<PAGE>

                ANNUAL REPORT FOR SMALL BUSINESS ISSUERS SUBJECT
                     TO THE 1934 ACT REPORTING REQUIREMENTS

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

   
                                  FORM 10-KSB/A
    
                  (Mark One)
[X]      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 
         OF 1934 For the fiscal year ended December 31, 1997

[  ]     TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
________________________________________________________________________________
                         Commission File Number 0-21752

                                  IMATEC, LTD.
                 (Name of small business issuer in its charter)

                 Delaware                                        11-3289398
(State or other jurisdiction of incorporation)                (I.R.S. Employer 
                                                             Identification No.)

           150 East 58th Street                                    10155
            New York, New York                                   (Zip Code)
 (Address of principal executive offices)

              (212) 826-0440
        (Issuer's Telephone Number)

Securities registered under Section 12(b) of the 
             Exchange Act:

           Title of each class         Name of each exchange on which registered
           -------------------         -----------------------------------------
                  None

Common Stock, par value $.01 per share             Nasdaq Smallcap Market


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

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B 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 10-KSB or any
amendment to this Form 10-KSB. [ ]

Issuer's revenue for its most recent fiscal year: $ 0

The aggregate market value of the voting stock held by non-affiliates, computed
based upon the price at which the stock was sold on March 26, 1998, is
$1,636,977.

The number of outstanding shares of Common Stock, par value $.01 per share, of
the Registrant as of March 26, 1997 was 3,735,201 shares.

                       DOCUMENTS INCORPORATED BY REFERENCE

If the following documents are incorporated by reference, briefly describe them
and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into
which the document is incorporated:

Document                      Part of Form 10-KSB


<PAGE>



                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

         The Company was formed in 1988 to develop, design, market, and license
its proprietary technology, which enhances image reproduction by reducing
distortion that normally occurs in the imaging process, for application in such
markets as medical imaging, graphic arts, computers, cinematography, and
television/video. Each application will be a demonstration system of hardware
and software components (an "Imatec 20/20 System") expressly developed for a
specific market. Based on the results of extensive testing, the Company has
developed an Imatec 20/20 System for medical diagnostic imaging devices which is
capable of improving the quality of film reproduction of images taken by medical
diagnostic imaging devices such as magnetic resonance imaging ("MRI"),
computerized tomography ("CT") and ultrasound scanners. The Imatec 20/20 System
for medical diagnostic imaging devices achieves this goal regardless of the type
of medical imaging film used which may result in cost savings to the user. The
Company has also developed an Imatec 20/20 System for the medical field of
teleradiology, which is the viewing of the same medical image on different
monitor screens in separate locations. Although the first applications of the
Company's technology have been for the medical diagnostic imaging field, which
only require black and white reproduction, the Company recently began developing
an Imatec 20/20 System designed to reduce distortions of reproduction of color
images and which is intended to facilitate the Company's development of Imatec
20/20 Systems for non-medical imaging fields.

         The Company's technology is designed to objectively measure the image
characteristics of an original image and compare it to its reproduced image,
computing the existing tone and color distortions between the two images and
correcting such distortions. Current imaging systems create reproductions that
have distortions and are usually adjusted subjectively during the reproduction
process. Aspects of the Company's technology are set forth in its patents which
have been licensed by the Company from Dr. Hanoch Shalit, the Company's
President and Chief Executive Officer. The Company has designed, built, and
tested a prototype of a device incorporating the Imatec 20/20 System which can
be used with MRI, CT, and ultrasound scanners.

         On November 6, 1997, the Company filed a Schedule 13E-3 with the
Securities and Exchange Commission relating to the sale of substantially all of
the operations of the Company (the "Sale") through the sale of all of the
outstanding shares of the common stock of a newly-formed, wholly-owned
subsidiary of the Company to Dr. Hanoch Shalit, current President, Chief
Executive Officer, Chairman of the Board and Secretary of the Company, pursuant
to the terms of an acquisition agreement dated as of September 10, 1997, as
amended (the "Acquisition Agreement"). The Schedule 13E-3 was accompanied by a
preliminary proxy statement relating to the Company's annual meeting at which
the shareholders would be asked to approve the Sale. On December 4, 1997, the
Company and Dr. Shalit amended the Acquisition Agreement to terminate the
proposed Sale. Accordingly, the Sale was not presented to shareholders for
consideration.


IMATEC 20/20 SYSTEMS

         Imatec 20/20 Systems are designed to improve a reproduced image so that
it more closely resembles the original image in terms of tone and color.
Presently, many image reproduction applications employ manual adjustments based
on subjective assessment. The individual taking the image adjusts the image
recording device (i.e., the camera) by adjusting the light intensity, exposure
time, etc. The adjustment of these variables is based on the operator's
subjective perceptions. In the medical imaging process, however, a number of
variables, in addition to the subjective perceptions of the operator, influence
the fidelity of the final image as compared to the original image. Such
variables include ambient lighting conditions, photographic materials used,
particular equipment characteristics, calibration, and equipment age. Imatec
20/20 Systems employ an objective measurement of image tone rather than
subjective assessments of image and tone to reduce the distortion in the imaging
process caused by these variables. When used in connection with an MRI, CT, or
ultrasound scanner, the Imatec 20/20 System uses a photometer (an instrument
that measures properties relating to light, especially luminous intensity) to
measure the image tone characteristics that appear on the monitor screen of the


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<PAGE>

medical imaging device via a test pattern representing the tone of such images.
Thereafter, a densitometer (an instrument that measures the optical density of a
film) measures the image tone characteristics of the same image as reproduced on
film via a test pattern that represents the image as it appears on the film.
Thereafter, the characteristics of the screen image and the film image are
transferred to a computer which calculates the distortion function between the
two images and the required correction function. This computed correction
function is automatically transferred to a digital signal processor system that
modifies the film image reproduction signal on a pixel-by-pixel basis to create
an image reproduced on the film that more closely resembles the image and tone
characteristics as set forth on the screen.

         This so-called closed loop system, which measures and compares the
image tone characteristics set forth on the screen and the image tone
characteristics reproduced on the film, adjusting for those variables that
influence the reproduced image, can take one of two forms. The Imatec 20/20
System can be an add-on to MRI, CT, and ultrasound scanners. In such instances,
the operator of the medical imaging device will be required to make adjustments
each time a variable that influences the final picture is altered, such as a
change in lighting conditions or the changing of the film. Alternatively, the
Imatec 20/20 System can also be incorporated as a component of MRI, CT, and
ultrasound scanners, in which event the Imatec 20/20 System can automatically
adjust for any change in these variables.

BUSINESS STRATEGY

         The Company's strategy is (i) to license the Company's technology and
Imatec 20/20 System developed for the medical diagnostic imaging field to
manufacturers of medical imaging products, such as scanners, cameras, and image
reproduction systems, (ii) to engage in marketing activities to facilitate the
licensing of the Company's technology and its Imatec 20/20 Systems, and (iii) to
continue its research and development activities with respect to other
applications of the Company's technology in the medical imaging field and for
other imaging fields, such as graphic arts, computer, cinematography, and
television/video. The precise scope and length of any license granted by the
Company is anticipated to be dependent upon the overall nature of the license
agreement and the remuneration to be received by the Company. The Company will
simultaneously seek to license Imatec 20/20 Systems both as an add-on device for
new and existing MRI, CT, and ultrasound scanners and as an enhancement to be
included as a component of new MRI, CT, and ultrasound scanners. The Company
does not presently intend to engage in any manufacturing, sales, distribution,
or service activities with respect to its Imatec 20/20 Systems or products that
incorporate the Company's technology, or provide technical service in connection
therewith. The Company may assist a licensee in adapting the Company's
technology or an Imatec 20/20 System and preparing a technical manual for any
product that incorporates the Company's technology or Imatec 20/20 system, but
will not engage in providing the actual technical assistance to end-users of any
such product. In the event that the Company is unable to effectively license its
technology or the Imatec 20/20 System, the Company may have to engage in
manufacturing of products incorporating its technology or the Imatec 20/20
System. The Company is presently engaged in preliminary discussion with a
potential licensee. However, a license agreement may not be consummated and,
even if consummated, the timing and amount of income to the Company is
speculative.

         The Company has sent letters alleging that its patents have been
infringed to three companies. They have denied such infringement. The Company
has been advised that patent infringement litigation may be expensive, its
results uncertain due to the uncertainty of litigation and that a final
judgement may not be expected before three years.

MANUFACTURING, SALES, AND DISTRIBUTION

         The Company has no present intention to engage in the manufacturing,
sales, or distribution process. In the event that due to the Company's inability
to successfully license its technology or any Imatec 20/20 System the Company
determined that it was necessary to manufacture, sell and distribute imaging
products incorporating the Company's technology or Imatec 20/20 Systems, the
Company would manufacture such products on a contract manufacturing or original
equipment manufacturer (OEM) basis and have such products distributed by a
network of independent regional distributors. The Company presently has an
arrangement with an independent third party company that provides research and
development services to the Company from time to time. Such third party also has
pre-production and production capabilities. Consequently, since such third party
is already familiar with the Company's technology, the Company would engage such
third party on an OEM basis in the event that the Company was required to
manufacture products. The Company presently does not have any relationship with
any independent retail distributors.


                                       3
<PAGE>



MARKETING

         The Company intends to market its technology and Imatec 20/20 Systems
by a variety of means, each of which is intended to facilitate the licensing of
its technology and Imatec 20/20 Systems. The Company intends to attend industry
trade shows in the United States where it believes it will gain additional
exposure to potential licensees for its technology and Imatec 20/20 Systems. The
Company also intends to seek to obtain awareness of Imatec 20/20 Systems through
the publishing of articles by Dr. Shalit, the first of which were a series of
articles commencing in November of 1996 in Medical Imaging, a trade magazine.
The Company also intends to gain exposure as well as keep current of emerging
and changing imaging standards by joining certain industry trade associations
and where feasible, having representatives of the Company serve on various
standards committees in the imaging field. The Company may hire marketing
personnel and consultants if required.

RESEARCH AND DEVELOPMENT

         In applying the Imatec 20/20 System designed for the medical diagnostic
imaging field to other aspects of the medical imaging field, as well as in
connection with developing Imatec 20/20 Systems for other fields, the Company
intends to engage consultants and independent contractors from time to time to
conduct research and development activities. The Company, in discreet instances,
may acquire certain technologies that the Company believes enhance or further
the application of the Company's technology or its Imatec 20/20 Systems to other
imaging fields, although it will only effect such acquisitions in those
instances where the Company believes that acquisition of such technologies is
more economical and efficient than engaging in the research and development
itself. The Company does not have any current arrangements or understandings at
the present time to acquire any such technologies.

         The Company incurred $137,970 and $60,034 in research and development
activities during the year ended December 31, 1996, and 1997, respectively.

COMPETITION

         The image enhancement field is subject to rapid and significant
technological change that may render an Imatec 20/20 System, or products that
incorporate the Company's technology, obsolete or incompatible with the machines
they are intended to complement. In addition, such rapid changes may impose
additional, unforeseen costs on the Company in that the Company may be required
to modify its technology and Imatec 20/20 Systems to adapt to such changes.
There can be no assurance that the Company will be able to successfully modify
or upgrade its technology and Imatec 20/20 Systems as may be necessary on a
timely basis, or at all.

         While the Company is not aware of any entities that build image
enhancement devices that compete with the Company's technology or Imatec 20/20
Systems in the medical imaging field, there are a number of entities that are
engaged in the research and development of image enhancement products. Some
entities have, and other entities may in the future develop technologies or
products that compete with the Company's technology or Imatec 20/20 Systems.
Potential competitors of the Company include independent companies,
universities, and public and private research organizations, most of which are
well established and have substantially greater marketing, financial,
technological, and other resources than the Company. In addition, the medical
imaging field in particular is dominated by large, well established, highly
capitalized corporations. There can be no assurance that competitors will not
succeed in securing patents and/or developing technologies or products that are
more effective than the Company's technology or Imatec 20/20 Systems, as a
result of which the Company's technology or Imatec 20/20 Systems may become
obsolete or noncompetitive.

LICENSE AGREEMENT

         The Company entered into a license agreement as of June 25, 1995 with
Dr. Hanoch Shalit, the Company's Chairman of the Board of Directors, President,
and Chief Executive Officer (the "License Agreement"). The License Agreement
grants the Company the exclusive right to make, use, sell, and sublicense
"Patentable Image Technology," which is defined in the License Agreement as the


                                       4
<PAGE>
three United States patents and certain foreign patent applications. Under the
terms of the License Agreement, Dr. Shalit received from the Company a one-time
$350,000 payment in January 1996. Dr. Shalit is also entitled to receive a flat
royalty fee of $140,000 per annum, payable in monthly installments of $11,667,
for so long as the Company and any successor of the Company is in existence (the
"Annual Royalty"); provided, however, that in the event that Dr. Shalit is no
longer Chairman of the Board of Directors, President, and Chief Executive
Officer for any reason whatsoever, but the Company or any successor of the
Company continues in existence, the Annual Royalty shall automatically be
increased to $250,000 per annum. Pursuant to the terms of the License Agreement,
the Annual Royalty shall increase by 5% every year as long as the Company or any
successor of the Company is in existence. The License Agreement also grants to
the Company the exclusive right as to inventions made by Dr. Shalit in the
course of his employment under his employment agreement with the Company. The
Company's obligations to pay the Annual Royalty shall continue until the
expiration of the License Agreement. The term of the License Agreement expires
when the last licensed patent expires, whether in the United States or abroad.
Under the License Agreement, the Company is obligated to use its reasonable best
efforts to make, use, sell and sublicense to others the Patentable Image
Technology.

INTELLECTUAL PROPERTY

         The Company presently intends to make all appropriate filings and
registrations, or take all other actions the Company believes to be necessary,
to obtain and protect all patents, trademarks, copyrights, tradenames, and all
other intellectual property rights, if any, relating to the Company, although
there can be no assurance that the Company will be able to effectively do so. In
the event the Company is able to fully establish intellectual property rights
with respect to the technology used by the Company, of which there can be no
assurance, third parties may attempt to exercise alleged rights in any of their
patents, trademarks, copyrights, or other intellectual property or appropriate
any patents, trademarks, copyrights, or other intellectual property rights
obtained by the Company, and the Company's failure or inability to adequately
protect any of its intellectual property rights may have a material adverse
effect on the Company. In addition, there can be no assurance that third parties
will not be able to successfully assert a claim with regard to the Company's
patents and/or the Imatec 20/20 Systems under their own intellectual property
rights.

         The Company also requires all employees to sign non-disclosure,
non-competition, confidentiality, and invention assignment agreements.

         Under the License Agreement, the Company has an exclusive, worldwide
license from Dr. Shalit to make, use, sell and sublicense to others the
Patentable Image Technology.

   
         The Company intends to seek to broaden its patent protection and the
application of the Company's technology and Imatec 20/20 Systems to other
markets. When seeking to apply the Company's technology to other markets, the
Company most likely will first design a research prototype of an Imatec 20/20
System for such market to test the technology in the laboratory. Thereafter, a
production prototype of such Imatec 20/20 System will be constructed for testing
at a beta, or third party, site. After successful beta testing, the Company will
then seek to market the Imatec 20/20 System and/or license the underlying
technology. 

         In February 1998 the Company filed a Patent Infringement Complaint for
$1.1 billion against Apple Computer Corp. ("Apple") in the United States
District Court, Southern District, New York. The suit alleges that Apple has
infringed on three United States Letters Patent, issued to Dr. Shalit, by its
making, using, and/or selling its "ColorSync" color management systems and
inducing others to do so. The patents cited in the suit are exclusively licensed
by Dr. Shalit to the Company and include: U.S. Letters Patent No. 4,939,581
entitled, "Method and System in Video Image Hard Copy Reproduction," No.
5,115,229 entitled "Method and System in Video Image Reproduction" and No.
5,345,315 entitled "Method and System for Improved Tone and Color Reproduction
of Electronic Images on Hard Copy Using a Closed Loop Control."
    
                                       5
<PAGE>
FDA CLEARANCE

         The United States Food and Drug Administration (the "FDA") employs a
rigorous system of regulations and requirements governing the clearance
processes for medical devices, requiring, among other things, the presentation
of substantial evidence, including clinical studies, establishing the safety and
efficacy of new medical devices. The principal methods by which FDA clearance is
obtained are pre-market approval ("PMA"), which is for products that are not
comparable to any other product in the market, or filing a pre-market
notification under Section 510(k) ("510(k)") of the Federal Food, Drug and
Cosmetic Act which is for products that are substantially equivalent to products
that have already received FDA clearance. Although both methods may require
clinical testing of the products in question under an approved protocol, because
PMA clearance relates to more unique, invasive, and/or potentially higher risk
products, the PMA procedure is more complex and time consuming. Applicants
utilizing the 510(k) procedure must prove that the products for which clearance
is sought are substantially equivalent to products on the market prior to the
Medical Device Amendments of 1976, or products approved thereafter pursuant to
the 510(k) procedure. The review period for a 510(k) application is
approximately ninety (90) days from the date of filing the application, although
there can be no assurance that the review period will not extend beyond such a
period.

         Under the PMA procedure, the applicant is required to conduct
substantial clinical testing to determine the safety, efficacy, and potential
hazards of the product. The review period under a PMA application is one hundred
eighty (180) days from the date of filing, and the application is not
automatically deemed cleared if not rejected during that period. The preparation
of a PMA application is significantly more complex, expensive, and time
consuming than the 510(k) procedure. Further, the FDA can request additional
information, which can prolong the clearance process.

         In order to conduct human clinical studies for any medical procedure
proposed for the Company's products, the Company, or a licensee of the Company's
technology or Imatec 20/20 System for medical imaging applications, as the case
may be, could also be required to obtain an investigational device exemption
("IDE") from the FDA or Institutional Review Board (the "IRB") which would
further increase the time before potential FDA clearance. In order to obtain an
IDE, the Company or a licensee, as the case may be, may be required to submit an
application to the FDA or IRB, including a complete description of the product
and detailed medical protocols that would be used to evaluate the product. In
the event an application were found to be in order, an IDE would ordinarily be
granted promptly thereafter.

         While the Company's licensees will be more likely to experience the FDA
review and clearance processes than the Company directly, it may be more
difficult to sell or license the Company's technology in light of such rigorous
FDA license requirements. The Company has never sought FDA approval for its
Technology.

EMPLOYEES

         As of December 31, 1997, the Company had two full-time employees, Dr.
Hanoch Shalit who serves as the Company's Chairman of the Board of Directors,
President, and Chief Executive Officer and one administrative assistant. The
Company also employs four part-time consultants, consisting of the Chief
Financial Officer, a marketing consultant, one computer programmer and one
electronic engineer. The Company believes that its relations with its employees
are good.

ITEM 2.  DESCRIPTION OF PROPERTY

         On January 31, 1996, the Company entered into a three (3) year lease
for approximately 2,048 square feet for its principal executive offices at 150
East 58th Street, New York, New York 10155 pursuant to which the Company pays
rent of approximately $5,600 per month. Dr. Hanoch Shalit, the Company's
President and Chief Executive Officer, has personally guaranteed the payments to
be made under such lease. Such lease expires on January 31, 1999.

ITEM 3.  LEGAL PROCEEDINGS

   
         In February 1998, the Company filed a patent infringement complaint for
$1.1 billion against Apple Computer Corp. ("Apple") in the United States
District Court, Southern District, New York. The suit alleges that Apple has
infringed on three United States Letters Patent, issued to Dr. Shalit, by its
making, using, and/or selling its ColorSync color management systems and
inducing others to do so. The patents cited in the suit are exclusively licensed
by Dr. Shalit to the Company and include: US Letters Patent No. 4,939,581
entitled, "Method and System in Video Image Hard Copy Reproduction." No.
5,115,229 entitled "Method and System in Video Image Reproduction" and No.
5,345,315 entitled "Method and System for Improved Tone and Color Reproduction
of Electronic Images on Hard Copy Using a Closed Loop Control." The complaint
claims Apple's acts of infringement are being committed willfully and without
the Company's consent and with full knowledge by them of the Company's rights
thereunder. The Company is seeking a preliminary and permanent injunction
enjoining Apple from infringing, inducing others or contributing to the
infringement of the Company's patents. A trial by jury has been demanded on all
issues.
    
                                       6
<PAGE>

         In March 1998, Apple filed a counterclaim, alleging that the
patents-in-suit are invalid, not infringed and unenforceable.

         In February 1998, an administrative civil subpoena was served upon
Hanoch Shalit, Chief Executive Officer of Imatec, Ltd. by the New Jersey
Division of Consumer Affairs, Bureau of Securities regarding an inquiry in the
matter of A.S. Goldmen & Co., Inc and Imatec, Ltd. We have not been advised to
date that either Dr. Shalit or Imatec, Ltd. is the focus of this civil
investigation.

         In December 1997, a purported class action/derivative complaint was
filed by Robert F. Martin and Theresa A. Martin and others on behalf of Imatec,
Ltd. against individual defendants Hanoch Shalit, Steven Ai, Simon Cross, Neal
Factor and Joseph Weiss and the Company as a nominal defendant. The complaint
arises out of an agreement by and between the Company and Dr. Shalit approved
July 16, 1997 by the Company's Board of Directors which plaintiffs allege
includes an agreement by the Company to sell all of its assets except for
$3,875,000 to Dr. Shalit. The agreement approved by the Board was terminated by
the parties effective December 4, 1997. Accordingly, the Company is of the view
that no damages occurred or could occur and that the relief sought, an
injunction to stop the sale, is moot. The Company intends to vigorously defend
against this lawsuit.

         In November 1997, James Jaeger and Richard Carey filed a law suit in
the Supreme Court of the State of New York, County of Suffolk, naming the
Company as a defendant. The plaintiff is seeking an aggregate of $3,000,000 from
the Company, alleging that the Company breached its obligations to the plaintiff
in connection with three separate agreements relating to the raising of funds
for the Company executed in 1993, 1994 and 1995. In December 1997, the Company
served a Verified Answer containing numerous affirmative defenses and/or
counterclaims. In addition, in December 1997, the Company served a Demand for a
Verified Bill of Particulars. In April 1998, the Company made an application to
the Court to dismiss the action based upon the plaintiffs' inability to support
their claims. To date, no decision or order has been rendered. The Company
intends to vigorously defend against this lawsuit.


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

None

                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         Price Range of Common Stock

         The common stock, par value $ .0001 per share (the "Common Stock"), and
the redeemable warrants (the "Redeemable Warrants") of the Company commenced
trading on the Nasdaq NATIONAL Market on October 29, 1996 under the symbols
"IMEC" and "IMECW," respectively. The following table sets forth, for the
periods indicated, the high and low sales prices for the Common Stock and the
Redeemable Warrants as reported by the Nasdaq SmallCap Market.

                              Common Stock             Redeemable Warrants
                        ------------------------- ---------------------------

Period                    High            Low          High          Low

1997 First Quarter       $6.50           $3.00         $3.25       $0.7031

1997 Second Quarter      3.375          0.3125         1.625        0.0938

1997 Third Quarter       0.875            0.25        0.2031        0.0938

1997 Fourth Quarter       0.75           0.125        0.1563        0.0313


         On March 26, 1998, the closing sale price of the Common Stock was $0.75
and the closing sale price for the Redeemable Warrants was $0.125.

         As of December 31, 1997, there were 74 holders of record and 862
Beneficial Holders of the Common Stock and 63 holders of record of the
Redeemable Warrants.
<PAGE>

DIVIDEND POLICY

         The Company has never paid cash or other dividends and does not expect
to pay any cash or other dividends in the foreseeable future with respect to the
Common Stock. The Company's future dividend policy will depend upon the
Company's earnings, capital requirements, financial condition, and other factors
considered relevant by the Company's Board of Directors. The Company presently
intends to retain any earnings which the Company may realize in the foreseeable
future to finance the growth of the Company.


ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

         The Company was organized on November 17, 1988 and is in the
development stage. To date, the Company's activities have primarily consisted of
research and development activities with respect to the development of the
Company's technology and an Imatec 20/20 System for the medical diagnostic
imaging field. During this time, the Company has received only minimal revenues
from limited non-recurring consulting activities. The Company believes, based
upon its internal budgets, that the Company's available cash resources,
including the net proceeds of the initial public offering of securities of the
Company in October 1996, will be sufficient for the Company (i) to engage in
licensing the Company's technology and Imatec 20/20 System developed for the
medical diagnostic imaging field to manufacturers of medical diagnostic imaging
products such as scanners, cameras and image reproduction systems, (ii) to
engage in marketing activities to facilitate the licensing of the Company's
technology and its Imatec 20/20 Systems, (iii) to continue research and
development activities with respect to other applications of the Company's
technology in the medical imaging field and in other imaging fields, such as
                                       

                                       7
<PAGE>

graphic arts, computer, cinematography and television/video, and (iv) otherwise
conduct its operations at least through the year ending December 31, 1998.

LIQUIDITY AND CAPITAL RESOURCES

         The Company is in the development stage, and, primarily as a
consequence of expenses incurred in connection with research and development
activities, at December 31, 1996 and 1997 the Company had an accumulated
stockholders' deficit of $3,352,727 and $4,860,327 respectively. The Company has
continued to incur losses since December 31, 1997.

         To date, the Company has financed its operations principally from the
sale of securities and loans. In 1991, the Company issued an aggregate of 55,250
shares of Common Stock to an investor for aggregate gross proceeds of $500,000.
In 1994, the Company issued an aggregate of 12,615 shares of Common Stock to two
investors for aggregate gross proceeds of $114,224.

         In the second and third quarters of 1995, the Company borrowed an
aggregate principal amount of $175,000 from five non-affiliated, accredited
investors pursuant to one year promissory notes. All of these investors
converted their respective loans into Units in the Bridge Financing (as
hereinafter defined).

         On November 30, 1995, the Company effected the initial closing (the
"First Closing") of a private placement (the "Bridge Financing") pursuant to
which it sold an aggregate of 37 units (the "Units") to non-affiliated,
accredited investors, each Unit consisting of (a) a 10% promissory note (the
"Note") in the principal amount of $50,000, which was repaid in November 1996
with a portion of the net proceeds of the initial public offering of securities
of the Company (the "Initial Public Offering") in accordance with the terms of
the Note, (b) 6,897 shares of Common Stock, and (c) 50,000 warrants (the "Bridge
Warrants") exercisable at $1.00 per share. See "Description of Securities." The
Company received gross proceeds from the sale of the 37 Units in the First
Closing of $1,850,000, pursuant to which it issued an aggregate of 255,194
shares of Common Stock and 1,850,000 Bridge Warrants. The investors in the First
Closing received financial statements from the Company which did not properly
account for the Company's research and development costs. As a result thereof,
the Company circulated revised financial statements and gave recision offers to
all of the investors in the First Closing, only one of whom accepted such
recision offer. All of the other investors in the First Closing affirmatively
chose not to rescind. On April 12, 1996, the Company effected a second closing
of the Bridge Financing (the "Second Closing") pursuant to which it received an
additional $2,150,000 in gross proceeds for which it issued an aggregate of 43
Units (consisting of notes in the aggregate principal amount of $2,150,000),
296,591 shares of Common Stock, and 2,150,000 Bridge Warrants. The aggregate net
proceeds from the Bridge Financing were approximately $3,230,000 (after
commissions and expenses) and in connection therewith the Company issued an
aggregate of 551,785 shares of Common Stock (including 25 shares of Common Stock
which resulted from rounding to the nearest whole share in connection with the
purchase of fractional units) and 4,000,000 Bridge Warrants. The Company used
the net proceeds from the Bridge Financing (i) to make a one-time payment of
$350,000 to the Company's Chairman of the Board of Directors, President, and
Chief Executive Officer, Dr. Hanoch Shalit, pursuant to the License Agreement
and (ii) for marketing and working capital purposes.

         In connection with the issuance of Notes with an aggregate principal
amount of $4,000,000, 551,785 shares of Common Stock and 4,000,000 Bridge
Warrants in the Bridge Financing, the Company recorded an original issue
discount of $1,503,570 based upon the allocation of the relative fair market
value of the Notes, Bridge Warrants, and shares of the Common Stock included in
the Units on the date of issuance. The Company incurred approximately $664,000
of offering costs related to the Bridge Financing, of which approximately
$415,000 was allocated to deferred debt issuance costs with the remainder
allocated to paid-in capital of the shares of Common Stock and Bridge Warrants
issued therein. The original issue discount was amortized over the term of the
Notes as interest expense.

         In October 1996, in order to comply with listing requirements of the
Nasdaq Market, the Company restructured the Bridge Financing (the "Bridge
Financing Restructuring"). Accordingly, all of the investors in the Bridge
Financing (the "Bridge Investors") were given the choice to either (i) convert
on the closing date of their entire principal and accrued interest into shares
of Common Stock at the rate of $4.00 per share, retain the Bridge Warrants, and
return all of the shares of Common Stock that they received in the Bridge
Financing ("Option A"), or (ii) upon the closing of the Initial Public Offering
receive a one time payment equal to 50% of the principal amount of their Note,
not receive any accrued interest whatsoever, and return all of the Bridge
Warrants and Common Stock that they received in the Bridge Financing ("Option
B"). Bridge Investors owning an aggregate of 38 Units elected Option A and
Bridge Investors owning an aggregate of 41 Units elected Option B. The Bridge
                                        

                                       8
<PAGE>

Investor representing the remaining one (1) Unit who failed to choose either
Option A or Option B as of March 1, 1997 was deemed to have chosen Option A by
the Company, and the Company canceled on its books and records the Common Stock
issued to him in the Bridge Financing. Consequently, the Bridge Financing was
restructured such that, upon the closing of the Initial Public Offering the
Company repaid an aggregate of $1,025,000 of principal amount of Notes with
respect to those investors who chose Option B. The balance of the principal
amount of the Notes issued in the Bridge Financing, and all accrued interest
thereon, has been forgiven and will not be repaid. In addition, the Company
issued upon the closing of the Initial Public Offering an aggregate of 525,201
shares of Common Stock and 1,950,000 Bridge Warrants to those Bridge Investors
who chose Option A. The balance of 2,050,000 Bridge Warrants and all 551,785
shares of Common Stock issued in the Bridge Financing were returned to the
Company upon the closing of this Offering.

         In connection with the Bridge Financing Restructuring, the Company (i)
wrote-off $726,602 of unamortized loan discount and $167,593 of deferred loan
costs, and, (ii) recognized income of $1,164,712 from the forgiveness of
indebtedness.

         On November 1, 1996, the Company consummated the initial public
offering of securities of the Company pursuant to which the Company sold an
aggregate of 1,000,000 shares of Common Stock and 4,000,000 Redeemable Warrants
for aggregate gross proceeds of $6,000,000.

         On November 8, 1996, the Company consummated a sale of 600,000
Redeemable Warrants included in the underwriter's over-allotment option for
aggregate gross proceeds of $150,000.

         The Company believes that the net proceeds of the Initial Public
Offering will be sufficient for the Company to sustain its operations and
implement its business plan through at least December 31, 1998, although there
can be no assurance that such net proceeds will be sufficient to finance the
Company's operations for such period.

NET OPERATING LOSS CARRYFORWARDS

         As of December 31, 1997, the Company had net operating loss
carryforwards under Section 172 of the Internal Revenue Code, as amended (the
"Code"), of approximately $4,300,000 for Federal income tax purposes which may
be used to offset future taxable income through 2012.


ITEM 7.  FINANCIAL STATEMENTS

         See Page F-1 hereof for the Financial Statements.


                                       9
<PAGE>


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

         Not Applicable.


                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; 
         COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

     Directors and Officers

         The names and ages of the directors and executive officers of the
Company are set forth below. All ages are as of July 1997.


                     Name     Age                    Position Held

Dr. Hanoch Shalit              44          Chairman of the Board of Directors, 
                                           President, Chief Executive Officer, 
                                           and Secretary

James A. Smith                 45          Chief Financial Officer

Steven Ai                      43          Director

Neal Factor                    45          Director

Simon Cross                    46          Director

Josef Weiss                    43          Director

         The Company has agreed with Dr. Shalit that he shall be entitled to a
nominee on the Board of Directors until the expiration date of the last of the
Company's patents. The Company has also agreed with the Underwriter that, for
the period terminating on October 29, 2001, that it will use its best efforts to
cause one individual designated by A.S. Goldmen & Co., Inc., the underwriter of
the Initial Public Offering, and acceptable to the Company to be elected to the
Board of Directors, which individual may be a director, officer, employee, or
affiliate of such underwriter. Directors serve until the next annual meeting of
stockholders and the election and qualification of their successors. Directors
will not receive any compensation for serving on the Board of Directors. The
officers are appointed by the directors and serve, subject to existing
employment agreements, at the discretion of the Board of Directors. There are no
family relationships among any Directors or executive officers.

         Dr. Hanoch Shalit founded the Company in November 1988 and has been its
Chairman of the Board of Directors, President, Chief Executive Officer, and
Secretary since inception. From September 1982 until June 1987 Dr. Shalit was
employed as a senior chemist with Chemco Photo Products, a private imaging
company. From June 1987 until November 1988, Dr. Shalit was employed by the
FONAR Corporation, a public imaging company where he was the President of the
Photographic Sciences Division in charge of production, sales, and service for
the FONAR Corporation's photographic products. Dr. Shalit earned a B.S. (Honors)
in the Sciences of Photography from the Polytechnic of Central London (now know
as University of Westminster) in Great Britain in 1978 and a Ph.D. in Physics
from the University of London in 1981.

         James A. Smith has been the Company's Chief Financial Officer since
September 24, 1996. From November 1992 until September 1996, Mr. Smith was the
controller of Ferrara Food Company, a public wholesale food company located in
East Brunswick, New Jersey. From June 1995 until November 1995, Mr. Smith also
served as a financial consultant to William Greenberg Desserts & Cafes, Inc., a
public company located in New York City. From September 1990 to August 1992, Mr.
Smith was the Vice President of Finance and Chief Financial Officer of Ambico,
Inc., a private wholesale electronics distribution company located in Norwood,
New Jersey.


                                       10
<PAGE>


         Steven Ai has been a director of the Company since November 30, 1995.
Since 1992, Mr. Ai has been the President of City Mill Co., Ltd., a private
company located in Honolulu, Hawaii, which owns and operates a chain of retail
home product stores. Prior to 1992, Mr. Ai was a manager with the public
accounting firm of KPMG Peat Marwick.

         Mr. Neal Factor has served as a director of the Company since November
30, 1995. Mr. Factor has maintained a private law practice in New York City
principally in the areas of corporate and commercial law since 1979. Mr. Factor
has represented the Company since inception and receives compensation from the
Company for his legal services. See "Certain Transactions."

         Simon Cross has served as a director of the Company since July 15, 1996
and served as Vice President - Marketing and Sales from January 6, 1997 until
December 1997. From February 1993, Mr. Cross was the general manager of Shackman
Instruments, a private company located in the United Kingdom which designs and
manufactures identification cameras and associated security systems. From May
1992 to February 1993, Mr. Cross was the sales and marketing manager of Techspan
Systems plc, a private company located in the United Kingdom which specializes
in computer controlled large scale electronic displays. From June 1990 to May
1992, Mr. Cross was the director of X-Tek Systems Ltd., a private company
located in the United Kingdom which develops and manufactures high definition
microfocus x-ray systems for industrial inspection.

         Josef Weiss has been a director of the Company since May 1997. In 1992
Mr. Weiss founded, and became the managing partner of Individual & Institutional
Investments, a Swiss company located in Zurich which provides profit oriented
asset management in financial markets. During his studies, Mr. Weiss was
professionally active as a business advisor to industrial corporations in both
the financial and marketing fields. After completing his education he joined the
securities department of Bank Leumi, which he left in 1982 to become an
independent portfolio manager, active in the Israeli securities markets.


COMMITTEES OF THE BOARD OF DIRECTORS

         On December 17, 1996, the Company established two committees of the
Board of Directors, an Audit Committee and a Compensation Committee.

         The Audit Committee reviews the engagement of the independent
accountants, review and approve the scope of the annual audit undertaken by the
independent accountants, and review the independence of the accounting firm. The
Audit Committee will also review the audit and non-audit fees of the independent
accountants and the adequacy of the Company's internal control procedures. The
members of the Audit Committee are Messrs. Ai and Factor. The Audit Committee
did not meet during the year ended December 31, 1997.

         The Compensation Committee reviews executive compensation issues. The
members of the Compensation Committee are Messrs. Factor and Cross. The
Compensation Committee did not meet during the year ended December 31, 1997.

ITEM 10. EXECUTIVE COMPENSATION.

         The following table sets forth the annual and long-term compensation
for services in all capacities to the Company for the years ended December 31,
1995, 1996 and 1997 of the Chief Executive Officer of the Company and of each
executive officer of the Company whose annual compensation in 1997 exceeded
$100,000 at December 31, 1997.



                                       11
<PAGE>


                           SUMMARY COMPENSATION TABLE
                               Annual Compensation
<TABLE>
<CAPTION>
                          Annual Compensation                                            Long Term Compensation
                          -------------------                                            ----------------------
<S>                   <C>       <C>         <C>             <C>            <C>         <C>          <C>           <C>
                                                                         Restricted               Long Term     
Name and Principal   Year     Salary       Bonus         Other Annual    Stock       Options      Incentive     Other
Position                                                 Compensation    Award(s)    SARs         Plan Payouts  Compensation
-------------------- -------- ------------ ------------- --------------- ----------- ------------ ------------- ----------------

Dr. Hanoch Shalit    1997     $64,575(1)    US $0(2)      -               -           -            -
Chairman of the
Board of
Directors, Chief
Executive Officer
and Secretary        1996     $61,500      0(2)          -               -           -            -

                     1995     $60,000

Simon Cross          1997    $112,981      0             -               -           -            -
Vice President-      1996           0      0             -               -           -            -
Marketing and
Sales                1995           0      0             -               -           -            -

</TABLE>

(1) Pursuant to his employment agreement, Dr. Shalit's salary is payable at the
rate of $60,000 per calendar year. However, for the calendar year ended December
31, 1995, Dr. Shalit received less than $60,000 because his employment agreement
did not become effective until July 1, 1995. See "Management -- Employment
Agreements."

(2) Pursuant to his employment agreement, Dr. Shalit is entitled to receive a
bonus equal to $10,000 for every $1,000,000 of gross annual sales received by
the Company. See "Management -- Employment Agreements."

EMPLOYMENT AGREEMENTS

      Effective July 1, 1995, the Company entered into a five-year employment
agreement with Dr. Hanoch Shalit, the Chairman of the Board of Directors,
President, Chief Executive Officer, and Secretary of the Company. Under his
employment agreement, Dr. Shalit is to serve as the Chairman of the Board of
Directors, President, and Chief Executive Officer of the Company and receive an
annual base salary of $60,000, which shall increase at the rate of 5% per annum,
plus benefits. Dr. Shalit is also entitled to receive a bonus of $10,000 for
every $1,000,000 of gross annual sales received by the Company. In addition, Dr.
Shalit's employment agreement provides that, during the term of such employment
agreement, he shall not compete with the Company in the United States or Canada
or disclose, without the Company's consent, confidential information that has
been or will be disclosed to him by the Company. Dr. Shalit's employment with
the Company shall terminate upon his death or disability, the Company no longer
being involved in the imaging technology business, the bankruptcy of the Company
or the Company having been merged into or acquired by another company.
Furthermore, Dr. Shalit's employment may be terminated by the Company for
"cause," which is defined as either dishonesty detrimental to the best interests
of the Company or wilful disloyalty to the Company.

      Effective September 24, 1996, the Company entered into a five-year
employment agreement with Mr. James A. Smith, the Chief Financial Officer of the
Company. Under his employment agreement, Mr. Smith is to serve as the Company's
Chief Financial Officer and receive an annual salary of $95,000, plus benefits.
In addition, Mr. Smith's employment agreement provides that, during the term of
his employment agreement and for three years thereafter, he shall not compete
with the Company or disclose, without the Company's consent, confidential
information that has been or will be disclosed to him by the Company. Mr.
Smith's employment agreement may be terminated by the Company for any cause or
no cause. In December 1997, Mr. Smith became a consultant of the Company and 
his employment agreement was terminated.

      In January 1996, the Company entered into a five-year employment agreement
with Simon A. Cross, a Director of the Company. Under his employment agreement,
Mr. Cross is to serve as the Company's Vice President Marketing and Sales and
receive an annual salary of $125,000, plus benefits. In addition, Mr. Cross's
employment agreement provides that, during the term of his employment agreement
and for three years thereafter, he shall not compete with the Company or
disclose, without the Company's consent, confidential information that has been
or will be disclosed to him by the Company. In December 1997, Mr. Cross became a
consultant to the Company and his employment agreement terminated. He continues
to serve as a member of the Board of Directors.

         The Company is the sole beneficiary of a "key man" life insurance
policy on the life of Dr. Hanoch Shalit in the amount of $1 million.

INDEMNIFICATION AGREEMENTS
                                       12
<PAGE>


      The Company has entered into an Indemnification Agreement with each of its
Directors and officers, and intends to enter into such an agreement with any
officer, employee, agent, or fiduciary designated by the Board of Directors (in
each case, an "Indemnified Party"), which provides that the Company indemnify
the Director or other party thereto to the fullest extent permitted by
applicable law. The agreement includes indemnification, to the extent permitted
by applicable law, against expenses, including reasonable attorneys' fees,
judgments, penalties, fines, and amounts paid in settlement actually and
reasonably incurred by the Indemnified Party in connection with any civil or
criminal action or administrative proceeding arising out of the Indemnified
Party's performance of his duties as a Director, officer, agent, or fiduciary of
the Company. Such indemnification is available if the Indemnified Party acted in
good faith and in a manner he reasonably believed to be in, or not opposed to,
the best interests of the Company, and, with respect to any criminal action, had
no reasonable cause to believe his conduct was unlawful.

      Under the Indemnification Agreement, the entitlement of an Indemnified
Party to indemnification will be determined by a majority vote of a quorum of
disinterested Directors, or if such quorum is not obtainable, either by
independent counsel or by the stockholders of the Company, as determined by such
disinterested Directors. If a change of control of the Company has occurred, the
entitlement of such Indemnified Party shall be determined by independent counsel
to the Company, unless such Indemnified Party requests that either the Board or
the stockholders make such determination. Each Indemnification Agreement
requires the Company to advance litigation expenses at the request of the
Indemnified Party who is a party thereto whether prior to or after final
resolution of a proceeding, provided that he undertakes to repay such advances
if it is ultimately determined that he is not entitled to indemnification for
his expense. The advance of litigation expenses will therefore be mandatory upon
satisfaction of certain conditions by the Indemnified Party.

      The Company has obtained officers' and directors' liability insurance
which provides for a maximum of $2,000,000 of coverage, subject to a $50,000
corporate reimbursement per occurrence payable by the Company. Any payments made
by the Company under an Indemnification Agreement which are not covered by the
insurance policy may have an adverse impact on the Company's earnings.

STOCK OPTION PLAN

      In February 1996, the Board of Directors of the Company adopted and the
stockholders of the Company subsequently approved, the adoption of the Company's
1996 Stock Option Plan ("Stock Option Plan"). The purpose of the Stock Option
Plan is to enable the Company to encourage key employees, officers, Directors,
and consultants to contribute to the success of the Company by granting such
individuals and Directors nonqualified "stock options" within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended ("ISOs").

      The Stock Option Plan will be administered by the Compensation Committee
of the Board of Directors (the "Committee") which will determine, in its
discretion, among other things, the recipients and vesting of grants and the
number of shares to be subject to such options.

      The Stock Option Plan provides for the granting of options to purchase
shares of Common Stock at an exercise price to be determined by the Board of
Directors or the Committee. Notwithstanding the foregoing, the Company has
agreed with A.S. Goldmen & Co., Inc., the underwriter of the Initial Public
Offering, that for a period of 18 months after the date of the Initial Public
Offering, the Company will not grant any stock option having an exercise price
less than the greater of the fair market value of the Common Stock on the date
of the grant or the Initial Public Offering price per share of Common Stock.

      The total number of shares with respect to which options may be granted
under the Stock Option Plan is 500,000.

      Upon the exercise of an option, the holder must make payment of the full
exercise price. Such payment may be made in cash, in shares of Common Stock, or
in a combination of both. The Company may lend to the holder of an option funds
sufficient to pay the exercise price, subject to certain limitations.

      The Stock Option Plan may be terminated or amended at any time by the
Board of Directors, except that, without stockholder approval, the Stock Option
Plan may not be amended to increase the number of shares subject to the Stock
Option Plan, change the class of persons eligible to receive options under the
Stock Option Plan or materially increase the benefits of participants.


                                       13
<PAGE>


      At March 1, 1998, no options had been granted under the Stock Option Plan.
No determinations have been made regarding the persons to whom options will be
granted in the future, the number of shares which will be subject to such
options or the exercise prices to be fixed with respect to any option.

ITEM 11.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS  AND MANAGEMENT

      The following table sets forth information as of December 31, 1997, with
respect to the beneficial ownership of shares of Common Stock by (i) each person
known by the Company to be the owner of more than 5% of the outstanding shares
of Common Stock, (ii) each officer and director, and (iii) all officers and
directors as a group.
<TABLE>
<CAPTION>

                                                                     Shares Beneficially Owned(1)

Names and Address of Beneficial Owner                      Number                                Percentage
-------------------------------------                      ------                                ----------
<S>                                                        <C>                                     <C>
Dr. Hanoch Shalit(2)......................                835,177                                   22.4

James A. Smith(2).........................                   0                                       0

Carmello Cotrino..........................                663,000                                   17.8
8 Homsted Circle
Marlboro, NJ  07746

Steven Ai.................................               41,833(3)                                  1.1
c/o City Mill Co., Ltd.
600 Nimits Highway
Honolulu, Hawaii  96817

Neal Factor...............................                   0                                       0
36 W. 44th Street,
Suite 1111
New York, New York 10036

Simon Cross...............................                   0                                       0
c/o Imatec, Ltd.
150 E. 58th Street
New York, New York 10155

Josef Weiss                                                  0                                       0
c/o Imatec, Ltd.
150 E. 58th Street
New York, New York 10155

Officers and directors as a group                         876,950                                   23.5
(7 persons)
</TABLE>

(1)   As used herein, the term beneficial ownership with respect to a security
      is defined by Rule 13d-3 under the Exchange Act, as consisting of sole or
      shared voting power (including the power to vote or direct the vote)
      and/or sole or shared investment power including the power to dispose or
      direct the disposition) with respect to the security through any contract,
      arrangement, understanding, relationship, or otherwise, including a right
      to acquire such power(s) during the next 60 days. Unless otherwise noted,
      beneficial ownership consists of sole ownership, voting, and investment
      power with respect to all Ordinary Shares shown as beneficially owned by
      them.
(2)   The address of each of the referenced individuals is c/o the Company, 150 
      East 58th Street, New York, New York 10155.



                                       14
<PAGE>

 
(3)   Includes 36,833 shares of Common Stock beneficially owned by Steven Ai and
      held by The Revocable Trust of David C. Ai, dated July 24, 1985, as
      restated, of which Steven Ai serves as Chairman and, along with two other
      individuals, is a trustee. Also includes 5,000 shares of Common Stock 
      owned by Steven Ai individually.

ITEM 12.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      Mr. Neal Factor, a director of the Company and an attorney who has
represented the Company since inception, charged the Company legal fees 
including disbursements of approximately $63,000 and $93,962 in 1996 and 1997, 
respectively.

      The Company entered into the License Agreement as of June 25, 1995 with
Dr. Hanoch Shalit, the Company's Chairman of the Board of Directors, President,
and Chief Executive Officer. The License Agreement grants the Company the
exclusive right to make, use, sell and sublicense "Patentable Image Technology,"
which is defined in the License Agreement as the three United States Patents and
certain foreign patent applications. Under the terms of the License Agreement,
Dr. Shalit received from the Company a one-time $350,000 payment in January
1996. Dr. Shalit is also entitled to receive a flat royalty fee of $140,000 per
annum, payable in monthly installments of $11,667, for so long as the Company
and any successor of the Company is in existence (the "Annual Royalty");
provided, however, that in the event that Dr. Shalit is no longer Chairman of
the Board of Directors, President, and Chief Executive Officer of the Company
for any reason whatsoever, but the Company or any successor of the Company
continues in existence, the Annual Royalty shall automatically be increased to
$250,000 per annum. Pursuant to the terms of the License Agreement, the Annual
Royalty shall increase by 5% every year as long as the Company or any successor
of the Company is in existence. The License Agreement also grants to the Company
the exclusive right as to inventions made by Dr. Shalit in the course of his
employment under his employment agreement with the Company. The Company's
obligations to pay the Annual Royalty shall continue until the expiration of the
License Agreement.

      The term of the License Agreement expires when the last licensed patent
expires, whether in the United States or abroad. Under the License Agreement,
the Company is obligated to use its reasonable best efforts to make, use, sell
and sublicense to others the Patentable Image Technology.

      Each of the transactions between the Company and Mr. Neal Factor and
between the Company and Dr. Hanoch Shalit was made on terms no less favorable to
the Company than those that were available from unaffiliated third parties. All
future transactions, including loans, between the Company and its officers,
directors, principal stockholders and their affiliates will be approved by a
majority of the Board of Directors, including a majority of the independent and
disinterested outside directors on the Board of Directors, and will be on terms
no less favorable to the Company than those that could be obtained from
unaffiliated third parties.

ITEM 13.       EXHIBITS AND REPORTS ON FORM 8-K

      (a)      Exhibits

Exhibit   Exhibit
No.

1.1(4)    Revised Form of Underwriting Agreement by and between the Company and 
          A.S. Goldmen & Co., Inc.

1.2(4)    Revised Form of Underwriter's Warrant Agreement, including form of
          specimen certificate for Underwriter's Warrant.

3.1(2)    Certificate of Incorporation of the Company.

3.2(2)    By-Laws of the Company.

4.1(3)    Form of Specimen certificate for shares of Common Stock.


                                       15

<PAGE>

4.2(4)    Revised Form of Redeemable Warrant Agreement by and between the
          Company and Continental Stock Transfer & Trust Company, including a
          form of specimen certificate for the Redeemable Warrants.

10.1(3)   Form of Financial Advisory and Consulting Agreement by and between the
          Company and the Underwriter.

10.2(2)   Employment Agreement by and between the Company and Dr. Hanoch Shalit.

10.3(1)   Employment Agreement by and between the Company and Lawrence
          Kollender.

10.4(4)   Employment Agreement by and between the Company and James A. Smith.

10.5(3)   License Agreement by and between the Company and Dr. Hanoch Shalit as 
          amended

10.6(3)   Form of Indemnification Agreement entered into with officers and
          directors.

10.7(2)   Lease for the Company's principal offices located at 150 E. 58th 
          Street, New York, NY 10155.

10.8(3)   Form of Stock Option Plan.

10.9(5)   Acquisition Agreement dated as of September 10, 1997, as amended 
          between the Company and Dr. Hanoch Shalit.

10.10     Employment Agreement by and between the Company and Simon A. Cross.

16.1(3)   Letter from Present, Cohen, Smallowitz & Glassman regarding change in
          certifying accountants.

(1)   Incorporated by reference to the corresponding exhibit to the Company's
      Registration Statement on Form SB-2, Registration No. 333-3589, dated May
      13, 1996.

(2)   Incorporated by reference to the corresponding exhibit to the Company's
      Registration Statement on Form SB-2, Registration No. 333-3589, dated May
      13, 1996 and Amendment No. 1 to the Company's Registration Statement on
      Form SB-2, Registration No.
      333-3589, dated June 24, 1996.

(3)   Incorporated  by reference to the  corresponding  exhibit to Amendment 
      No. 1 to the Company's  Registration  Statement on Form SB-2, Registration
      No. 333-3589, dated June 24, 1996.

(4)   Incorporated  by reference to the  corresponding  exhibit to Amendment 
      No. 3 to the Company's  Registration  Statement on Form SB-2, Registration
      No. 333-3589, dated October 11, 1996.

(5)   Incorporated  by reference to Exhibit (c) to the Schedule  13E-3,  dated 
      November 6, 1997, as amended on November 26, 1997 and March 4, 1998.



                                       16
<PAGE>



                                   SIGNATURES

      In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.


                                  IMATEC, LTD.



Date: April 16, 1998               By:/s/ Hanoch Shalit
                                     -----------------
                                     Hanoch Shalit
                                     Chairman of the Board of Directors, 
                                     President, and Chief Executive Officer

      In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.

<TABLE>
<CAPTION>
       Name                                        Title                              Date
<S>                                            <C>                                     <C>
/s/ Hanoch Shalit                      Chairman of the Board of Directors,        April 16, 1998
-----------------                      President and Chief Executive Officer
   Hanoch Shalit                       

/s/ James A. Smith                     Chief Financial Officer                    April 16, 1998
------------------
   James A. Smith

/s/ Steven Ai                          Director                                   April 16, 1998
-------------
    Steven Ai

/s/ Neal Factor                        Director                                   April 16, 1998
---------------
    Neal Factor

/s/ Simon Cross                        Director                                   April 16, 1998
---------------
    Simon Cross 
</TABLE>


                                       17
<PAGE>

                                  IMATEC, LTD.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                              FINANCIAL STATEMENTS



                                      INDEX

INDEPENDENT AUDITORS' REPORT                                   F-2     
                                                                    
BALANCE SHEET - December 31, 1996 and 1997                     F-3 
                                                               
STATEMENT OF OPERATIONS - November 17, 1988 (Inception)        F-4
to December 31, 1997 (Cumulative) and years ended             
December 31, 1996 and 1997                                           
                                                                  
STATEMENT OF STOCKHOLDERS' (DEFICIT) EQUITY - November         F-5
17, 1988 (Inception) to December 31, 1997                          
                                                                 
STATEMENT OF CASH FLOWS - November 17, 1988 (Inception)        F-6
to December 31, 1997 (Cumulative) and years ended                
December 31, 1996 and 1997                                      
                                                                      
NOTES TO FINANCIAL STATEMENTS                                  F-7 - F-12






                                      F-1


<PAGE>

Stockholders and Board of Directors                             January 29, 1998
Imatec, Ltd.                                                   (February 13, and
New York, New York                                                March 9, 1998,
                                                                  as to Note 12)

                          INDEPENDENT AUDITORS' REPORT

    We have audited the accompanying balance sheet of Imatec, Ltd. (A
Development Stage Enterprise) as of December 31, 1996 and 1997, and the related
statements of operations, stockholders' (deficit) equity, and cash flows for the
years ended December 31, 1996 and 1997 and November 17, 1988 (Inception) to
December 31, 1997 (Cumulative). 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 audit.

    We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 Imatec, Ltd. (A Development
Stage Enterprise), as of December 31, 1996 and 1997, and the results of its
operations and its cash flows for the years ended December 31, 1996 and 1997 and
November 17, 1988 (Inception) to December 31, 1997(Cumulative) in conformity
with generally accepted accounting principles.


                                               /s/ Most Horowitz & Company, LLP
                                               ---------------------------------
                                                   Most Horowitz & Company, LLP

New York, New York




                                      F-2


<PAGE>


                                  IMATEC, LTD.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                                  BALANCE SHEET
<TABLE>
<CAPTION>
                                                                                          December 31
                                                                             ----------------------------------

                                                     ASSETS

                                                                                  1996                 1997
                                                                                  ----                 ----
<S>                                                                             <C>                   <C>
CURRENT ASSETS

   Cash (Note 4)                                                             $    510,713          $     98,015

   Marketable Securities (Note 5)                                               4,702,315             3,726,004

   Other Current Assets                                                           144,613                21,126
                                                                                  -------                ------

       TOTAL CURRENT ASSETS                                                     5,357,641             3,845,145

FIXED ASSETS (net of accumulated depreciation of $12,803 and                      117,596                93,902
 $43,017 at December 31, 1996 and 1997, respectively)

DEPOSIT                                                                            17,920                17,920
                                                                                  -------               -------

       TOTAL ASSETS                                                          $  5,493,157          $  3,956,967
                                                                             ============          ============

                                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES

   Accounts Payable and Accrued Expenses                                     $     96,326          $     67,736
                                                                             ------------          ------------

       TOTAL LIABILITIES                                                           96,326                67,736
                                                                             ------------          ------------

COMMITMENTS AND CONTINGENCY (Notes 8, 9 and 11)

STOCKHOLDERS' EQUITY (Note 3)

   Preferred Stock, $.0001 par value; authorized - 2,000,000 shares;
     issued and outstanding - none

   Common Stock, $.0001 par value; authorized - 20,000,000 shares;                    373                   373
     issued and outstanding -- 3,735,201 in 1996 and
     1997

   Additional paid-in capital                                                   8,749,185             8,749,185

   Deficit accumulated during the development stage                            (3,352,727)           (4,860,327)
                                                                             ------------          ------------ 

       TOTAL STOCKHOLDERS' EQUITY                                               5,396,831             3,889,231
                                                                             ------------          ------------ 

       TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                            $  5,493,157          $  3,956,967
                                                                             ============          ============ 
</TABLE>

                        See notes to financial statements

                                      F-3
<PAGE>


                                  IMATEC, LTD.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                             STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
                                                       Years Ended December 31,                          
                                                       ------------------------            November 17, 1988         
                                                                                             (Inception) to         
                                                                                           December 31, 1997                
                                                         1996                 1997            (Cumulative)   
                                                         ----                 ----            ------------
<S>                                                     <C>                    <C>               <C>
 INCOME-consulting fees                                                                     $      133,973
                                                                                            --------------

 EXPENSES

    Royalties (Note 8)                            $     (144,084)     $     (150,675)             (714,759)

    Research and development                            (137,970)            (66,695)             (542,054)

    General and administrative                          (920,705)         (1,513,797)           (3,033,115)
                                                  ---------------     ---------------       ---------------

           TOTAL EXPENSES                             (1,202,759)         (1,731,167)           (4,289,928)
                                                  ---------------     ---------------       ---------------

           LOSS FROM OPERATIONS                       (1,202,759)         (1,731,167)           (4,155,955)

 INTEREST AND AMORTIZATION                            
     AND WRITE-OFF OF DISCOUNT AND DEBT
     ISSUANCE COSTS (Note 3)                          (2,138,804)                               (2,211,400)
                                                      
 INTEREST INCOME                                         104,233             223,567               342,316
                                                  --------------      --------------        --------------

           LOSS BEFORE EXTRAORDINARY INCOME           (3,237,330)         (1,507,600)           (6,025,039)

 EXTRAORDINARY INCOME FROM FORGIVENESS OF         
     INDEBTEDNESS                                      1,164,712                                 1,164,712     
                                                  --------------      --------------        --------------
           NET LOSS                               $   (2,072,618)     $   (1,507,600)       $   (4,860,327)
                                                  ===============     ===============       ===============

 AVERAGE NUMBER OF COMMON                         
     SHARES OUTSTANDING (Note 2)                       4,415,123           5,295,201             4,423,669
                                                  ===============     ===============       ===============
                                                  
 LOSS PER COMMON SHARE
    Loss before extraordinary income                      $(0.73)             $(0.28)               $(1.36)

    Extraordinary Income                                    0.26                                      0.26
                                                          -------             -------               -------
           NET LOSS                                       $(0.47)             $(0.28)               $(1.10)
                                                          =======             =======               =======
</TABLE>

                        See Notes to financial statements

                                      F-4
<PAGE>

                                  IMATEC, LTD.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                   STATEMENT OF STOCKHOLDERS' (DEFICIT) EQUITY
               NOVEMBER 17, 1988 (INCEPTION) TO DECEMBER 31, 1997

<TABLE>
<CAPTION>
                                                                                               Deficit  
                                                                                             Accumulated
                                                  Common Stock             Additional         During the
                                              ----------------------        Paid-In          Development
                                              Shares          Amount        Capital             Stage             Total
                                              ------          ------        -------             -----             ------
<S>                                           <C>            <C>           <C>               <C>               <C>
Issuance of shares                           1,105,000        $111         $      889                          $      1,000
Contribution of shares                         (82,875)         (8)                 8
Issuance of shares                              55,250           5            499,995                               500,000
Issuance of shares                              27,625           3                 (3)
Contribution of shares                         (12,615)         (1)                 1
Issuance of shares                              12,615           1            114,223                               114,224
Net loss for the period inception
   to December 31, 1994                                                                       $ (617,515)          (617,515)
                                          ------------        ----         ----------         ----------         ----------
     Balance - December 31, 1994             1,105,000         111            615,113           (617,515)            (2,291)
                                                                                                            
Issuance of shares                           1,105,000         110                                                      110
Issuance of shares and warrants                                                                             
   in bridge financing                         262,091          26            714,156                               714,182
Expenses of bridge financing                                                 (136,188)                             (136,188)
Net loss for the year ended                                                                                 
  December 31, 1995                                                                             (662,594)          (662,594)
                                          ------------        ----         ----------        -----------         ----------
     Balance - December 31, 1995             2,472,091         247          1,193,081         (1,280,109)           (86,781)
                                                                                                            
Cancellation of shares of                                                                                   
   bridge financing                             (6,897)         (1)           (16,973)                              (16,974)
Issuance of shares and warrants                                                                             
   in bridge financing                         296,591          30            808,152                               808,182
Expenses of bridge financing                                                 (118,535)                             (118,535)
Issuance of shares and warrants                                                                             
   in public offering                        1,000,000         100          6,149,950                             6,150,050
Expenses of public offering                                                (1,367,163)                           (1,367,163)
Cancellation of shares of                                                                                   
   bridge financing restructuring             (551,785)        (56)                                                     (56)
Issuance of shares in bridge                                                                                
   financing restructuring                     525,201          53          2,100,673                             2,100,726
Net loss for the year ended                                                                                 
   December 31, 1996                                                                          (2,072,618)        (2,072,618)
                                          ------------        ----         ----------         ----------         ----------
     Balance - December 31, 1996             3,735,201         373          8,749,185         (3,352,727)         5,396,831
                                                                                                            
Net Loss for the year ended                                                                                 
   December 31, 1997                                                                          (1,507,600)        (1,507,600)
                                          ------------        ----         ----------         ----------         ----------
                                                                                                            
     Balance - December 31, 1997             3,735,201        $373         $8,749,185        ($4,860,327)        $3,889,231
                                          ============        ====         ==========         ==========         ==========
</TABLE>                                                                        

                        See notes to financial statements

                                      F-5
<PAGE>


                                  IMATEC, LTD.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                             STATEMENT OF CASH FLOWS 
<TABLE>
<CAPTION>
                                                                                                        November 17, 1988
                                                                                                          (Inception) to
                                                                                                         December 31, 1997
                                                                        Years Ended December 31,           (Cumulative)
                                                                     -----------------------------       -----------------
                                                                        1996               1997
                                                                        ----               ----
<S>                                                                   <C>              <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES                                 ($2,072,618)     ($1,507,600)         ($4,860,327)
  Net loss
  Adjustments to reconcile net loss to net cash used in
    operating activities
  Amortization and write-off of discount and debt issuance             
    costs                                                              1,862,343                             1,914,490
  Depreciation and other amortization                                     12,803           24,317               37,977
  Net loss on disposal of fixed assets                                                      5,932                5,932
  Forgiveness of indebtedness                                         (1,164,712)                           (1,164,712) 
  Increase (decrease) in cash flows from                                
     Other current assets                                               (134,898)         123,487,             (21,126) 
     Deposit                                                             (17,920)                              (17,920) 
     Accounts payable and accrued expenses                               (26,026)         (28,590)             358,119
                                                                     -----------      -----------          ----------- 

      NET CASH USED IN OPERATING ACTIVITIES                           (1,541,028)      (1,382,454)          (3,747,567)
                                                                     -----------      -----------          ----------- 

CASH FLOWS FROM INVESTING ACTIVITIES                                  
  Proceeds from sales of marketable securities                         5,723,823        4,702,315            6,750,134
  Investments in marketable securities                                (9,075,287)      (3,726,004)         (10,476,139) 
  Purchases of fixed assets                                             (130,399)         (11,968)            (142,979) 
  Other                                                                                     5,413                5,413 
                                                                     -----------      -----------          ----------- 
      NET CASH (USED IN) PROVIDED BY INVESTMENT ACTIVITIES            (3,481,863)         969,756           (3,863,571) 
                                                                     -----------      -----------          ----------- 
CASH FLOWS FROM FINANCING ACTIVITIES                                   
  Proceeds from public offering (net of conversion of bridge notes
    payable and accrued interest of $1,960,671 and expenses of
    $1,367,163)                                                        4,782,887                             4,782,887
  Proceeds from bridge financing (net of expenses of $305,434 and      
    exchange notes payable of $50,000)                                 1,794,566                             3,211,177
  Proceeds from issuance of common stock                                                                       615,334 
  Proceeds from other notes payable                                                                            175,000 
  Payment of notes payable                                            (1,075,000)                           (1,075,000) 
  Payment of organization costs                                                                                   (245)
                                                                     -----------      -----------          ----------- 

      NET CASH PROVIDED BY FINANCING ACTIVITIES                        5,502,453                             7,709,153 
                                                                     -----------      -----------          ----------- 
      INCREASE (DECREASE) IN CASH                                        479,562         (412,698)              98,015 

CASH - beginning                                                          31,151          510,713
                                                                     -----------      -----------          -----------

CASH - ending                                                         $  510,713       $   98,015           $   98,015
                                                                     ===========      ===========          =========== 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                     
  Cash paid for income taxes                                          $    4,670       $    4,383           $   12,797
                                                                      ==========       ==========           ========== 
  Cash paid for interest                                              $    3,573             NONE           $    6,818
                                                                      ==========       ==========           ========== 
</TABLE>

                        See notes to financial statements

                                      F-6
<PAGE>

                                  IMATEC, LTD.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                          NOTES TO FINANCIAL STATEMENTS


1.    LINE OF BUSINESS

      Imatec, Ltd. (Company) was incorporated on November 17, 1988 to develop,
design, market and license image reproduction and enhancement products. The
Company has been in the development stage since its inception.


2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      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.

      Marketable Securities

     Marketable securities have been classified as available-for-sale and
recorded at fair value.

      Fixed Assets

      Fixed assets, consisting of office equipment and furniture, were stated at
cost and are being depreciated on the straight-line method over the estimated
useful lives of the assets of three to seven years.

      Debt Issuance Costs and Discounts

      Debt issuance costs on the Bridge Notes (Note 3) have been capitalized and
were amortized on the straight-line method over the term of the notes payable.

      Discounts on the Bridge Notes were amortized on the interest method over
the term of the notes payable.

      Patents

      Patent costs have been charged to operations as incurred as their
realizability was uncertain and were included in research and development
expenses. Effective January 1, 1996, the Company adopted SFAS No. 121
(Accounting for the Impairment of Long-Lived Assets), without material effect.

      Research and Development Costs and Royalty Expenses

      Research and development costs and royalty expenses (Note 8) have been
charged to operations as incurred.

      Advertising Costs

      Advertising costs have been charged to operations as incurred and were
included in general and administrative expenses. For the years ended December
31, 1996 and 1997, advertising costs were $202,167 and $1,666, respectively.

      Loss Per Share

      Loss per share was computed based on the weighted average number of common
shares and common share equivalents outstanding during the year. All shares and
per share amounts have been retroactively restated to reflect the reverse stock

                                      F-7
<PAGE>

split on May 2, 1995, and the stock split on October 19, 1995. The 1,105,000
shares issued in May 1995 and the shares and warrants issued in the Bridge
Financing (Note 3) have been treated as outstanding for all periods in
calculating loss per common share because such shares were issued at prices
below the public offering price (Note 3).

      Fully-dilutive loss per common share has not been presented because it was
anti-dilutive. Effective February 1997, the Company adopted SFAS No.128
"Earnings Per Share" without material effect.


3.    CAPITALIZATION

      Issuance of Common Stock

      On December 1, 1988, the Company issued 1,105,000 shares for $1,000. On
September 20, 1991, a stockholder contributed 82,875 shares to the Company and
the Company reissued 55,250 shares of common stock for $500,000 and 27,625
shares in exchange for assistance with raising equity. Also in 1991, the
stockholder gave 102,300 shares of common stock of the Company for assistance
with raising equity for the Company. The Company valued the 27,625 and 102,300
shares at $25,000 and $92,580, respectively, the values of the consulting
services and charged additional paid-in-capital.

      During 1994, two stockholders contributed 12,615 shares to the Company and
the Company reissued the shares for $114,224, including the capitalization of a
loan payable.

      On May 30, 1995, the Company issued 1,105,000 shares of common stock in
exchange for $110. Had the private placement not been fully sold, the Company
could have reacquired up to the total of these shares for $110.

      Reverse Stock Split

      On May 2, 1995, the Company had a one-for-four reverse stock split. All
shares and per share amounts have been retroactively restated to reflect the
reverse stock split.

      Reincorporation

      On September 20, 1995, the Company reincorporated in Delaware, authorizing
20,000,000 shares of $.0001 par value common stock and 2,000,000 shares of
$.0001 par value preferred stock.

      Stock Split

      On October 19, 1995, the Company authorized a 22,100 for 1 stock split and
issued 2,210,000 shares of new common stock in exchange for 100 shares of old
common stock. All shares and per share amounts have been retroactively restated
to reflect the stock split.

      Bridge Financing

      On November 30, 1995 and April 12, 1996, the Company had closings under a
private placement. Under the private placement, the Company issued 10%
promissory notes in the aggregate principal amount of $1,900,000 and $2,100,000
(Bridge Notes), 262,091 and 289,694 shares of common stock and warrants to
purchase 1,900,000 and 2,100,000 shares of common stock (Bridge Warrants),
respectively. The Company has allocated $2, per share, and $.10, per warrant, of
the proceeds of the private placement to the common stock and warrants, the
values of the shares and warrants at the dates of issuance.

      In February 1996, an investor in one unit of the first closing was
refunded $50,000, the notes, shares, and warrants were canceled and then all
were resold in the second closing. The cancellation has been included net in the
second closing amounts.

                                      F-8
<PAGE>

      The Company received net proceeds from the private placement of
$1,517,834 and $1,811,635, respectively, after disbursements of:

                                       November 30, 1995         April 12, 1996
                                       -----------------         --------------


  Commission                                $ 190,000             $ 210,000
  Non-accountable expense allowance            57,000                63,000
  Other expenses of placement agent            10,166                15,365
  Exchanges of notes payable                  125,000                50,000
                                              -------                ------

                                            $ 382,166              $338,365
                                             ========              ========

      In addition, the Company incurred additional expenses of $101,223 under
the first closing and $23,569 under the second closing. Total expenses of the
private placement have been allocated between the Bridge Notes and common stock.

      Each Bridge Warrant was exercisable at $1, per warrant, commencing a year
from closing for a period of five years. Upon the public offering, each Bridge
Warrant was exchanged for a Redeemable Warrant.

      Bridge Financing Restructuring

      In October 1996, the Company restructured the Bridge Financing.
Accordingly, upon the public offering, all investors in the Bridge Financing
chose either to: (A) convert the principal amount of their Bridge Note plus all
accrued interest into shares of common stock, at $4, per share, return all the
common stock received in the Bridge Financing and exchange their Bridge Warrants
for redeemable warrants or (B) receive a cash payment equal to 50% of the
principal amount of their Bridge Notes, not receive any accrued interest and
return all the shares of common stock and Bridge Warrants that they received in
the Bridge Financing. One investor representing $50,000 of the Bridge Notes,
6,897 of the Bridge shares and 50,000 of the Bridge Warrants, did not advise the
Company whether he will choose option A or option B. This investor was deemed to
have chosen option A by the Company.

      Consequently, the Company converted $1,950,000 principal amount of Bridge
Notes and $150,672 of accrued interest thereon into 525,201 shares of common
stock and repaid $1,025,000 of principal amount of Bridge Notes. In addition,
all 551,785 shares of common stock and the balance of 2,050,000 Bridge Warrants
issued in the Bridge Financing were returned to the Company and 1,950,000 of
Bridge Warrants were exchanged for Redeemable Warrants upon the closing of the
public offering. As a result of the restructuring, the Company wrote-off
unamortized loan discount of $726,602 and deferred loan costs of $167,593 and
the recognized forgiveness of indebtedness income of $1,164,712.

      Public Offering

      On November 1, 1996 the Company completed a public offering of 1,000,000
shares of common stock, at $5, per share, and 4,000,000 redeemable warrants, at
$.25, per warrant (Redeemable Warrant). Each redeemable warrant is exercisable
to purchase one share of common stock at $6.50, per share, through October 1999.
The redeemable warrants are redeemable by the Company under certain
circumstances, at $.10, per warrant, commencing nine months from the date of the
offering. In addition, the Company granted the underwriter an overallotment
option for 45 days from the date of the offering to purchase up to an additional
150,000 shares of common stock and an additional 600,000 Redeemable Warrants, of
which all the Redeemable Warrants were sold.

                                      F-9
<PAGE>

      The underwriter of the public offering received a discount of 10% and
non-accountable expense allowance equal to 3% of the gross proceeds of the
public offering. The Company also retained the underwriter as a financial
consultant for a period of two years for $48,000, paid upon closing of the
public offering. In addition, the Company sold to the underwriter, for nominal
consideration, warrants (Underwriter's Warrants) to purchase 100,000 shares of
common stock and 400,000 Redeemable Warrants. The Underwriter's Warrants are
exercisable at prices of $6.00 and $.30, per share, and, per Redeemable Warrant,
respectively, for a period of four years commencing one year from the date of
the offering. The Redeemable Warrants underlying the Underwriter's Warrants are
exercisable at a price of $8.125, per share of common stock.

      The Company received net proceeds from the public offering of $4,782,887
after disbursements of:

             Underwriter's discount                                   $  615,000
             Professional fees                                           374,128
             Underwriter's non-accountable expense allowance             184,500
             Printing expenses                                           113,304
             Blue sky fees                                                59,713
             Other expenses of underwriter                                14,800
             Other                                                         5,718
                                                                     -----------
                                                                      $1,367,163
                                                                     ===========

      Stock Option Plan

      In February 1996, the Company adopted a nonqualified stock option plan
under which it may grant up to 500,000 shares of common stock. The Company may
not grant any options with a purchase price less than fair market value of the
common stock as of the date of the grant. Through December 31, 1997, the Company
had not granted any options under the Plan.

      Reserved Shares

      As of December 31, 1997, the Company has reserved the following shares of
common stock:

             Redeemable warrants                                       6,550,000
             Underwriter's warrants                                      500,000
             Stock option plan                                           500,000
                                                                      ----------
                                                                       7,550,000
                                                                      ==========


4.    CONCENTRATION OF CASH

      The Company from time to time has cash in financial institutions in
excess of insured limits. In assessing its risk, the Company's policy is to
maintain funds only with reputable financial institutions.


5.    MARKETABLE SECURITIES

      As of December 31, 1996 and December 31, 1997, the fair value of
marketable securities, which approximated unamortized cost, were as follows:

                                               1996                     1997
                                            -------------            -----------
      
      Money Market Mutual Fund                                       $ 3,726,004
      U.S. Treasury Bill                    $   3,638,426                 
      U.S. Government Money Market Fund         1,063,889            
                                            -------------            -----------
                                            $   4,702,315            $ 3,726,004
                                            =============            ===========

                                      F-10
<PAGE>

6.    INCOME TAXES

      As of December 31, 1996 and 1997, the tax effects of timing differences
between financial statement and income tax reporting were as follows:

                                                      December 31,
                                         --------------------------------------
                                             1996                      1997
                                         -----------               -----------

    Research and development costs       $   190,000               $   215,000
    Net operating loss carryforward        1,120,000                 1,700,000
                                           ---------                 ---------
                                           1,310,000                 1,915,000
    Valuation allowance                   (1,310,000)               (1,915,000)
                                           ---------                 ---------
                                              None                      None
                                           =========                 =========

      As of December 31, 1997, the Company has net operating loss
carryforwards available to reduce future taxable income of approximately 
$4,300,000 expiring through 2012.


7.    RELATED PARTY TRANSACTIONS

      During the years ended December 31, 1996 and 1997, a director was paid
attorney's fees of $63,093 and $93,962, respectively. During the year ended
December 31, 1997, a relative of a stockholder/officer was paid a consulting fee
of $20,160.


8.    LICENSE AGREEMENT

      The Company is committed under a license from a stockholder/officer
(President, Chief Executive Officer and Chairman of the Board) of the Company to
make, use, sell and otherwise exploit certain technologies under patents (Note
12), including future technologies. The Company paid the stockholder/officer a
non-refundable advance royalty of $350,000 in January 1996 and, commencing July
1, 1995, an annual royalty of $140,000. If the stockholder/officer ceases to be
employed by the Company, the annual royalty increases to $250,000. The annual
royalty shall increase at the rate of 5%, per annum. The license agreement shall
end when the last patent expires.


9.    EMPLOYMENT AGREEMENTS

      The Company is committed under an employment agreement with a
stockholder to be President, Chief Executive Officer and Chairman of the Board
of Directors expiring on the earlier of July 1, 2000, the Company being no
longer involved in the technology business or a bankruptcy, merger or
reorganization of the Company. Compensation under the agreement shall be
$60,000, per year, 5% annual increases and a bonus equal to 1% of annual sales.
In addition, the employee shall receive director's and officer's liability
insurance, an automobile lease up to $8,400, per year, disability insurance for
60% of salary through age 65, Company paid disability of 40% of salary for one
year and a life insurance policy of $1,000,000.

      Effective September 24, 1996, the Company entered into an employment
agreement with a Chief Financial Officer expiring September 23, 2001. The
agreement provides for annual compensation of $95,000. As of December 31, 1997,
the Agreement was terminated.

                                      F-11
<PAGE>

10.   PROFIT-SHARING PLAN

      The Company has a discretionary, defined-contribution profit-sharing
plan covering all of its eligible employees. The Company made no contributions
for the years ended December 31, 1996 and 1997.


11.   COMMITMENT AND CONTINGENCY
      
      Lease

      Effective February 1996, the Company entered into a noncancellable
lease for office space through January 1999, requiring minimum rent plus
additional rent for increases in real estate taxes and operating expenses. The
lease is guaranteed by a stockholder/officer.

      As of December 31, 1997, the future minimum aggregate annual payments
under the lease were as follows:

      Years Ending                 
      December 31,                 
      ------------                 
          1998                                           $  77,034 
          1999                                              11,006 
                                                         --------- 
                                                         $  88,040 
                                                         ========= 
                                                         
      For the years ended December 31, 1996 and 1997, rent expense was
$63,038 and $70,104.

     Litigation

     In November 1997, two shareholders commenced an action against the Company,
alleging breaches of certain obligations related to raising of funds, and are
seeking $3,000,000. The Company intends to vigorously defend against this
action.

12.   SUBSEQUENT EVENT

     On February 13, 1998, the Company filed a patent infringement complaint for
$1.1 billion against Apple Computer Corp. (Apple), alleging infringement on all
the Company's patents (Note 8). On March 9, 1998, Apple counterclaimed, alleging
the patents are invalid. If the patents are held invalid, the Company's patents 
may be deemed worthless and the Company may still be required to continue 
royalty payments.



                                      F-12