<PAGE>

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

                                   FORM 10-KSB

(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, 1998

[ ]      TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
         ACT OF 1934 For the transition period from ____ to ____ .

                     -----------------------------------------
                         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
                    -----------------------------------------
                                      None

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

                               Title of each class
                    -----------------------------------------
                     Common Stock, par value $.01 per share
                              Share Purchase Rights

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 common equity stock held by
non-affiliates, computed based upon the average bid and ask price on March 25,
1999, is $3,034,850.

The number of outstanding shares of Common Stock, par value $.01 per share, of
the Registrant as of March 26, 1999 was 3,735,201 shares.

Transitional small business disclosure format (check one) Yes [ ] No [X]


                                    
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                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

         The Company was incorporated 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 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.

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
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.

                                       1

<PAGE>

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.

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.

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 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 $66,695 and $15,114 in research and development
activities during the year ended December 31, 1997, and 1998, respectively.

                                        2

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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 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
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.
                                        3

<PAGE>

         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.

         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.

         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."

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.

                                       4
<PAGE>

EMPLOYEES

         As of December 31, 1998, 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 a chief financial
officer, 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

         (a) 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. Such lease expires on January 31,
1999. The lease was extended to July 31, 1999, at $6,912 per month. The company
subleases 1,536 square feet of its office space for $5000 per month.

         (b) Investment Policies
             Not applicable.

         (c) Description of real estate and operating data
             Not applicable.

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.

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

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 $ .01 per share (the "Common Stock) of the
Company commenced trading on the NASDAQ NATIONAL Market on October 29, 1996
under the symbol "IMEC" . In June, 1998, the Company was delisted from the
NASDAQ National Market for failure to meet the listing requirements. The Company
is currently listed on the OTC Bulletin Board. The following table sets forth,
for the periods indicated, the high and low sales prices for the Common Stock

--------------------------------------------------------------------------------
                                  1998                           1997
--------------------------------------------------------------------------------
       Period              High            Low           High           Low
--------------------------------------------------------------------------------
First quarter             $ 1.063        $ 0.250       $ 6.500        $ 3.000
--------------------------------------------------------------------------------
Second Quarter              0.750          0.250         3.375          0.313
--------------------------------------------------------------------------------
Third Quarter               1.750          0.250         0.875          0.250
--------------------------------------------------------------------------------
Fourth Quarter              0.938          0.313         0.750          0.125
--------------------------------------------------------------------------------

          On March 25, 1999, the closing sale price of the Common Stock was
$0.8125.

         As of December 31, 1998, there were 333 holders of record and 748 
Beneficial Holders of the Common Stock.
                                        5

<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. The Company is
currently involved in significant patent litigation against Apple Computer
Corp., as discussed in item 1 herein. The Company believes, based upon its
internal budgets, that its available cash resources will be sufficient for the
Company to (i) 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, and (iii)
to conduct its operations at least through the year ending December 31, 1999;
however, the Company has no plans to pursue its business plan until the
resolution of its patent litigation. The Company does not intend to utilize any
cash resources towards research and development or the purchase and/or sale of
any significant equipment. In addition, the Company does not anticipate any
significant change in its number of employees.

YEAR 2000 COMPLIANCE

          Many currently installed computer systems and software products are
unable to distinguish between twentieth century dates and twenty-first century
dates. As a result, many companies' software and computer systems may need to be
upgraded or replaced to comply with such "Year 2000" requirements. Imatec's
business is dependent on the operations of numerous systems that could
potentially be impacted by Year 2000 related problems.
Those systems include, among others:

         The internal systems of Imatec's customers and suppliers,

         The hardware and software systems used by Imatec in the management of 
         its business, and

         Non-information technology systems and services used by Imatec in its
         business, such as telephone systems and building systems.

         Imatec has internally reviewed the proprietary software systems used in
the management of its business. Although Imatec believes that its systems are
designed to be Year 2000 compliant, Imatec uses third-party equipment and
software that may not be Year 2000 compliant. Failure of such third-party or
currently owned equipment or software to operate properly with regard to the
Year 2000 and thereafter could require Imatec to incur unanticipated expenses to
remedy any problems. Management does not believe that these expenses would have
a material adverse impact on its business, prospects, financial condition and
results of operations. Management does not believe that its expenditures to
upgrade its internal systems and applications have been material to its
business, prospects, financial condition and results of operations.

          Imatec does not presently have a contingency plan for handling Year
2000 problems that are not detected and corrected prior to their occurrence. Any
failure of Imatec to address any unforeseen Year 2000 issues could adversely
impact its business, prospects, financial condition and results of operations.

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, 1997 and 1998 the Company had an accumulated
stockholders' deficit of $4,860,327 and $5,636,986 respectively. The Company has
continued to incur losses since December 31, 1998.

         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).

                                       6
<PAGE>

         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 part, in
November 1996 with a portion of the net proceeds of the initial public offering
of securities of the Company (the "Initial Public Offering"), (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 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
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.

                                        7

<PAGE>

         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, 1999, 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, 1998, the Company had net operating loss
carryforwards under Section 172 of the Internal Revenue Code, as amended (the
"Code"), of approximately $5,050,000 for Federal income tax purposes which may
be used to offset future taxable income through 2013.

ITEM 7.  FINANCIAL STATEMENTS

         See Page F-1 hereof for the Financial Statements.


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.

      Name               Age                 Position Held
      ----               ---                 -------------
Dr. Hanoch Shalit         45                 Chairman of the Board of Directors,
                                             President, Chief Executive Officer,
                                             and Secretary

Steven Ai                 44                 Director

Simon Cross               47                 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 A.S. Goldman, the
underwriter of the Initial Public Offering (the "Underwriter") that, for the
period terminating on October 29, 2001, that it will use its best efforts to
cause one individual designated by the Underwriter, 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 have not received 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 
known as University of Westminster) in Great Britain in 1978 and a Ph.D. in
Physics from the University of London in 1981.

                                       8
<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.

         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. Mr.
Weiss resigned as director of the Company in January, 1998.

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
member of the Audit Committee is Mr. Ai . The Audit Committee did
not meet during the year ended December 31, 1998.

         The Compensation Committee reviews executive compensation issues. The
members of the Compensation Committee are Messrs. Cross and Shalit. The
Compensation Committee met once during the year ended December 31, 1998.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

          Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors, executive officers and persons or entities who
own more than 10% of the Company's Common Stock to file initial reports of
beneficial ownership and reports of changes in beneficial ownership of the
Company's Common Stock with the Securities and Exchange Commission. Such persons
or entities are also required by SEC regulations to furnish the Company with
copies of all reports that they file under Section 16(a). To the Company's
knowledge, all Section 16(a) filing requirements applicable to such persons or
entities were complied with in 1998, with the exception of Mr. Ai, who failed to
file a Form 4 reporting a sale of Common Stock.

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,
1996, 1997 and 1998 of the Chief Executive Officer of the Company and of each
executive officer of the Company whose annual compensation in 1998 exceeded
$100,000.

                                        9

<PAGE>

                                         SUMMARY COMPENSATION TABLE
                                             Annual Compensation
<TABLE>
<CAPTION>

                               Annual Compensation                         Long Term Compensation
                     ----------------------------------------- -----------------------------------------------
                                                    Other      Long Term              Incentive
Name and Principal                                 Annual        Stock      Options     Plan        Other
     Position        Year    Salary     Bonus   Compensation    Award(s)      SARs     Payouts   Compensation
------------------   ----   ---------- -------  ------------   ----------   -------   ---------  ------------- 
<S>                  <C>    <C>        <C>      <C>             <C>         <C>       <C>          <C>                    
Dr. Hanoch Shalit    1998   $67,804(1)  $ 0(2)        -            -           -         -            -
Chairman of the      1997   $64,575       -           -            -           -         -            -
Board of Directors,  1996   $61,500       -           -            -           -         -            - 
Chief Executive
Officer and 
Secretary
--------------------------------------------------------------------------------------------------------------
Simon Cross          1998        $0       -           -            -           -         -            -
Vice President-      1997  $112,981       -           -            -           -         -            -
Marketing and        1996        $0       -           -            -           -         -            -
Sales
</TABLE>

(1) Pursuant to his employment agreement, Dr. Shalit's salary is payable at the 
    rate of $60,000 per calendar year. 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 willful disloyalty to the Company.

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

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.

                                       10
<PAGE>

      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.

      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.

       At April 1, 1999, 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, 1998, 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.

                                       11

<PAGE>
<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

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

Steven Ai (2)...............................               36,833(3)                      1.0

Simon Cross(2)............................                      0                           0

Yoram Yosifov(2)..................                        297,000                         8.0

Officers and directors as a group                         872,010                        23.3
(3 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.

(3)  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.

ITEM 12.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         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.

      Management believes that each of the transactions 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.


                                       12

<PAGE>

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

      (a) Exhibits

Exhibit  No.
------------
 3.1(1)         Certificate of Incorporation of the Company.

 3.2(1)         By-Laws of the Company.

 4.1(2)         Form of Specimen certificate for shares of Common Stock.

 4.2(3)         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.

 4.3(4)         Rights Agreement, effective as of August 17, 1998, between the
                Company and Continental Stock Transfer and Trust Company.

10.1(2)         Form of Financial Advisory and Consulting Agreement by and
                between the Company and the Underwriter.

10.2(1)(5)      Employment Agreement by and between the Company and Dr. Hanoch 
                Shalit.

10.5(2)         License Agreement by and between the Company and Dr. Hanoch 
                Shalit as amended

10.6(2)         Form of Indemnification Agreement entered into with officers
                and directors.

10.7(1)         Lease for the Company's principal offices located at 150 E.
                58th Street, New York, NY 10155. As amended.

10.8(2)(5)      Form of Stock Option Plan.


(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 and Amendment No. 1 to the Company's Registration Statement on Form
    SB-2, Registration No. 333-3589, dated June 24, 1996.

(2) 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.

(3) 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.

(4) Incorporated by reference to the Company's Form 8-A dated September 16,1998.

(5) Indicates management contract or compensatory plan or arrangement.

                                       13
<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 14, 1999                              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.

        Name                           Title                           Date
        ----                           -----                           ----
/s/ Hanoch Shalit        Chairman of the Board of Directors,      April 14, 1999
-----------------        President, Chief Executive
    Hanoch Shalit        and Financial Officer
   

/s/ Steven Ai            Director                                 April 14, 1999
-----------------
    Steven Ai


/s/ Simon Cross          Director                                 April 14, 1999
-----------------
    Simon Cross




                                       14


<PAGE>


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



                                      INDEX

INDEPENDENT AUDITORS' REPORT                                                F-2

BALANCE SHEET - December 31, 1997 and 1998                                  F-3

STATEMENT OF OPERATIONS                                                     F-4
November 17, 1988 (Inception) to December 31, 1998 (Cumulative)
and years ended December 31, 1997 and 1998

STATEMENT OF STOCKHOLDERS' (DEFICIT) EQUITY -
November 17, 1988 (inception) to December 31, 1998                          F-5

STATEMENT OF CASH FLOWS - November 17, 1988 (Inception)                     F-6
to December 31, 1998 (Cumulative) and years ended 
December 31, 1997 and 1998

NOTES TO FINANCIAL STATEMENTS                                         F-7 - F-12






                                       F-1


<PAGE>


Stockholders and Board of Directors                            February 19, 1999
Imatec, Ltd.
New York, New York


                          INDEPENDENT AUDITORS' REPORT

    We have audited the accompanying balance sheet of Imatec, Ltd. (A
Development Stage Enterprise) as of December 31, 1997 and 1998, and the related
statements of operations, Stockholders' (deficit) equity and cash flows for the
years ended December 31, 1997 and 1998 and November 17, 1988 (Inception) to
December 31, 1998 (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, 1997 and 1998, and the results of its
operations and its cash flows for the years ended December 31, 1997 and 1998 and
November 17, 1988 (Inception) to December 31, 1998(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                                         1997              1998
                                                                         -----------       -----------
<S>                                                                     <C>               <C> 
Current Assets
      Cash (Note 4)                                                      $   98,015        $   13,086
      Marketable Securities (Note 5)                                      3,726,004         3,039,372
      Other Current Assets                                                   21,126            50,272
                                                                         ----------        ----------
      Total Current Assets                                                3,845,145         3,102,730

FIXED ASSETS (net of accumulated depreciation
      of $43,017 and $ 61,629 at December 31,
      1997 and 1998, respectively)                                           93,902            74,602
DEPOSIT                                                                      17.920            17,920
                                                                         ----------        ----------
TOTAL ASSETS                                                             $3,956,967        $3,195,252
                                                                         ==========        ==========

              LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
      Accounts Payable and Accrued Expenses                              $   67,736        $   82,680
                                                                         ----------        ----------
TOTAL LIABILITIES                                                            67,736            82,680
                                                                         ----------        ----------

COMMITMENTS AND CONTINGENCIES (Notes 7,8 and 10)

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; issued and outstanding -
        3,735,201 at December 31, 1997 and 1998                                 373               373
      Additional paid-in capital                                          8,749,185         8,749,185
      Deficit accumulated during the development stage                   (4,860,327)       (5,636,986)
                                                                         ----------        ----------
TOTAL STOCKHOLDERS' EQUITY                                                3,889,231         3,112,572
                                                                         ----------        ----------
                       TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY        $3,956,967        $3,195,252
                                                                         ==========        ==========
</TABLE>

                 See accompanying notes to financial statements.

                                       F-3


<PAGE>



                                  IMATEC, LTD.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                             STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
                                                                                                   November 17,  
                                                               Years Ended December 31,          1988 (Inception)
                                                             -----------------------------        to December 31
                                                                 1997              1998          1998 (Cumulative)
                                                             ------------      -----------       -----------------
<S>                                                          <C>               <C>                 <C>        
INCOME - consulting fees                                                                              $   133,973
                                                                                                      -----------
EXPENSES
      Royalties (Note 7)                                     $  (150,675)      $ (158,209)               (872,968)
      Research and Development                                   (66,695)         (15,114)               (557,168)
      General and administrative                              (1,513,797)        (776,659)             (3,809,774)
                                                             -----------       ----------             -----------
TOTAL EXPENSES                                                (1,731,167)        (949,982)             (5,239,910)
                                                             -----------       ----------             -----------
LOSS FROM OPERATIONS                                          (1,731,167)        (949,982)             (5,105,937)

INTEREST AND AMORTIZATION AND
      WRITE-OFF OF DISCOUNT AND
      DEBT ISSUANCE COSTS (Note 3)                                                                     (2,211,400)
INTEREST INCOME                                                  223,567          173,323                 515,639
                                                             -----------       ----------             -----------
LOSS BEFORE EXTRAORDINARY INCOME                              (1,507,600)        (776,659)             (6,801,698)
EXTRAORDINARY INCOME FROM
      FORGIVENESS OF DEBT                                                                               1,164,712
                                                             -----------       ----------             -----------
NET LOSS                                                     $(1,507,600)      $ (776,659)            $(5,636,986)
                                                             ===========       ==========             ===========

Average number of common shares outstanding (Note 2)           5,295,201        5,295,201               4,510,088
                                                             ===========       ==========             ===========

Loss per common share:
      Loss before extraordinary income                            ($0.28)          ($0.15)                 ($1.51)
      Extraordinary income                                                                                   0.26
                                                             -----------       ----------             -----------
Net Loss per common share                                         ($0.28)          ($0.15)                 ($1.25)
                                                             ===========       ==========             ===========
</TABLE>

                 See accompanying 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, 1998
<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                                   0
Issuance of shares                               55,250              5         499,995                             500,000
Issuance of shares                               27,625              3              (3)                                  0
Contribution of shares                          (12,615)            (1)              1                                   0
Issuance of shares                               12,615              1         114,223                             114,224
Net loss for the period inception
  to December 31, 1994                                                                       $  (617,515)         (617,515)
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)
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

Net loss for the year ended
  December 31, 1998                                                                             (776,659)         (776,659)
                                              ---------           ----     -----------       -----------       -----------
Balance - December 31, 1998                   3,735,201           $373     $ 8,749,185       $(5,636,986)      $ 3,112,572
                                              =========           ====     ===========       ===========       ===========

</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)
                                                                    Years Ended December 31,     to December 31,
                                                                   --------------------------          1998
                                                                       1997           1998         (Cumulative)
                                                                   ------------    ----------    ----------------
<S>                                                                <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
    Net Loss                                                       ($1,507,600)    ($776,659)      ($5,636,986)
     Adjustments to reconcile net loss to net cash used in
     Operating activities:
      Amortization and write-off of discount and debt
        issuance costs                                                                               1,914,490
      Depreciation and other amortization                               24,317        20,963            58,940
      Net loss on disposal of fixed assets                               5,932                           5,932
      Forgiveness of indebtedness                                                                   (1,164,712)
      Increase (decrease) in cash flows from:
        Other current assets                                           123,487       (29,146)          (50,272)
        Deposit                                                                                        (17,920)
        Accounts payable and accrued expenses                          (28,590)       14,944           373,063
                                                                   -----------     ---------       -----------
NET CASH USED IN OPERATING ACTIVITIES                               (1,382,454)     (769,898)       (4,517,465)
                                                                   -----------     ---------       -----------
CASH FLOWS FROM INVESTING ACTIVITIES
    Proceeds from sales of marketable securities                     4,702,315       686,632         7,436,766
    Investments in marketable securities                            (3,726,004)                    (10,476,139)
    Purchases of fixed assets                                          (11,968)       (5,443)         (148,422)
    Other                                                                5,413         3,780             9,193
                                                                   -----------     ---------       -----------
NET CASH (USED IN) PROVIDED BY
INVESTMENT ACTIVITIES                                                  969,756       684,969        (3,178,602)
                                                                   -----------     ---------       -----------
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
    Proceeds from bridge financing (net of expenses of
      $305,434 and exchange of notes payable of $50,000)                                             3,211,177
    Proceeds from issuance of common stock                                                             615,334
    Proceeds from other notes payable                                                                  175,000
    Payments of notes payable                                                                       (1,075,000)
    Payment of organization expenses                                                                      (245)
                                                                   -----------     ---------       -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                                            7,709,153
                                                                   -----------     ---------       -----------
INCREASE (DECREASE) IN CASH                                           (412,698)      (84,929)           13,086
CASH - beginning                                                       510,713        98,015
                                                                   -----------     ---------       -----------
CASH - ending                                                          $98,015       $13,086           $13,086
                                                                   ===========     =========       ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
    Cash paid for income taxes                                          $4,383       $20,680           $33,477
                                                                   ===========     =========       ===========
    Cash paid for interest                                                None          None            $6,818
                                                                   ===========     =========       ===========
</TABLE>

                 See accompanying 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 7) 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.

      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
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).

                                       F-7
<PAGE>

      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.

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

                                       F-8

<PAGE>

                                        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.

      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.

                                       F-9
<PAGE>

      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, 1998, the Company
had not granted any options under the Plan.

      Reserved Shares

      As of December 31, 1998, 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, 1997 and December 31, 1998, marketable securities,
which consisted of money market mutual funds, approximated cost.

6.    INCOME TAXES

      As of December 31, 1997 and 1998, the tax effects of timing differences
between financial statement and income tax reporting were as follows:

                                                   December 31,
                                           ---------------------------
                                               1997           1998
                                           ------------   ------------
Research and development costs             $   215,000    $   220,000
Net operating loss carryforward              1,700,000      2,000,000
                                           -----------    -----------
                                             1,915,000      2,220,000
Valuation allowance                         (1,915,000)    (2,220,000)
                                           -----------    -----------
                                                  None           None
                                           ===========    ===========

      As of December 31, 1998, the Company has net operating loss carryforwards
available to reduce future taxable income of approximately $5,050,000 expiring
through 2013.

                                      F-10
<PAGE>

7.    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
10), 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.

8.    EMPLOYMENT AGREEMENT

      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.

9.   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, 1997 and 1998.

10. LITIGATION

     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 7). 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.

11. RELATED PARTY TRANSACTIONS

     During the years ended December 31, 1997 and 1998, a former director was
paid attorney's fees of $93,962 and $34,645, respectively. During the year ended
December 31, 1997, a relative of a stockholder/officer was paid a consulting fee
of $20,160.




                                      F-11