<PAGE>
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC 20549
                                  FORM 10-KSB

(Mark One)
[X]   Annual report pursuant to section 13 or 15(d) of the Securities Exchange
      Act of 1934 for the fiscal year ended JANUARY 3, 1998.
                                            ---------------

[_]   Transition Report pursuant to section 13 or 15(d) of the Securities
      Exchange Act of 1934 for the transition period from ____________ to
      ____________

                       Commission File Number:- 0-27638
                                                -------

                           THE EASTWIND GROUP, INC.
--------------------------------------------------------------------------------
            (Exact name of registrant as specified in its charter)

       DELAWARE                                               23-2732753
--------------------------------------------------------------------------------
     (State or other jurisdiction of                       (I.R.S. Employer
     incorporation or organization)                        Identification No.)

   100 FOUR FALLS CORPORATE CENTER, SUITE 305, WEST CONSHOHOCKEN, PA 19428 
--------------------------------------------------------------------------------
                   (Address of principal executive offices)

                                (610) 828-6860
--------------------------------------------------------------------------------
             (Registrant's telephone number, including area code)

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

                                     None
                              -------------------
                               (Title of Class)


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

                    Common Stock, $.10 par value per share
                    --------------------------------------
                               (Title of Class)


Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.

               Yes   X                                     No ______
                    ---

Based on the closing price on the NASDAQ Small Cap Market on April 16, 1998, the
aggregate market value of the voting stock held by nonaffiliates of the
registrant was $6,856,000.

The number of shares outstanding of the registrant's Common stock, $0.10 par
value, was 3,725,019 at April 16, 1998.

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. [X]

State issuer's revenues for its most recent fiscal year: $ 43,441,000.

                                    Page 1
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                                    PART I
                                    ------


ITEM 1   BUSINESS
------   --------

GENERAL DEVELOPMENT OF BUSINESS
-------------------------------

The Eastwind Group, Inc. (the "Company") is a holding company formed in August
1993 to acquire and consolidate middle-market manufacturing businesses on an
industry by industry basis. The Company focuses on the acquisition of entities
that management believes are not performing to potential. Since its inception,
the Company has completed six acquisitions, five of which now comprise the
Company's three operating business segments:

1.   Polychem Corporation ("Polychem), acquired March 10, 1995, develops and
     manufactures engineered plastic molded products for wastewater treatment
     facilities and other industrial uses.

2.   TEAM Graphics, Inc ("TEAM Graphics"), through its subsidiaries Centennial
     Printing Company ("Centennial"), acquired October 16, 1996, Wickersham
     Printing Company ("Wickersham"), acquired January 3, 1997, and Princeton
     Academic Press ("Princeton"), acquired March 10, 1995, is engaged in
     commercial printing, book maufacturing and the printing of journals and
     manuals. Jointly, Wickersham and Princeton do business as Premier Book
     Press ("Premier").

3.   Lavelle Company ("Lavelle"), acquired January 3, 1997, fabricates and
     manufactures sheet metal products for the aerospace industry.

The Company sold its 92.5% ownership interest in Ivy-Tygart Acquisition Corp.
("Ivy") on February 23, 1998. Ivy is engaged in the manufacture of architectural
moulding and picture frame moulding. Ivy was acquired December 31, 1996. Ivy's
operations were treated as discontinued in 1997.

Each of the Company's operating business segments are described in detail below.
On April 13, 1998, the Company decided to close the operations of Premier. These
operations consisted primarily of book manufacturing and the printing of
journals and manuals.

Financial information by industry segment for the years ended January 3, 1998,
December 31, 1996 and 1995, appears in Note Q to the consolidated financial
statements of the Company, which is provided under Item 7 of this Report.

                                    Page 2
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POLYCHEM CORPORATION
--------------------

BACKGROUND
----------

Polychem is a wholly-owned subsidiary of the Company, which was formed in
February 1995 for the purpose of acquiring substantially all of the assets and
business of The Polychem Division of The Budd Company. Polychem develops and
manufactures custom engineered plastic molded products which are marketed
primarily to wastewater treatment plants, as well as to other industrial users.

PRODUCTS
--------

Polychem engineers and produces an extensive line of plastic molded products.
Polychem's typical products include, among others, complete non-metallic
rectangular clarifier component systems for water and wastewater treatment
operations, which are comprised of non-metallic chain, sprockets, stub shafts,
wear shoes and other products fabricated to customer specifications; cast nylon
elevator buckets for the handling of foundry sand, aggregate, and glass cullet;
phenolic sprockets and pulleys for agricultural and mining equipment; bearings
for steel mills; extruded thermoset profiles for aircraft applications; and
molded conveyor chains and accessories for food packaging, water and wastewater
treatment and other material handling applications. Most of the nylon buckets,
steel mill bearings and table-top conveyor chain are sold as off-the-shelf items
to steel mills and distributors. The majority of the balance of Polychem's
products are produced for use in a complete system of wastewater treatment
clarifier equipment which Polychem sells to its customers. The latter category
is sold primarily as a complete system built to customer specifications, which
is usually sold under an order selected from competitive bids. The reaction
injection molded ("RIM") nylon products and the injected molded products account
for approximately 57% of Polychem's sales; compression molded products comprise
the balance of the business.


MANUFACTURING PROCESSES
-----------------------

Polychem's plant is equipped and organized to handle three distinct
manufacturing processes by which its diverse line of products is fabricated:
RIM, which produces cast nylon, is used for buckets, stub shafts, and sprockets;
compression molding, which produces phenolic moldings, is used for steel mill
bearings, timing gears, timing pulleys, and other molded products; and injection
molding, which produces engineered resin parts used for wastewater drive and
collector chain, and table-top conveyor chain.

Polychem's various products are more easily categorized by these three processes
rather than by product type because each of Polychem's many products is created
through only one of the processes. In RIM molding, a compound containing a
catalyst and a compound containing a promoter are mixed in the mold where a
reaction takes place; the combination and percentage of base chemicals and
additives determine the properties of the final product. In the compression
molding process, phenolic macerate or phenolic laminate is placed in heated
molds (approximately 325 degrees) and cured for a specific period of time at
pressures up to 3000 PSI. In injection 

                                    Page 3
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molding, engineered plastic materials are melted and injected into the mold at a
controlled temperature and rate. Once in the mold, the plastic is cooled to a
shape reflecting the cavity.

Polychem's plant is laid out so that each of its manufacturing processes
occupies a separate location. In the Molding Department, products are molded in
batches and then sent to the Fabricating Department as complete orders for
machining and assembly. Raw materials for all of the manufacturing processes are
stored in tanks inside and outside the facility. Polychem's plant operates on a
three-shift basis. Most of the employees are interchangeable and have been
trained to operate all of the various equipment in their departments, which
gives Polychem additional flexibility in scheduling personnel to meet production
needs as they arise.


MARKETING AND CUSTOMERS
-----------------------

Polychem primarily maufactures products designed for the wastewater treatment
market; in 1997 revenues from wastewater products comprised approximately 79% of
Polychem's annual sales volume. The wastewater treatment market is global in
nature, and the Company believes the potential exists for Polychem to expand
into growing markets for such products in Mexico, Central and South America,
Asia, and Eastern Europe.

In addition to non-metallic clarifier component systems for wastewater
treatment, Polychem markets its traditional products (such as plastic chain,
compression molded phenolic and injection molded plastic components,
RIM-processed nylon buckets, phenolic bearings and corrugated fibre products) to
the food processing, electronics, steel, automotive, chemical, printing,
aerospace, and consumer products industries, among others. Polychem markets its
plastic chain and cast nylon buckets primarily through distributors. The balance
of its products, including its water and wastewater treatment component systems,
are sold through Polychem's sales force and agents. In 1997, Polychem's sales
force generated 63% of its annual sales revenue (55% in 1996), international
distributors accounted for 29% (39% in 1996) and domestic distributors accounted
for 8% (6% in 1996). Domestic revenues were approximately 78% and international
revenues were approximately 22% in 1997, compared to 64% and 36% in 1996,
respectively.


COMPETITION AND STRATEGY
------------------------

Competition with Polychem and its products continues to be fragmented, although
several large companies are beginning to consolidate certain product lines. Many
other companies, domestically and internationally, produce one or more products
similar to Polychem's, but Polychem believes that none of its competitors offer
a similar variety of light-weight plastic products for a variety of industries.
Experienced competition exists in each of Polychem's major markets, and many of
Polychem's competitors enjoy excellent working relationships with their
customers, produce a variety of quality products, and have access to significant
resources. These factors, along with product characteristics, reliability,
servicing, and pricing form the major competitive factors in Polychem's markets.

                                    Page 4
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Polychem has three significant competitors in the area of non-metallic
rectangular wastewater clarifier systems, of which it considers Envirex, a
subsidiary of U.S. Filter, to be the most significant. Polychem believes it
possesses approximately 30% of this market. However, while Polychem provides
products only to clarifier systems in wastewater plants, Envirex has a much
broader line of wastewater treatment products that encompass all of the major
processes in a treatment plant. FMC and NRG are Polychem's other less
substantial (in terms of market share) competitors. As part of the industry
consolidation efforts mentioned above, U.S. Filter has recently purchased FMC's
non-metallic waste water treatment operations. U.S. Filter is significantly
larger than Polychem. Polychem has three competitors in the market for nylon
buckets and five competitors in the market for table-top chains.

Polychem's long-term goals include solidifying its reputation as a leading
provider of quality wastewater treatment equipment products; increasing sales of
its traditional products by improving existing product lines; and seeking new
products to supplement its current line, both from internal research and
development and by acquisition.


MATERIALS AND SUPPLIES
----------------------

Polychem's business of manufacturing a broad line of engineered plastic products
requires the purchase of various raw materials, even in periods of short supply.
Polychem has developed a strong supply network over the past thirty years, and
does not believe the potential for shortages in raw materials exists. At
present, Polychem does not maintain more than one month's supply of raw
materials beyond the amount required for its scheduled production work.


ENVIRONMENTAL REGULATIONS
-------------------------

Polychem does not anticipate any significant expenses for environmental
remediation projects. In the ordinary course of its business, it incurs some
cost for oil reclamation, hauling of waste products and normal energy costs
associated with recycling and waste disposal. Polychem maintains two
environmental permits, one for a dust collection system and the other for its
after burner heater. The collected dust is transported to an approved landfill
and samples of the dust are periodically analyzed. The heater is used to
impregnate phenolic resin into rolls of fabric which are then processed into
specific products. Methanol from the heater is processed through an after burner
and emits little in the way of contaminants. Polychem maintains seven above
ground storage tanks. Two are used to store phenolic resins inside the plant;
two store fuel oil; and three outside tanks are used to store other chemicals.
There are spill containment systems in place throughout the facility.

Occasionally, there are minor and isolated spills of heat transfer oil,
caprolactam and phenolic resins. The latter two quickly solidify at room
temperature and the hardened material is removed to an approved landfill; spills
of heat transfer oil are cleaned and properly disposed of with other waste
products. Polychem has submitted a revised spill prevention and response plan to
the Pennsylvania Department of Environmental Resources in May 1994 to which no
comments have been received as of the date of this filing.

                                    Page 5
<PAGE>
 
The Company believes that the Polychem property in Phoenixville, Pennsylvania
was first used as a silk mill in the early part of this century and then as a
manufacturing site for felt carpet padding. For this reason, the Company
commissioned several environmental audits prior to its acquisition of the
Polychem Division assets, and no contamination was found.


EMPLOYEES
---------

Polychem employs 75 employees, of whom approximately 43 are employed on an
hourly basis. Hourly employees are members of United Textile Workers of America,
AFL-CIO and its affiliate United Food Commercial Workers Local Number 130T (the
"Union"). Most are semi-skilled workers. In October 1996, Polychem renegotiated
its Union contract, which will expire at the end of September 1999. As of the
date of this report, management believes that employee relations are
satisfactory.

Polychem has also renegotiated its defined benefit retirement plan for hourly
rated employees at its Phoenixville, Pennsylvania plant. As of January 3, 1998,
the plan meets ERISA funding requirements; however, there can be no assurances
that market performance of plan investments will be sufficient to meet all plan
liabilities as they arise.

RESEARCH AND DEVELOPMENT
------------------------

Polychem is the owner of a number of United States and foreign patents and
patent applications relating to water treatment plastic products, chain conveyor
links, conveyor chain bearings, sprockets with locking mechanisms and a bucket
grit elevator system. The ownership of such patents helps Polychem from a
marketing standpoint by securing its continued reputation as an innovative
competitor in its industry.

Polychem employs seven (7) application engineers who use CAD equipment to design
custom wastewater treatment non-metallic rectangular clarifier systems or to
alter existing clarifiers to meet changing specification requirements. All new
products are evaluated for patent protection. In 1996, Polychem filed two new
Patent Applications and are awaiting approval. The amounts spent on research and
development by Polychem were $55,000, $173,000 and $100,000 for the years ended
January 3, 1998, December 31, 1996 and 1995, respectively.

                                    Page 6
<PAGE>

TEAM GRAPHICS, INC.
-------------------

BACKGROUND
----------

In January 1997, the Company formed TEAM Graphics, Inc. as the principal entity
for its operations in the printing industry. The Company exchanged a combination
of its investment in Centennial, Princeton and Wickersham, which was acquired in
January 1997, and cash for all of the outstanding stock of TEAM Graphics.

In mid-1997, the operations of Princeton and Wickersham were consolidated under
the trade name Premier Book Press in two rented facilities in Lancaster,
Pennsylvania to eliminate overhead costs associated with running two separate
operations. Hiring and training new employees and implementing the required
management systems and controls at Wickersham to respond to the near doubling in
throughput resulting from the consolidation proved to be highly problematic.
Consequently, productivity fell, quality levels slipped, and delivery schedules
were not met. As a further consequence, market share also declined. During the
second half of 1997, Premier's operations suffered substantial financial losses.
Despite improvements in productivity and the narrowing of losses during the
first quarter of 1998, the Company concluded that it did not have the financial
resources to continue these operations. The Company decided to close the
operations of Premier effective April 13, 1998. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."


PRODUCTS
--------

Centennial's products include annual reports, high-quality advertising
brochures, pamphlets, and high-profile marketing pieces. Premier's products
include manufactured books and manuals for publishers, university presses, and
other information providers, as well as related services involved in managing
the process of creating books and manuals.

                                    Page 7
<PAGE>
 
ACQUISITON
----------

In May 1996, the Company purchased convertible preferred stock of Wickersham for
$250,000. In addition, during 1996 the Company made working capital advances and
earned preferred stock dividends totalling approximately $91,000. In January
1997, the Company entered into an agreement to acquire all of the outstanding
common stock of Wickersham in exchange for 30,000 shares of the Company's Common
stock. The acquisition was accounted for using the purchase method of
accounting.


MARKETING AND CUSTOMERS
-----------------------

Centennial's customer base is primarily comprised of pharmaceutical, financial,
museum, manufacturing, service,and marketing companies, which are located in the
Eastern United States. The majority of Centennial's work consists of
high-quality, multicolor pieces with typical run lengths of approximately 5,000
to 15,000 copies. In 1997, five customers represented 50% of Centennial's
revenue. Centennial's management believes Centennial enjoys a strong
relationship with these customers: however, there is no assurance that these
customers will continue to purchase from Centennial at historical levels.

Premier's customer base is primarily comprised of university presses and
traditional book and journal publishers, which are principally concentrated in
the Northeastern United States. The majority of Premier's products consist of
short to medium run (under 10,000 copies), black and white books, journals and
directories.


COMPETITION AND STRATEGY
------------------------

All phases of TEAM Graphics' business are highly competitive. The printing and
publishing industries are highly fragmented. While most establishments are
relatively small, several of TEAM Graphics' competitors are considerably larger
or are affiliated with companies which are considerably larger and have greater
financial and other resources than both TEAM Graphics and the Company. In recent
years, consolidation of customers and competitors within TEAM Graphics' markets
has increased competitive pricing pressures. Currently, approximately 90% of
TEAM Graphics' projects are competitively bid in the marketplace. The major
competitive factors in TEAM Graphics' business in addition to price are product
quality, delivery, customer service, availability of appropriate printing
capacity, rapid turnaround, scheduling flexibility, and technology support. TEAM
Graphics obtains its customers primarily through its own sales force.

Centennial intends to grow through the purchase of additional printing equipment
and applications of computer technology that will increase its capabilities and,
therefore, its product offerings and also enhance its competitive position
through lower costs.

                                    Page 8
<PAGE>
 
OPERATIONS, MATERIALS AND SUPPLIES
----------------------------------

TEAM Graphics, through Centennial and Premier, offers a broad line of printing
services. Centennial operates five sheet-fed presses (three six-color, one
four-color, and one two-color). These presses are designed to produce high
quality multi-color products such as annual reports and high-profile advertising
brochures, pamphlets and marketing materials. Premier owns four sheet-fed
presses, two web presses, and three Docutechs, available for on-demand printing.
This combination of printing equipment at Premier allows it to serve the varying
black and white printing needs of a broad range of book and manual publishers,
university presses, and other information providers. In addition, Premier owns
folding equipment and a perfect binder that allow it to deliver a finished
product produced entirely in-house for many of its customers.

TEAM Graphics purchases paper, film, plate materials, cover stock and ink from
outside suppliers. Because these items are readily available from a large number
of suppliers, TEAM Graphics maintains a minimal inventory of raw materials. The
duration of the average job varies from two to six weeks, resulting in the need
to support work-in-process inventory as large as two weeks' sales.

TEAM Graphics' overall business is not subject to predictable seasonal
fluctuations other than the heavy load of corporate annual reports in the
March-April timeframe at Centennial.


ENVIRONMENTAL REGULATIONS
-------------------------

Management believes that TEAM Graphics' operations comply in all material
respects with applicable federal, state and local environmental laws and
regulations. Because all of TEAM Graphics' film development and ink processes
are closed systems in which potentially hazardous substances are recycled or
stored for proper disposal in accordance with existing law, it does not
anticipate incurring any significant expenditures in order to comply with such
laws and regulations that would have a material impact on capital expenditures,
earnings or competitive position. In addition, TEAM Graphics normally utilizes
soy-based inks to lessen any potential adverse environmental conditions. The
Company is unaware of investigations, audits or threatened actions related to
environmental matters within the last five years, nor is it aware of any ongoing
investigations, audits or threatened actions related to environmental matters
which occurred prior to that period.


EMPLOYEES
---------

As of January 3, 1998, TEAM Graphics had 252 employees with 133 employed by
Centennial and 119 employed by Premier. Both Centennial and Premier use part-
time workers throughout the year in peak periods of production. With the
exception of the pressroom at Premier, all employees of TEAM Graphics are non-
union. Twenty pressmen at Premier are members of the Graphics Communications
Union, Local 160C and are covered by an agreement that expires in November 2001.

                                    Page 9
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LAVELLE COMPANY
---------------

BACKGROUND
----------

Lavelle Company is a wholly-owned subsidiary of the Company, which was acquired
on January 3, 1997. Lavelle was incorporated in March 1996 to purchase the net
assets of Lavelle Aircraft Company which was liquidated under Chapter 11 of the
US Bankruptcy Law. Lavelle is a manufacturer of sheet metal products for the
aerospace industry.

ACQUISITION
-----------

In March 1996, the Company invested $450,000 in Lavelle in the form of a
subordinated debenture. In addition, the Company made advances to Lavelle for
working capital purposes and guaranteed certain equipment debt of Lavelle. In
January 1997, the Company acquired all of the outstanding common stock of
Lavelle in exchange for 44,537 shares of the Company's common stock and the
forgiveness of certain receivables due from Lavelle.


PRODUCTS
--------

Lavelle fabricates and manufactures sheet metal products according to design
criteria established by its customers in the aerospace industry. In general, the
products manufactured by Lavelle are in low volume quantities. Because of the
tooling and specialty raw material requirements associated with Lavelle's work,
long lead times from order placement to delivery are normal.


MANUFACTURING PROCESSES
-----------------------

Lavelle is a custom job shop specializing in sheet metal manufacturing and
forming. To that end, it employs a wide variety of specialized equipment.
Inclusive within its facilities are hot and cold expansion forming equipment,
fusion and resistance welding capabilities, and various automated machine tools
in addition to various punches, breaks and shears. In order to meet customers'
specialized quality requirements, Lavelle maintains a wide variety of
non-destructive testing and measuring equipment including a Cordax Coordinate
Measuring Machine (CMM), a 160 KV X-ray machine and Zyglo equipment in addition
to routine measuring, testing, and analyzing equipment.


MARKETING AND CUSTOMERS
-----------------------

Lavelle's customer base consists of the United States Government, who purchases
products used in defense applications, and contractors and subcontractors in the
aerospace industry, who purchase products used in the commercial and defense
segments of the aerospace industry. Approximately 50% of Lavelle's sales in 1997
were to the US Government and one other customer. Most of Lavelle's sales result
from the efforts of its in-house sales force, although some contracts are sold
through sales agents who earn commissions on the sales.

                                    Page 10
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COMPETITION AND STRATEGY
------------------------

Lavelle's business is highly competitive and highly fragmented. Competitors in
the industry attempt to differentiate themselves on the basis of their
manufacturing capabilities. Smaller companies such as Lavelle tend to have niche
manufacturing capabilities, resulting in these companies supplying products as
subcontractors to much larger firms. Large competitors have broader
manufacturing capabilities than does Lavelle, allowing them to offer customers a
wider array of services and products which results in a competitive advantage.
Much of Lavelle's work is awarded through competitive bid processes. A history
of on time delivery is important and can overcome small price premiums. Because
the applications for Lavelle' products are primarily aerospace, Lavelle's
ability to meet its customers' quality control requirements is critical.
Lavelle's quality control procedures and manufacturing processes are certified
with their customers, resulting in an advantage relative to some of its
competitors.


MATERIALS AND SUPPLIES
----------------------

Lavelle specializes in a wide variety of custom materials obtained specifically
for individual orders. These materials are generally certified by the
manufacturer and approved by Lavelle's quality department. As these materials
are usually applicable only to the job for which they are ordered, inventories
beyond immediate requirements are not often maintained. Materials and supplies 
are readily obtained from several potential suppliers.


ENVIRONMENTAL REGULATIONS
-------------------------

Management believes that Lavelle's operations comply in all material respects
with applicable federal, state and local environmental laws and regulations.
During 1997, Lavelle successfully completed both Phase I and Phase II
environmental audits in conjunction with its purchase of its manufacturing
facility in January 1998. Wherever possible, Lavelle utilizes environmentally
safe, water-based solvents and fluids. Where applicable, all waste products are
properly manifested to licensed disposal facilities.


EMPLOYEES
---------

Lavelle is non-union and has a total employment of 50 full time employees. There
are, at present, no retirement plans.


RESEARCH AND DEVELOPMENT
------------------------

Lavelle does not perform any research and development activities.


DISCONTINUED OPERATIONS -- IVY-TYGART ACQUISITION CORPORATION
-------------------------------------------------------------

BACKGROUND
----------

Ivy was a majority-owned (92.5%) subsidiary of the Company, which was formed in
October 1996 for the purpose of acquiring substantially all of the assets of
Tygart Moulding Corp. On February 23, 1998, the Company sold its 92.5% ownership
in Ivy to an investment group that included Ivy's President. The Company
received $377,000 in cash, $377,000 in a short term (30 day) note, which has
been paid, and $397,000 in a three year note, which was sold at face value to an
officer of the Company for cash.

                                    Page 11
<PAGE>
 
ITEM 2   PROPERTY
------   --------

POLYCHEM PROPERTY AND EQUIPMENT
-------------------------------

Polychem operates from a 220,000 square foot facility in Phoenixville,
Pennsylvania, which it owns, subject to a mortgage with Congress Financial Corp.
Polychem uses approximately 120,000 square feet for manufacturing and
warehousing, and 20,000 square feet for offices. Polychem leases approximately
41,500 square feet of its facility as warehouse space to a wholesale distributor
of imported outdoor furniture. The lease continues until December 1999 at a
rental rate of $124,000 per year, net of utilities. Polychem leases an
additional 7,200 square feet of the facility on a month to month lease at the
rate of $36,000 per year. An additional 25,000 square feet of warehouse space is
available for lease at the facility.

Polychem either owns or leases, through capital leases, all of the equipment
required to conduct its business. The equipment is comprised of compression
molding presses, transfer molding presses, injection molding presses, reactors,
dispensers and RIM press lines for nylon-6 operations, a complete fabrication
shop with state of the art computerized numerical control equipment and a
computer aided design center. Polychem capital expenditures were $150,000,
$177,000 and $41,000 in 1997, 1996 and 1995, respectively, nearly all of which
were funded by capital leases. In 1998, capital expenditures are expected to be
approximately $300,000. Polychem considers its equipment to be in good operating
condition and adequate for its present needs, as well as near term expanded
business volume.

Management believes that all of Polychem's real and personal property is
adequately covered by insurance.

TEAM GRAPHICS PROPERTY AND EQUIPMENT
------------------------------------

Centennial's operations are housed in a facility in King of Prussia,
Pennsylvania comprised of approximately 50,000 square feet, which it leases. The
term of the lease extends until June 30, 2002 at a rate of $5.65 per square foot
(excluding electric) through December 1999 and $6.35 per square foot (excluding
electric) for the remaining term. Centennial considers its plant to be well
maintained and suitable for the purpose intended.

Centennial's products are manufactured on equipment which, in most cases, is
leased by Centennial, because computers and electronic printing systems are
subject to more rapid obsolescence. Capital expenditures in 1997 were $151,000.
In 1998, capital expenditures are expected to approximate $150,000, which are
anticipated to be funded by capital leases. Centennial considers its equipment
to be in good operating condition and adequate for its present needs, as well as
near term expanded business volume.

Premier's operations are housed in two leased facilities in Lancaster,
Pennsylvania. One facility, housing the primary operations of the business, is
located in a 50,000 square foot building including 14,000 square feet of office
space. Annual rental is approximately $126,000 per year. The second facility
houses the business's on-demand printing equipment and storage space, and
consists of approximately 27,000 square feet. Annual rental is $124,000 per
year.

Premier's capital expenditures in 1997 were $137,000. Because the business was
shut down in April 1998, capital expenditures for Premier are expected to be
immaterial in 1998.

In connection with the shut down of Premier, the Company expects to dispose of
Premier's property and equipment. The Company expects there to be no significant
loss on disposal versus the recorded amount of such property and equipment.

Management believes that all of TEAM Graphics' real and personal property is
adequately covered by insurance.

                                    Page 12
<PAGE>
 
LAVELLE PROPERTY AND EQUIPMENT
------------------------------

Lavelle owns and operates an approximate 100,000 square foot facility on eight
acres in Northeast Philadelphia, PA, subject to a mortgage of $1.7 million. The
facility is comprised of 12,000 square feet of office space with the balance
being shop floor and mezzanine storage area. During 1997 the facility was leased
from its predecessor, Lavelle Aircraft Company. This facility was subsequently
acquired by Lavelle in January 1998.

Lavelle leases all of its equipment through a sale/lease back arrangement with
Quaker State Financial Corporation. All equipment is maintained in excellent
operating condition and deemed adequate for immediate manufacturing
requirements.

Management believes that all of Lavelle's real and personal property are
adequately covered by insurance.


ITEM 3   LEGAL PROCEEDINGS
------   -----------------

CENTENNIAL
---------

Centennial, through its ultimate parent, The Eastwind Group, Inc., instituted a
Demand for Arbitration with the American Arbitration Association on March 31,
1997 against the former owner of Centennial pursuant to the indemnification
provisions of the Amended and Restated Agreement and Plan of Merger by and
between Centennial, the Company, and Centennial Acquisition Corp. (a transitory
subsidiary of the Company used to effect the acquisition of Centennial from the
former owner). The Demand for Arbitration asserts various theories of recovery,
including the matters referred to in the paragraph below, and seeks damages of
at least $4.5 million. Prior to the formal arbitration proceedings, the Company
received an offer of settlement from the former owner, which would relieve the
Company of (1) the obligation to pay the former owner $191,312 over the next two
years; (2) any obligation relating to the Series B Preferred stock, including
all accrued dividends; and (3) any responsibility for market price support on
the Company's Common Stock. Also, as part of the settlement, the Company would
issue 45,000 additional shares of its Common Stock to the former owner. While
settlement discussions continue, the settlement agreement has not been
executed. The Company was recently advised that the Commonwealth of Pennsylvania
has initiated a criminal investigation into the failure of Centennial to file 
and pay sales taxes attributable to periods predating its acquisition of the 
Company, but the Company has been advised by the investigator that neither it, 
Centennial, nor any current employee of the Company is the target of such 
investigation.

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

None

                                    Page 13
<PAGE>
 
ITEM 5   MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER 
------   ----------------------------------------------------------------
         MATTERS
         -------

The Company's Common stock is currently traded on the Nasdaq SmallCap Market,
under the symbol EWND. Prior to its listing on the Nasdaq SmallCap Market on
May 28, 1996, the Company's Common Stock traded on the Nasdaq Electronic
Bulletin Board, under the symbol EWND. The following table sets forth, for the
periods indicated, the range of high and low bid prices of the Common Stock of
the Company as reported by Nasdaq, with respect to the period during which the
Company's Common Stock was traded on the Nasdaq SmallCap Market and, prior to
that, by the National Quotations Bureau. The quotations reported by the National
Quotations Bureau represent prices between dealers and do not include retail
markups, markdowns, or commissions, and do not necessarily represent actual
transactions. The number of holders of record of the Company's Common Stock as
of April 4, 1998 was approximately 1,800.

The market price per share by quarter was:

<TABLE> 
<CAPTION> 
            Three months ended        High              Low
            ------------------        ----              ---
            <S>                       <C>               <C> 
            March 31, 1996            $ 9               $ 6 1/2
            June 30, 1996             $11 1/2           $10
            September 30, 1996        $11 1/4           $ 7 29/32
            December 31, 1996         $ 8 15/16         $ 4 1/2
            March 29, 1997            $ 7               $ 4 3/4
            June 28, 1997             $ 5 9/16          $ 3 11/16
            September 27, 1997        $ 5 3/16          $ 3 3/8
            January 3, 1998           $ 4 1/2           $ 2 7/16
            April 4, 1998             $ 2 7/8           $ 1 3/4
</TABLE> 

The Company has not paid any cash dividends to date, and does not anticipate or
contemplate paying cash dividends in the foreseeable future. Moreover, payment
of dividends are limited or prohibited under certain restrictions in the loan
agreements of its subsidiaries, which would be necessary to provide the cash for
any such dividends. It is the present intention of management to utilize all
earnings from operations for working capital of the Company.

By letter dated February 26, 1998, the Company was notified by the Nasdaq Stock
Market, Inc. that according to its records the Company was not in compliance
with the requirements of its Marketplace Rules, which became effective on
February 23, 1998, and therefore the Company's securities were scheduled for
delisting effective at the close of business on March 16, 1998. However, it was
further provided that the Company could request a temporary exception to the new
requirements by sending a hearing request prior to the close of business on
March 13, 1998, which was in fact done on March 4, 1998, indicating that the
Company would make a written submission on or before March 27, 1998 supporting
its position that its securities should not be delisted. The Company made such a
written submission in a timely fashion. On April 14, 1998, the Nasdaq Stock
Market notified the Company that it was not in agreement with its position. The
Company will request an oral hearing expected to be scheduled in late May
1998 or early June 1998, which will stay the delisting process until a final
determination thereafter by the Nasdaq Stock Market.

If the Company's appeal is unsuccessful, its Common Stock will be delisted from
the Nasdaq SmallCap Market. Trading, if any, in the Company's Common Stock would
thereafter be conducted on the Nasdaq Electronic Bulletin Board which could
substantially reduce the liquidity and the market for the Company's Common
Stock and consequently, could adversely affect the trading price of such Common
Stock.

Between March 10, 1995 and March 31, 1995, the Company sold 295,750 shares of
its Common Stock to eight investors in private placements exempt from
registration under the Securities Act of 1933, pursuant to Section 4(2) thereof,
for cash or services (either for investment banking services, as an inducement
for an officer to join the Company in the nature of a signing bonus or as
inducements for bridge financing loans), which resulted in cash consideration
received in the aggregate of $400,000. These investors were Sector Associates,
Ltd. (200,000 shares), FAC Enterprises, Inc. (49,000 shares), Andrew Panzo
(10,000 shares), Mitchell K. Posner (9,500 shares), William B. Miller (10,000
shares), Centaur Financial Corp. (7,500 shares), Rozel International Holdings,
Ltd. (6,000 shares) and HST Partners (3,750 shares).

On March 10, 1995, the Company issued a total of 220,000 shares of Common Stock
to Graeme B. Frazier, IV (66,000 shares), Robert N. Spahr (22,000 shares), Paul
A. DeJuliis (66,000 shares) and John R. Thach (66,000 shares), in exchange for
all of the issued and outstanding shares of Princeton Academic Press through a
share exchange with DTF Media, Inc., which in turn distributed such shares to
the four DTF Media stockholders. The issuance of these shares was exempt as a
private placement pursuant to Section 4(2) of the Securities Act of 1933, as
amended.

Between March 10 and March 31, 1995, the Company issued a total of 1,252,500
Class A-1, Class A, Class B, Class C and Class D Common Stock purchase warrants
at varying exercise prices ranging from $4.00 to $8.00 per share to nine
investors in exchange for acquisition related services performed for the benefit
of the Company, or as an inducement for bridge investment loans, or as a bonus
to an employee of an operating subsidiary for the performance of services or in
the nature of a signing bonus to induce an individual to assume the position of
an officer of the Company. The Company received an additional $240,000 in cash
for a portion of these warrants issued. The investors who received such warrants
were Paul A. DeJuliis (250,000 Class A-1 Warrants), John R. Thach (250,000 Class
A-1 Warrants), Sector Associates, Ltd. (250,000 Class A Warrants, 187,500 Class
B Warrants and 250,000 Class C Warrants), Graeme B. Frazier, IV (25,000 Class A-
1 Warrants), William B. Miller (25,000 Class A-1 Warrants), FAC Enterprises,
Inc. (12,000 Class D Warrants), Centaur Financial Corp. (10,000 Class D
Warrants), Rozel International Holdings, Ltd. (8,000 Class D Warrants) and HST
Partners (5,000 Class D Warrants). The issuance of these shares was exempt as a
private placement pursuant to Section 4(2) of the Securities Act of 1933, as
amended.

On December 29, 1995, the Company issued a total of 35,000 shares of Common
Stock to four investors in cancellation of outstanding debt owed by the Company
to these investors totaling $175,000 of principal amount, all of which were
exempt from registration under Section 4(2) of the Securities Act of 1933, as
amended. These investors were Rozel International Holdings, Ltd. (8,000 shares),
Centaur Financial Corp. (10,000 shares), FAC Enterprises, Inc. (12,000 shares)
and HST Partners (5,000 shares).

On May 20, 1996, the Company issued 1,000 shares of its Series A Preferred Stock
together with 220,000 Common Stock purchase warrants to Odyssey Capital Group,
L.P. in exchange for $1,000,000 cash for the preferred shares and $220 for the
warrants, which had an exercise price of $6.00 per share.

On June 14, 1996, the Company sold 200,000 units of securities, each unit
consisting of one share of Common Stock and Common Stock purchase warrants for
one and one-quarter shares to Clifton Capital Ltd. for cash of $1,200,000. The
warrants had an exercise price of $6.00 per share. The units were issued
pursuant to the private placement exemption in Section 4(2) of the Securities
Act of 1933, as amended.

On June 20, 1996, the Company sold a subordinated debenture having a face amount
of $500,000 together with 80,000 Common Stock purchase warrants to Mentor
Special Situation Fund L.P. for cash consideration of $500,080. The debenture
has a maturity date with respect to one-third of the principal amount on June
30, 1999, another third on June 30, 2000 and the final balance by June 30, 2001.
Interest is at a fixed rate of 12% per annum. The exercise price of the Common
Stock purchase warrants is $6.00 per share. The debenture and warrants were
issued pursuant to the private placement exemption in Section 4(2) of the
Securities Act of 1933, as amended.

On October 7, 1996, the Company issued 30,000 common stock purchase warrants to
Mentor Management Co. in exchange for investment advisory services. The issuance
was exempt from registration under Section 4(2) of the Securities Act of 1933,
as amended. The exercise price of the warrants was $6.00 per share.

On October 7, 1996, the Company issued 100,000 common stock purchase warrants to
American Maple Leaf Financial Corporation in exchange for investment advisory
services. The issuance was exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended. The exercise price of the warrants was $9.00
per share.

On October 17, 1996, the Company issued 182,232 shares of common stock and 9,000
shares of its Series B Preferred Stock to Bruce K. Worrall as consideration for
the acquisition of Centennial Printing Company in a merger transaction, which
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended. In exchange, the Company received all of the
issued and outstanding shares of Centennial Printing Company. The Series B
Preferred Stock carried a 6% cumulative dividend rate and was redeemable in
installments at a stated value of $100 per share upon call by the holder.

On November 4, 1996, the Company issued 22,500 Common Stock purchase warrants to
Equibond S.A. in exchange for investment advisory services. The issuance was
exempt from registration under Section 4(2) of the Securities Act of 1933, as
amended. The exercise price of the warrants was $6.00 per share.

In March, 1997, the Company issued a total of 44,537 shares of Common Stock to
eleven investors in exchange for all of the issued and outstanding common stock
of the Lavelle Company, consisting of 156,700 shares pursuant to a Stock
Exchange Agreement dated as of January, 1997. The following investors received
the following shares of Common Stock pursuant to such Exchange Agreement: C.D.L.
Perkins 4,438 shares; Steven Perkins 4,438 shares; Dorothy P. Gilbert 2,219
shares; Edward H. Merves 4,438 shares; Samuel R. Foster 2,219 shares; John W.
Burrows 4,438 shares; Albert C. Bailey, Jr. 6,508 shares; Michael L. Schlupp
2,839 shares; Patricia Medvic 2,000 shares; Barbara Marks 1,000 shares; and The
Lavelle Charitable Trust 10,000 shares. The issuance of these shares was exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933, as
amended.

On May 9, 1997, the Company issued a total of 30,000 shares of Common Stock to
four individuals, in exchange for all of the 1,280,925 shares of Common Stock of
Wickersham Printing Company then issued and outstanding. The issuance was
pursuant to a Stock Exchange Agreement dated in January 1997 pursuant to which
John Yurchak, Jr. received 25,493 shares, Stephen J. Cooper received 2,576
shares, Arthur R. Dean, Jr. received 1,890 shares and James L. Porter received
41 shares. The issuance was exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended.
 
On March 1, 1997, the Company issued 5,000 Common Stock purchase warrants to
Quaker State Financial Corp. as an inducement for certain lending accommodations
to the Company in connection with equipment purchases, which warrants had an
exercise price of $6.63 per share. The issuance of such warrants was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.

On July 16, 1997, the Company issued 125,000 shares of its Common Stock with
500,000 Common Stock purchase warrants exercisable at $3.00 per share and 
200,000 Common Stock purchase warrants exercisable at $5.00 per share for cash
consideration of $325,000. The Common Stock and Common Stock purchase warrants
were issued to Clifton Capital Ltd. pursuant to an exemption from registration
under Section 4(2) of the Securities Act of 1933, as amended.

On August 20, 1997, the Company issued 45,000 Common Stock purchase warrants to
Canterbury Companies, Inc. in exchange for investment advisory services. The
issuance was exempt from registration under Section 4(2) of the Securities Act
of 1933, as amended. The exercise price of the warrants was $4.00 per share.
    
                                    Page 14
<PAGE>
 
ITEM 6   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
------   -----------------------------------------------------------------------
         OF OPERATIONS
         -------------

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
---------------------------------------------------------

This Form 10-KSB contains certain forward-looking statements regarding, among
other things, the anticipated financial and operating results of the Company.
For this purpose, forward looking statements are any statements contained herein
that are not statements of historical fact and include, but are not limited to,
those preceded by or that include the words, "believes," "expects,"
"anticipates," or similar expressions. In connection with the "safe harbor"
provisions in the Private Securities Litigation Reform Act of 1995, the Company
is including this cautionary statement identifying important factors that could
cause the Company's actual results to differ materially from those projected in
forward looking statements made by, or on behalf of, the Company. These factors,
many of which are beyond the control of the Company, include the Company's
ability to (i) identify and capitalize on possible acquisition opportunities,
(ii) obtain suitable financing to support its operations, (iii) manage its
growth, (iv) achieve operating efficiencies associated with the acquisitions of
separate businesses, (v) integrate the operation of separate businesses and the
operating subsidiaries' ability to successfully compete in their respective
markets and (vi) realize the savings and liquidity improvements to be 
implemented by the Company and as described under "Consolidated Liquidity of
the Company at January 3, 1998" below. Although the Company believes that the
forward looking statements contained herein are reasonable, it can give no
assurance that the Company's expectations will be met. All forward looking
statements are expressly qualified in their entirety by this Cautionary
Statement.


BACKGROUND AND BASIS OF PRESENTATION
------------------------------------

Although the Company was formed in August 1993, no significant business
operations were conducted until March 10, 1995 when the Company acquired the
shares of Princeton from DTF Media, Inc. and the Company's wholly-owned
subsidiary acquired the assets of the Polychem Division of The Budd Company.

The acquisitions of Princeton, Polychem, Centennial, Ivy, Wickersham and Lavelle
were accounted for using the purchase method of accounting. Under the purchase
method of accounting, the assets of the acquired business are generally valued
at their fair market value on the date of acquisition, with the amount by which
the purchase price differs from the aggregate fair market value of the acquired
assets treated as goodwill or negative goodwill. The results of the operations
of the acquired businesses are included with the results of operations of the
Company beginning on the date of acquisition.

Because the acquired businesses were part of larger operations or were privately
held prior to their acquisition, their results of operations prior to the date
of acquisition may not be indicative in evaluating results of operations which
may be expected in the future.

Effective January 1, 1997, the Company has elected to report its results of
operations on a fifty-two or fifty-three week fiscal year basis. Accordingly,
the first quarter of 1997 contained twelve weeks and four days. Each subsequent
fiscal quarter contained thirteen weeks, except for the final fiscal quarter of
1997, which contained fourteen weeks and ended on January 3, 1998.

                                    Page 15
<PAGE>

 
CONSOLIDATED RESULTS OF OPERATIONS
----------------------------------

Results of Operations are presented for the fiscal years ended January 3, 1998
and December 31, 1996. Results of Operations in fiscal 1997 include the Company
and its six wholly-owned subsidiaries, Princeton, Polychem, Centennial, Ivy,
Wickersham and Lavelle. Wickersham and Lavelle were acquired effective the first
day of business in fiscal 1997. The operations of Ivy, which was acquired as of
the close of business on December 31, 1996, are included in the consolidated
statements of operations as income from discontinued operations, net of income
taxes, as the Company sold all of the outstanding Common stock of Ivy on
February 23, 1998.

The following table sets forth certain statement of operations items as a
percentage of total net sales for the periods indicated:


<TABLE> 
<CAPTION> 
                                                                    FISCAL YEAR ENDED
                                                                    -----------------
                                                             JANUARY 3,                DECEMBER 31,
                                                              1 9 9 8                    1 9 9 6
                                                              -------                    -------
   <S>                                                       <C>                       <C>   
   Net sales                                                  100.0%                     100.0%
   Cost of goods sold                                          83.5                       75.3
                                                              -----                      -----
       Gross Profit                                            16.5                       24.7
   Selling, general  and administrative                        22.4                       20.3
   Asset carrying value adjustment                                                 
     for operations closed after year end                       2.0                        ---
   Contract settlement with former officer                      1.0                        ---
                                                              -----                      -----
   Operating income (loss)                                     (8.9)                       4.4
   Interest expense                                             3.3                        3.0
   Interest and dividend income                                 0.0                        1.0
                                                              -----                      -----
   Income (loss) before income taxes (benefit)                (12.2)                       2.5
   Income taxes (benefit)                                     ( 2.4)                       1.1
                                                              -----                      -----
   Net Income (loss) from continuing operations               (10.2)                       1.3
   Net Income (loss) of Ivy-discontinued operations             0.2                        ---
                                                              -----                      -----
   Net Income (loss)                                          (10.0)%                      1.3%
                                                              =====                      =====
</TABLE> 

Net sales for the fiscal year ended January 3, 1998 were $43,441,000, compared
to $23,633,000 for the prior year. The principal reasons for the significant
increase in net sales in fiscal 1997 versus 1996 were the inclusion of net sales
from Centennial for the entire year versus the period from October 17, 1996 (the
date of acquisition) through December 31, 1996 (an increase of $13,178,000), and
the inclusion of net sales of Wickersham and Lavelle for 1997 of $7,264,000 and
$4,680,000, respectively.

Polychem's net sales decreased 18% in fiscal 1997 versus 1996, principally due
to a decrease in net sales to foreign customers, particularly in the Pacific Rim
market, due to unsettled ecomnomic conditions there.

Net sales for Princeton in fiscal 1997 reflected a decrease of 35% from 1996.
Loss of market share due to production difficulties and competition were the
major contributors to the decline in revenues.

                                    Page 16
<PAGE>
 
Gross profits for fiscal 1997 were 16.5%, fiscal compared to 24.7% in 1996.
Gross profits were $7,184,000 and $5,839,000, for fiscal 1997 and 1996,
respectively. The decrease in gross profits was principally due to two factors.
The first factor is related to revenue mix. The Company had a higher percentage
of printing revenue in fiscal 1997 than in 1996 and printing generally produces
a lower gross margin than fiscal Company's other businesses. The second factor
relates specifically to the performance of the Company's printing operations;
TEAM Graphics' gross profit was 9.8%. Centennial's fiscal 1997 results were
below industry norms primarily due to an unusually soft sales market during the
summer months, during which period Centennial failed to develop revenue adequate
to absorb its substantial fixed manufacturing overhead. Centennial's gross
profit for fiscal 1997 was 15.2%. Premier experienced production and delivery
problems and, accordingly, was barely profitable at the gross profit line.
Polychem's gross profit decreased to 24.6% in 1997 from 29.7% due principally to
fixed manufacturing overhead being spread over fewer units as a result of
Polychem's 18% period to period decline in revenue. Lavelle's gross profit of
34% in fiscal 1997 was in line with expectations and comparable to 1996.

Selling, general and administrative expenses totalled $9,728,000 and $4,795,000
for 1997 and 1996, respectively. The increase in selling, general and
administrative expenses in fiscal 1997 was principally due to the inclusion of
Centennial for an entire year in 1997, versus a shorter period in 1996 (October
17, 1996 through December 31, 1996). This accounted for $2,641,000 of the
increase. The acquisitions of Wickersham and Lavelle added $1,004,000 and
$987,000 to selling, general and administrative expenses, respectively. Due to
the consolidation of Princeton and Wickersham into Premier, Princeton's selling,
general and administrative expenses were reduced by $356,000. Polychem also 
reduced selling, general and administrative expenses by $145,000. Corporate
overhead increased in fiscal 1997 over 1996 by $1,021,000. The principal
components of this increase were additional staffing at headquarters, increased
expenditures for investor relations, costs related to the unconsummated
refinance effort, cost of potential acquisitions which did not come to fruition,
plus significant increases in professional fees as a result of significantly
expanded operations.

By agreement, dated June 20, 1997 and effective July 1, 1997, John R. Thach
resigned from his office as President of the Company and from his position as a
member of the Executive Committee of the Board of Directors. He remained a
Director of the Company until December 1997 when he resigned from that position.
The agreement provides for equal monthly payments through December 1999 in
satisfaction of his employment contract plus a lump sum contingent payment. That
portion that was fixed and determinable ($500,000) has been recorded in the
accompanying financial statements as a $430,137 charge to income in fiscal 1997
at its present value.

Due to continuing operating losses of Premier, the Company decided to close down
the operations of Premier, effective April 13, 1998. At January 3, 1998, the
Company has written off net goodwill related to the Wickersham and Princeton
acquisitions, and recorded valuation allowances on certain assets in the amount
of $900,000.

As stated above, the Company sold all of the outstanding Common stock of Ivy on
February 23, 1998. The net income of Ivy for fiscal 1997 was $102,000,
which is recorded as a separate line item in the Company's statement of
operations for fiscal 1997.

                                    Page 17
<PAGE>
 
Interest expense for fiscal 1997 was $1,459,000 or 3.3% of net sales, 0.3
percentage points higher than 1996. This increase is due to increased borrowings
on lines of credit to continue to fund the Company's consolidated losses.

Interest and dividend income was virtually non-existent in fiscal 1997 versus
$250,000 in 1996. This also occurred as a result of the need to fund the
Company's consolidated losses with previously raised capital.

In fiscal 1997, the Company recorded a federal income tax benefit totalling
$881,000. A component of the benefit is $240,000 recoverable tax, representing
the refund available to the Company by carrying the fiscal 1997 loss back to
1996. In addition, the gain on the 1998 sale of Ivy will be offset by net
operating loss carryovers from fiscal 1997 resulting in an approximate $330,000
benefit. Also, the net deferred tax liability as recorded in the Company's
consolidated balance sheet at December 31, 1996 has been reversed to the extent
of $311,000.

CONSOLIDATED LIQUIDITY OF THE COMPANY AT JANUARY 3, 1998
--------------------------------------------------------

The Company sustained a net loss of $4,350,000 for the fiscal year ended January
3, 1998, which resulted in a net use of cash of $645,000 leaving a cash balance
of $65,000 at January 3, 1998.

Cash used in operating activities in fiscal 1997 was $2,676,000 resulting from
the net loss plus increases in inventory ($321,000), prepaid and recoverable
income taxes ($175,000), other assets ($414,000), net deferred tax benefit
($811,000), and other liabilities ($563,000). These uses of cash were offset by
net depreciation and amortization ($1,778,000), inputed interest ($104,000),
minority interest ($9,000), a net reduction in accounts receivable ($22,000), a
reduction in prepaid expenses ($84,000), an increase in accounts payable
($1,350,000), an increase in accrued expenses ($117,000), and the write down of
assets on operations subsequently closed ($494,000).

Investment activities in fiscal 1997 reflected a use of cash of $272,000 due to
the purchase of property and equipment ($444,000) offset by cash acquired from
acquisitions.

In fiscal 1997, net cash provided by financing activities was $2,303,000,
including net borrowing under lines of credit ($1,807,000), loans from officers
($150,000), net proceeds from the exercise of warrants ($1,542,000), and the
sale of Common stock ($531,000). The cash provided was offset by repayments of
principal in term debt ($638,000) and capital leases ($999,000), and preferred
stock dividends ($90,000).

At January 3, 1998, the Company had a working capital deficit of $3,384,000, a
decrease of $4,870,000 from December 31, 1996. A significant component of the
decrease is the net working capital deficit of Wickersham ($1,333,000 at January
3, 1998) together with the substantial impact of operating losses during fiscal
1997 on current assets.

The Company has no significant capital spending or purchase commitments other
than normal commitments under facility and capital leases. See Item 2
"Property".

The Company's operating subsidiaries are subject to various loan agreements and 
commitments described in "Note I" to the Company's Consolidated Financial 
Statements, and some of these obligations are guaranteed by the Company, 
including in SBA loan agreement (Section 504 Loan Program) in which the 
Company's discontinued Ivy-Tygert operation is the obligor (and as to which the 
Company is the beneficiary of a guarantee from one of the individual purchasers 
of that operation). Recently, the Budd Company gave notice of a nonpayment of 
principal and interest under the Polychem term note payable to the Budd Company,
which amounts were subsequently paid by the Company.

The Company's cash requirements for fiscal 1998 include principal payments on
term loans, capital leases and other debt obligations in the amount of
$2,156,000, as well as accumulated payables and, if its appeal for the abatement
of civil penalties for Centennial's sales tax obligations is not granted, a
significant tax payment to Pennsylvania. Cash flows from operations in fiscal
1998, together with a combination of other financing actions being taken by the
Company, if successful, are expected to provide sufficient cash flow to meet the
Company's obligations.

                                    Page 18
<PAGE>
 
OVERVIEW
--------
As a result of the audit of the Company's financial statements for the fiscal 
year ended January 3, 1998, Grant Thornton LLP has issued a qualified opinion 
related to its doubt about the Company's ability to continue as a going concern.

Significant actions by the Company, which have either taken place to date in
fiscal 1998 or are planned to take place in 1998, to alleviate the concerns of
Grant Thornton are as follows:

1.   The Company has executed a Confidential Private Offering Memorandum for the
      sale of 400,000 shares of its Common stock together with a Stock Purchase
      Warrant for up to 200,000 shares of its Common stock. This offering will
      result in net proceeds to the Company of $470,000, expected in May 1998.

2.   The lender at Polychem has indicated an interest in refinancing Polychem's
      term debt, resulting in net proceeds of approximately $300,000 for
      Polychem's use, expected in April 1998.

3.   The Company will file its 1997 Consolidated Federal Income Tax return by
      April 30, 1998 and, as a result, file for a loss carryback refund to 1996,
      thus recovering $240,000 in federal tax paid for that year.

4.   On February 23, 1998, the Company sold its 92.5% ownership in the
      outstanding Common stock of its subsidiary Ivy for $1,152,250 in cash and
      notes plus intercompany advances. All cash from this transaction
      (including under the notes) was realized as of March 30, 1998. The sale
      resulted in an after tax gain of approximately $698,000.

5.   The Company effectively closed its Premier operations on April 13, 1998 in
      order to avoid continuing losses from this business entity, which
      experienced pre-tax losses of approximately $1,600,000 in fiscal 1997. The
      write down of certain assets and the write off of goodwill resulted in an
      additional $727,000 non-cash pre-tax charge to operations for fiscal 1997.
      The Company currently believes there will be no significant further losses
      related to this closing.

6.   The Centennial Printing subsidiary of Team Graphics, which had pre-tax
      losses of $1,066,000 in fiscal 1997, has operated with positive cash flow
      for the last four months of fiscal 1997 and through the first quarter of
      fiscal 1998.

7.   The operation of other subsidiaries of the Company, Polychem and Lavelle,
      show moderate net losses during the first quarter of fiscal 1998, but
      operated at a positive cash flow. Sales order backlogs are increasing for
      both companies, indicating, based upon required lead times for shipments,
      a profitable second half of fiscal 1998.

8.   The subscription receivable recorded at $762,000 in the Company's balance
      sheet at January 3, 1998 as a reduction of stockholders' equity is
      collateralized by Common Stock in a company which is currently in
      registration with the U.S. Securities and Exchange Commission. Under its
      agreement, the Company is to be listed as a selling shareholder in the
      registration statement. The Company expects to realize this subscription
      receivable within 60 days through the sale of stock, either in the public
      market or by exercising its rights in a put option.

9.   The Company continues to focus on refinancing its lines of credit and term
      debt, principally to realize excess cash available from under-leveraged
      real estate and machinery and equipment. By excluding Premier Book Press
      from the loan request, the Company believes that it can meet the excess
      cash and collateral availability requirements of the lender and close the
      credit facility, which will result in cash proceeds of approximately
      $500,000 in excess of that required to pay off existing debt and lengthen
      the maturity of the Company's term debt.

Other than Items 3, 4, and 5 above, there is no certainty that any or all of
these planned actions will be accomplished, or accomplished in the time frame
described.

                                    Page 19
<PAGE>
 
ITEM 7   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
------   -------------------------------------------

The financial statements required by this Item can be found at pages F-1 to F-32
of this Report.


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

On September 24, 1997, the Company filed a Form 8-K (which was subsequently 
amended on October 17, 1997), reflecting the mutual agreement with Arthur 
Andersen LLP to terminate Authur Andersen as the Company's independent auditors
effective September 26, 1997. On November 6, 1997, the Company filed a Form 8-K
reflecting the appointment of Grant Thornton LLP as the Company's independent
auditors effective October 31, 1997.




                                    Page 20
<PAGE>
 
                                   PART III


ITEM 9   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------   --------------------------------------------------

The present members of the Board of Directors (see below definitions of Director
Classes for terms), their ages and positions with the Company are set forth
below:


<TABLE> 
<CAPTION> 
                               DIRECTOR             POSITIONS WITH
     NAME                       CLASS      AGE      THE COMPANY
     ----                       -----      ---      -----------   
     <S>                        <C>        <C>      <C> 
     Paul A. DeJuliis             I         42       Chairman of the Board of Directors and Chief Executive Officer

     Anthony J. Mendicino         II        50       President, Chief Operating Officer and a Director

     William B. Miller            I         57       Senior Vice President, Chief Financial Officer and a Director

     Bruce P. Murray              II        52       Director

     Andrew Panzo                 III       33       Director

     Edward F. Sager              III       50       Director
</TABLE> 

     Director Class I -- Term expires at Annual Meeting of Stockholders in 2000
     Director Class II -- Term expires at Annual Meeting of Stockholders in 1999
     Director Class III -- Term expires at Annual Meeting of Stockholders in
                           1998


PAUL A. DEJULIIS - CHAIRMAN OF THE BOARD OF DIRECTORS, CHIEF EXECUTIVE OFFICER
------------------------------------------------------------------------------
and a founder of the Company, has experience in strategic planning, mergers and
acquisitions and corporate finance. Prior to assuming his current roles, he was
a partner in Phoenix Management Services, Inc., a turnaround consulting firm
(1989-91). Previously he was Vice-President, Corporate Finance for Colmen & Co.,
a national investment banking firm (1987-89), and Manager, Corporate Turnaround
Consulting Group for Coopers & Lybrand (1986-87). Mr. DeJuliis has a B.S. in
finance and accounting from the University of Delaware. He is also a certified
public accountant.

ANTHONY J. MENDICINO - PRESIDENT, CHIEF OPERATING OFFICER AND A DIRECTOR, was
------------------------------------------------------------------------ 
Senior Vice President, Chief Financial Officer and a director of UTI Energy
Corp., a diversified oilfield service company listed on the American Stock
Exchange, from 1987 through 1996. Prior thereto, since 1981, Mr. Mendicino
served in various capacities for UGI Corporation, initially as Director of
Corporate Development and, from 1984, as Treasurer. He holds a degree in
engineering from Lehigh University and an MBA from the Wharton School of the
University of Pennsylvania.

                                    Page 21
<PAGE>
 
WILLIAM B. MILLER - SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND A
------------------------------------------------------------------------
DIRECTOR, is a certified public accountant and founder, in 1976, of the public
--------
accounting firm of Kreischer, Miller & Co. in Horsham, PA, which he left in
1987. Prior to the formation of that firm, he was with Price Waterhouse in
Philadelphia (1966-71). Mr. Miller also served as Vice President and Treasurer
of WPHL-TV, Inc. in Philadelphia (1971-75); President of Marian Financial
Services Corp. in Philadelphia, the real estate finance affiliate of a private
bank (1987-92); Chief Financial Officer of Worlco, Inc. in King of Prussia, PA
(1990-91), a holding company for an insurance, equipment leasing and commercial
mortgage brokerage companies which filed for bankruptcy in 1993; and President
of Schulmerich Carillons, Inc. in Sellersville, Pennsylvania (1992-94). Mr.
Miller holds an accounting and economics degree from Muhlenberg College.

BRUCE MURRAY - A DIRECTOR, is founder and President of The Bannock Burn Group,
-------------------------
Ltd., a management consulting firm with a national practice specializing in
assisting businesses in transition. Prior to the founding of his firm in 1987,
he was part of a senior operating turnaround team recruited by The Sun Company
to manage Sun Ship in Chester, PA and thereafter part of the senior management
group at Sun Carriers, a trucking subsidiary of the Sun Company. Prior to that,
Mr. Murray was employed by the U.S. Maritime Administration as the on site
representative at the Bath Ironworks in Maine, where he was responsible for
managing the Maritime Administration's interests in major ship construction
contracts. He is a graduate of the United States Merchant Marine Academy and has
a masters degree from Rensselaer Polytechnic Institute. He was formerly Chairman
and a Director of the Board of EA Industries, Inc., the stock of which is traded
on the New York Stock Exchange.

ANDREW PANZO - A DIRECTOR, is the managing director of American Maple Leaf
-------------------------
Financial Corporation ("AMLF") in Bala Cynwyd, Pennsylvania, an investment
banking advisor to the Company which specializes in emerging growth companies.
He is also a director of Sector Associates, Ltd., a publicly-held company. Mr.
Panzo was a director of Florida West Airlines, Inc. from July through December
1993. Mr. Panzo was formerly Executive Vice President of HMA Investments, Inc.,
an investment banking firm at which he managed certain diversified securities
investments. He is formerly an associate with Venture Partners, Ltd., of
Middletown, Connecticut, a venture capital firm. Mr. Panzo is a graduate of the
University of Connecticut and has a masters degree in international business and
finance from Temple University.

EDWARD F. SAGER - A DIRECTOR, has been the President of Mentor Management
----------------------------
Company since 1994, general partner of Mentor Special Situation Fund LP, an
investment fund, and President of Mentor Capital Partners Ltd., a venture
capital firm since 1994. From 1985 to 1994 Mr. Sager was President of Sager &
Associates, a merchant banking firm providing access to venture capital for
small to medium size companies. His is a graduate of Lafayette College with a
B.S. degree in Mechanical Engineering and he received an MBA in Finance from New
York University.

                                    Page 22
<PAGE>
 
MANAGEMENT OF OPERATING SUBSIDIARIES
------------------------------------

The following is a summary of the business experience of the management of the
Company's operating subsidiaries:


TEAM GRAPHICS, INC.
------------------

BRUCE H. JACKSON - PRESIDENT, has been with TEAM Graphics, Inc. since May 1997,
----------------------------
first as Vice president of Sales and Marketing, then effective December 23,
1997, as President. Mr. Jackson has extensive experience in graphic arts sales
and management, having been Vice President-Marketing of Webcraft Technologies,
Inc., Horsham PA (1994-1997); Business Unit Manager of Graphic Packaging
Corporation, Wayne PA (1992-1994); Vice President of Sales and Marketing of The
Lehigh Press, Inc., Cherry Hill NJ (1988-1992).

BILL SIEBERT -- VICE PRESIDENT. Mr. Siebert has had twenty-one years of industry
------------------------------
experience. Mr. Siebert completed 4 years at the Eastern Montgomery Technical
School with a major in General Printing and has attended numerous management
seminars and courses that compliment his printing operations experience. Mr.
Siebert joined Centennial Printing in 1992 and advanced rapidly from Working
Foreman to Pressroom Supervisor to Plant Management, and was promoted to V.P. of
Operations in November 1996. Prior to joining Centennial, Mr. Siebert held
operations positions with four businesses in the printing industry.

MICHAEL P. LAMOREUX -- CONTROLLER has been Controller of Centennial Printing for
---------------------------------
15 months. He has over seven years experience in accounting and financial
management in the graphics arts industry. Prior to joining Centennial in January
1997, Mr. Lamoreux held the positions of Manager of Information Systems and
Accounting manager at Baum Printing Company in Philadelphia PA (1990-1996). He
holds a BS degree in accounting from LaSalle University and an MS degree in
finance from Temple University.


POLYCHEM CORP.
-------------

THEODORE F. RUTKOWSKI - PRESIDENT, prior to assuming that position in 1995, Mr.
---------------------------------
Rutkowski was the General Manager of The Polychem Division of The Budd Company
since 1975. He previously served as President of The Budd Company Trailer
Division, which was sold in 1985, and was responsible for the restructuring of
Greening Donald in Hamilton, Ontario, a Budd Company subsidiary. He has an
accounting degree from Rutgers University.

WILLIAM J. CRIGHTON - VICE PRESIDENT AND TREASURER, previously served as the
--------------------------------------------------
divisional controller of the Polychem Division of The Budd Company since 1975.
Prior to joining that division he was employed with the automotive division and
technical center of The Budd Company. He holds an accounting degree from LaSalle
University in Philadelphia and an MBA from Widener University.

                                    Page 23
<PAGE>
 
J. R. HANNUM - MANAGER OF INTERNATIONAL SALES, PRODUCT DEVELOPMENT AND
----------------------------------------------------------------------
ENGINEERING, had previously served as General Manager of The Polychem Division
-----------
of The Budd Company and as manager of domestic sales, research and development
and manufacturing engineering of that division, prior to which he was the plant
manager. He has an engineering degree from Villanova University and a masters
degree in engineering from Penn State University.

DONALD L. HUTTON - NATIONAL SALES MANAGER, has been with The Budd Company for 36
-----------------------------------------
years, during which time he has served as advertising manager, manager of
distributor sales and manager of customer service. He is a graduate of the
University of Delaware.


LAVELLE COMPANY
---------------

ALBERT C. BAILEY - PRESIDENT, has been with Lavelle Company since March 1, 1996
----------------------------
at which time Lavelle purchased the assets of the former Lavelle Aircraft
Company. Mr. Bailey has extensive turn-around management experience having
previously been President and CEO of Berwick Forge & Fabricating (1991-1996)
prior to joining Lavelle. He has a bachelors degree in economics from Muhlenberg
College and an MBA from the University of Scranton.

ROBERT ASHWORTH - CONTROLLER, has been with Lavelle since November 1997. Prior
----------------------------
to joining Lavelle, Mr. Ashworth was the Accounting Manager and Controller with
Modern Dental Concepts (1995-1997) and was Controller for Dock Street Brewing
Company, Inc. (1991-1994). He holds a bachelors degree from West Virginia
Wesleyan College and an MBA from Rutgers University.

                                    Page 24
<PAGE>
 
ITEM 10  EXECUTIVE COMPENSATION
------   ----------------------

The following table discloses for the fiscal years ended December 31, 1995,
1996, and January 3, 1998, individual compensation information relating to the
chief executive officer of the Company and the executive officers of the Company
who earned in excess of $100,000 during 1997 (the "Named Executive Officers").


<TABLE> 
<CAPTION> 
                                  ANNUAL COMPENSATION                                 LONG TERM COMPENSATION
                                                                         Restricted
                                                    Other Annual          Stock       Options/      LTIP     All Other
   Name and                   Salary     Bonus      Compensation          Awards       SARS        Payouts   Compensation
   <S>                       <C>      <C>            <C>                  <C>          <C>          <C>       <C>  
   Principal Position          ($)        ($)           ($)               ($)              (#)       ($)           ($)

   Paul A. DeJuliis
   Chief Executive Officer

     1997                    262,000       0          3,815                0                0         0             0
     1996                    204,167       0          4,812                0           75,000         0             0
     1995                    157,917       0          3,661                0          125,000         0             0

   Anthony J. Mendicino
   President
     1997                    150,321       0          4,500                0                0         0             0
     1996                          0       0              0                0           55,000         0             0
     1995                          0       0              0                0           40,000         0             0

   William B. Miller
   Chief Financial Officer
     1997                    108,000  22,500          2,104                0                0         0             0
     1996                    103,500       0          2,765                0           35,000         0             0
     1995                     70,000       0          1,814                0           70,000         0             0

   John R. Thach
   Former President
     1997                    115,500       0          4,500                0                0         0             0
     1996                    190,321       0          3,841                0           75,000         0             0
     1995                    161,167       0          1,916                0           70,000         0             0
</TABLE> 

                                    Page 25
<PAGE>
 
        AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND F/Y END
        ---------------------------------------------------------------
                                OPTION/SAR VALUES
                                -----------------

The following table sets forth information with respect to option exercises and
fiscal year-end option values for the Named Executive Officers.

<TABLE> 
<CAPTION> 
                                                                                Number of
                                                                             Securities Underlying          Value of
                                 Shares Acquired          Value              Unexercised Options/       Unexercised in-the-money
                                  On Exercise            Realized            SARS at FY-End (#)         Options/SARS at FY-End ($)
Name                                 ( # )                 ( $ )            Exercisable/Unexercisable   Exercisable/Unexercisable(1)
<S>                              <C>                     <C>                <C>                         <C> 
Paul A. DeJuliis                       0                    ---                133,334 / 66,666            0 / 0
Anthony J. Mendicino                   0                    ---                 45,000 / 50,000            0 / 0
William B. Miller                      0                    ---                 58,334 / 46,666            0 / 0
</TABLE> 


(1) Based upon the closing price of the Company's Common stock on January 2, 
    1998 of $2.375.


OPTION/SAR GRANTS IN LAST FISCAL YEAR
-------------------------------------

There were no option grants in 1997.


EMPLOYMENT ARRANGEMENTS
-----------------------

Effective as of January 1, 1995, the Company entered into an employment
agreement with Paul A. DeJuliis. The agreement provides, based on recently
consummated significant acquisitions, for a base salary of $250,000 annually
with certain automatic adjustments in the event certain targets relating to the
financial performance of the Company are satisfied (incremental increases of
$25,000 for each $1.0 million increase in annual pre-tax net income over a base
of $1.5 million), together with discretionary bonuses, if any, to be declared by
the Board of Directors, but with a provision that at such time as his equity
stock ownership in the Company is reduced to 10% or less of the total issued and
outstanding shares of all classes of equity stock, then he shall be entitled to
annual minimum incentive compensation equal to 3% of the Company's annual pre-
tax net income. The agreement also provides for certain benefits, including
vacation, health and medical insurance, reimbursement of certain expenses and
stock option plan participation, but only to the extent such benefits are
offered to comparable employees by the Board of Directors. Such agreement
contains covenants regarding confidentiality of proprietary information of the
Company and a restrictive covenant in favor of the Company under certain
circumstances. The agreement has an initial term of five years, and thereafter
is annually renewable for successive two-year periods. Such agreement will

                                    Page 26
<PAGE>
 
earlier terminate as a result of the employee's death, permanent disability or
dismissal for "just cause." If the termination results from death or permanent
disability, the agreement provided for continuation of base compensation and
fringe benefits for a period of six months, but if the termination results from
any reason other than death, permanent disability, termination for "just cause,"
or where the employee terminates his employment for "good reason," then his base
compensation and all existing fringe benefits shall be continued for the balance
of the unexpired term of his employment agreement, but in no event for less than
one year, after which the employee shall be entitled to all earned and accrued
incentive compensation. Moreover, if his termination follows a "change of
control" and the employee owns no more than 20% of the total issued and
outstanding securities of the Company, he shall be entitled to a lump sum
severance benefit equal to 500% of his annual base compensation.

By agreement, dated June 20, 1997 and effective July 1, 1997, John R. Thach
resigned from his office as President of the Company and from his position as a
member of the Executive Committee of the Board of Directors. He remained a
Director of the Company until December 1997 when he resigned from that position.
The agreement provides for equal monthly payments through December 1999 in
satisfaction of his employment contract plus a lump sum contingent payment. That
portion that was fixed and determinable ($500,000) has been recorded in the
accompanying financial statements as a $430,137 charge to income in 1997 at its
present value.

In January 1997, the Company entered into an employment agreement with Anthony 
J. Mendicino. Such agreement provides for a base salary of $150,000 per year, 
together with discretionary bonuses, if any, to be declared by the Board of 
Directors. The agreement also provides for certain benefits, including vacation,
health and medical insurance, car allowance and stock option plan participation,
if such are implemented for comparable employees by the Board of Directors. The
agreement contains covenants regarding confidentiality of proprietary
information of the Company and a restrictive covenant in favor of the Company.
The agreement is for a term of one year, and thereafter is annually renewable
for successive one year periods, although either party may terminate the
agreement upon six months written notice to the other and the Company may
discharge the employee at any time with or without cause. If the employee is
terminated without cause, the Company shall pay to the employee a severance
allowance equal to six months base compensation.

In May 1997, the Company entered into an employment agreement with William B.
Miller. Such agreement provides for a base salary in the first year of $84,00
per year, together with discretionary bonuses, if any, to be declared by the
Board of Directors. The based salary automatically increased to $108,000 per
year upon the completion of a significant acquisition by the Company. The
agreement also provides for certain benefits, including vacation, health and
medical insurance, reimbursement of certain expenses and stock option plan
participation, if such are implemented for comparable employees by the Board of
Directors. The agreement contains covenants regarding confidentiality of
proprietary information of the Company and a restrictive covenant in favor of
the Company. The agreement is for a term of one year, and thereafter is annually
renewable for successive one year periods, although either party may terminate
the agreement upon six months written notice to the other and the Company may
discharge the employee at any time with or without cause. If the employee is
terminated without cause, the Company shall pay to the employee a severance
allowance equal to six months base compensation.

COMPENSATION OF DIRECTORS
-------------------------

Non-employee directors receive no cash compensation, but they participate in a
non-qualified stock option plan. The listed non-employee directors received no 
option grants in 1996 and fiscal 1997. Employee directors receive no
compensation in connection with their services as director.

                                    Page 27
<PAGE>
 
ITEM 11   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-------   --------------------------------------------------------------

PRINCIPAL STOCKHOLDERS
----------------------

The following table sets forth, as of April 16, 1998, information with respect
to the securities holdings of all persons which may be deemed the beneficial
owners of 5% or more of the Company's outstanding Common Stock. Also set forth
in the table is the beneficial ownership of all shares of the Company's
outstanding Common Stock, as of such date, of each Named Executive Officer and
director and all officers and directors, individually and as a group.


<TABLE> 
<CAPTION> 
                                                           Amount & Nature
                                                            of Beneficial                   % of
                                                             Ownership                    Ownership
                                                             ---------                    ---------
                  <S>                                      <C>                            <C> 
                  Paul A. DeJuliis                            609,334/(1)/                   15.1%

                  John R. Thach                               427,000/(2)/                   11.0%

                  William B. Miller                            83,334/(3)/                    2.2%
 
                  Andrew Panzo                                 36,666                         1.0%

                  Bruce P. Murray                              26,666                         0.7%

                  Anthony J. Mendicino                         63,000                         1.7%

                  Edward F. Sager                              30,000                         0.8%

                  All Officers and Directors
                  as a group (6 persons)                      819,000                        28.6%
</TABLE> 


/(1)/  Includes 175,000 shares which may be obtained through currently
       exercisable warrants.
/(2)/  Includes 175,000 shares which may be obtained through currently
       exercisable warrants.
/(3)/  Includes 15,000 shares which may be obtained through currently
       exercisable warrants.

The addresses of Messrs. DeJuliis, Mendicino, and Miller is 100 Four Falls
Corporate Center, Suite 305, West Conshohocken, PA 19428. The address of Mr.
Panzo and Sector Associates, Ltd. is 2 Penn Center Plaza Suite 605,
Philadelphia, PA 19103. The address of Mr. Murray is c/o Bannock Burn Group, 712
Pheasant Run, Suite Two, Kennett Square, PA 19348. The address of Mr. Sager is
PO Box 560, Yardley, PA 19067. The address of Mr. Thach is c/o The Eastwind 
Group, 100 Four Falls Corporate Center, Suite 305, West Conshohocken, PA 19428.


ITEM 12   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------   ----------------------------------------------

None.

                                    Page 28
<PAGE>
 
ITEM 13  LIST OF EXHIBITS AND REPORTS ON FORM 8-K
-------  ----------------------------------------

<TABLE> 
<CAPTION> 
Exhibit No.        Description                         Method of Filing
-----------        -----------                         ----------------         
<S>          <C>                          <C> 
    2.1      Asset purchase agreement     Incorporated by reference to Exhibit
             between Polychem             2.1 to the Registrant's Registration
             Corporation and The Budd     Statement on Form SB-2 filed under
             Company dated March 10,      the Securities Act of 1933, as
             1995.                        amended, Registration no. 33-94252.

    2.2      Securities Purchase          Incorporated by reference to Exhibit
             Agreement between the        2.3 to the Registrant's Registration
             company and Sector           Statement on Form SB-2 filed under
             Associates, Ltd. dated       the Securities Act of 1933, as
             January 25, 1995.            amended, Registration no. 33-94252.

    2.3      Amended and Restated         Incorporated by reference to Exhibit
             Agreement and Plan of        2.1 of the Registrant's Form 8-K
             Merger by and between        (No. 0-27638) filed on November 1, 
             Centennial Printing          1996.   
             Corporation, The 
             Eastwind Group, Inc. 
             and Centennial 
             Acquisition Corp.

    2.4      Stock Exchange Agreement     Incorporated by reference to Exhibit 
             by and among the             2.1 of the Registrant's Form 8-K (No. 
             Registrant, John Yurchak     0-27638) filed on April 2, 1997.
             Jr., Stephen J. Cooper,
             Arthur R. Dean and James
             L. Porter dated as of
             January 3, 1997.

    2.5      Lavelle Stock Exchange       Incorporated by reference to Exhibit 
             Agreement dated as of        2.2 of the Registrant's Form 10-QSB
             January 3, 1997.             filed on May 19, 1997.                
                                             
    2.6      Asset Purchase Agreement     Incorporation by reference to Exhibit
             by and between Tygart        2.1 of the Registrant's Form 8-K 
             Moulding Corporation and     (No. 0-27638) filed on January 14,
             Ivy-Tygart Acquisition       1997.
             Corp. 

    2.7      Note for Stock Exchange      Filed herewith.
             Agreement by and among       
             the Company and the D.A.R.   
             Group dated as of November
             19, 1997.

    3.1      Amended and Restated         Incorporated by reference to Exhibit
             Certificate of               3.1 to the Registrant's Registration
             Incorporation of the         Statement on Form SB-2 filed under
             Company.                     the Securities Act of 1933, as
                                          amended, Registration no. 33-94252.

    3.2      Restated and Amended         Incorporated by reference to Exhibit
             Bylaws of The Company.       3.2 to the Registrant's Registration
                                          Statement on Form SB-2 filed under
                                          the Securities Act of 1933, as
                                          amended, Registration no. 33-94252.

    4.1      Specimen common stock        Incorporated by reference to Exhibit
             certificate of the Company.  4.1 of Amendment No. 2 to the
                                          Registrants Registration Statement on
                                          Form SB-2 filed under The Securities
                                          Act of 1933, as amended, File No.
                                          33-94252.

    4.2      Specimen form of series      Incorporated by reference to Exhibit
             A-1 common stock purchase    4.2 to the Registrant's Registration
             warrant of the Company.      Statement on Form SB-2 filed under
                                          the Securities Act of 1933, as
                                          amended, Registration no. 33-94252.

    4.3      Specimen form of series C    Incorporated by reference to Exhibit
             common stock purchase        4.5 to the Registrant's Registration
             warrant of the Company.      Statement on Form SB-2 filed under
                                          the Securities Act of 1933, as
                                          amended, Registration no. 33-94252.

    4.4      Specimen form of series D    Incorporated by reference to Exhibit
             common stock purchase        4.6 to the Registrant's Registration
             warrant of the Company.      Statement on Form SB-2 filed under
                                          the Securities Act of 1933, as
                                          amended, Registration no. 33-94252.

    4.5      Specimen form of Common      Incorporated by reference to Exhibit
             Stock Purchase Warrant       4.5 to the Registrant's Registration 
             issued to Clifton Capital,   Statement on Form SB-2 filed under the
             Ltd.                         Securities Act of 1933, as amended, 
                                          Registration No. 333-08227.

    4.6      Specimen form of Common      Incorporated by reference to Exhibit 
             Stock Purchase Warrant       4.2 of the Registrant's Form 8-K (No. 
             issued to Odyssey Capital    0-27638) filed on May 23, 1996.
             Group, LP.                
 
    4.7      Specimen form of Common      Incorporated by reference to Exhibit
             Stock Purchase Warrant       4.7 of the Registrant's Form 10-KSB
             issued to Mentor Special     (No. 0-27638) filed on April 15, 1997.
             Situation, LP.  

    4.8      Certificate of Designation   Incorporated by reference to Exhibit 
             Series B Preferred Stock.    4.7 of the Registrant's Form 10-KSB
                                          (No. 0-27638) filed on April 15, 1997.

    4.9      Certificate of Designation   Incorporated by reference to Exhibit
             for Series A Preferred       4.1 of the Registrant's Form 8-K (No. 
             Stock.                       0.27638) filed on May 23, 1996. 
                                          
    4.10     $500,000 Subordinated 12%    Incorporated by reference to Exhibit 
             Debenture issued to Mentor   4.7 to the Registrant's Registration 
             Special Situation Fund,      Statement on Form SB-2 filed under the
             L.P.                         Securities Act of 1933, as amended, 
                                          Registration No. 333-08227. 

    9.1      Voting agreement of          Incorporated by reference to Exhibit
             certain stockholders of      9.1 to the Registrant's Registration
             the Company.                 Statement on Form SB-2 filed under
                                          the Securities Act of 1933, as
                                          amended, Registration no. 33-94252.

   10.1      Investment banking advisor   Incorporated by reference to Exhibit
             agreement among the          10.1 to the Registrant's Registration
             Company, FAC Enterprise,     Statement on Form SB-2 filed under
             Inc. and American Maple      the Securities Act of 1933, as
             Leaf Financial Corporation   amended, Registration no. 33-94252.
             dated January 25, 1995.

   10.2*     Employment agreement         Incorporated by reference to Exhibit
             between the Company and      10.2 to the Registrant's Registration
             Paul A. DeJullis.            Statement on Form SB-2 filed under
                                          the Securities Act of 1933, as
                                          amended, Registration no. 33-94252.

   10.3*     Employment agreement         Incorporated by reference to Exhibit
             between the Company and      10.3 to the Registrant's Registration
             John R. Thach.               Statement on Form SB-2 filed under
                                          the Securities Act of 1933, as
                                          amended, Registration no. 33-94252.

   10.4*     Employment agreement         Incorporated by reference to Exhibit
             between the Company and      10.4 to the Registrant's Registration
             William B. Miller.           Statement on Form SB-2 filed under
                                          the Securities Act of 1933, as
                                          amended, Registration no. 33-94252.

   10.5      Loan agreement between       Incorporated by reference to Exhibit
             Princeton Academic Press     10.5 to the Registrant's Registration
             and Fremont Financial        Statement on Form SB-2 filed under
             Corporation.                 the Securities Act of 1933, as
                                          amended, Registration no. 33-94252.

   10.6      Loan agreement between       Incorporated by reference to Exhibit
             Polychem Corporation and     10.6 to the Registrant's Registration
             Congress Financial           Statement on Form SB-2 filed under
             Corporation.                 the Securities Act of 1933, as
                                          amended, Registration no. 33-94252.

   10.7      Term note of the Company     Incorporated by reference to Exhibit
             in favor of The Budd         10.7 to the Registrant's Registration
             Company.                     Statement on Form SB-2 filed under
                                          the Securities Act of 1933, as
                                          amended, Registration no. 33-94252.

   10.8      Surety agreement of the      Incorporated by reference to Exhibit
             Company in favor of The      10.13 to the Registrant's
             Budd Company.                Registration Statement on Form SB-2
                                          filed under the Securities Act of
                                          1933, as amended, Registration no.
                                          33-94252.

   10.9      Limited guaranty of the      Incorporated by reference to Exhibit
             Company in favor of          10.14 to the Registrant's
             Congress Financial           Registration Statement on Form SB-2
             Corporation.                 filed under the Securities Act of
                                          1933, as amended, Registration no.
                                          33-94252.

   10.10     Intercreditor agreement      Incorporated by reference to Exhibit
             between Congress Financial   10.15 to the Registrant's
             Corporation and The Budd     Registration Statement on Form SB-2
             Company dated March          filed under the Securities Act of
             10,1995 to which Polychem    1933, as amended, Registration no.
             Corporation has signed an    33-94252.
             Acknowledgment and
             Agreement.

   10.11     Mortgage on Phoenixville,    Incorporated by reference to Exhibit
             Pennsylvania property by     10.16 to the Registrant's
             Polychem Corporation in      Registration Statement on Form SB-2
             favor of Congress            filed under the Securities Act of
             Financial Corporation.       1933, as amended, Registration no.
                                          33-94252.

   10.12     Real estate lease between    Incorporated by reference to Exhibit
             Polychem Corporation, as     10.20 to the Registrant's
             successor to The Budd        Registration Statement on Form SB-2
             Company, and Windsor         filed under the Securities Act of
             Designs, Inc. for a term     1933, as amended, Registration no.
             expiring November 30, 1999.  33-94252.

   10.13     Real estate lease between    Incorporated by reference to Exhibit
             Princeton University         10.21 to the Registrant's
             Press, as lessor, and        Registration Statement on Form SB-2
             Princeton Academic Press,    filed under the Securities Act of
             Inc., as lessee dated        1933, as amended, Registration no.
             July, 1, 1993.               33-94252.

   10.14     The Corporate Plan for the   Incorporated by reference to Exhibit
             Profit Sharing/401 (k)       10.25 to the Registrant's
             Plan Fidelity Basic as       Registration Statement on Form SB-2
             Document No. 07.             filed under the Securities Act of
                                          1933, as amended, Registration no.
                                          33-94252.

   10.15     Spectra Regional Prototype   Incorporated by reference to Exhibit
             Non-Standardized Cash or     10.26 to the Registrant's
             Deferred Profit Sharing      Registration Statement on Form SB-2
             Plan and Trust.              filed under the Securities Act of
                                          1933, as amended, Registration no.
                                          33-94252.

   10.16     Adoption Agreement for the   Incorporated by reference to Exhibit
             Spectra Regional Prototype   10.27 to the Registrant's
             Non-Standardized Cash or     Registration Statement on Form SB-2
             Deferred Profit Sharing      filed under the Securities Act of
             Plan and Trust.              1933, as amended, Registration no.
                                          33-94252.

   10.17 *   The Eastwind Group, Inc.     Incorporated by reference to Exhibit
             Stock Option Incentive       10.28 to the Registrant's
             Plan.                        Registration Statement on Form SB-2
                                          filed under the Securities Act of
                                          1933, as amended, Registration no.
                                          33-94252.

   10.18 *   The Eastwind Group, Inc.     Incorporated by reference to Exhibit
             Non-Employee Directors       10.29 to the Registrant's
             Stock Option Plan.           Registration Statement on Form SB-2
                                          filed under the Securities Act of
                                          1933, as amended, Registration no.
                                          33-94252.
                                     

   10.19     Securities Purchase          Incorporated by reference to Exhibit
             Agreement between the        10.1 to the Registrant's form 8-K
             Company and Odyssey          dated May 10, 1996 filed under the 
             Capital Group, LP dated      Securities Exchange Act of 1934.
             May 10, 1996.                

   10.20     Amendment No. 1 to           Incorporated by reference to Exhibit  
             Securities Purchase          10.27 to the Registrant's Registration
             Agreement between the        Statement on Form SB-2 filed under the
             Company and Odyssey          Securities Act of 1933, as amended,   
             Capital Group, LP dated      Registration no. 333-08227.          
             June 20, 1996.

   10.21     Securities Purchase          Incorporated by reference to Exhibit 
             Agreement between the        10.28 to the Registrant's Registration
             Company and Mentor Special   Statement on Form SB-2 filed under the
             Situation, LP dated June     Securities Act of 1933, as amended,  
             20, 1996.                    Registration no. 333-08227.          

   10.22 *   Loan Plan for Officers       Incorporated by reference to Exhibit
             and Key Employees.           10.1 to the Registrant's Form 10-QSB
                                          filed on May 19, 1997,

   10.23 *   Employment Agreement         Incorporated by reference to Exhibit
             between the Company and      10.2 to the Registrant's Form 10-QSB
             Anthony J. Mendicino.        filed on May 19, 1997.

   10.24 *   Severence Agreement          Incorporated by reference to Exhibit
             between the Company and      10.1 to the Registrant's Form 10-QSB 
             John R.Thach dated June      filed on August 18, 1997 (subsequently
             20,1997                      amended by Form 10-QSB/A filed on 
                                          August 19, 1997).

   21        Subsidiaries of the          Filed herewith.
             Registrant.                  
                                                                              
   23.1      Consent of Arthur Andersen   Filed herewith.
             LLP

   23.2      Consent of Grant Thornton    Filed herewith.
             LLP

    27       Financial Data Schedule.     in electronic format only.   
</TABLE> 

_________________________
* Management contract or compensatory plan or arrangement.


 (B)      REPORTS ON FORM 8-K
  -       -------------------

On September 29, 1997, the Company filed a Form 8-K reflecting the Mutual 
Agreement with Arthur Andersen LLP to terminate Arthur Andersen LLP as the 
Company's independent auditors effective September 26, 1997. Such Form 8-K was 
amended on October 17, 1997.

On November 6, 1997, the Company filed a Form 8-K reflecting the appointment of
Grant Thornton LLP as the Company's auditors effective October 31, 1997.

                                    Page 29

<PAGE>
 
                       FINANCIAL STATEMENTS AND REPORT OF
                    INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

                   THE EASTWIND GROUP, INC. AND SUBSIDIARIES

                     JANUARY 3, 1998 AND DECEMBER 31, 1996

                                      F-1
<PAGE>
 
                                C O N T E N T S


                                                                Page
                                                                ----

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS              F-3
 
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                        F-4
 
FINANCIAL STATEMENTS
 
   CONSOLIDATED BALANCE SHEETS                                  F-5
 
   CONSOLIDATED STATEMENTS OF OPERATIONS                        F-6
 
   CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY    F-8
 
   CONSOLIDATED STATEMENTS OF CASH FLOWS                        F-9
 
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   F-10
 
 
                                      F-2
<PAGE>
 
               Report of Independent Certified Public Accountants
               --------------------------------------------------


Board of Directors
The Eastwind Group, Inc.


     We have audited the accompanying consolidated balance sheet of The Eastwind
Group, Inc. (a Delaware corporation) and Subsidiaries as of January 3, 1998, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the year then ended.  These financial statements are
the responsibility of the Company's management.  Our responsibility is to
express an opinion on these financial statements based on our 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 consolidated financial position of The Eastwind
Group, Inc. and Subsidiaries as of January 3, 1998, and the consolidated results
of their operations and their consolidated cash flows for the year then ended in
conformity with generally accepted accounting principles.

     The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.  As discussed in Note C to the
financial statements, the Company has suffered significant losses from
operations that raise substantial doubt about its ability to continue as a going
concern.  Management's plans with regard to these matters are also described in
Note C.  The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.


GRANT THORNTON LLP

Philadelphia, Pennsylvania
April 17, 1998

                                      F-3
<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To The Eastwind Group, Inc.:

We have audited the accompanying consolidated balance sheet of The Eastwind 
Group, Inc. (a Delaware corporation) and Subsidiaries as of December 31, 1996, 
and the related consolidated statements of operations, stockholders' equity and 
cash flows for the year then ended.  These financial statements are the 
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our 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 The Eastwind Group, Inc. and 
Subsidiaries as of December 31, 1996, and the results of their operations and 
their cash flows for the year then ended in conformity with generally accepted 
accounting principles.



                                                             ARTHUR ANDERSEN LLP


Philadelphia, Pa.
  March 26, 1997

                                      F-4
<PAGE>
 
                   The Eastwind Group, Inc. and Subsidiaries

                          CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
 
                  ASSETS                                                            January 3,    December 31,
                                                                                       1998           1996
                                                                                   ------------   -------------
<S>                                                                                <C>            <C>
Current assets
 Cash and cash equivalents                                                         $    64,970     $   709,697
 Accounts receivable, net                                                            8,797,027       7,655,763
 Stock subscription receivable                                                         250,000               -
 Recoverable income taxes                                                              240,065               -
 Due from related parties                                                                    -       1,047,354
 Inventories                                                                         5,641,271       4,001,007
 Prepaid expenses                                                                      224,515         203,820
 Prepaid income taxes                                                                   25,977          91,500
                                                                                   -----------     -----------
          Total current assets                                                      15,243,825      13,709,141
Property, plant and equipment, net                                                   8,100,147       7,024,393
Investments in investee companies                                                            -         700,000
Deferred income taxes                                                                  330,000               -
Goodwill and other assets                                                            8,239,520       7,024,489
                                                                                   -----------     -----------
                                                                                   $31,913,492     $28,458,023
                                                                                   ===========     ===========
          LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
 Lines of credit                                                                   $ 6,038,576     $ 3,626,365
 Current portion of long-term debt                                                   1,238,069         880,012
 Current portion of capitalized lease obligations                                      997,516         848,701
 Loans payable to officers                                                             150,000               -
 Accounts payable                                                                    6,394,011       3,775,002
 Accrued expenses                                                                    3,555,073       2,718,391
 Due to related party                                                                        -         276,260
 Deferred income taxes                                                                       -          98,186
 Other current liabilities                                                             254,772               -
                                                                                   -----------     -----------
          Total current liabilities                                                 18,628,017      12,222,917
Long-term debt                                                                       4,937,040       5,537,523
Capitalized lease obligations                                                        1,419,791       1,695,229
Deferred credit, net                                                                         -         160,224
Deferred income taxes                                                                        -         382,814
Other liabilities                                                                      780,555         218,510
                                                                                   -----------     -----------
          Total liabilities                                                         25,765,403      20,217,217
                                                                                   -----------     -----------
Minority interest in consolidated subsidiary                                            23,531          14,927
                                                                                   -----------     -----------
Redeemable Series B preferred stock                                                    900,000         900,000
                                                                                   -----------     -----------
Commitments and contingencies                                                                -               -
                                                                                   -----------     -----------
Stockholders' equity
 Series A preferred stock, $0.10 par value, 3,000,000 shares authorized,
   1,000 shares issued and outstanding                                                     100             100
 Common stock, $0.10 par value, 5,000,000 shares authorized, 3,525,019
   and 2,411,482 shares issued and 3,525,019 and 2,376,482 shares outstanding          352,502         241,148
 Warrants outstanding                                                                1,009,797       1,271,597
 Additional paid-in capital                                                          9,314,614       6,408,621
 Accumulated deficit                                                                (4,690,455)       (147,051)
                                                                                   -----------     -----------
                                                                                     5,986,558       7,774,415
 Less
   Common stock in treasury, 35,000 shares at cost                                           -        (193,609)
   Notes receivable from sale of stock                                                (762,000)       (240,000)
   Deferred compensation                                                                     -         (14,927)
                                                                                   -----------     -----------
          Total stockholders' equity                                                 5,224,558       7,325,879
                                                                                   -----------     -----------
                                                                                   $31,913,492     $28,458,023
                                                                                   ===========     ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.

                                      F-5
<PAGE>
 
                   The Eastwind Group, Inc. and Subsidiaries

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
 
                                                                              Fiscal year ended
                                                                         ----------------------------
                                                                          January 3,     December 31,
                                                                             1998            1996
                                                                         -------------   ------------
<S>                                                                      <C>             <C>
Net sales                                                                 $43,441,259     $23,632,872

Cost of goods sold                                                         36,256,982      17,793,635
                                                                          -----------     -----------
          Gross profit                                                      7,184,277       5,839,237

Selling, general and administrative expenses                                9,727,507       4,795,227

Contractual settlement with former officer                                    430,137               -

Write-down of assets on operations subsequently closed                        900,498               -
                                                                          -----------     -----------
 
          Operating (loss) income                                          (3,873,865)      1,044,010
 
Interest expense                                                            1,458,566         716,381
 
Interest and dividend income                                                        -         249,982
                                                                          -----------     -----------
 
          (Loss) income from continuing operations before income
            tax (benefit) expense                                          (5,332,431)        577,611
 
Income tax (benefit) expense                                                 (881,020)        261,927
                                                                          -----------     -----------
 
          (Loss) income from continuing operations                         (4,451,411)        315,684
 
Income from discontinued operations, net of income taxes of $69,279           101,507               -
                                                                          -----------     -----------
 
          NET (LOSS) INCOME                                               $(4,349,904)    $   315,684
                                                                          ===========     ===========
 
Per share data
 (Loss) income from continuing operations                                      $(1.63)    $      0.11
                                                                          ===========     ===========
 
 Net (loss) income                                                             $(1.60)    $      0.11
                                                                          ===========     ===========
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                      F-6
<PAGE>
 
                   The Eastwind Group, Inc. and Subsidiaries

           CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

            Fiscal years ended January 3, 1998 and December 31, 1996


<TABLE>
<CAPTION>
 
                                                                                                                            
                                                                                                                           
                                  Series A                                   Additional                                    
                                 preferred       Common        Warrants       paid-in       Accumulated       Treasury     
                                   stock          stock      outstanding      capital         deficit           stock      
                                ------------   -----------   ------------   ------------   -------------   --------------- 
<C>                             <C>            <C>            <C>             <C>           <C>               <C>         
 
Balance, January 1, 1996                $  -      $160,825    $  158,586     $1,818,215       $(363,414)        $       -  
 
 Sale of 1,000 shares of
  Series A preferred
   stock, net of expenses of
    $71,086                              100             -       484,344        444,690               -                 -  
 Sale of 200,000 shares of
  Common stock
   units, net of expenses of
    $181,284                               -        20,000       341,694        657,022               -                 -  
 Issuance of warrants to
  subordinated
   noteholders, net of
    expenses of $15,010                    -             -       196,190              -               -                 -  
 Issuance of 182,232 shares
  of common
   stock in connection with
    Centennial
   acquisition                             -        18,223             -      1,481,777               -                 -  
 Issuance of warrants to
  investment
   bankers in connection
    with Centennial
   acquisition                             -             -       118,800              -               -                 -  
 Issuance of warrants to
  investment
   bankers                                 -             -        32,850        (32,850)              -                 -  
 Exercise of 421,000 warrants              -        42,100       (60,867)     2,039,767               -                 -  
 Purchase of 35,000 shares
  of common
   stock for treasury                      -             -             -                              -          (193,609) 
 Deferred compensation
  related to Ivy
   acquisition                             -             -             -              -               -                 -  
 Dividends                                 -             -             -              -         (99,321)                -  
 Net income                                -             -             -              -         315,684                 -  
                                ------------   -----------    ----------     ----------    ------------    --------------  
 
Balance, December 31, 1996              $100      $241,148    $1,271,597     $6,408,621       $(147,051)        $(193,609) 
                                ============   ===========    ==========     ==========    ============    ==============  
<CAPTION>  
                                     Notes
                                  receivable                            Total
                                   from sale         Deferred       stockholders'
                                   of stock        compensation         equity
                                ---------------   ---------------   --------------
<S>                             <C>               <C>               <C>
                               
Balance, January 1, 1996             $       -          $      -       $1,774,212
                               
 Sale of 1,000 shares of       
  Series A preferred           
   stock, net of expenses of   
    $71,086                                  -                 -          929,134
 Sale of 200,000 shares of     
  Common stock                 
   units, net of expenses of   
    $181,284                                 -                 -        1,018,716
 Issuance of warrants to       
  subordinated                 
   noteholders, net of         
    expenses of $15,010                      -                 -          196,190
 Issuance of 182,232 shares    
  of common                    
   stock in connection with    
    Centennial                 
   acquisition                               -                 -        1,500,000
 Issuance of warrants to       
  investment                   
   bankers in connection       
    with Centennial            
   acquisition                               -                 -          118,800
 Issuance of warrants to       
  investment                   
   bankers                                   -                 -                -
 Exercise of 421,000 warrants         (240,000)                -        1,781,000
 Purchase of 35,000 shares     
  of common                    
   stock for treasury                        -                 -         (193,609)
 Deferred compensation         
  related to Ivy               
   acquisition                               -           (14,927)         (14,927)
 Dividends                                   -                 -          (99,321)
 Net income                                  -                 -          315,684
                                --------------    --------------       ----------
                               
Balance, December 31, 1996           $(240,000)         $(14,927)      $7,325,879
                                ==============    ==============       ==========
</TABLE>

                                  (Continued)

                                      F-7
<PAGE>
 
                   The Eastwind Group, Inc. and Subsidiaries

     CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - CONTINUED

            Fiscal years ended January 3, 1998 and December 31, 1996

<TABLE>
<CAPTION>
 
                                                                                    
                                   Series A                                    Additional                                     
                                  preferred         Common        Warrants       paid-in      Accumulated       Treasury        
                                    stock           stock       outstanding      capital        deficit           stock         
                                --------------   ------------   ------------   ------------   ------------   ---------------   
<S>                             <C>              <C>            <C>            <C>            <C>            <C>               
 
Balance, December 31, 1996                $100      $241,148     $1,271,597     $6,408,621    $  (147,051)        $(193,609)   
 
 Issuance of 44,537 shares
  of common
   stock in connection with
    Lavelle
   acquisition                               -         4,454              -        207,097              -                 -    
 Issuance of 30,000 shares
  of common
   stock in connection with
    Wickersham
   acquisition                               -         3,000              -        139,500              -                 -    
 Exercise of 914,000 warrants                -        91,400       (424,100)     2,396,589              -                 -    
 Issuance of Common stock,
  net of
   expenses of $37,500                       -        16,000        162,300        352,916              -                 -    
 Amortization of deferred
  compensation
   expense                                   -             -              -              -              -                 -    
 Preferred stock dividends                   -             -              -              -       (193,500)                -    
 Retirement of treasury stock                -        (3,500)             -       (190,109)             -           193,609    
 Net loss                                    -             -              -              -     (4,349,904)                -    
                                --------------      --------    -----------     ----------    -----------    --------------    
 
Balance, January 3, 1998                  $100      $352,502     $1,009,797     $9,314,614    $(4,690,455)        $       -    
                                ==============      ========    ===========     ==========    ===========    ==============    
<CAPTION>  
                                   Notes
                                 receivable                          Total
                                 from sale        Deferred       stockholders'
                                  of stock      compensation         equity
                                ------------   ---------------   --------------
<S>                             <C>            <C>               <C>
                               
Balance, December 31, 1996        $(240,000)         $(14,927)     $ 7,325,879
                               
 Issuance of 44,537 shares     
  of common                    
   stock in connection with    
    Lavelle                    
   acquisition                            -                 -          211,551
 Issuance of 30,000 shares     
  of common                    
   stock in connection with    
    Wickersham                 
   acquisition                            -                 -          142,500
 Exercise of 914,000 warrants      (522,000)                -        1,541,889
 Issuance of Common stock,     
  net of                       
   expenses of $37,500                    -                 -          531,216
 Amortization of deferred      
  compensation                 
   expense                                -            14,927           14,927
 Preferred stock dividends                -                 -         (193,500)
 Retirement of treasury stock             -                 -                -
 Net loss                                 -                 -       (4,349,904)
                                -----------    --------------      -----------
Balance, January 3, 1998          $(762,000)         $      -      $ 5,224,558
                                ===========    ==============      ===========
</TABLE>

    The accompanying notes are an integral part of this financial statement.

                                      F-8
<PAGE>
 
                   The Eastwind Group, Inc. and Subsidiaries

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                Fiscal year ended
                                                                           ----------------------------
                                                                            January 3,    December 31,
                                                                               1998           1996
                                                                           ------------   -------------
<S>                                                                        <C>            <C>
Cash flows from operating activities
 Net (loss) income                                                         $(4,349,904)    $   315,684
 Adjustments to reconcile net (loss) income to net cash (used in)
     provided by operating activities
   Depreciation and amortization                                             1,802,178         529,387
   Amortization of deferred credit                                             (24,650)        (24,650)
   Imputed interest                                                            103,763          21,952
   Deferred income tax (benefit) provision                                    (811,000)         40,794
   Minority interest                                                             8,604               -
   Write-down of assets on operations subsequently closed                      494,434               -
   Changes in assets and liabilities, net of effect from acquisitions
     (Increase) decrease in assets
       Accounts receivable                                                      22,323        (117,925)
       Recoverable income taxes                                               (240,065)              -
       Inventories                                                            (320,491)        (93,156)
       Prepaid expenses                                                         84,473         (94,900)
       Prepaid income taxes                                                     65,523         (91,500)
       Other assets                                                           (414,207)        (48,756)
     Increase (decrease) in liabilities
       Accounts payable                                                      1,349,622        (201,311)
       Accrued expenses                                                        117,047         776,777
       Other current liabilities                                              (542,074)              -
       Other liabilities                                                       (21,109)              -
                                                                           -----------     -----------
          Net cash (used in) provided by operating activities               (2,675,533)      1,012,396
                                                                           -----------     -----------
Cash flows from investing activities
 Purchase of property and equipment                                           (444,686)        (49,777)
 Purchase of capital stock of Centennial                                             -      (1,241,226)
 Purchase of net assets of Ivy, net of cash acquired                                 -         (10,355)
 Investments in and advances to investee companies                                   -      (1,393,094)
 Cash acquired from acquisitions                                               172,550               -
                                                                           -----------     -----------
          Net cash used in investing activities                               (272,136)     (2,694,452)
                                                                           -----------     -----------
Cash flows from financing activities
 Net borrowings (repayments) under lines of credit                           1,807,394      (2,207,940)
 Borrowings on term notes                                                            -         104,000
 Repayments of term notes                                                     (637,907)       (418,881)
 Repayments of capitalized lease obligations                                  (999,650)       (242,677)
 Loans from officers                                                           150,000               -
 Proceeds from sale of preferred stock, net of expenses                              -         929,134
 Proceeds from exercise of warrants, net of expenses                         1,541,889       1,781,000
 Collection of stock subscription receivable                                         -         746,000
 Proceeds from sale of Common stock units, net of expenses                     531,216       1,018,716
 Proceeds from issuance of subordinated note payable and warrants,
   net of expenses                                                                   -         484,990
 Payment of dividends                                                          (90,000)        (35,357)
 Purchase of Common stock for treasury                                               -        (193,609)
                                                                           -----------     -----------
          Net cash provided by financing activities                          2,302,942       1,965,376
                                                                           -----------     -----------
          NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                (644,727)        283,320
Cash and cash equivalents at beginning of year                                 709,697         426,377
                                                                           -----------     -----------
Cash and cash equivalents at end of year                                   $    64,970     $   709,697
                                                                           ===========     ===========
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                      F-9
<PAGE>
 
                   The Eastwind Group, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     January 3, 1998 and December 31, 1996



NOTE A - NATURE OF BUSINESS

 The Eastwind Group, Inc. (the Company) is a management holding company which
 has three operating business segments.  A fourth business segment, Ivy-Tygart
 Acquisition Corp. (Ivy), existed at January 3, 1998 and was subsequently sold
 (NOTE R).  Effective January 1, 1997, the Company has elected to report its
 results of operations on a 52- or 53-week fiscal year basis.

 Polychem Corporation (Polychem)
 -------------------------------

 Polychem, located in Phoenixville, Pennsylvania, manufactures and sells
 clarifier components for wastewater treatment applications and other plastic
 molded products, including buckets, sprockets and bearings.

 TEAM Graphics, Inc. (TEAM Graphics)
 -----------------------------------

 TEAM Graphics is the parent company for the Company's printing industry, which
 consists of the following subsidiaries:

     Centennial Printing Corp. (Centennial)
     --------------------------------------

     Centennial, located in King of Prussia, Pennsylvania, provides high-quality
     commercial printing services, including annual reports, advertising
     brochures, pamphlets and marketing pieces.

     Princeton Academic Press (Princeton) and Wickersham Printing Company
     --------------------------------------------------------------------
     (Wickersham), collectively doing business as Premier Book Press
     ---------------------------------------------------------------

     Princeton, located in Lancaster, Pennsylvania, is engaged in the printing
     and binding of books and related activities for publishers, university
     presses and other information providers (NOTE R).

     Wickersham, located in Lancaster, Pennsylvania, is a printing and book
     manufacturer (NOTE R).

 Lavelle Company (Lavelle)
 -------------------------

 Lavelle, located in Philadelphia, Pennsylvania, manufactures and sells sheet
 metal fabricated products for the aerospace industry.

                                      F-10
<PAGE>
 
                   The Eastwind Group, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     January 3, 1998 and December 31, 1996


NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 1. Principles of Consolidation
    ---------------------------

 The consolidated financial statements include the accounts of the Company and
 its subsidiaries.  All of the subsidiaries are wholly owned except for a 7.5%
 minority interest in Ivy.  All intercompany accounts and transactions have been
 eliminated in consolidation.

 2. 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.

 3. Cash and Cash Equivalents
    -------------------------

 The Company's cash management system provides for the short-term investment of
 cash and the transfer or deposit of sufficient funds to cover checks as they
 are submitted for payment.  The Company considers all highly liquid debt
 instruments purchased with an original maturity of three months or less to be
 cash equivalents.  There were no cash equivalents as of January 3, 1998 and
 December 31, 1996.

 4. Inventories
    -----------

 Inventories consist of raw materials, work-in-process and finished goods.
 Work-in-process and finished goods include raw materials, direct labor and a
 portion of manufacturing overhead.  The inventories of Polychem and Princeton
 are stated at the lower of cost or market, with cost determined by the last-in,
 first-out (LIFO) method, while the cost of inventories of Centennial and Ivy is
 determined on the first-in, first-out (FIFO) method.

 5. Property, Plant and Equipment
    -----------------------------

 Property, plant and equipment are stated at cost less accumulated depreciation.
 Depreciation is recorded using the straight-line and accelerated depreciation
 methods over the estimated useful life of the assets.  Leasehold improvements
 are amortized over the term of the lease or estimated useful life, whichever is
 shorter.

 In 1996, the Company adopted  Statement of Financial Accounting Standards
 (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for
 Long-Lived Assets to Be Disposed Of, which provides guidance on when to
 recognize and how to measure impairment losses of long-lived assets and certain
 identifiable intangibles and how to value long-lived assets to be disposed of.
 The initial adoption of SFAS No. 121 did not have a material impact on the
 Company's consolidated financial position or results of operations.

                                  (Continued)

                                     F-11
<PAGE>
 
                   The Eastwind Group, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     January 3, 1998 and December 31, 1996


NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

 6. Income Taxes
    ------------

 The Company accounts for its income taxes under the liability method specified
 by SFAS No. 109, Accounting for Income Taxes.  Deferred tax assets and
 liabilities are determined based on the difference between the financial
 statement and tax bases of assets and liabilities as measured by the enacted
 tax rates which will be in effect when these differences reverse.  Deferred tax
 expense is the result of changes in deferred tax assets and liabilities.  The
 Company files a consolidated federal income tax return, and the amount of
 income tax expense or benefit is computed and allocated on a separate return
 basis.

 7. (Loss) Earnings Per Share
    -------------------------

 The Company adopted the provisions of SFAS No. 128, Earnings Per Share.  SFAS
 No. 128 eliminates primary and fully diluted earnings per share (EPS) and
 requires the presentation of basic and diluted EPS in conjunction with the
 disclosure of the methodology used in computing such EPS.  Basic EPS excludes
 dilution and is computed by dividing income available to common shareholders by
 the weighted average common shares outstanding during the period.  Diluted EPS
 takes into account the potential dilution that could occur if securities or
 other contracts to issue Common stock were exercised and converted into Common
 stock.  Prior period EPS calculations have been restated to reflect the
 adoption of SFAS No. 128.

 All options and warrants to purchase shares of Common stock were not included
 in the computation of EPS because the exercise prices were greater than the
 average market prices of the common shares (NOTES M and N).
<TABLE>
<CAPTION>
 
                                                               January 3,    December 31,
                                                                  1998           1996
                                                              ------------   ------------
<S>                                                           <C>            <C>
 
   Net (loss) income                                          $(4,349,904)     $  315,684
   Net income from operations of discontinued subsidiary          101,507               -
   Less preferred stock dividends                                 193,500          99,321
                                                              -----------      ----------
   (Loss) income available to common stockholders
     from continuing operations                               $(4,644,911)     $  216,363
                                                              ===========      ==========
   Shares used in computing (loss) earnings per share           2,842,848       1,971,137
                                                              ===========      ==========
   Per share data
     (Loss) income from continuing operations                 $     (1.63)     $     0.11
                                                              ===========      ==========
     Net income from discontinued operations (NOTE R)         $      0.03      $        -
                                                              ===========      ==========
</TABLE>
                                  (Continued)

                                     F-12
<PAGE>
 
                   The Eastwind Group, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     January 3, 1998 and December 31, 1996


NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

 8. Goodwill
    --------

 Goodwill arising from acquisitions is being amortized using the straight-line
 method over 20 years.  Management reviews the valuation and amortization of
 goodwill on an ongoing basis.  As part of this review, the Company estimates
 the value and the estimated undiscounted future net income expected to be
 generated by the related subsidiary to determine if impairment has occurred
 (NOTES H and R).

 9. Other Information
    -----------------

 In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
 130, Reporting Comprehensive Income.  SFAS No. 130 establishes standards to
 provide prominent disclosure of comprehensive income items.  Comprehensive
 income is the change in equity of a business enterprise during a period from
 transactions and other events and circumstances from nonowner sources.  SFAS
 No. 130 is effective for all periods beginning after December 15, 1997.
 Subsequent to the effective date, all prior-period amounts are required to be
 restated to conform to the provisions of SFAS No. 130.  The adoption of SFAS
 No. 130 is not expected to have a material impact on the Company's consolidated
 financial position or results of operations.

 In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
 Enterprise and Related Information.  SFAS No. 131 requires that public business
 enterprises report certain information about operating segments in complete
 sets of financial statements of the enterprise and in condensed financial
 statements of interim periods issued to shareholders.  It also requires that
 public business enterprises report certain information about their products and
 services, the geographic areas in which they operate, and their major
 customers.  SFAS No. 131 is effective for all periods beginning after December
 15, 1997.  The adoption of SFAS No. 131 will have no impact on the Company's
 consolidated financial position or results of operations.

 10.  Reclassifications
      -----------------

 Certain reclassifications have been made to the 1996 financial statements to
 conform to the 1997 presentation.

NOTE C - REALIZATION OF ASSETS

 The accompanying financial statements have been prepared in conformity with
 generally accepted accounting principles, which contemplate continuation of the
 Company as a going concern.  However, the Company has sustained substantial
 losses from operations in 1997.

                                  (Continued)

                                     F-13
<PAGE>
 
                   The Eastwind Group, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     January 3, 1998 and December 31, 1996


NOTE C - REALIZATION OF ASSETS - Continued

 The Company experienced a net loss in the fiscal year ended January 3, 1998 of
 $4,349,904, which resulted in cash used in operations of $2,675,533.  Cash
 resources of the Company are not sufficient to sustain such cash losses, should
 they continue to occur.  The Company has been attempting to refinance its
 senior debt in order to expand its lines of credit and borrow on under-
 leveraged assets to solve cash flow difficulties.  The refinance project has
 been delayed due principally to the Company's current inability to meet certain
 closing requirements of the lender.

 In view of the matters described in the preceding paragraph, recoverability of
 a major portion of the recorded asset amounts shown in the accompanying
 consolidated balance sheets is dependent upon continued operations of the
 Company, which in turn is dependent upon the Company's ability to meet its
 financing requirements on a continuing basis, to maintain present financing,
 and to succeed in its future operations.  The financial statements do not
 include any adjustments relating to the recoverability and classification of
 recorded asset amounts or amounts and classification of liabilities that might
 be necessary should the Company be unable to continue in existence.

 Management has taken steps to revise its operating and financial condition,
 which it believes are sufficient to provide the Company with the ability to
 continue in existence.  In addition to closing down certain unprofitable
 operations as noted in NOTE R, the Company has instituted certain revenue-
 enhancing measures and cost-cutting programs.  As noted above, the Company is
 also in the process of attempting to refinance its senior debt and continues to
 work toward raising additional capital through private placements.

NOTE D - ACQUISITIONS

 1. Wickersham
    ----------

 On May 24, 1996, the Company purchased convertible preferred stock of
 Wickersham for $250,000.  The preferred stock has a minimum dividend rate of
 6%.  The preferred stock has a liquidation preference equal to, in the
 aggregate, $250,000 plus accrued and unpaid dividends thereon, and is
 convertible into 80% of the outstanding Common stock of Wickersham depending
 upon its achievement of certain earnings levels.  In 1996, Wickersham
 experienced net losses of approximately $131,000.  The Company had a receivable
 from Wickersham of $91,493 as of December 31, 1996, representing working
 capital advances and dividends receivable.

 In January 1997, the Company acquired all of the outstanding Common stock of
 Wickersham in exchange for 30,000 shares of the Company's Common stock.  The
 acquisition was accounted for using the purchase method of accounting.  The
 fair value of assets acquired and liabilities assumed was $2,667,424 and
 $2,274,924, respectively.

                                  (Continued)

                                     F-14
<PAGE>
 
                   The Eastwind Group, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     January 3, 1998 and December 31, 1996


NOTE D - ACQUISITIONS - Continued

 2. Lavelle
    -------

 Lavelle was incorporated to purchase the net assets of Lavelle Aircraft, which
 was liquidated under Chapter 11 of the U.S. Bankruptcy Law.  The stock of
 Lavelle was owned by nonaffiliates of the Company.  Lavelle is a manufacturer
 of sheet metal products for the aerospace industry.

 In March 1996, the Company invested $450,000 in Lavelle in the form of a
 subordinated debenture.  The debenture matures in March 2001 and pays interest
 at a rate of 20% per year.  In addition, the Company made advances to Lavelle
 for working capital purposes.  Interest income of $120,989 was recorded on the
 subordinated debenture and advances for the year ended December 31, 1996.  In
 connection with its investment, the Company guaranteed the indebtedness of
 Lavelle under a $900,000 equipment facility for which the Company charged a
 $37,500 fee in 1996.  The Company's debenture was subordinate to the equipment
 facility indebtedness.  In addition, the Company pledged a $100,000 security
 interest in favor of the equipment facility lender.  As of December 31, 1996,
 the Company had a receivable of $524,356 from Lavelle for advances and accrued
 interest.

 Because of the Company's guarantee and pledge relating to Lavelle's equipment
 facility, any loss of Lavelle would have been recognized by the Company in its
 statement of operations and recorded as a reduction in the carrying amount of
 its investment.  Lavelle reported net income of approximately $125,000 for the
 period from the date of the Company's investment through December 31, 1996.

 In January 1997, the Company acquired all of the outstanding Common stock of
 Lavelle in exchange for 44,537 shares of the Company's Common stock and
 forgiveness of certain receivables due from Lavelle.  The acquisition was
 accounted for using the purchase method of accounting.  The fair value of
 assets acquired and liabilities assumed was $2,550,434 and $2,531,410,
 respectively.

 3. Pro Forma Information
    ---------------------

 The following unaudited pro forma information is presented for the acquisition
 of Centennial, Wickersham and Lavelle as if the acquisition had occurred on
 January 1, 1996.  The unaudited pro forma information does not purport to be
 indicative of the results that would have been attained if the operations had
 actually been combined during the periods presented and is not necessarily
 indicative of operating results to be expected in the future.
<TABLE>
<CAPTION>
 
                                                                  December 31,
                                                                      1996
                                                                  ------------
<S>                                                               <C>
 
   Net sales                                                       $47,282,000
 
   Net (loss) available to common stockholders                     $   (78,000)
 
   Pro forma (loss) per share available to common stockholders     $   (  0.04)
 
   Shares used in computing pro forma loss per share                 1,971,137
</TABLE>

                                     F-15
<PAGE>
 
                   The Eastwind Group, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     January 3, 1998 and December 31, 1996

<TABLE>
<CAPTION>
 
 
NOTE E - ACCOUNTS RECEIVABLE
                                                         January 3,    December 31,
                                                            1998           1996
                                                        ------------   -------------
<S>                                                     <C>            <C>
 
   Trade receivables                                     $8,877,277      $7,699,041
   Retainage receivables                                    361,124         316,822
   Allowance for doubtful accounts                         (288,353)       (207,079)
                                                         ----------      ----------
                                                          8,950,048       7,808,784
   Less retainage receivables due in over one year          153,021         153,021
                                                         ----------      ----------
 
                                                         $8,797,027      $7,655,763
                                                         ==========      ==========
</TABLE>
 Polychem sells clarifier components to general contractors for use in building
 and maintaining wastewater treatment facilities operated by government
 municipalities.  Sales of these components under contracts generally require
 retainage provisions which become due upon completion of the entire contract.
 Retainage receivables expected to be collected after one year are included in
 other assets in the accompanying consolidated balance sheets.
<TABLE>
<CAPTION>
 
NOTE F - INVENTORIES
                           January 3,    December 31,
                             1998           1996
                          -----------   ------------
<S>                       <C>           <C>
 
   Raw materials           $1,599,996     $1,246,482
   Work-in-process          2,362,413      1,189,328
   Finished goods           1,678,862      1,565,197
                           ----------     ----------
 
                           $5,641,271     $4,001,007
                           ==========     ==========
</TABLE>

 Had the FIFO method of valuing all inventories of Princeton and Polychem been
 used, the value of inventories would not have been significantly different as
 of January 3, 1998 and December 31, 1996.
<TABLE>
<CAPTION>
 
NOTE G - PROPERTY, PLANT AND EQUIPMENT
                                         Estimated         January 3,    December 31,
                                        useful lives         1998           1996
                                      ----------------    -----------   ------------
<S>                                     <C>               <C>          <C>           
 
 Land                                      -                $352,135     $  368,916
 Buildings and improvements......      10  -  15 years     2,898,881      2,142,863
 Machinery and equipment.........       3  -   7 years     6,673,136      5,141,739
                                                          -----------   ------------
                                                           9,924,152      7,653,518
 Less accumulated depreciation                             1,824,005        629,125
                                                          -----------   ------------
                                                           $8,100,147     $7,024,393
                                                          ===========   ============
</TABLE>

                                  (Continued)

                                     F-16
<PAGE>
 
                   The Eastwind Group, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     January 3, 1998 and December 31, 1996


NOTE G - PROPERTY, PLANT AND EQUIPMENT - Continued

 Machinery and equipment as of January 3, 1998 and December 31, 1996 includes
 $4,017,872 and $3,484,800, respectively, of equipment under capital leases,
 with accumulated depreciation of $732,104 and $205,509, respectively.
<TABLE>
<CAPTION>
 
NOTE H - GOODWILL AND OTHER ASSETS
                                                                    January 3,    December 31,
                                                                       1998           1996
                                                                    -----------   ------------
<S>                                                                 <C>           <C>
 
   Goodwill, net                                                     $7,036,605     $6,042,889
   Covenant not to compete, net                                         439,583        489,583
   Retainage receivables due in over one year                           153,021        153,021
   Deferred financing, net                                              225,956        138,253
   Cash surrender value of officers' life insurance                           -         92,496
   Other                                                                384,355        108,247
                                                                     ----------     ----------
                                                                     $8,239,520     $7,024,489
                                                                     ==========     ==========
 
NOTE I - LONG-TERM DEBT
                                                                     January 3,     December 31,
                                                                        1998           1996
                                                                     ----------     ------------
 
 Princeton term note payable to bank, secured by all of its
   assets, due in monthly installments of $8,333, plus
   interest at the bank's prime rate plus 3.75% (12.25% at
   January 3, 1998), repaid February 1998                            $   58,338     $  158,341
 
 Polychem term note payable to the Budd Company, interest
   at 8%, principal payable in quarterly installments of
   $81,305 commencing March 1998, through March 2003                  1,626,093      1,626,093
 
 Polychem note payable to bank, interest at the bank's prime
   rate plus 1.5% (10% at January 3, 1998), payable
   in 18 monthly installments of $21,155 and 41 monthly
   installments of $29,617 plus interest, with a final payment
   in March 2000                                                        951,963      1,307,364
</TABLE>

                                  (Continued)

                                     F-17
<PAGE>
 
                   The Eastwind Group, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     January 3, 1998 and December 31, 1996

<TABLE>
<CAPTION>
 
 
NOTE I - LONG-TERM DEBT - Continued
                                                                              January 3,   December 31,
                                                                                 1998          1996
                                                                              ----------   ------------
<S>                                                                           <C>          <C>
 
 Centennial notes payable to individuals, interest at 12.5%,
   repaid on February 1, 1997                                                 $        -     $  105,000
 
 Centennial term note payable to seller, interest at 8%, due
   in 36 monthly installments of principal and interest of
   $8,333, through November 1999                                                 191,312        251,235
 
 Centennial term note payable to a vendor, interest at 8%, due
   in 24 semimonthly payments of principal and interest of
   $4,523, beginning January 10, 1997                                                  -        104,000
 
 Ivy note payable to a bank, secured by certain property, interest at
   7.2%, due in monthly installments of principal and interest
   of $5,909 through March 2017                                                  735,206        750,000
 
 Ivy note payable to a bank, secured by certain property, interest at
   the bank's prime rate plus 2% (10.5% at January 3, 1998), due
   in monthly installments of principal and interest of $10,757,
   through April 2017                                                          1,065,075      1,054,750
 
 Ivy term note payable to a bank, secured by certain property, interest
   at 9.4%, due in monthly installments of principal and interest
   of $2,777, through December 2016                                              295,934        300,000
 
 Ivy term note payable to a bank, secured by certain property, interest
   at 10.1%, due in monthly installments of principal and interest of
   $5,856, through July 2002                                                     258,052              -
 
 Ivy automobile notes payable, secured by the automobiles, interest
   at 9% and 10%, due in monthly installments of principal and
   interest of $568 each, maturing June 2001 and May 2002                         43,869              -
 
 Ivy term note payable to a finance company, secured by substantially
   all of its assets, due in 35 monthly installments of $7,500 with a
   final installment of $187,500, plus interest at the bank's prime rate
   plus 4.5% (13% at January 3, 1998)                                            360,000        450,000
 
</TABLE>
                                  (Continued)

                                     F-18
<PAGE>
 
                   The Eastwind Group, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     January 3, 1998 and December 31, 1996

<TABLE>
<CAPTION>

NOTE I - LONG-TERM DEBT - Continued
                                                                          January 3,    December 31,
                                                                            1998           1996
                                                                          ----------    ------------
 <S>                                                                      <C>           <C>
  Wickersham term note payable to bank, due in monthly installments
    of $6,000 principal and interest at the bank's prime rate plus
    1.75% (10.25% at January 3, 1998), secured by the assets and
    certain real estate of the Company                                    $  164,935     $        -
 
  Wickersham debt payable to an equipment supplier, due in monthly
    installments of $1,835 principal, secured by equipment                    52,495              -
 
  Wickersham debt payable to financing company, due in monthly
    installments of $1,083 principal, unsecured                               14,785              -
 
  Eastwind subordinated note payable to an investor                          357,052        310,752
                                                                          ----------     ----------
                                                                           6,175,109      6,417,535
  Less current portion                                                     1,238,069        880,012
                                                                          ----------     ----------
 
                                                                          $4,937,040     $5,537,523 
                                                                          ==========     ==========
</TABLE>
 Interest expense of $728,570 and $312,624 on the term notes was charged to
 operations for the years ended January 3, 1998 and December 31, 1996,
 respectively.

 1. Princeton
    ---------

 Princeton has a $1,000,000 demand line of credit with a bank through June 30,
 1998, subject to renewal.  Borrowings under the line of credit bear interest at
 the bank's prime plus 3.75% (12.25% at January 3, 1998) and are limited to 80%
 of eligible accounts receivable plus the lesser of 50% of paper stock inventory
 or $350,000.  Outstanding borrowings were $270,024 and $343,812 as of January
 3, 1998 and December 31, 1996, respectively.  Interest expense of $70,728 and
 $64,888 was charged to operations for the years ended January 3, 1998 and
 December 31, 1996, respectively.  The line is collateralized by substantially
 all of Princeton's assets.  The line of credit and term loan were repaid in
 February 1998 (NOTE R).

                                  (Continued)

                                     F-19
<PAGE>
 
                   The Eastwind Group, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     January 3, 1998 and December 31, 1996


NOTE I - LONG-TERM DEBT - Continued

 2. Polychem
    --------

 Polychem entered into a loan and security agreement with a bank on March 10,
 1995, which provides for a three-year, $9,000,000 revolving line of credit and
 term note.  Borrowings under the revolver bear interest at the bank's prime
 rate plus 1.5% (10% at January 3, 1998) and are limited to 75% of eligible
 accounts receivable plus the lesser of 55% of eligible inventory or $1,000,000
 less 55% of then undrawn amounts of outstanding letters of credit for inventory
 purchases.  Outstanding borrowings were $1,492,511 and $310,139 as of January
 3, 1998 and December 31, 1996, respectively.  As of January 3, 1998, there was
 $7,507,489 available under the line.  Interest expense of $139,190 and $91,155
 was charged to operations for the years ended January 3, 1998 and December 31,
 1996, respectively.  The line is collateralized by substantially all of
 Polychem's assets, except for the land and building, and a $2,500,000 limited
 guarantee by the Company.  In addition, the financing agreement requires that
 Polychem maintain adjusted working capital of at least $2,200,000 and maximum
 adjusted net deficit of $500,000, and places restrictions on the payment of
 dividends to the Company and investment in, loans or advances directly to any
 other subsidiary other than expenditures, among other items.

 3. Centennial
    ----------

 Centennial has a $2,500,000 line of credit with a bank expiring on June 30,
 1998.  Borrowings under the line bear interest at the bank's prime rate plus
 1.25% (9.75% at January 3, 1998) and are limited to 80% of eligible accounts
 receivable as defined.  Outstanding borrowings were $2,499,207 and $2,223,205
 at January 3, 1998 and December 31, 1996, respectively.  Interest expense of
 $236,552 and $43,793 was charged to operations for the year ended January 3,
 1998 and the period from acquisition (October 17, 1996) through December 31,
 1996, respectively.  The line of credit is collateralized by substantially all
 of Centennial's assets and the unlimited guarantee of the Company.  In
 addition, the arrangement requires that Centennial maintain total net worth of
 at least $3,350,000.  It also places restrictions on transactions with
 Eastwind, including management fees.

 4. Ivy
    ---

 Ivy has a $1,500,000 line of credit with a finance company through January 1,
 2000.  Borrowings under the line of credit bear interest at the bank's prime
 rate plus 3.5% (12% at January 3, 1998) and are limited to 85% of eligible
 accounts receivable plus the lesser of 50% of raw materials and finished goods
 inventory or $750,000.  Outstanding borrowings were $1,108,631 and $749,209 as
 of January 3, 1998 and December 31, 1996, respectively.  Interest expense of
 $128,780 was charged to operations for the year ended January 3, 1998.  The
 line is collateralized by substantially all of Ivy's assets and the guarantee
 of Eastwind.  An annual commitment fee of $15,000, a monthly collateral
 monitoring fee of $1,500 and a monthly minimum income fee of $6,000 are
 required under the line.  The arrangement requires that the Company maintain a
 minimum tangible net worth of $200,000, working capital of $500,000, a debt
 service coverage ratio of at least 1.25 to 1.00 and net income of at least
 $100,000 for each fiscal year.  It also places restrictions on the amount of
 capital expenditures, transactions with Eastwind and officer compensation.

                                  (Continued)

                                     F-20
<PAGE>
 
                   The Eastwind Group, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     January 3, 1998 and December 31, 1996


NOTE I - LONG-TERM DEBT - Continued

 In connection with the acquisition of Ivy, Ivy obtained a $1,804,750 bridge
 note which was originally due on March 31, 1997.  During 1997, Ivy replaced the
 bridge note with $750,000 and $1,054,750 of term notes.  The Company sold all
 of the outstanding Common stock of Ivy in February 1998 (NOTE R).

 5. Wickersham
    ----------

 Wickersham has a $1,000,000 demand line of credit with a finance company.
 Wickersham pledges accounts receivable to the lender and receives 80% of their
 face value.  Customers are instructed to make payments directly to the lender.
 The lender sets up a reserve account for the 20% portion of the receivable that
 was not funded at the time of purchase.  The lender charges the reserve account
 for interest and fees, and remits the balance to Wickersham on a weekly basis.
 Interest is charged at the bank's prime rate plus 2% (10.5% at January 3,
 1998).  Outstanding borrowings were $668,203 at January 3, 1998.  Interest
 expense of $112,362 was charged to operations for the year ended January 3,
 1998.  The line is collateralized by accounts receivable and inventory (NOTE
 R).

 6. Eastwind Subordinated Note Payable
    ----------------------------------

 In June 1996, the Company sold to an investor a five-year, $500,000
 subordinated note which bears interest at 12%.  The note is payable in three
 equal installments due June 30, 1999, 2000 and 2001.  The Company can repay the
 note in whole or in part at any time.  In addition the investor received a
 warrant to purchase 80,000 shares of the Company's Common stock at $6.00 per
 share exercisable for a seven-year period.  The warrant was valued at $211,200
 for financial reporting purposes and was recorded as a debt discount, which is
 being amortized over the term of the debenture.  Interest expense of $46,300
 and $54,452 was recorded for the years ended January 3, 1998 and December 31,
 1996, respectively.  The effective interest rate on the subordinated debenture
 is 14.8%.

 Future maturities of debt as of January 3, 1998 are as follows:
<TABLE>
 
<S>                               <C>
   1998                            $1,049,412
   1999                               951,792
   2000                               741,534
   2001                               491,925
   2002                               325,258
                                   ----------
                                    3,559,921
   Less unamortized interest          142,948
                                   ----------
                                    3,416,973
   Add Ivy debt (NOTE R)            2,758,136
                                   ----------

                                  $ 6,175,104
                                   ==========
</TABLE> 

                                     F-21
<PAGE>
 
                   The Eastwind Group, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     January 3, 1998 and December 31, 1996


NOTE J - CAPITALIZED LEASE OBLIGATIONS

 The Company leases certain equipment under capital leases.  The weighted
 average interest rate was 14.2% and 11.2% for the years ended January 3, 1998
 and December 31, 1996, respectively.  Interest expense of $352,584 and $108,465
 on the capitalized lease obligations was charged to operations for the years
 ended January 3, 1998 and December 31, 1996, respectively.  Future minimum
 lease payments as of January 3, 1998 are as follows:
<TABLE>
 
<S>                                                  <C>
   1998                                               $1,096,588
   1999                                                1,044,980
   2000                                                  254,208
   2001                                                  195,222
   2002                                                  193,375
                                                      ----------
 
 Total minimum lease payments                          2,784,373
 Less amounts representing interest                      459,451
                                                      ----------
 
 Present value of future minimum lease payments        2,324,922
 Less current portion                                    997,516
 Add Ivy capital lease obligations (NOTE R)               92,385
                                                      ----------
                                                     $ 1,419,791
                                                      ==========
</TABLE> 
   
NOTE K - EMPLOYEE BENEFIT PLANS

 1. Defined Contribution Plans
    --------------------------

 Management and nonunion employees of Polychem participate in a qualified 401(k)
 savings plan.  Participants can contribute a portion of their pretax
 compensation, and Polychem matches 50% of the first 4% of compensation
 contributed by the employee.  Contributions to the plan for the years ended
 January 3, 1998 and December 31, 1996 were $30,270 and $30,708, respectively.
 Participants vest in Polychem's contributions pro rata over two to five years.
 At the direction of the Board of Directors, Polychem may elect to contribute a
 maximum of 9% of each employee's compensation in addition to the regular match,
 if sufficient profits are generated.  Discretionary contributions were $93,964
 and $97,920 for the years ended January 3, 1998 and December 31, 1996,
 respectively.

 All employees of Princeton that meet minimum eligibility requirements, as
 defined, may participate in a qualified 401(k) savings plan.  Participants can
 contribute a portion of their pretax compensation to the plan.  Princeton may
 make contributions to the plan at its discretion.  Participants vest in
 employer contributions 20% per year beginning in year three, while they are
 always vested in their contributions.  Princeton has not made any discretionary
 contributions to the plan since the date of acquisition.

                                  (Continued)

                                     F-22
<PAGE>
 
                   The Eastwind Group, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     January 3, 1998 and December 31, 1996


NOTE K - EMPLOYEE BENEFIT PLANS - Continued

 All employees of Wickersham that meet minimum eligibility requirements, as
 defined, may participate in a qualified 401(k) plan.  Participants can
 contribute a portion of their pretax compensation to the plan.  Wickersham may
 make contributions to the plan at its discretion.  For the year ended January
 3, 1998, Wickersham did not make a discretionary contribution; however,
 Wickersham provided a matching contribution on certain employee contributions
 to the plan.  The amounts of matching contributions for the years ended January
 3, 1998 and December 31, 1996 were $9,694 and $12,466, respectively.

 All employees of Centennial who meet eligibility requirements, as defined, may
 participate in a qualified 401(k) savings plan.  Participants can contribute a
 portion of their pretax compensation to the plan, and Centennial matches, on a
 discretionary basis, up to 25% of the first 6% of compensation contributed by
 the employee.  Contributions to the plan for the year ended January 3, 1998 and
 the period from acquisition (October 17, 1996) to December 31, 1996 were $-0-
 and $10,571, respectively.  Participants vest in Centennial's contributions
 over six years.

 2. Defined Benefit Plans
    ---------------------

 In accordance with the terms of the Polychem acquisition agreement, the pension
 plan for hourly union employees was amended to name Polychem as the plan
 sponsor.  Polychem assumed all assets, liabilities and future obligations of
 the plan.  The pension benefits are based on years of service and the benefit
 rate in effect at the date of retirement.  The plan was fully funded by the
 Budd Company as of the acquisition date based on actuarial assumptions defined
 in the acquisition agreement.  As of the acquisition date, the plan's assets
 and liabilities were remeasured in accordance with provisions of Statement of
 Financial Accounting Standards (SFAS) No. 87, Employer's Accounting for
 Pensions, which resulted in the recognition of an assumed pension liability of
 $157,370.
 
 The plan's funded status was as follows:
<TABLE>
<CAPTION>
 
                                                               January 3,            December 31,
                                                                   1998                   1996
                                                            -------------------   --------------------
<S>                                                         <C>                   <C>
    Actuarial present value of
      Vested benefit obligation                                     $2,213,711             $2,223,820
      Nonvested benefit obligation                                           -                    895
                                                                    ----------             ----------
 
 Accumulated benefit obligation                                      2,213,711              2,224,715
 Fair market value of plan assets                                    2,157,972              1,907,801
                                                                    ----------             ----------
 
 Projected benefit obligation in excess of plan assets                  55,739                316,914
 Unrecognized net gain (loss)                                          221,635               (128,332)
 Unrecognized prior service cost                                       (61,393)                     -
                                                                    ----------             ----------
 Accrued pension cost                                               $  215,981             $  188,582
                                                                    ==========             ==========
</TABLE>
                                  (Continued)

                                     F-23
<PAGE>
 
                   The Eastwind Group, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     January 3, 1998 and December 31, 1996


NOTE K - EMPLOYEE BENEFIT PLANS - Continued

 A discount rate of 7.0% and 7.5% and an expected long-term rate of return on
 plan assets of 9.0% and 8.5% were used in determining the actuarial present
 value of the obligations as of January 3, 1998 and December 31, 1996,
 respectively.  The pension plan assets held as of January 3, 1998 and December
 31, 1996 consist of amounts invested in fixed-income money market funds.

 The net periodic pension cost includes the following components:
<TABLE>
<CAPTION>
                                                      January 3,    December 31,
                                                        1998           1996
                                                     -----------   -------------
<S>                                                  <C>           <C>
 
 Service cost benefits earned during the period...    $  28,445       $  25,639
 Interest cost on projected benefit obligation....      155,221         152,192
 Return on assets.................................     (470,163)       (208,168)
 Net amortization and deferrals...................      313,896          55,949
                                                      ---------       ---------
                                                      $  27,399       $  25,612
                                                      =========       =========
</TABLE>
 3. Postretirement Life Insurance Benefits
    --------------------------------------

 Polychem provides postretirement life insurance benefits to all union
 employees.  The life insurance plan provides coverage ranging from $3,000 to
 $6,000 for qualifying retired employees.  A discount rate of 7% was used in
 determining the actuarial present value of the obligations as of January 3,
 1998 and December 31, 1996.  The unfunded accumulated postretirement benefit
 obligation as of January 3, 1998 and December 31, 1996 was $25,782 and $29,928,
 respectively, and the net periodic postretirement benefit cost for the years
 ended January 3, 1998 and December 31, 1996 was immaterial.
 
NOTE L - INCOME TAXES

  The components of income taxes are as follows:

<TABLE>
<CAPTION>
                                                         January 3,  December 31,
                                                           1998          1996
                                                         ---------     --------
<S>                                                  <C>             <C>
 Current
   Federal                                               $ (10,811)    $ 38,834
   State                                                    10,070      182,299
                                                         ---------     --------
                                                              (741)     221,133
                                                         ---------     --------
 Deferred
   Federal                                                (811,000)     146,108
   State                                                         -      (25,486)
                                                         ---------     --------
                                                          (811,000)     120,622
Decrease in valuation allowance                                  -      (79,828)
                                                         ---------     --------
                                                         $(811,741)    $261,927
                                                         =========     ========
</TABLE>
                                  (Continued)

                                     F-24
<PAGE>
 
                   The Eastwind Group, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     January 3, 1998 and December 31, 1996


NOTE L - INCOME TAXES - Continued

 The reconciliation of the statutory federal rate to the Company's effective
 income tax rate is as follows:
<TABLE>
<CAPTION>
 
                                                             January 3,    December 31,
                                                                1998           1996
                                                            ------------  --------------
<S>                                                          <C>           <C>
 
 Statutory tax (benefit) provision........................       (34.0)%           34.0%
 State income tax provision, net of federal tax benefit...          0.2            17.9
 Increase (decrease) in valuation allowance...............         11.4           (13.8)
 Other....................................................          5.9             7.2
                                                                 ------           -----
                                                                  (16.5)%          45.3%
                                                                 ======           ====== 
</TABLE>

 Under SFAS No. 109, Accounting for Income Taxes, deferred tax assets and
 liabilities are recognized for the future tax consequences attributable to
 differences between the financial statement carrying amounts of existing assets
 and liabilities and their respective tax bases.  Deferred tax assets and
 liabilities are measured using enacted tax rates.

 The tax effect of temporary differences that give rise to deferred income taxes
 is as follows:
<TABLE>
<CAPTION>
                                                  January 3,    December 31,
                                                     1998           1996
                                                  -----------   -------------
<S>                                               <C>           <C>
 Deferred tax assets
   Accruals and reserves                           $ 288,935       $ 169,748
   Inventory                                          19,301               -
   Net operating loss carryforwards                  979,492               -
   Valuation allowance on deferred tax asset        (414,289)              -
   Other                                              20,183          50,726
                                                   ---------       ---------
                                                     893,622         220,474
                                                   ---------       ---------
 
 Deferred tax liabilities
   Property, plant and equipment                    (563,622)       (523,709)
   Inventory                                               -        (177,765)
                                                   ---------       ---------
                                                    (563,622)       (701,474)
                                                   ---------       ---------
</TABLE>                                         $   330,000     $  (481,000)
                                                   ==========      ========== 

                                     F-25
<PAGE>
 
                   The Eastwind Group, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     January 3, 1998 and December 31, 1996


NOTE M - EQUITY TRANSACTIONS

 In May 1996, the Company issued 1,000 shares of its newly designated Series A
 preferred stock (the Series A Preferred Stock) to a third-party investor for
 gross proceeds of $1,000,000.  The Series A Preferred Stock has a stated value
 of $1,000 per share and pays quarterly dividends at 9% per year until May 9,
 1999, 15% per year thereafter until May 9, 2002, and 18% per year thereafter.
 The Company may redeem the Series A Preferred Stock at any time on 30 days'
 prior notice at the stated value per share plus accrued and unpaid dividends
 thereon to the date of redemption.  The holders of the Series A Preferred Stock
 are entitled to payment of the stated value plus accrued and unpaid dividends
 thereon, prior to payment in respect of any class of capital stock of the
 Company, in the event of a liquidation or dissolution of the Company.  The
 Series A Preferred Stock is not entitled to any voting rights.  In connection
 with the issuance of the Series A Preferred Stock, the Company issued 220,000
 Common stock purchase warrants which are exercisable at $6.00 per share until
 they expire on May 10, 2003.  The warrants were valued at $521,400 for
 financial reporting purposes and were recorded as warrants outstanding.

 In June 1996, the Company sold to a third-party investor 200,000 Common stock
 units (the Units), with each Unit consisting of one share of Common stock and
 1-1/4 Common stock purchase warrants, for $1,200,000.  Each warrant is
 exercisable at $3.00 per share for a three-year period commencing December 14,
 1996.  All 200,000 Units were issued on the effective date of the Company's
 most recent registration statement, which was July 25, 1996.  The warrants were
 valued at $402,500 for financial reporting purposes and were recorded as
 warrants outstanding.  In November 1996, in connection with the sale of the
 Units, the Company issued warrants to investment bankers to purchase 22,500
 shares of Common stock at an exercise price of $6.00.  These warrants expire in
 November 1999.

 In October 1996, in connection with the acquisition of Centennial (NOTE D), the
 Company issued warrants to investment bankers to purchase an aggregate of
 130,000 shares of Common stock at exercise prices ranging from $6.00 to $9.00.
 These warrants expire between three and seven years from the date of issuance.

 In December 1996, the Company purchased 35,000 shares of its Common stock for
 treasury at a price of approximately $5.50 per share.

 During 1996, warrants were exercised at prices ranging from $3.50 to $6.00.
 The net proceeds from the exercise of these warrants was $1,781,000.

 In 1997, in conjunction with the issuance of shares of Common stock, the
 Company issued Common stock purchase warrants to acquire 700,000 shares of the
 Company's Common stock at exercise prices ranging from $3.00 to $5.00.

 At January 3, 1998, the Company has reserved 1,002,500 shares of Common stock
 for issuance upon exercise of outstanding warrants at prices ranging from $1.50
 to $6.63, which includes warrants held by officers/stockholders to purchase
 385,000 shares of Common stock at an exercise price of $4.00.

                                     F-26
<PAGE>
 
                   The Eastwind Group, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     January 3, 1998 and December 31, 1996


NOTE N - STOCK PLANS

 The Company has two stock plans that provide for the granting of both incentive
 and nonqualified stock options and stock appreciation rights (SARs) to
 officers, employees, consultants and nonemployee directors.  Under the plans,
 2,000,000 shares of Common stock have been reserved for issuance and are
 available for future grants.  The number of options/SARs and exercise
 price/base price, respectively, are determined by the Board of Directors in
 accordance with the terms of the plans.  Information with respect to the
 options under the plans is as follows:
<TABLE>
<CAPTION>
 
                                 Stock Option Incentive Plan    Non-Employee Director Plan
                                 ----------------------------   --------------------------
                                                  Weighted                     Weighted
                                  Number of       average       Number of      average
                                   shares      exercise price    shares     exercise price
                                 -----------   --------------   ---------   --------------
<S>                              <C>           <C>              <C>         <C>
 
 Balance, December 31, 1995...      300,000             $6.00     120,000            $7.50
 
 Grants.......................      280,000              4.57      40,000             9.06
                                   --------             -----     -------            -----
 
 Balance, December 31, 1996...      580,000              5.31     160,000             7.89
------------------------------     --------             -----     -------            -----
 
 Grants                              10,000              6.75           -                -
 
 Forfeitures..................     (162,500)             5.31                            -
                                   --------             -----     -------            -----
 
 Balance, January 3, 1998.....      427,500             $5.32     160,000            $7.89
                                   ========             =====     =======            =====
</TABLE>

 These options vest ratably over three years.  As of January 3, 1998, 326,655
 options were exercisable and 1,412,500 were available for future grant.  As of
 January 3, 1998, no SARs had been granted.

                                  (Continued)

                                     F-27
<PAGE>
 
                   The Eastwind Group, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     January 3, 1998 and December 31, 1996


NOTE N - STOCK PLANS - Continued

 The Company accounts for its stock option plans under APB Opinion No. 25,
 Accounting for Stock Issued to Employees.  Accordingly, no compensation expense
 has been recognized for stock options issued to employees.  The disclosure
 requirements of SFAS No. 123, Accounting for Stock-Based Compensation, were
 adopted by the Company in 1996.  Had compensation cost for the Company's Common
 stock option plans been determined based upon the fair value of the options at
 the date of grant, as prescribed under SFAS No. 123, the Company's pro forma
 net (loss) income available to common stockholders and (loss) earnings per
 share available to common stockholders would have been as follows:
<TABLE>
<CAPTION>
 
                                                                    January 3,    December 31,
                                                                       1998           1996
                                                                   ------------   -------------
<S>                                                                <C>            <C>
   Net (loss) income available to common stockholders
     As reported                                                   $(4,543,404)      $ 216,363
     Pro forma                                                      (5,377,054)       (407,023)
 
   (Loss) earnings per share available to common stockholders
     As reported                                                         (1.60)           0.11
     Pro forma                                                           (1.89)          (0.21)
</TABLE>

 The weighted average fair value of each stock option granted during the years
 ended January 3, 1998 and December 31, 1996 was $4.22 and $3.19, respectively.
 The fair value of each option grant is estimated on the date of grant using the
 Black-Scholes option pricing model with the following weighted average
 assumptions:
<TABLE>
<CAPTION>
 
                                January 3,    December 31,
                                   1998           1996
                                -----------   -------------
<S>                             <C>           <C>
 
   Risk-free interest rate             6.7%            6.3%
   Expected dividend yield               -               -
   Expected life                    6 years         6 years
   Expected volatility                  60%             60%
</TABLE>

 The weighted average remaining contractual life of stock options outstanding as
 of January 3, 1998 is 8.3 years.

 The Company has issued a stock option to purchase a 10% interest in Ivy to the
 president of that subsidiary.  The option vests only upon an initial public
 offering or change in control, as defined, of Ivy (NOTE R).

                                     F-28
<PAGE>
 
                   The Eastwind Group, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     January 3, 1998 and December 31, 1996


NOTE O - COMMITMENTS AND CONTINGENCIES

 1. Operating Leases
    ----------------

 The Company leases certain facilities and equipment under noncancellable
 operating leases that expire through June 2002.  Rent expense of $1,483,295 and
 $491,844 has been charged to operations for the years ended January 3, 1998 and
 December 31, 1996, respectively.  Minimum future rental payments under leases
 as of January 3, 1998 are as follows:
<TABLE>
 
<S>          <C>
   1998    $   531,199
   1999        509,569
   2000        416,071
   2001        317,500
   2002        158,750
             ---------
           $ 1,933,089
            ==========
    
</TABLE>
                                                            
 2. Employment Agreements
    ---------------------

 In  1995, the Company entered into a five-year employment agreement with an
 executive officer/stockholder.  This agreement provides for aggregate base
 compensation of $250,000 per year plus scheduled increases in base compensation
 of $25,000 for every $1,000,000 increase in pretax income above $1,500,000.
 The base compensation is also subject to increases upon the Company acquiring a
 third operating company.  The officer/stockholder is entitled to incentive
 compensation equal to 3% of pretax income if his respective stock ownership is
 reduced to 10% or less.  No additional compensation was earned during the
 fiscal years ended January 3, 1998 and December 31, 1996.  The employment
 agreement also provides for certain payments upon termination of employment and
 change in control of the Company.

 By agreement dated June 20, 1997 and effective July 1, 1997, the former
 President of the Company resigned from his office and from his position as a
 member of the Executive Committee of the Board of Directors.  He remained a
 Director of the Company until his resignation in December 1997.  The agreement
 provides for equal monthly payments in satisfaction of his employment contract
 plus a lump-sum contingent payment.  That portion that was fixed and
 determinable ($500,000) has been recorded in the accompanying financial
 statements as a charge to income at its present value.

 In January 1997, the Company entered into an employment agreement with another
 executive. Such agreement provides for a base salary of $150,000 per year,
 together with discretionary bonuses, if any, to be declared by the Board of
 Directors. The agreement also provides for certain benefits, including
 vacation, health and medical insurance, car allowance and stock option plan
 participation, if such are implemented for comparable employees by the Board of
 Directors. The agreement contains covenants regarding confidentiality of
 proprietary information of the Company and a restrictive covenant in favor of
 the Company. The agreement is for a term of one year, and thereafter is
 annually renewable for successive one year periods, although either party may
 terminate the agreement upon six months written notice to the other and the
 Company may discharge the employee at any time with or without cause. If the
 employee is terminated without cause, the Company shall pay to the employee a
 severance allowance equal to six months base compensation.

 The Company entered into a one-year employment agreement with another executive
 officer.  This agreement provides for a base compensation of $84,000 per year
 plus benefits, which was subsequently increased to $108,000.

                                  (Continued)

                                     F-29

<PAGE>
 
                   The Eastwind Group, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     January 3, 1998 and December 31, 1996


NOTE O - COMMITMENTS AND CONTINGENCIES - Continued

 3. Litigation
    ----------

 In connection with the acquisition of Centennial, the Company issued Series B
 Redeemable Preferred Voting stock, agreed to pay the former owner $100,000 per
 year over three years, and guaranteed the aggregate sales price of the 182,232
 shares of the Company's Common stock to be $7.00 per share.

 The Series B Redeemable Preferred Voting stock issued has  stated value of $100
 per share, and the holder is entitled to received cash dividends at 6% per
 year.  Additionally, the holder may require the Company to redeem for cash up
 to 1,800 shares during each three-month period beginning on April 1, 1997, at a
 price equal to the stated value plus accrued dividends.  Accrued dividends at
 January 3, 1998 and December 31, 1996 were $60,750 and $6,750, respectively.

 In March 1997, the Company instituted a demand for arbitration against the
 former owner of Centennial pursuant to the indemnification provisions of the
 stock purchase agreement.  Prior to the formal arbitration proceedings, the
 Company received an offer of settlement from the former owner, which would
 relieve the Company of:

    .  the remainder of the $100,000 per year payments ($191,312 at January 3,
       1998);
    .  any obligation relating to the Series B Preferred Voting Stock, including
       all accrued dividends; and
    .  any responsibility for market price support on the Company's Common
       stock.

 The Company also agreed to issue 45,000 additional shares of its Common stock
 to the former owner.

 While there has been an agreement in principle, the settlement agreement has
 not been executed.

 The Company is involved in certain legal actions and claims arising out of the
 ordinary course of business.  Management believes that the outcome of such
 litigation and claims will not have a material adverse effect on the Company's
 financial position or results of operations.

NOTE P - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 Cash paid for interest was $1,715,458 and $706,901 for the years ended January
 3, 1998 and December 31, 1996, respectively.

 The Company paid income taxes of $-0- and $337,564 for the years ended January
 3, 1998 and December 31, 1996, respectively.

 The Company entered into $85,685 and $453,189 of capital lease obligations for
 computer equipment and various furniture and fixtures for the years ended
 January 3, 1998 and December 31, 1996, respectively.

                                     F-30
<PAGE>
 
                   The Eastwind Group, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     January 3, 1998 and December 31, 1996


NOTE Q - INDUSTRY SEGMENT AND FOREIGN SALES INFORMATION

 The Company continues operations in three business segments through its
 subsidiaries: Polychem, Team Graphics and Lavelle.  Net sales, operating income
 (loss), identifiable assets, capital expenditures, and depreciation and
 amortization  for continuing operations are presented below:
<TABLE>
<CAPTION>
 
                                                            Year Ended January 3, 1998
                                      --------------------------------------------------------------------------
                                                                                   Corporate and
                                       Polychem     TEAM Graphics      Lavelle      eliminations       Total
                                      -----------   --------------   -----------   --------------   ------------
<S>                                   <C>           <C>              <C>           <C>              <C>
 
   Net sales                          $12,130,000     $26,631,000     $4,680,000     $         -    $43,441,000
   Operating income (loss)              1,046,000      (2,169,000)       604,000      (3,354,000)    (3,874,000)
   Identifiable assets                  7,311,000      16,442,000      3,059,000         169,000     26,981,000
   Capital expenditures                         -         294,000         96,000          13,000        402,000
   Depreciation and amortization          233,000       1,241,000        186,000          34,000      1,694,000
 
                                                             Year Ended December 31, 1996
                                      --------------------------------------------------------------------------
                                                                                   Corporate and
                                      Polychem      Printing         Ivy           eliminations     Total
                                      -----------   -------------    -----------   -------------    -----------
 
   Net sales                          $14,860,000     $ 8,773,000     $        -     $         -    $23,633,000
   Operating income (loss)              1,734,000         (20,000)             -        (670,000)     1,044,000
   Identifiable assets                  7,377,000      15,156,000      3,952,000       1,973,000     28,458,000
   Capital expenditures                     3,000          26,000              -          21,000         50,000
   Depreciation and amortization          204,000         273,000              -          28,000        505,000
</TABLE>

 For the fiscal year ended January 3, 1998, Polychem's sales to foreign
 customers were approximately $2,722,000, or 6% of consolidated net sales, and
 consist of sales to customers in Asia (1%), Europe (3%) and North America (2%).

 For the year ended December 31, 1996, Polychem's sales to foreign customers
 were approximately $5,325,000, or 23% of consolidated net sales, and consist of
 sales to customers in Asia (13%), Europe (7%) and North America (3%).
 Receivables from these customers were approximately $1,353,000 as of December
 31, 1996.

                                     F-31
<PAGE>
 
                   The Eastwind Group, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     January 3, 1998 and December 31, 1996


NOTE R - SUBSEQUENT EVENTS

 On January 26, 1998, Lavelle purchased the building they were occupying for
 $1,670,670.  Lavelle financed the building through mortgages totalling
 $1,652,000.

 The stock subscription receivable of $250,000 recorded at January 3, 1998 was
 paid in February 1998.

 On February 23, 1998, the Company sold all of the outstanding Common stock of
 Ivy for $1,152,250. The Company received $755,000 in cash and $397,250 in the
 form of a promissory note due in 36 monthly principal installments of $11,635
 plus interest of 8.5%. The consolidated balance sheet at January 3, 1998
 contains the net assets of Ivy in the amount of $324,128 consisting of the
 following:
<TABLE>
 
<S>                            <C>
   Current assets              $  557,386
   Noncurrent assets            4,389,251
   Current liabilities          1,995,717
   Noncurrent liabilities       2,650,323
   Stockholders' equity           300,597
</TABLE>

 Ivy revenues were $6,343,000 for the fiscal year ended January 3, 1998.

 Due to continuing operating losses, the Company decided to close down the
 operations of Premier Book Press, effective April 13, 1998.  As of January 3,
 1998, the Company has written off net goodwill related to the Wickersham and
 Princeton acquisitions, and recorded valuation allowances on certain assets.

                                     F-32
<PAGE>
 
                                  SIGNATURES

In accordance with Section 13 or 15d of the Securities Exchange Act of 1934, the
Registrant caused this Form 10-KSB to be signed on its behalf by the
undersigned, thereunto duly authorized on the 20th day of April, 1998.

                                          THE EASTWIND GROUP, INC.
                                    
                                     By:  /s/ Paul A. DeJuliis
                                          --------------------------------------
                                          Paul A. DeJuliis
                                          Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Form
10-KSB has been signed by the following persons in their capacities and on the
dates indicated.

<TABLE> 
<CAPTION> 
SIGNATURE                      TITLE                         DATE              
---------                      -----                         ----              
<S>                            <C>                           <C> 
/s/ Paul A. DeJuliis                                                           
----------------------------                                                   
Paul A. DeJuliis               Chairman of the Board and     April 20, 1998   
                               Chief Executive Officer                         
                                                                               
/s/ Anthony J. Mendicino                                                       
----------------------------                                                   
Anthony J. Mendicino           President and                                   
                               Chief Operating Officer                         
                               and Director                  April 20, 1998   
                                                                               
/s/ William B. Miller                                                          
----------------------------                                                   
William B. Miller              Senior Vice President         April 20, 1998    
                               and Chief Financial Officer                     
                               and Director                                    
                                                                               
/s/ Bruce P. Murray                                                            
----------------------------                                                   
Bruce P. Murray                Director                      April 20, 1998    
                                                                               
                                                                               
/s/ Andrew Panzo                                                               
----------------------------                                                   
Andrew Panzo                   Director                      April 20, 1998   
                                                                               
                                                                               
/s/ Edward F. Sager                                                            
----------------------------                                                   
Edward F. Sager                Director                      April 20, 1998     
</TABLE> 

                                    Page 30