporated by reference to Exhibit 10.ar to the 1990 Annual Report).

     10.as  Amendment  to the  Agreement  dated July 31,  1984  between  Kendall
Company and the Company  (Incorporated by reference to Exhibit 10.as to the 1990
Annual Report).

     10.at License  Agreement dated January 11, 1991 between  Biosearch  Medical
Products Inc. and the Company (Incorporated by reference to Exhibit 10.at to the
1991 Annual Report).

     10.au  License  Agreement  dated May 16,  1991  between I E Sensors and the
Company (Incorporated by reference to Exhibit 10.au to the 1991 Annual Report).

     10.av Lease Renewal Agreement dated April 15, 1991 between Salem Realty and
The  Company  (Incorporated  by  reference  to Exhibit  10.av to the 1991 Annual
Report).

     10.aw  License  Agreement  dated July 25,  1991  between  Johnson & Johnson
Orthopaedics and the Company  (Incorporated by reference to Exhibit 10.aw to the
1992 Annual Report).

     10.ax License Agreement dated August 19, 1991 between Navarre  Laboratories
Ltd. and the Company  (Incorporated  by  reference to Exhibit  10.ax to the 1992
Annual Report).

     10.ay Amended  License  Agreement  dated  September 15, 1991 between Boston
Scientific Corp. and the Company  (Incorporated by reference to Exhibit 10.ay to
the 1992 Annual Report).

     10.az  Option/License  Agreement dated September 23,1991 between Elan Corp.
PLC and the Company  (Incorporated  by  reference  to Exhibit  10.az to the 1992
Annual Report).

     10.ba Lease  Agreement  dated November 1, 1991 between Morton Street Realty
and the Company  (Incorporated  by reference to Exhibit 10.ba to the 1992 Annual
Report).

     10.bb License  Agreement  dated August 17, 1992 between  SCIMED  Peripheral
Interventions,   division  of  SCIMED  Life  Systems,   Inc.  and  the  Company.
(Incorporated by reference to Exhibit 10.bb to the 1993 Annual Report).

     10.bc License  Agreement  dated March 9, 1993 between Arrow  International,
Inc. and the Company.  (Incorporated  by reference to Exhibit  10.bc to the 1993
Annual Report).

     10.bd License Agreement dated April 28, 1993 between St. Jude Medical, Inc.
and the Company.  (Incorporated by reference to Exhibit 10.bd to the 1993 Annual
Report).

     10.be License  Agreement  dated  November 11, 1993 between  Katoh  Hatsujyo
Kaisha, Ltd. and the Company. (Incorporated by reference to Exhibit 10.be to the
1994 Annual Report).

     10.bf  Lease  Agreement  dated June 9, 1995  between  Salem  Realty and the
Company (Incorporated by reference to Exhibit 10.bf to the 1995 Annual Report).

     10.bg Amendment  dated September 20, 1995 to License  Agreement dated April
28, 1993  between St. Jude  Medical,  Inc.  and the  Company.  (Incorporated  by
reference to Exhibit 10.bg to the 1996 Annual Report).

     10.bh  License  Agreement  dated  April  12,  1990  between  Interventional
Therapeutics  and the  Company  was  terminated  effective  December  22,  1995.
(Incorporated by reference to Exhibit 10.bh to the 1996 Annual Report).

     10.bi  License  Agreement  dated May 16,  1991  between I E Sensors and the
Company was terminated  effective December 31, 1995.  (Incorporated by reference
to Exhibit 10.bi to the 1996 Annual Report).

     10.bj Consented to the assignment of license  agreement dated April 28,1993
between  St. Jude  Medical,  Inc.  and the Company to CR Bard dated  January 18,
1996. (Incorporated by reference to Exhibit 10.bj to the 1996 Annual Report).



                                       14
<PAGE>

     10.bk License  Agreement dated April 30, 1986 between HPK International and
the Company  was  terminated  effective  February  19,  1996.  (Incorporated  by
reference to Exhibit 10.bk to the 1996 Annual Report).

     10.bl  License  Agreement  dated  June 6, 1996  between  Biosearch  Medical
Products  Inc. and the Company.  (Incorporated  by reference to Exhibit 10.bl to
the 1996 Annual Report).

     10.bm  License  Agreement  dated August 1, 1996 between  Biosearch  Medical
Products Inc. and the Company.  10.bn Amended License  Agreement dated September
4, 1996 between SCIMED (Boston  Scientific  Corporation  and the Company.  10.bo
License  Agreement  dated January 6, 1997 between  Sherwood Davis & Geck and the
Company.

     10.bp Use  permit for  certain  designated  area dated May 4, 1997  between
Biosearch Medical Products Inc. and the Company

     11 Contract of sale between  Biosearch Medical Products and the Company for
the sale of 35 Industrial Parkway dated 3/31/98.

     12 Note and mortgage with PNC Bank dated 6/12/98

     13 3 year lease agreement with Biosearch Medical Products dated 6/12/98 for
35 Industrial Parkway

     14 Audit  Report for Year Ended  6/30/98-  Rosenberg  Rich Baker Berman and
Company, independent auditors.

     15 Notice of 1998 Annual Meeting of Stockholders.

     25 Power of Attorney  (see "Power of Attorney" in the Annual Report on Form
10-KSB).


                                       15
<PAGE>



                                 Hydromer, Inc.

                              Financial Statements

                             June 30, 1998 and 1997







<PAGE>


                                 Hydromer, Inc.
                        Index to the Financial Statements
                             June 30, 1998 and 1997



                                                                         Page

Independent Auditors' Report ..........................................   1

Financial Statements

   Balance Sheets ....................................................    4

   Statements of Income ..............................................    4

   Statement of Stockholders' Equity .................................    4

   Statements of Cash Flows ..........................................    5

   Notes to the Financial Statements .................................   6-12




<PAGE>


                      Rosenberg Rich Baker Berman & Company
                                  [LETTERHEAD]




                          Independent Auditors' Report


To the Board of Directors and Stockholders of
Hydromer, Inc.


We have audited the accompanying balance sheets of Hydromer, Inc. as of June 30,
1998 and 1997 and the related  statements of income,  stockholders'  equity, and
cash  flows  for the  years  then  ended.  These  financial  statements  are the
responsibility of the company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Hydromer,  Inc. as of June 30,
1998 and 1997,  and the  results  of its  operations  and its cash flows for the
years then ended in conformity with generally accepted accounting principles.


                                       /s/ Rosenberg Rich Baker Berman & Company


Bridgewater, New Jersey

August 25, 1998



                                                                               1
<PAGE>

                                 Hydromer, Inc.
                                 Balance Sheets

<TABLE>
<CAPTION>
                                                                                       June 30,
                                                                               --------------------------
                                                                                   1998           1997
                                                                               -----------    -----------
<S>                                                                            <C>            <C>       
Assets
Current Assets
  Cash and cash equivalents                                                    $   783,475    $   716,045
  Trade receivables less allowance for doubtful accounts of $8,831 in
     1998 and 1997                                                                 497,579        431,150
  Inventory                                                                        176,131        148,753
  Prepaid expenses                                                                  71,708         77,567
  Other                                                                             42,083             --
  Deferred tax asset                                                               236,235        100,000
                                                                               -----------    -----------
       Total Current Assets                                                      1,807,211      1,473,515

Property and Equipment, net                                                      1,585,209        271,743
Deferred Tax Asset                                                                      --        262,856
Other                                                                              100,117         11,968
                                                                               -----------    -----------
       Total Assets                                                              3,492,537      2,020,082
                                                                               ===========    ===========
       Liabilities and Stockholders' Equity

Current Liabilities
  Accounts payable                                                                  42,563         29,213
  Accrued expenses                                                                 232,432        167,678
  Current portion of mortgage payable                                               56,667             --
  Current portion of deferred rental income                                        115,500             --
  Income tax payable                                                                    --         40,223

       Total Current Liabilities                                                   447,162        237,114
                                                                               -----------    -----------
  Long term portion of mortgage payable                                            793,333             --
  Long term portion of deferred rental income                                      224,906             --
                                                                               -----------    -----------
       Total Liabilities                                                         1,465,401        237,114
                                                                               -----------    -----------
Stockholders' Equity
  Common stock - no par value, authorized 6,000,000 shares, 4,378,904
     issued and 4,367,987 shares outstanding                                     2,922,708      2,922,708
  Contributed capital                                                              577,750        577,750
  Accumulated deficit                                                           (1,467,182)    (1,711,350)
  Treasury stock, 10,917 common shares at cost                                      (6,140)        (6,140)
                                                                               -----------    -----------
       Total Stockholders' Equity                                                2,027,136      1,782,968
                                                                               -----------    -----------
       Total Liabilities and Stockholders' Equity                              $ 3,492,537    $ 2,020,082
                                                                               ===========    ===========
</TABLE>

See notes to the financial statements.

                                                                               2
<PAGE>


                                 Hydromer, Inc.
                              Statements of Income


                                                           Year Ended June 30,
                                                       ------------------------
                                                          1998         1997
                                                       -----------  -----------
Revenues
   Sales of products and services                      $   989,527  $ 1,062,772
   Royalties, options and licenses                       1,371,043      999,254
                                                       -----------  -----------
                                                         2,360,570    2,062,026
Cost of Sales                                              203,636      242,025
                                                       -----------  -----------
Gross Profit                                             2,156,934    1,820,001

Operating Expenses                                       1,654,468    1,521,278
                                                       -----------  -----------
Operating Income                                           502,466      298,723
                                                       -----------  -----------
Other Income (Expense)
   Interest income                                          33,394       14,047
   Interest expense                                         (1,969)          --
   Other income                                                131           --
                                                       -----------  -----------
Total Other Income                                          31,556       14,047
                                                       -----------  -----------
Income Before Provision for (Benefit from) Taxes           534,022      312,770
Provision for (Benefit from) Income Taxes                  158,487      (31,624)
                                                       -----------  -----------
Net Income                                             $   375,535  $   344,394
                                                       ===========  ===========
Earnings Per Common Share                              $       .09  $       .08
                                                       ===========  ===========
Weighted Average Number of Common Shares Outstanding     4,367,987    4,367,987
                                                       ===========  ===========

See notes to the financial statements.

                                                                               3

<PAGE>


                                 Hydromer, Inc.
                        Statement of Stockholders' Equity

<TABLE>
<CAPTION>
                              Common Stock                                          Treasury Stock
                        ------------------------   Contributed   Accumulated    -----------------------
                         Shares        Amount        Capital       Deficit       Shares        Amount         Total
                        ----------   -----------   -----------   -----------    ---------   -----------    -----------
<S>                      <C>         <C>           <C>           <C>               <C>      <C>            <C>        
Balance June 30, 1996    4,378,904   $ 2,922,708   $   577,750   $(2,055,744)      10,917   $    (6,140)   $ 1,438,574
Net Income                      --            --            --       344,394           --            --        344,394
                        ----------   -----------   -----------   -----------    ---------   -----------    -----------
Balance June 30, 1997    4,378,904     2,922,708       577,750    (1,711,350)      10,917        (6,140)     1,782,968
Dividends Paid                  --            --            --      (131,367)          --            --       (131,367)
Net Income                      --            --            --       375,535           --            --        375,535
                        ----------   -----------   -----------   -----------    ---------   -----------    -----------
Balance June 30, 1998    4,378,904   $ 2,922,708   $   577,750   $(1,467,182)      10,917   $    (6,140)   $ 2,027,136
                        ==========   ===========   ===========   ===========    =========   ===========    ===========
</TABLE>


See notes to the financial statements.

                                                                               4

<PAGE>


                                 Hydromer, Inc.
                            Statements of Cash Flows


<TABLE>
<CAPTION>
                                                                           Year Ended June 30,
                                                                       --------------------------
                                                                           1998           1997
                                                                       -----------    -----------
<S>                                                                    <C>            <C>        
Cash Flows From Operating Activities
  Net Income                                                           $   375,535    $   344,394
  Adjustments to Reconcile Net Income to Net Cash Provided by
    Operating Activities
      Depreciation and amortization                                         77,941         43 326

  Changes in Assets and Liabilities
    Trade receivables                                                      (66,429)       193,121
    Inventory                                                              (27,378)        22,607
    Prepaid expenses                                                         5,859        (32,305)
    Deferred tax asset                                                     126,621        (69,331)
    Other assets                                                          (130,232)        (2,093)
    Accounts payable and accrued liabilities                                78,104        104,274
    Income taxes payable                                                   (40,223)        36,707
                                                                       -----------    -----------
        Net Cash Provided by Operating Activities                          399,798        640,700
                                                                       -----------    -----------
Cash Flows From Investing Activities
  Cash purchases of property and equipment                              (1,051,000)       (92,555)
  Proceeds from mortgage on new building                                   850,000             --
  Cash dividends paid                                                     (131,368)            --
                                                                       -----------    -----------
        Net Cash (Used in) Investing Activities                           (332,368)       (92,555)
                                                                       -----------    -----------
Net Increase in Cash and Cash Equivalents                                   67,430        548,145
Cash and Cash Equivalents at Beginning of Year                             716,045        167,900
                                                                       -----------    -----------
Cash and Cash Equivalents at End of Year                               $   783,475    $   716,045
                                                                       ===========    ===========

SUPPLEMENTAL  DISCLOSURES OF CASH FLOW  INFORMATION
  Cash paid during the year for:
    Interest                                                           $     1,969    $        --
    Income taxes                                                       $    44,878    $        --
</TABLE>

NON-CASH DISCLOSURES OF CASH FLOW IN FORMATION

     In 1998 the  Company  financed a portion of their  acquisition  of property
     with a prepaid lease to Biosearch Medical Products, Inc. for $346,500.


See notes to the financial statements.

                                                                               5

<PAGE>


                                 Hydromer, Inc.
                        Notes to the Financial Statements


SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Nature of Operations

          Hydromer,  Inc.  (The Company) is a polymer  research and  development
          company based in Branchburg,  New Jersey. The Company develops polymer
          complexes for commercial  markets in the medical and industrial fields
          primarily in the United States.  The Company  obtains patent rights on
          certain products from which royalty revenues are received.

     Cash and Cash Equivalents

          Cash and cash  equivalents  consist  of short  term  investments  with
          original maturities of three months or less.

     Inventories

          Inventories  are  valued  at the  lower  of  cost,  determined  by the
          first-in,  first-out method, or market and include appropriate amounts
          of labor and overhead.

     Depreciation

          The cost of property and equipment is depreciated  on a  straight-line
          method over the  estimated  useful  lives of the assets:  10 years for
          machinery and equipment,  3-5 years for furniture and office equipment
          and the term of the lease for leasehold improvements.  When assets are
          retired or  otherwise  disposed  of, the cost and related  accumulated
          depreciation are removed from the accounts,  and any resulting gain or
          loss is  reflected in income for the period.  Repairs and  maintenance
          which do not  extend  the  useful  lives  of the  related  assets  are
          expensed as incurred.

     Patents

          Expenses associated with new patent applications are prepaid until the
          patents are approved at which time they are amortized over the life of
          the patent,  typically  20 years.  Prepaid  expenses  associated  with
          patents which are not approved or abandoned are expensed in the period
          in which such patents are not approved or abandoned.  Maintenance fees
          associated  with existing  patents are written off over 12 months.  At
          June  30,  1998  and  1997,  no new  patents  had  been  approved  and
          accordingly, no amortization expense has been recognized.

     Income Taxes

          Income taxes are provided for the tax effects of transactions reported
          in the financial  statements  and consist of taxes  currently due plus
          deferred taxes related  primarily to differences  between the bases of
          assets and  liabilities  for financial and income tax  reporting.  The
          deferred tax assets and  liabilities  represent  the future tax return
          consequences  of those  differences,  which will  either be taxable or
          deductible  when the assets and  liabilities are recovered or settled.
          Deferred  taxes also are  recognized  for  operating  losses  that are
          available to offset future federal income taxes.

     Earnings Per Share

          Earnings per share,  in  accordance  with the  provisions of Financial
          Accounting Standards Board Statement No. 128. "Earnings Per Share", is
          computed  by dividing  net income by the  weighted  average  number of
          shares of common  stock  outstanding  during the period.  Common stock
          equivalents  were not included in computing  diluted earning per share
          since their effects would be antidilutive.


<PAGE>


                                 Hydromer, Inc.
                        Notes to the Financial Statements


SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

     Concentration of Credit and Business Risk

          The  Company  maintains  cash  balances  in a  financial  institution.
          Accounts  at  the  institution  are  insured  by the  Federal  Deposit
          Insurance Corporation (FDIC) up to $100,000. At times,  throughout the
          year, the Company may maintain  certain account  balances which exceed
          the FDIC insured  limits.  The Company  provides  credit in the normal
          course of business to customers.  Ongoing  credit  evaluations  of its
          customers are  performed,  and  allowances  for doubtful  accounts are
          based on factors  surrounding  the credit risk of specific  customers,
          historical trends, and other information.

     Advertising

          Advertising costs are expensed as incurred except for tangible assets,
          such as printed advertising materials, which are expensed as consumed.
          Advertising expense was $8,743 and $3,569 for the years ended June 30,
          1998 and 1997,  respectively.  Advertising included in prepaid expense
          on the  balance  sheet at June 30,  1998 and 1997 were  $7,725 and $0,
          respectively.

     Research and Development

          Research and development costs are charged to operations when incurred
          and are included in operating  expenses.  The amounts  charged in 1998
          and 1997 were $512,107 and $304,631, respectively.

     Major Customers

          The Company sold products and collected  royalty  income  representing
          more than 10% of its total  revenues  for the year ended June 30, 1998
          and 1997, to three customers.

     Revenue Recognition

          Revenue  from  product  sales are  recognized  at the time of shipment
          provided  that  collection  of the  resulting  receivable is probable.
          Revenue  from  royalties  are  recognized  upon  the  sale of  certain
          products by licensees with whom the Company has licensing agreements.

     Use of Estimates

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

INVENTORY

      Inventory consists of:
                                                  June 30,
                                           ----------------------
                                              1998        1997
                                           ---------    ---------
              Finished goods               $  102,689   $  86,580
              Raw materials                    73,442      62,173
                                           ----------   ---------
                                           $  176,131   $ 148,753
                                           ==========   =========

                                                                               7
<PAGE>


                                 Hydromer, Inc.
                       Notes to the Financial Statements

PROPERTY AND EQUIPMENT

    Property and equipment consists of the following:

                                                             June 30,
                                                     --------------------------
                                                         1998           1997
                                                     -----------    -----------
    Land                                             $   472,410    $        --
    Building                                             752,453             --
    Machinery and equipment                              598,300        476,765
    Furniture and fixtures                               128,443        108,906
    Leasehold improvements                               215,077        189,605
                                                     -----------    -----------
                                                       2,166,683        775,276
    Less accumulated depreciation and amortization      (581,474)      (503,533)
                                                     -----------    -----------
                                                     $ 1,585,209    $   271,743
                                                     ===========    ===========

Depreciation  expense  charge to operations  was $77,941 and $43,326 in 1998 and
1997, respectively.

LONG-TERM DEBT

     Long-term debt is comprised of the following:

Mortgage note

          Due in equal monthly  installments  of $4,722 plus
          interest through June 1, 2003 secured by the land,
          building,  machinery  and  equipment and all rents
          from leases  currently  and  subsequently  entered
          into                                                 $850,000

          Less: Current Maturities                               56,667
                                                               --------
Long-term Debt, Net of Current Maturities                      $793,333
                                                               ========

The  mortgage  note bears  interest at a rate of 200 basis points over the banks
fully absorbed five year cost of funds,  adjusted every five years. The interest
rate for the first five year period is 8%.

         Year ended June 30,
         -------------------                                   ----------
              1999                                             $  56,667 
              2000                                                56,667 
              2001                                                56,667 
              2002                                                56,667 
              2003                                                56,667 
              Thereafter                                         509,998 
                                                               --------- 
                                                               $ 793,333 
                                                               ========= 

                                                                               8

<PAGE>


                                 Hydromer, Inc.
                        Notes to the Financial Statements

FAIR VALUE OF FINANCIAL INSTRUMENTS

     The carrying amount of cash and equivalents,  accounts receivable, accounts
     payable and accrued expenses  approximates  fair value because of the short
     maturity of these  instruments.  The fair value of the Company's  long term
     debt  approximates  its  carrying  value and is based on the current  rates
     offered  to the  Company  for debt of the same  remaining  maturities  with
     similar collateral requirements.

     Limitations

          Fair value  estimates are made at a specific  point in time,  based on
          relevant  market  information  about the financial  instrument.  These
          estimates  are  subjective  in nature and  involve  uncertainties  and
          matters of  significant  judgment and  therefore  cannot be determined
          with precision.  Changes in assumptions could significantly affect the
          estimates.

INCOME TAXES

          The income tax provision (benefit) is comprised of the following:

                                       Federal       State       Total
                                      ---------    ---------   ---------
          Year Ended June 30, 1998                                      
                                                                        
            Current                   $      --    $  17,872   $  17,872
            Deferred                    140,615           --     140,615
                                      ---------    ---------   ---------
                                      $ 140,615    $  17,872   $ 158,487
                                      =========    =========   =========
                                                                        
          Year Ended June 30, 1997                                      
                                                                        
            Current                   $      --    $  36,707   $  36,707
            Deferred                    (68,331)          --     (68,331)
                                      ---------    ---------   ---------
                                      $ (68,331)   $  36,707   $ (31,624)
                                      =========    =========   =========

          A reconciliation  between taxes computed at the federal statutory rate
          and the consolidated effective tax rate follows:

                                                               June 30,      
                                                           ----------------  
                                                            1998      1997   
                                                           -----     -----   
          Federal statutory tax rate                        34.0%     39.0%  
          Surtax exemptions                                   --      (5.4)  
          State income tax - net of federal tax benefit     (4.6)     (5.8)  
          Permanent and other differences                    0.3     (37.9)  
                                                            29.7%    (10.1)% 
                                                           =====     =====   
         
          The  temporary  differences  causing  such  deferred  tax benefits are
          primarily due to net operating loss carryforwards.

          At June 30, 1998,  the Company has net operating  loss  carry forwards
          for federal  income tax purposes of $734,807,  which are  available to
          offset  future  Federal  taxable  income,  if  any.  The  federal  net
          operating loss carryforwards expire as follows:

                                                            Federal    
                                                           ---------   
                       2000                                $ 106,573   
                       2001                                  198,315   
                       2002                                  138,889   
                       2003                                   58,675   
                       2010                                  232,355   
                                                           ---------   
                                                           $ 734,807   
                                                           =========

                                                                               9

<PAGE>


                                 Hydromer, Inc.
                        Notes to the Financial Statements


INCOME TAXES, Continued

     For June 30, 1998 and 1997 it is reasonably  certain that all the temporary
     differences will reverse in future years,  therefore no valuation allowance
     is  provided.  Using  the  applicable  federal  tax of 34% each  year,  the
     deferred tax assets and liabilities are as follows:

                                                          June 30,          
                                                   -----------------------  
                                                      1998          1997    
                                                   ---------     ---------  
     Current deferred tax asset                    $ 249,835     $ 100,000  
     Current deferred tax liability                  (13,600)      262,856  
                                                   ---------     ---------  
                                                                            
     Net Deferred Tax Asset                        $ 236,235     $ 362,856  
                                                   =========     =========  
     
STOCK OPTIONS AND AWARDS

     On January 23,  1992,  the Board of Directors  granted  options to purchase
     12,000  shares  of  common  stock of the  Company  which  were to expire on
     January 22, 1997, with 4,000 shares being  exercisable  immediately,  4,000
     becoming  exercisable  one year from the date of the  grant,  and the final
     4,000  becoming  exercisable  two  years  from the date of the  grant.  The
     exercise  price of $0.625  per share was equal to the  market  price at the
     date of the grant. At June 30, 1997, the 12,000 options  exercisable  under
     this arrangement have expired.

     On January 22, 1998 the Board of  Directors  authorized a stock option plan
     for senior  management.  Under the plan,  senior management would be issued
     stock options in an amount equal to 3% of the incremental market cap of the
     Company  divided by the stock  price at June 30th in each of the next three
     years.  The incremental  market cap of the Company is defined as the number
     of outstanding shares at the end of each year multiplied by the increase in
     the market value per share for each year.  These  options  would be equally
     divided by the number of  participants  in the plan.  As of June 30,  1998,
     there were three  participants.  The plan was effective  July 1, 1998.  The
     market cap of the company on July 1, 1998 was $3,010,496. The first options
     will be issued under this plan as of June 30, 1999.

     On January 22, 1998 the Board of Directors  also  authorized a stock option
     plan for the Chief Executive  Officer (CEO).  Under the plan, the CEO would
     be issued stock options in an amount equal to 3% of the incremental  market
     cap of the  Company  divided by the stock price at June 30th in each of the
     next three years.  The incremental  market cap of the Company is defined as
     the number of outstanding  shares at the end of each year multiplied by the
     increase  in the  market  value  per  share  for  each  year.  The plan was
     effective  July 1, 1998.  The market cap of the company on July 1, 1998 was
     $3,010,496. The first options will be issued under this plan as of June 30,
     1999.

     On January 22, 1998 the company  issued  25,000  stock  options to a senior
     executive as part of his employment agreement. These options vest 100% in 6
     months and are priced at $0.875 per share.  The Company also issued  60,000
     stock  options  to the same  executive  that will vest once the  company is
     listed on a regional or national exchange.  The vesting will be at the rate
     of 20,000  shares  immediately  upon listing and 5,000 shares at the end of
     each of the next 8 quarters  from  listing  date.  The price of the options
     will be the listing price or $2.00, whichever is higher.

     On January  22,  1998 the Board of  Directors  approved  an option plan for
     active  directors that would give each active director of the Company 5,000
     options with a strike  price on  September 1, 1998,  the date of record and
     each subsequent year on the record date.


                                                                              10

<PAGE>



                                 Hydromer, Inc.
                        Notes to the Financial Statements


STOCK OPTIONS AND AWARDS, Continued


     A summary of activity under the plan for the years ending June 30, 1998 and
     1997 is as follows:

                        Common Stock Options Outstanding

                                                              Shares
                                                             --------
                Balance, June 30, 1996                        12,000
                      Granted                                     --
                      Exercised                                   --
                      Canceled                                12,000
                                                             -------
                 Balance, June 30, 1997                           --
                                                             =======
                      Granted                                 85,000
                      Exercised                                   --
                                                                    
                      Canceled                                    --
                                                             --------
                 Balance, June 30, 1998                       85,000
                                                             ========
                                                                    
                   Shares exercisable at June 30, 1998            --
                                                             ========
                 Weighted average fair value of                     
                   options granted during 1998               $  1.67
                                                             ========

     Following  is a summary of the status of  options  outstanding  at June 30,
     1998:

                                  Outstanding Options
                 ---------------------------------------------------------
                                                  Weighted
                                                   Average      Weighted
                                                  Remaining      Average
                   Exercise                      Contractual    Exercise
                  Price Range      Number           Life          Price
                 -------------  -------------   -------------  -----------
                   .875-2.00       85,000          5 Years        $1.67

RETIREMENT PLAN

     The Company  sponsors a qualified  401(k) plan covering  substantially  all
     full time employees  under which eligible  employees can defer a portion of
     their annual compensation. The Company made no matching contribution to the
     plan  during the years ended June 30,  1998 and 1997.  Effective  August 1,
     1998, the Company will match 25% up to 6% of salary.

                                                                              11

<PAGE>
                                 
                                 Hydromer, Inc.
                        Notes to the Financial Statements

LEASES

     The Company  leases its  facility  under an operating  lease.  Total rental
     expense  for the  years  ended  June 30,  1998 and 1997  were  $79,375  and
     $81,000,  respectively.  The lease  calls for payment by the Company of all
     operating  costs  such  as  utilities,  maintenance,  taxes  and  liability
     insurance.

     Future  minimum rental  commitments  for the next five years as of June 30,
     1998 on the aforementioned lease is as follows:

               1999                               $   91,250
               2000                                  101,875
               2001                                   43,750
               2002 and Thereafter                        --
                                                  ----------
                                                  $  236,875
                                                  ==========

RELATED PARTY TRANSACTIONS

     The Company and Biosearch Medical Products,  Inc. (BMP) are related parties
     since certain  shareholders hold a substantial  ownership  interest and are
     members of management in both companies.  During 1998 and 1997, the Company
     sold  materials and services to BMP for $45,019 and $31,257,  respectively.
     The Company also earned  royalty income from BMP of $25,894 and $43,171 for
     the years ended June 30, 1998 and 1997, respectively. Total amounts owed to
     the  Company by  BMP were  $25,093  and  $19,794 at June 30, 1998 and 1997,
     respectively.

     In addition, BMP provides engineering and secretarial services to Hydromer.
     These expenses amounted to $17,393 and $10,090 and for the years ended June
     30, 1998 and 1997,  respectively.  Amounts owed to BMP at June 30, 1998 and
     1997, respectively, were $3,811 and $597.

     In 1998 and 1997,  the Company  purchased  furniture and equipment from BMP
     for $500 and $46,000, respectively.

     Also,  during 1997, the Company leased  equipment and space from  BMP, on a
     week-to-week basis. Total rental expense paid to BMP was $10,000 and $6,000
     for the years ended June 30, 1998 and 1997, respectively.

     On June 12,  1998,  the Company  purchased a facility and land from BMP for
     $850,000  in cash and a  pre-paid  lease to BMP of  $346,500.  The land and
     building  has  an   appraised   value  of   $1,370,000.   BMP  will  occupy
     approximately 75% of the building and Hydromer the remaining 25%.

RECLASSIFICATIONS

     Certain items in the June 30, 1997 report have been reclassified to conform
     to current year  classifications.  Such  reclassifications had no effect on
     previously reported net income.

SUBSEQUENT EVENT

     Subsequent to the year ended June 30, 1998, the Board of Directors declared
     a cash dividend of $.03 per share.  The amount of the cash dividend  totals
     approximately $131,000.