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

                                   Form 10-KSB

(X)  ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
     1934

                  For the fiscal year ended December 31, 1997

                         Commission File Number 0-20701

                                Compositech Ltd.
                 (Name of small business issuer in its charter)

           Delaware                                              11-2710467
(State or other jurisdiction of                               (I.R.S. Employer
 incorporation or organization)                              Identification No.)

                  120 Ricefield Lane, Hauppauge, New York 11788
                    (Address of principal executive offices)

                    Issuer's telephone number: (516) 436-5200

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

                                      None

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

                          Common Stock, $.01 par value
                        Redeemable Common Stock Warrants

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

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of  Regulation  S-B  contained  in  this  form,  and no  disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

     Issuer's revenues for fiscal year ended December 31, 1997: $507,403

     As of March 17,  1998,  there were  10,188,380  shares of the  registrant's
Common Stock, $.01 par value  outstanding.  The aggregate market value of Common
Stock  held by  non-affiliates  of the  registrant,  as of  March  17,  1998 was
approximately $19,740,000.

Documents  Incorporated  By Reference:  Portions of the issuer's Proxy Statement
for its 1998 Annual  Meeting of  Stockholders  scheduled  to be held on June 23,
1998, are incorporated by reference into Part III of this Form 10-KSB.

     Transitional Small Business Disclosure Format (check one): Yes ___  No _X_


<PAGE>


                                     PART I

Item 1. Description of Business

General

Compositech Ltd. (the "Company" or  "Compositech")  was founded in 1984 by Jonas
Medney and Fred Klimpl, its Chairman and President, respectively, to develop and
market innovative superior  copper-clad  fiberglass epoxy laminates used to make
printed  circuit boards required by the  electronics  industry.  The Company was
incorporated  in the State of New York on June 13,  1984 and was  merged  into a
newly formed Delaware corporation on January 29, 1988. The primary innovation of
Compositech was to replace the fiberglass cloth component of the laminate with a
more modern and structurally efficient fiberglass core resulting from a uniform,
orthogonally layered construction. The Company has received grants of 26 patents
covering its products,  processes and  apparatus,  including  five in the United
States, and has submitted eight additional patent applications.  The most recent
patents  granted  were three in Japan and one in Hong Kong.  The  Company  was a
development  stage company  through 1996.  Based on the level of production  and
sales for 1997,  the Company has  concluded it was no longer in the  development
stage as of January 1, 1997. Based on its own benchmark  testing and evaluations
by  customers  and other  potential  users,  the  Company  believes  that it has
succeeded in developing a laminate that is superior to  competitive  copper-clad
fiberglass epoxy laminates.

On July 9, 1996, the Company received net proceeds of approximately $9.9 million
from its initial public offering ("IPO"). Approximately $4.3 million was used to
reduce  debt  substantially  and pay  accrued  interest.  The  Company  used the
remaining  proceeds to add production  modules to its existing equipment and for
working capital.

From May through August 1997,  the Company  issued  $6,505,000 of 5% Convertible
Debentures (the  "Debentures") in a private  placement and received net proceeds
of  approximately  $5.9  million  for working  capital and to obtain  additional
production  equipment.  Through March 15, 1998,  $3,295,000  of debentures  were
converted into 2,324,132 shares of common stock.

The Company's innovative laminates are produced using proprietary  processes and
machinery,  designed  by the  Company's  engineering  staff.  The patents on the
laminates,  processes  and  apparatus are  supplemented  with other  proprietary
technology  unprotected  by  patents  and  considered  by the  Company  to be of
substantial value.

Compositech's   laminate   construction  is  structurally  more  efficient  than
competitive  copper-clad  fiberglass epoxy laminates designated "FR-4", which is
the industry standard,  resulting in enhanced smoothness and greater dimensional
stability.  The Company  believes,  based on results of customers'  evaluations,
that its improved  products can economically  replace the fiberglass woven cloth
epoxy  laminates  currently used in the electronics  industry.  According to the
Institute for  Interconnecting  and Packaging  Electronic  Circuits (the "IPC"),
this market exceeded $2.9 billion in 1996.

The Company  successfully  constructed,  debugged  and  operated its first pilot
plant production equipment for laminates with a panel size of 24" x 24" in 1991.
In 1991 and 1992,  Compositech  recruited an initial  sales staff to develop the
market  potential of its product,  continued  refining its product and designing
its production equipment to manufacture laminates with a panel size of 36" x 48"
and initiated a sampling program targeted at major potential customers. In 1994,
the  Company  started  up and began  debugging  its first  production  module to
manufacture  36" x 48" laminates  and, in 1995 and 1996,  produced  laminates on
this equipment in limited quantities for the purpose of making  modifications to
the production processes constituting the module and reformulating the laminates
produced  by the  module.  In the  last  quarter  of  1996,  the  Company  began
installation  of advanced  production  equipment  which was  completed  in 1997.


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<PAGE>


Throughout  1997,  the Company  continued  to adjust and enhance its  production
equipment and its manufacturing processes. The Company also worked on and solved
problems  with  incoming  materials  and  interior  environment  which  affected
manufacturing  yields. Sales consisted of qualifying orders and small production
runs.

On October  16,  1997,  the  Company  closed its  transaction  with four  Quebec
institutional investors (collectively,  the " Quebec Investors") to form a 50/50
joint venture for the  establishment  of a plant in the greater Montreal area to
manufacture  Compositech's  laminates.  The investor  group is comprised of four
institutional  investors:  Societe  generale de financement du Quebec,  Fonds de
solidarite des  travailleurs  du Quebec  (F.T.Q.),  Societe  Innovatech du Grand
Montreal and Fonds regional de solidarite  Ile de Montreal.  The project cost is
estimated to be approximately  $24.5 million with an initial  capitalization  by
the  parties  of  approximately  $11  million  with  the  balance  to be in debt
financing for which firm  commitments  have been obtained from the National Bank
of Canada and governmental  agencies.  The Company's  approximately $5.4 million
capital  investment  in the joint  venture  was funded by the  Quebec  Investors
purchasing  1,066,192 shares of the Company's Common Stock. The Quebec Investors
have an option to sell their 50%  interest  in the joint  venture to the Company
for a like number of shares and, under certain circumstances, the Company has an
option to purchase  the  interest  for the same  number of shares.  The plant is
planned  to start  production  in 1999  with an  anticipated  annual  production
capacity of approximately 10 million square feet.

On February 9, 1998,  the Company  entered into a joint  venture  agreement  and
patent,  information and trademark agreement with a Taiwanese investor group led
by Fidelity  Venture  Capital Corp. of Taiwan  ("Fidelity") to establish a joint
venture to manufacture the Company's  laminates in Taiwan.  The Company received
$1 million as a license  down payment and it will  receive  additional  up-front
license  payments of $1 million and, will in turn,  invest $500,000 in the joint
venture, upon the achievement of certain milestones. As part of the transaction,
the joint venture  acquired  587,372 shares of the Company's common stock for $1
million and agreed to buy a like amount of shares for another $1 million  within
30 days  following  approval of the joint  venture  license by the science  park
where it is proposed to be located.  The Company will receive an approximate 10%
interest in the joint  venture and royalty  payments  based on sales.  A related
letter of intent with  Fidelity  provides for entering  into a contract with the
Company  for it to supply the joint  venture  with the  requisite  manufacturing
equipment.

Industry Overview

Initially, most circuit boards had circuits (traces) on one or two sides. In the
last ten years, rapid  technological  advances in both semiconductor  design and
fabrication  techniques  have placed  significant  demands on the performance of
printed circuit boards. Greater circuit density,  complexity and miniaturization
have increased demand for more sophisticated printed circuit boards. In response
to  this  demand,   multilayer  printed  circuit  boards  were  developed  which
incorporate  multiple layers of metallic traces. The several layers of circuitry
are aligned and bonded together in a stack to form a multilayer  board with both
horizontal  and vertical  electrical  interconnections.  Further  circuit  board
sophistication   is  currently  being  achieved  by  decreasing  the  width  and
separation  of the traces,  drilling  and plating  smaller  holes to connect the
internal  trace layers and precisely  situating the traces and pads on the board
surface to accommodate surface mount components.

These trends in the printed  circuit  board  industry  have placed  increasingly
rigorous demands on the electrical,  thermal, chemical and mechanical properties
of  laminates.  Mechanical  properties  must be  increasingly  more  uniform and
tightly  controlled in order to align the various layers in a multilayer printed
circuit board.  Electrical properties of laminates must be highly consistent and
predictable in order to avoid circuit timing malfunctions.  Thermal stability is
also critical for attaching the  components  and for dense,  high speed systems,
because of the heat generated.



                                       3
<PAGE>


Compositech's  technology is targeted at the fiberglass  laminate segment of the
laminate  industry.  According to the IPC, in 1996 the single- and  double-sided
laminate  market  was  approximately   $1.2  billion  and  the   multilayer/high
performance  laminate  market was  approximately  $1.7  billion,  totaling  $2.9
billion. In these two segments,  the United States' share was approximately $790
million experiencing a growth rate of 20% for 1996.

Products

Printed Circuit Board Laminates.  Printed circuit boards are the basic platforms
used  to  interconnect  the  microprocessors,   integrated  circuits  and  other
components essential to the functioning of electronic products.  They consist of
a pattern of electrical  circuitry  resulting from etching copper foil laminated
to a composite made of insulating  materials usually comprised of fiberglass and
epoxy. The laminate itself, therefore, is the copper-clad,  fiberglass and epoxy
core from which printed circuit boards are produced.

Compositech's  Laminates.  CL200+ is the introductory Compositech laminate. This
laminate uses the same basic raw materials as conventional laminates: fiberglass
yarn, epoxy resin and copper foil.  Compositech  combines these materials into a
unique,  more  efficient  laminate.  Conventional  laminates are made from woven
fiberglass  cloth in which  the  yarn is  twisted  and  crimped  in the  weaving
process.  The resultant weave pattern is impressed into the copper foil, thereby
roughening the surface of the laminate.  In the  construction  of  Compositech's
laminates,  the filaments of fiberglass are wound in orthogonal  layers of flat,
continuous parallel filaments. This construction creates the enhanced smoothness
and improved dimensional stability of Compositech's laminates.

High processing  temperature  tolerance is necessary for soldering components to
circuit  boards.  CL200+  uses  a  proprietary  epoxy  resin  formulation  that,
according  to Company  tests,  results in a thermal  rating  over  200(degree)C,
principally  because  of the  formulation,  which is  generally  20(degree)C  to
80(degree)C  higher than other copper-clad  fiberglass epoxy laminates.  Certain
laminates  produced from materials  other than  fiberglass  epoxy,  addressing a
small, higher cost end of the market, have thermal ratings which equal or exceed
those of the Company's introductory CL200+ laminates.

Management  believes that the benefits of Compositech's  laminates should enable
the printed circuit board industry to:

     o    Decrease costs through  reducing waste in the  manufacture of existing
          boards  because  the  improved  dimensional   stability,   temperature
          tolerances and enhanced smoothness increase manufacturers' yields.

     o    Accelerate the development of new products  requiring denser circuitry
          by  permitting  finer lines and smaller  pads. A pad is a portion of a
          conductive pattern which is usually, but not exclusively, used for the
          connection and/or attachment of components.

Compositech's Strategy

The  Company's  objective  is to be  the  leading  manufacturer  of  copper-clad
fiberglass  epoxy  laminates for electronics  equipment.  The Company expects to
achieve this  position  through the effective  exploitation  of its patented and
proprietary products and processes.

Management has targeted the $1.7 billion  multilayer  laminate market sector for
its  initial  sales  efforts to  establish  its  laminates  as the  leading-edge
technology  for  current and future  economical  production  of printed  circuit
boards.

Management  believes that the strategic  value of the Company's  products to its
prospective customers is to



                                       4
<PAGE>

enable them economically to produce increasingly sophisticated circuit boards in
a shorter  time  cycle.  This  combination  of  benefits  is a basic  element of
Compositech's product technology thrust.

The Company has patented and developed a flexible  manufacturing process that it
believes can be exceptionally responsive to the ever-changing product iterations
required by the rapid  introduction of new designs into the electronics  market.
The  manufacturing  capacity  can  be  expanded  incrementally  in  response  to
increased market demand.

Management  believes  that  the  Company's   technology  has  global  potential.
According to IPC data, approximately 70% of the world laminate market is outside
of North  America.  The Company plans to export its products and form  strategic
alliances to manufacture and market its laminates internationally.

The  foregoing  strategic  objectives  represent   anticipated   accomplishments
dependent on future events.  As in the case of all forward  looking  statements,
the Company can not ensure that it will achieve these goals.

Marketing and Customers

The  Company's  marketing  efforts are  directed to  establishing  good  working
relations with leading-edge  producers of circuit boards.  According to the IPC,
there are over 670 manufacturers of printed circuit boards in North America with
18 companies  comprising over one-third of the market.  The Company has sold its
laminates  principally  on a test  basis  to a select  group of these  companies
considered  to be the key companies for  Compositech's  growth.  During the past
three years,  Compositech has encouraged benchmark  comparisons of its laminates
with  current  laminates  which  have  included  qualities  such as  dimensional
stability,  smoothness,  flatness and thermal  processing.  In virtually  all of
these  evaluations,  CL200+ has proven  superior  to  current  laminates.  These
results  have led  several  manufacturers  to begin to use  CL200+  for  current
production  applications  in  limited  quantities.  Recently,  sales  have  been
affected  by  delays  in  or  cancellation  of  customers'   program  for  which
Compositech's  laminates had been  qualified.  These  companies,  part of the 18
companies  mentioned  above,  include  AMP  Incorporated   ("AMP"),   VIASYSTEMS
Technologies  Corp.,  successor to Lucent  Technologies,  Inc. (formerly part of
AT&T Corp.),  HADCO  Corporation,  Merix  Corporation,  North  American  Printed
Circuits (a division of TYCO  International  Ltd.) and Teradyne,  Inc. Customers
benefit from increased  production  yield  primarily by reducing waste caused by
circuitry misalignment.

Compositech's   laminates   are   designed   and  have  proven  to  be  directly
substitutable for conventional laminates in the circuit board production process
as  demonstrated  by their use in production by  customers.  This  compatibility
enables the circuit board  manufacturer  to substitute  Compositech's  laminates
without the need for additional equipment or new process technology.

The Company  markets to circuit  board  manufacturers  in the United  States and
Canada with its own direct sales force recently  supplemented by two independent
sales  representatives.  The Company's own sales force currently consists of its
President,  its Vice President of Sales and a marketing  associate.  The Company
plans to use additional  independent sales  representatives  and distributors to
expand sales.

Although  the Company  does not believe that  ultimately  its  business  will be
dependent upon a single  customer,  in view of limited  production  capacity the
Company  currently  is focusing its efforts on a number of select  accounts.  In
1997,  HADCO  Corporation  and  Merix   Corporation   represented  75%  and  18%
respectively,  of the Company's net sales.  The printed  circuit board  industry
generally follows a "just-in-time" strategy by purchasing laminates only as they
are required for production runs.  Accordingly,  the Company  currently does not
have a significant backlog of sales commitments as the orders are matched to the
Company's  present  production  capacity.  The  Company  expects  the backlog to
increase in relation to its planned production expansion.



                                       5
<PAGE>


Competition

     The  laminate  business  is  highly  competitive.   The  Company  has  many
competitors  of  varying  sizes and  financial  resources  located in the United
States,  Western Europe and the Far East.  Competition in the laminate market is
based  upon  factors  such  as  product  quality,   performance,   technological
capability,  responsiveness  to  customers,  delivery,  service  and price.  The
Company  believes there are more than 40 competitors  worldwide,  with more than
ten in the United  States.  The Company  believes  that its major  domestic  and
international  competitors  are  ADI/Isola,  AlliedSignal  Laminate  Systems  (a
subsidiary of AlliedSignal, Inc.), Arlon Inc., General Electric Company, Hitachi
Chemical Co. Inc.,  Matsushita  Electric  Industrial Co., Nan Ya Plastics Corp.,
Nelco International Corp. (a subsidiary of Park Electrochemical Corp.), Polyclad
Laminates, Inc. (a subsidiary of Cookson Group), Sumitomo Bakelite Co. Ltd., and
Toshiba Chemical Corp. The Company's  competitors  consist of companies that are
usually divisions or subsidiaries of some of the world's leading electronics and
manufacturing  concerns and have significantly  greater financial resources than
the Company.

     The Company believes its patented and proprietary technology will enable it
to become an effective  competitor by offering  customers products with a higher
value. The unique physical  characteristics of the Company's products should, in
the  Company's  opinion,  allow it to penetrate  the market and increase  sales.
However,  there is no assurance  that the  Company's  products  will prove to be
economically   competitive   or  that  the  Company  will  continue  to  develop
technologically competitive products in the future.

Manufacturing

     The Company  occupies a leased building at 120 Ricefield  Lane,  Hauppauge,
New York,  which  includes its  corporate  offices,  laboratory,  machine  shop,
engineering offices and manufacturing  operations.  The building is large enough
to allow the Company's  production line to be expanded to meet near-term  needs.
The technologically  advanced products manufactured by the Company require clean
environments  to ensure high yields.  Clean rooms are utilized by the Company in
certain  areas  of the  production  line to  control  contamination  from  small
particles.

     Compositech's   manufacturing   process   is  unique  and   patented.   The
manufacturing  equipment has been designed by the Company's  engineering  staff.
Much of the equipment  incorporates  proprietary  designs including hardware and
software.   Management  believes  that  the  Company's   manufacturing   process
eliminates many manufacturing  steps compared to the conventional  manufacturing
process, including weaving the fiberglass cloth.

     The  Company's  manufacturing  process  enables  the Company to control the
consistency  of mechanical,  thermal and  electrical  properties of laminates in
various  thicknesses.  In addition,  the Company's process eliminates the use of
solvents as an integral part of the manufacturing process although it uses small
amounts of  solvents  for the sole  purpose of cleaning  some of its  equipment.
Compositech's  CL200+  laminate is  comprised of copper,  fiberglass  and epoxy.
Other  combinations  of materials  usable in this process include aramid fibers,
quartz fibers, carbon fibers,  cyanate ester resins,  polyimide resins and other
conductive metal foils.

     The expansion of the Company's production facilities in 1997 and increments
planned for 1998 increase its annual capacity  significantly.  This expansion is
the first production-scale expansion undertaken by the Company, and consequently
no assurances can be made that the Company's production facilities will meet the
Company's  production targets in a timely way or that the resultant product will
meet the high  commercial  standard  needed for successful  market  penetration.
Furthermore,  the  expanded  production  facilities  may not be able to  provide
adequate efficiency and yield.


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<PAGE>


Materials and Sources of Supplies

     The principal  materials used in the manufacture of the Company's laminates
are copper foil,  fiberglass yarn and specially formulated resins and chemicals.
The  Company's  policy is to identify  and  concentrate  on a limited  number of
chosen  suppliers.  The Company's major suppliers are Circuit Foil USA, Inc. for
copper  foil;  Owens  Corning for  fiberglass  yarn;  John C. Dolph  Company for
resins;  and Lonza Inc. for certain  chemicals.  The Company attempts to develop
and maintain close working  relationships with those chosen suppliers who comply
with the Company's  stringent  technical  requirements and  specifications.  The
Company has  identified  alternative  sources of supply for each of the required
materials.  However,  there exists a limited  number of  qualified  suppliers of
these materials,  and although the Company considers its relationships  with its
suppliers to be satisfactory, a disruption of the supply of material from one or
more of the Company's  principal  suppliers could adversely affect its business.
Substitutes  for some of  these  materials  are not  readily  available,  and an
inability  to  obtain  essential  materials,  if  prolonged,   could  materially
adversely affect the business of the Company.

     In 1995,  some raw  material  shortages  were  reported  to the  Company by
certain of its suppliers  and in 1997,  the Company  encountered  high levels of
defects in incoming copper foil.  Although the Company is not  experiencing  any
such  shortages or high levels of defects  currently,  no assurance  can be made
that  it  can  obtain  adequate  quality  supplies  necessary  for  its  planned
expansion.

Patents and Proprietary Information

     The Company  continues to build a patent estate to protect its  technology.
Twenty-six  patents have been granted in the United States and  internationally.
The U.S. patents granted expire from 2007 to 2012. The foreign patents generally
have expiration dates from 2004 to 2009.  Eight patent  applications in the U.S.
and internationally are currently pending.  These patents and applications cover
the unique laminate product and the process and equipment used for producing the
laminates.  The patents also cover a precision  multilayer process and a circuit
transfer  process.  Additional  inventions  have been disclosed to the Company's
patent attorneys and may be the subject of future patent applications.

     In addition,  the Company has developed extensive  proprietary  information
considered  to be of  substantial  value.  The  Company  has no patents for this
proprietary  information.  The Company believes that, although such information,
techniques  and  expertise  are  subject to  misappropriation  or  obsolescence,
development  of improved  methods,  processes and techniques by the Company will
continue on an ongoing basis.

     In June 1990, HT Troplast AG ("HT"), a former manufacturer of laminates for
printed  circuit  boards and an indirect  subsidiary of the Veba Group, a German
industrial  group,  invested  $6  million in the  Company  and agreed to provide
technical  and  marketing  assistance  at no cost for a 25% equity  share in the
Company and the exclusive right to produce and market Compositech's laminates in
Europe,  the  countries of the former  Soviet Union and Turkey.  To date, HT has
provided assistance with product quality standardization,  customer evaluations,
laboratory testing,  engineering,  patent advice,  research,  manufacturing cost
comparisons,  Asian prospective licensee contacts and production management.  In
accordance with the corporate  strategy of its parent  company,  HT discontinued
its manufacturing  operations for epoxy and fiberglass laminates in 1994 and for
all  laminates  in  1995,  but it  continues  to make  technical  and  marketing
assistance  available to the Company.  Pursuant to existing  agreements with HT,
the Company has the obligation to sell in the above described  territories  only
through HT and HT continues to retain Board representation.

     In February 1993, AMP and AKZO Electronics B.V. ("AMP/AKZO"),  which at the
time were  operating a joint  venture,  loaned the Company  $2.8  million  under
nonrecourse notes collateralized by two



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<PAGE>


licenses. The Company used these funds in its development program for production
equipment for 36" x 48"  laminates.  In May 1994, the  above-mentioned  licenses
were canceled,  and AMP/AKZO provided an additional $2 million and converted the
$2.8  million  note plus  approximately  $213,000 in interest  into a payment to
Compositech for immunity from prosecution  under the Company's product patent in
order to permit the  manufacture of laminates  using their own process which was
under development.  The immunity agreement does not cover the Company's patented
process or apparatus.

     The Company  expended  approximately  $77,000 and $153,000 for research and
development  during the years ended  December  31, 1997 and 1996,  respectively,
reflecting the shift in emphasis to manufacturing activities.

Environmental Matters

     Unlike other laminate  manufacturing  operations,  Compositech does not use
solvents as an integral part of its manufacturing process.  However, the Company
uses copper and chemicals in its  manufacturing  process and limited  amounts of
solvents for the sole purpose of cleaning  some of its  equipment and is subject
to a variety of applicable  environmental  laws.  The Company  believes that its
facilities  comply in all material respects with applicable  federal,  state and
local  environmental  laws and believes that costs arising from  compliance with
existing  environmental  laws  will not have a  material  adverse  effect on the
Company's  operations.  However,  environmental laws could become more stringent
over time,  imposing greater compliance costs and increasing risks and penalties
associated with a violation.

Employees

     The Company has 75 full-time employees. None of the employees is subject to
collective bargaining agreements. Management considers its labor relations to be
satisfactory  and believes that there is an adequate pool of labor  available to
satisfy foreseeable hiring needs.

Important Factors Regarding Future Results

     Information  provided by the Company,  including  information  contained in
this  Annual  Report,  or by its  spokespersons  from  time to time may  contain
forward-looking  statements concerning projected financial  performance,  market
and industry segment growth,  product development and commercialization or other
aspects of future operations.  Such statements, made pursuant to the safe harbor
established by recent securities  legislation,  are based on the assumptions and
expectations  of the Company's  management at the time such statements are made.
The  Company  cautions  investors  that its  performance  (and,  therefore,  any
forward-looking  statement)  is  subject  to risks  and  uncertainties.  Various
important  factors,  including but not limited to the  following,  may cause the
Company's  future  results  to differ  materially  from those  projected  in any
forward-looking statement.

Development Stage Company Until December 31, 1996; Ability to Continue as Going
Concern; Uncertainty of Future Financial Results

     The Company was a development  stage company through  December 31, 1996 and
has had limited  revenues from the sale of laminates,  has incurred  significant
losses and has had  substantial  negative cash flow since its  inception.  As of
December 31, 1997, the Company had an accumulated  deficit of  $27,971,370.  The
Company's  independent auditors have included an explanatory  paragraph in their
report  covering the December 31, 1997  financial  statements,  which  expresses
substantial  doubt about the Company's  ability to continue as a going  concern.
The Company  will require  additional  funding to cover  operating  expenses and
expenditures for additional  production equipment until revenues from operations
are  sufficient  for  these  purposes.  The  Company  expects  that  significant
operating  losses will continue for a substantial  part, or all, of 1998.  There
can be no assurance that the Company will successfully complete expansion of its
production  equipment,  achieve  broad  commercial  acceptance of its product or
generate



                                       8
<PAGE>


sufficient revenues to achieve profitable operations.

Need for Additional Financing

     The Company's available funds, without giving effect to alternative sources
of  revenue,  is not  sufficient  to raise  the  Company's  production  level to
profitability or provide  sufficient working capital for expansion of sales. The
Company  will need  additional  funding for  operations  in 1998 and  additional
funding is being sought.  Such additional  funding may be raised through sources
including  license  fees,  sales  of  equipment  in  connection  with  licensing
operations,  joint  ventures or other  collaborative  relationships,  as well as
equity or debt financing. There can be no assurance that additional funding will
be sufficient and available or, if it is available, that it will be available on
acceptable  terms. If additional funds are raised through the issuance of equity
securities or securities  convertible into equities, the percentage ownership of
then current stockholders of the Company will be reduced and such securities may
have rights,  preferences or privileges senior to those of the holders of Common
Stock.  If adequate  funds are not  available to satisfy  either  short-term  or
long-term  capital  requirements,  the  Company  may be  required  to limit  its
operations significantly.

Liens on Assets and Patents

     Notes   payable  to   stockholders   of  $100,000  and  notes   payable  to
stockholders/directors/officers  in the amount of  $675,000  due January 2, 1999
(as extended)  are  collateralized  by a second lien on U.S.  Patents and Patent
Applications. Notes payable to  stockholders/directors/officers in the amount of
$745,000 due January 2, 1999 (as extended) are collateralized by a first lien on
the Company's patents,  patent applications and certain production equipment. In
connection with the issuance of 5% Convertible  Debentures  (the  "Debentures"),
the  Company  granted  security  interests  as  follows:   Debentures  currently
outstanding  in the amount of $500,000 are  collateralized  by certain  existing
production  equipment (two vacuum molding  presses and one winding  machine) and
Debentures  currently  outstanding  in the amount of  $2,740,000  are  partially
collaterialized  by a vacuum  molding press and capital  equipment  being bought
with the proceeds of the Debentures.  If there is a default under the Debentures
or the notes,  the Company  could lose all or most of its patents and  equipment
thus  requiring it to negotiate new and  disadvantageous  terms or causing it to
cease operations.

Competition

     The laminate  manufacturing  business is highly competitive.  The Company's
competitors  include major  corporations,  such as General  Electric Company and
AlliedSignal  Inc.,  which have substantial  financial,  marketing and technical
resources.  In 1994, the Company  granted patent immunity on its product patents
to AMP and Akzo  Electronics  Products NV, which,  at the time, were operating a
joint venture which was developing a new process to make linear  laminates.  The
Company  may  need  to  raise  substantial   additional   resources  to  compete
effectively.  There is no  assurance  that the  Company  will be able to compete
successfully in the future.

Management of Growth

     The  Company  intends  to  expand   significantly   its  overall  level  of
operations.  Any such  expansion,  however,  is expected to strain the Company's
management,   technical,   financial  and  other  resources.  To  manage  growth
effectively,   the  Company  must  add  manufacturing  capacity  and  additional
personnel  while  maintaining  a  high  level  of  quality  and  achieving  good
manufacturing efficiency and while expanding, training and managing its employee
base. The Company's failure to add capacity and manage growth  effectively could
have a material adverse effect on the Company's  business,  financial  condition
and results of operations.



                                       9
<PAGE>


Reliance Upon Key Personnel

     The Company  believes that its success will depend to a significant  extent
upon the efforts of its senior management,  including Jonas Medney, its Chairman
and  Chief  Executive  Officer,  and Fred E.  Klimpl,  its  President  and Chief
Marketing Officer, who together invented its technology and founded the Company.
The  Company  maintains  and is the  beneficiary  of $2 million  key person life
insurance  policies  on  each  of  Messrs.   Medney  and  Klimpl.  The  loss  or
unavailability  of either Mr.  Medney or Mr.  Klimpl or other senior  management
could  have a  material  adverse  effect on the  Company's  business,  financial
condition and results of operations.

Dependence on Single Manufacturing Facility

     The Company's current laminate manufacturing  operations are centralized in
one building in  Hauppauge,  New York,  although  the joint  venture in Montreal
plans to build an  additional  larger plant in Montreal and the joint venture in
Taiwan  plans to build a third  plant.  See Item 1.  "Description  of Business -
General".  Because currently the Company does not operate multiple facilities in
different geographic areas, the ability to service large orders may be affected.
Further, a disruption of the Company's  manufacturing  operations resulting from
sustained  process  abnormalities,  human error,  government  intervention  or a
natural  disaster  such as fire,  earthquake or flood could cause the Company to
cease or limit its  manufacturing  operations and  consequently  have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations.

Uncertainty of Production Quality and Production Costs; Process Disruption

     The  Company has had  limited  experience  in  producing  laminates  on its
production-scale  modules.  The Company  recently  added  production  modules to
achieve  higher  quantity  levels and economies of scale.  This expansion is the
first production-scale  expansion undertaken by the Company, and consequently no
assurances can be made that the Company's  production  facilities  will meet the
Company's  production targets in a timely way or that the resultant product will
meet the high  commercial  standard  needed for successful  market  penetration.
Furthermore,  the  expanded  production  facilities  may not be able to  provide
adequate  efficiencies  and  produce  high  yields.  In  addition,  the costs of
production  may not be as low as management  expects,  in which case the Company
may not achieve  profitable  operations.  The Company's business involves highly
complex  manufacturing  processes  which  are  subject  to  disruption.  Process
disruptions  have occurred,  resulting in delays in product  shipments.  Process
disruptions  were  due  to  machine   breakdowns,   lack  of  adequate  interior
atmospheric  control  of  temperature  and  humidity,   electric  utility  power
failures, problems of breaking in an expanded workforce, contamination generated
during  installation  of equipment and  development of processes,  and defective
incoming copper foil.  There can be no assurance that disruptions will not occur
in the  future.  The loss of revenue and  earnings  to the  Company  from such a
disruption could have a materially adverse effect on its results of operations.

Significant Customers

     Due to limited  productive  capacity,  the  Company has been  focusing  its
efforts on a few select  accounts.  During  1997,  HADCO  Corporation  and Merix
Corporation  accounted for 75% and 18%,  respectively,  of sales.  Loss of these
customers could have a material adverse effect on the Company's business.

Technological Change

     The Company's  laminates are used in the electronic  printed  circuit board
industry which could encounter  competition  from new technologies in the future
and reduce the number of circuit  boards  required in  electronic  equipment  or
render existing interconnect technology less competitive or obsolete.



                                       10
<PAGE>


Availability of Materials; Price Fluctuations of Raw Materials;  Dependence Upon
Third-Party Supplier

     Raw materials used by the Company to produce laminates are purchased by the
Company  and in  certain  circumstances  the  Company  bears  the  risk of price
fluctuations.  In  addition,  shortages  of and  defects  in  certain  types  of
materials have occurred in the past and may occur in the future. During 1997 the
Company experienced defects in incoming copper foil used to make laminates.  The
Company  has  obtained  an  alternate  source  of supply  and also has  explored
solutions  with  the  previous  supplier.  Future  shortages,  defects  or price
fluctuations  in raw  materials  could  have a  material  adverse  effect on the
Company's  business,  financial  condition  and  results  of  operations.  Owens
Corning, a major fiberglass manufacturer, has developed and continues to develop
products to meet the Company's processing and product requirements.  Should this
manufacturer  not continue  supplying the Company's  quality and quantity needs,
the  Company  would have to secure  another  supplier.  Such event  could have a
material  adverse effect on the Company's  ability to supply customers and could
reduce expected sales and increase the costs of  manufacture.  No assurances can
be given that an  alternative  supplier  could meet the  Company's  quality  and
quantity needs on satisfactory terms.

Patents and Intellectual Property Protection

     The Company  believes that its patent estate and its know-how are important
for the protection of its technology. No assurance can be given that any patents
issued to the Company will not be  challenged,  invalidated or  circumvented  or
that such  patents  will  provide  substantial  protection  with  respect to the
Company's  product,  process  or  competitive  position.  In  addition,  certain
proprietary  information  which is considered to be of substantial  value is not
covered by patents and, along with the Company's other intellectual property, is
subject to  misappropriation  or  obsolescence.  In  addition,  the  Company has
granted certain  immunities on its product  patents to potential  competitors of
the Company, AMP and Akzo Electronics Products NV. The Company, under a license,
has granted HT Troplast AG ("HT"), a principal  stockholder of the Company,  the
exclusive  right to produce and market  Compositech's  laminates in Europe,  the
countries  of the former  Soviet  Union and Turkey.  HT has exited the  laminate
business  and no longer  pursues an active role  therein.  However,  the license
remains in effect and can only be assigned  to  entities in which HT's  ultimate
parent  company,  Veba AG, has  directly  or  indirectly  an over 50%  interest.
Pursuant to the  agreement,  the Company has the obligation to sell only through
HT in such territories.

Environmental Compliance

     The Company  uses copper and  chemicals  in its  manufacturing  process and
limited  amounts of solvents  for the sole  purpose of cleaning  its  equipment.
Although  the  Company  believes  that its  facility  complies  in all  material
respects  with  existing  environmental  laws and  regulations,  there can be no
assurance that violations will not occur. In the event of any future  violations
of  environmental  law and  regulations,  the  Company  could be held liable for
damages and for the cost of remedial actions.  In addition,  environmental  laws
could become more stringent over time,  imposing  greater  compliance  costs and
increasing risks and penalties associated with a violation.

Control by Existing Stockholders

     As at December 31, 1997, officers,  directors and certain other significant
stockholders of the Company owned  approximately  52.8% of the Company's  Common
Stock  and  voting  preferred  stock,   including  stock  options  and  warrants
exercisable within 60 days. It is expected that these stockholders will continue
to control the  management  and  policies  of the  Company,  including,  without
limitation, the power to elect and remove a majority of directors of the Company
and the power to approve any action requiring common  stockholder  approval.  In
addition,  some  of  these  officers,  directors  and  other  stockholders,   in



                                       11
<PAGE>


connection  with  certain  outstanding  loans,  have a security  interest in the
Company's  manufacturing  equipment and all of the Company's  patents and patent
applications or in the Company's U.S. patents and patent applications.

Quotation  of  Securities  on The Nasdaq  SmallCap  MarketSM;  Possible  Loss of
Quotation of Securities

     The Common Stock and  Redeemable  Common Stock Warrants  (collectively  the
"Securities")  are  quoted  on The  Nasdaq  SmallCap  MarketSM.  There can be no
assurance  that the Company will continue to meet the  maintenance  criteria for
continued listing of the Securities on The Nasdaq SmallCap MarketSM. The minimum
listing  requirements  for The Nasdaq  SmallCap  MarketSM  include,  among other
criteria,  (i)  net  tangible  assets  of  at  least  $2.0  million,  or  market
capitalization  of $35 million,  or net income of $500,000 (in the latest fiscal
year or two of the last three  fiscal  years),  and (ii) a minimum bid price per
share of $1.00,  a market value of the public float of $1.0  million,  300 round
lot  shareholders  and two  market  makers.  Furthermore,  The  Nasdaq  SmallCap
MarketSM  listing and  maintenance  criteria may become more stringent over time
and thus more difficult for the Company to meet. Failure to meet the maintenance
criteria may result in the  discontinuance of the inclusion of the Securities in
The Nasdaq SmallCap MarketSM.  In such event, trading, if any, in the Securities
may  continue  to  be  conducted  in  non-Nasdaq  over-the-counter  markets  and
investors  may find it more  difficult  to  dispose  of, or to  obtain  accurate
quotations  as to the price of, the  Securities.  The Common Stock would then be
subject to the risk that it could become  characterized  as low-priced or "penny
stock," which characterization could severely affect market liquidity.

Penny Stock Regulation

     Broker-dealer  practices in connection with  transactions in "penny stocks"
are  regulated  by certain  penny  stock  rules  adopted by the  Securities  and
Exchange  Commission.  Penny stocks generally are equity securities with a price
of less than  $5.00  (other  than  securities  registered  on  certain  national
securities exchanges or quoted on the Nasdaq system, provided that current price
and volume  information  with  respect to  transactions  in such  securities  is
provided  by  the  exchange  or  system).   The  penny  stock  rules  require  a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt from
the rules,  to deliver a  standardized  risk  disclosure  document that provides
information  about  penny  stocks and the risks in the penny stock  market.  The
broker-dealer  also  must  provide  the  customer  with  current  bid and  offer
quotations for the penny stock,  the compensation of the  broker-dealer  and its
salesperson  in the  transaction,  and monthly  account  statements  showing the
market value of each penny stock held in the  customer's  account.  In addition,
the penny stock rules  generally  require that prior to a transaction in a penny
stock the  broker-dealer  make a special  written  determination  that the penny
stock is a suitable  investment  for the purchaser  and receive the  purchaser's
written agreement to the transaction. These disclosure requirements may have the
effect of reducing the level of trading  activity in the secondary  market for a
stock that becomes subject to the penny stock rules. If the Common Stock becomes
subject to the penny stock rules,  investors may find it more  difficult to sell
their Common Stock.

Certain Restrictive Charter and Bylaw Provisions

     The Company's  Certificate of Incorporation and Bylaws empower the Board of
Directors,  without approval of the  stockholders,  to issue shares of preferred
stock  and  to  fix  the  rights  and  preferences   thereof,  and  to  prohibit
stockholders of the Company from calling a special  meeting unless  requested by
at least a majority of the outstanding  voting shares.  The certificate does not
provide for cumulative voting for election of directors. In addition, the Bylaws
of the Company  provide that while the removal of a director or the entire board
of directors,  with or without cause,  may be accomplished by the holders of the
majority of shares  entitled to vote, any director  designated by HT may only so
be  removed  for cause.  These  provisions  could  have the effect of  deterring
unsolicited  takeovers or other business  combinations or delaying or preventing
changes in control or management of the Company, including transactions in which
stockholders



                                       12
<PAGE>


might otherwise  receive a premium for the securities over  then-current  market
prices.  In addition,  these provisions may limit the ability of stockholders to
approve transactions that they may deem to be in their best interests.

Item 2. Description of Property

     The Company  occupies  approximately  33,000  square feet of leased  office
space and  manufacturing  facilities in Hauppauge,  New York. The lease for such
space has a five-year  term  expiring  August 31,  2000,  with an annual rent of
$156,000  until  August  31,  1998  and  $168,000  for  each  of the  two  years
thereafter, and with a renewal option for an additional five years.

Item 3. Legal Proceedings

     No legal proceedings are currently pending against the Company.

Item 4. Submission of Matters to a Vote Of Security Holders

     No matters  were  submitted  to a vote of the  Company's  security  holders
during the fourth quarter of the Company's fiscal year.

Item 4A. Directors, Executive Officers, Promoters and Control Persons

     The  following  table lists the Company's  current  directors and executive
officers.

<TABLE>
<CAPTION>
     Name                              Age    Position(s) With the Company
     ----                              ---    ----------------------------
<S>                                    <C>    <C>
     Jonas Medney                      69     Director, Chairman
     Fred E. Klimpl                    63     Director, President and Secretary
     Samuel S. Gross                   71     Director, Executive Vice President and Treasurer
     Willard T. Jackson(1)(2)          70     Director
     Pierre Laflamme                   51     Director
     Robert W. Middleton(2)            59     Director
     Heinz-Gerd Reinkemeyer(1)         60     Director
     James W. Taylor(1)(2)             79     Director
</TABLE>

----------
(1)  Member of Compensation Committee

(2)  Member of Audit Committee


     The following table lists other management personnel:

<TABLE>
<CAPTION>
     Name                              Age    Position(s) With the Company
     ----                              ---    ----------------------------
<S>                                    <C>    <C>
     Richard E. DePoto                 40     Vice President, Manufacturing Operations
     Richard Lucier                    64     Vice President, Sales
     Ralph W. Segalowitz               39     Vice President, Engineering
     Kenneth J. Thompson               40     Controller
     Lucille Mavrokefalos              45     Director of Administration and Assistant Secretary
</TABLE>



                                       13
<PAGE>


Management and Directors

     Jonas Medney,  Director,  Chairman and Chief Executive Officer, has over 40
years of experience in the composites industry and has more than 50 patents. Mr.
Medney has been a director  and Chairman of the Company  since its  inception in
1984. He co-founded Lamtex  Industries,  a public company which was a pioneer in
filament-wound  composites,  which was acquired by Koppers  Company in 1963.  He
co-founded  Fiberglass Resources  Corporation,  a manufacturer of filament wound
epoxy pipes and  conduits,  with Mr.  Klimpl.  This company was acquired by Koch
Industries in 1983. Mr. Medney is a graduate of the  Massachusetts  Institute of
Technology (B.S. Mechanical Engineering).

     Fred E. Klimpl,  Director,  President and  Secretary,  has over 35 years of
experience in the  composites  industry and has over 25 patents.  Mr. Klimpl has
been a director,  President  and Secretary of the Company since its inception in
1984. He was  co-inventor  and a key manager in the development and marketing of
the fiberglass  underground  gasoline tank program for  Owens-Corning  Fiberglas
Corp.  He was  subsequently  responsible  for the  start-up  and  marketing of a
fiberglass pipe business for Ciba-Geigy Corporation. Mr. Klimpl is a graduate of
Lowell University (B.S. Textile Engineering) and Stevens Institute of Technology
(M.S. Industrial Management).

     Samuel S. Gross, Director, Executive Vice President,  Treasurer,  Assistant
Secretary and Chief Financial Officer,  is a certified public accountant and has
been  Executive  Vice  President and Treasurer of the Company since 1990. He had
been a consultant to the Company and a director  since 1987. He was previously a
partner  at  Ernst & Young  LLP  where  he was  responsible  for the  Fiberglass
Resources  Corporation  account. Mr. Gross was affiliated with Ernst & Young LLP
and its predecessors for 39 years. He is a director and  Secretary/Treasurer  of
the National  Mental Health  Association,  Chairman of the Board of Directors of
the Mental Health Association in New York State, Inc., and a director and former
president of Long Island Transportation Management, Inc. Mr. Gross is a graduate
of City College of New York (B.B.A.).

     Richard E. DePoto, Vice President,  Manufacturing Operations, has been with
the  Company  since  1997.  From 1981 to 1997 he was with AMP  Circuits  and its
predecessor  companies at its  Riverhead  printed  circuit  board  manufacturing
plant.  He held various  engineering  positions  and most  recently  Director of
Manufacturing  and  Manufacturing  Engineering.  He is a  graduate  of the State
University of New York at Stony Brook (B.S. Engineering/Chemistry).

     Richard  Lucier,  Vice  President,  Sales,  has been with the Company since
1992. He was Corporate Accounts Manager with Polyclad  Laminates,  Inc. (Cookson
Group) from 1989 to 1992 and Senior Vice President with Fortin-Westinghouse from
1980 to 1989.  Prior to that time,  he was employed at  Honeywell,  Raytheon and
GTE. He is a graduate of Northeastern University (B.S. Mechanical Engineering).

     Ralph W. Segalowitz, Vice President, Engineering, has been with the Company
since 1990.  From 1985 to 1990, he was with Robotic Vision  Systems Inc.,  where
his  final  position  was  as  a  project  manager   responsible  for  automated
manufacturing  systems.  From  1981 to  1985,  he was a  product  engineer  with
Databit, Inc., a manufacturer of data transmission  equipment.  He is a graduate
of the State University of New York at Stony Brook (B.S. Mechanical  Engineering
and M.S. in Industrial Management).

     Kenneth J.  Thompson,  Controller  , has been with the Company  since 1996.
From 1995 to 1996 he was  Controller of Cameron  Engineering,  P.C. From 1991 to
1995 he was with Loveshaw Corporation, most recently as Vice President, Finance.
He is a graduate of Adelphi University (B.B.A. Accounting).

     Lucille  Mavrokefalos,  Director of Administration and Assistant  Secretary
has been with Company in various positions since 1988.



                                       14
<PAGE>


     Board of  Directors.  The Board of  Directors  consists of Messrs.  Medney,
Klimpl  and  Gross  and five  outside  directors:  Willard  T.  Jackson,  Pierre
Laflamme, Robert W. Middleton, Heinz-Gerd Reinkemeyer and James W. Taylor.

     Willard  T.  Jackson,  private  investor,  retired  in 1988 as a partner of
Brundage,  Story and Rose,  a New York  investment  counseling  firm in which he
became a partner in 1969. He has been a director since January 1988. Mr. Jackson
is a graduate of Middlebury College (A.B.) and Columbia University (M.B.A.).  He
is a trustee emeritus of Middlebury College.

     Pierre  Laflamme was elected a director in October  1997.  He has been Vice
President  Development,  High  Technology at Societe  generale de financement du
Quebec since May 1997. From 1985 to May 1997, he was with the Solidarity Fund in
Montreal,  Canada, most recently as Senior Vice President,  Economic Development
and Strategic Investments.  From 1994 to 1996, he was on loan as Deputy Minister
at  Executive  Council  of the  Province  of  Quebec.  He is a  graduate  of the
Universite  de  Sherbrooke   (B.A.)  and  the   Universite  de  Montreal   (B.A.
Architecture). Mr. Laflamme is the designee of the Quebec Investors to the Board
pursuant to terms of  agreements  in  connection  with the joint  venture in the
greater Montreal area.

     Robert W.  Middleton  was elected as a director in March 1996 and has acted
as an investment  banker to the Company in its prior financings and with respect
to the IPO. He has been Managing Director-Corporate Finance of Trautman Kramer &
Company,  Inc., an investment  banking  firm,  since 1993.  From 1985 to October
1993, Mr. Middleton was, successively,  Director of Corporate Finance of Barclay
Investments, Inc., and a Vice President at C.L. King & Associates, Inc. Prior to
that time, he was associated with Fahnestock & Company from 1983 to 1985 and was
a general partner from 1984-1985.  From 1974 to 1983, Mr. Middleton held various
positions  with  Burgess & Leith,  Inc.,  including  Senior Vice  President  and
Director, while serving as Manager of the New York office. He attended Princeton
University.  Mr. Middleton is the designee of Trautman Kramer & Company, Inc. to
the Board pursuant to the terms of a financing agreement.

     Heinz-Gerd Reinkemeyer has been a director since 1990. He had been Director
of the Industrial  Plastics Division of HT, a German manufacturer and subsidiary
of the Rutgers Group, which is an affiliate of the Veba Group.  Currently, he is
a consultant for the Rutgers Group.  Mr.  Reinkemeyer has a degree in mechanical
engineering  and from 1961 he had been with Dynamit  Nobel,  a  manufacturer  of
laminates,  until it was acquired by HT in 1988. Mr. Reinkemeyer is the designee
of HT to the Board.

     James W. Taylor has been a director  since 1987.  He has been  President of
Reuter Manufacturing Inc. since 1992. He is a certified  management  consultant.
He was a  director  from  1967 to 1973 and  President  from  1970 to 1973 of the
international  management consulting firm, Booz Allen & Hamilton. Mr. Taylor was
President and a director of Bradford Trust from 1973 to 1975. He has served as a
director  of  Insilco  Corporation,   Times  Fiber  Communications,   Inc.,  The
Enterprise Companies,  Techalloy, Inc., Amphenol Inc. and Knogo Corporation.  He
is a life  trustee of  Carnegie  Mellon  University.  He was a trustee of Beaver
College and was a vice  president and director of the  Association of Consulting
Management Engineers and of the Institute of Management Consultants.  He holds a
B.S. from Carnegie Mellon University.


                                       15
<PAGE>


                                     PART II

Item 5. Market for Common Equity and Related Stockholder Matters

     In July 1996, the Company  completed an initial public offering  ("IPO") of
2,415,000 shares of Common Stock and 2,415,000  Redeemable Common Stock Warrants
(the  "Redeemable  Warrants").  Prior to the IPO, there was no public market for
the Company's Common Stock.  The Company's Common Stock and Redeemable  Warrants
are traded on the Nasdaq SmallCapSM Market under the symbols "CTEK" and "CTEKW",
respectively.

     The  following  sets forth the range of the high and low bid prices for the
Common Stock, as reported on the Nasdaq SmallCap Market.

                                           1996
                                           ----
                                     High         Low
                                     ----         ---
            Third quarter           8 1/8        5 1/2
            Fourth quarter          6 1/2        5 1/4

                                           1997
                                           ----
                                     High         Low
                                     ----         ---
            First quarter           6 3/8        4 2/3
            Second quarter          5 3/8        4 1/4
            Third quarter           7            4 3/8
            Fourth quarter          4 1/2        1 1/2

     There were approximately 110 holders of record of shares of Common Stock as
of March 13, 1998.

     The Company has never paid cash dividends on its Common Stock.  The Company
does not intend to pay cash  dividends  on its Common  Stock in the  foreseeable
future.

Item 6. Management's  Discussion and Analysis of Financial Condition and Results
of Operations

Overview

     The  Company was founded in 1984 to develop  copper-clad  fiberglass  epoxy
laminates used to manufacture printed circuit boards required by the electronics
industry.  As part of its development  program,  the Company developed processes
and  machinery to  manufacture  its unique  laminates,  designed  and  assembled
prototype  equipment to produce 24" x 24"  laminates,  designed and assembled an
initial  production module to produce 36" x 48" laminates,  designed,  assembled
and started additional  production modules obtained with part of the proceeds of
its IPO in 1996 in order to achieve commercial levels of production.

     During  1996 and 1997,  the  Company  has been  producing  and  selling its
laminates in limited  quantities for  qualification and use in production by its
customers.  In 1997, the Company completed installation of production modules to
achieve higher  quantity  levels and economies of scale.  The Company also added
manufacturing   management   and  initially   expanded  its  workforce  to  meet
anticipated increases in sales levels. Starting at the end of 1997, however, the
workforce was scaled back when the  anticipated  increase in sales did not occur
in accordance with management's expectations. This production-scale expansion is
the first undertaken by the Company,  and consequently no assurances can be made
that the Company's  production  facilities  will meet the  Company's  production
targets in a timely way or that the


                                       16
<PAGE>


resultant  product will meet the high commercial  standard needed for successful
market penetration.  Furthermore,  the expanded production facilities may not be
able to provide adequate efficiencies and produce high yields. In addition,  the
costs of production may not be as low as management  expects,  in which case the
Company may not achieve profitable  operations.  The Company's business involves
highly complex manufacturing processes which are subject to disruption.  Process
disruptions  have occurred,  resulting in delays in product  shipments.  Process
disruptions  were  due  to  machine   breakdowns,   lack  of  adequate  interior
atmospheric  control  of  temperature  and  humidity,   electric  utility  power
failures, problems of breaking in an expanded workforce, contamination generated
during  installation  of equipment  and  development  of processes and defective
incoming  copper foil for which the Company has obtained an alternate  source of
supply. There can be no assurance that disruptions will not occur in the future.
The loss of revenue and  earnings to the Company  from such a  disruption  could
have a materially adverse effect on its results of operations.

     In October 1997, the Company entered into a 50/50 joint venture with Quebec
Investors  for the  establishment  of a plant in the  greater  Montreal  area to
manufacture Compositech's laminates. The plant is planned to start production in
1999. See "Item 1 - General".  The Company's investment in the joint venture was
funded by the Quebec  Investors  purchasing  1,066,192  shares of the  Company's
Common Stock.

     In  February  1998,  the  Company  entered  into joint  venture and license
agreements  with  a  Taiwanese  investor  group  to  manufacture   Compositech's
laminates  in  Taiwan.  See  "Item  1 -  General".  The  Company  would  have an
approximate  10%  interest in the joint  venture and  receive  license  fees and
royalties. The plant is planned to start production in 1999.

     Through  December 31, 1996, the Company had been in the  development  stage
because it had not generated  significant  revenues  from its planned  principal
operations.  Based on the level of production and sales in 1997, the Company has
concluded that it is no longer in the development stage, as of January 1, 1997.

Results of Operations - Years Ended December 31, 1997 and 1996

     Sales of laminates increased to $507,403 in 1997 from $327,411 in 1996. The
increase  resulted from  additional  orders of laminates by  customers,  but was
limited  by the  production  constraints  referred  to above and by delays in or
cancellation  of  customers'  programs for which  Compositech's  laminates  were
qualified.

     Research and development expense decreased to $76,720 in 1997 from $152,870
in 1996.  The  decrease  was in line with the  Company's  increased  emphasis on
achieving commercial  production levels and a reduction in activities associated
with research and development.

     Manufacturing  expenses increased to $4,953,123 for 1997 from $2,525,619 in
1996,  reflecting the higher levels of production  during 1997,  affected by the
process  disruptions  referred  to  above  and  the  addition  and  training  of
manufacturing  personnel to meet anticipated increases in sales levels which did
not occur according to  management's  expectations.  The increased  expense also
related to development and refinement of the Company's processes and products.

     Selling,  general and  administrative  expenses  increased to $1,519,763 in
1997 from $  1,274,476  in 1996.  Legal and other  expenses  related  to being a
public company  increased  $132,000 in 1997 as compared to 1996. Other increases
were approximately  $216,000 in personnel costs and $32,000 in insurance related
to increases in commercial  activities.  Administrative  expenses related to the
establishment  of the Company's joint venture in Canada  decreased by $54,000 in
1997 as  compared  to 1996.  During  1997,  $107,000  of  selling,  general  and
administrative expenses were charged to the


                                       17
<PAGE>


Canadian joint venture, in accordance with the joint venture agreements.

     Interest  income  decreased  to  $96,201  in 1997  from  $154,027  in 1996,
reflecting a decrease in the average monthly  balances of the Company's cash and
short term  investment  account  balances.  Interest  expense  (net of  interest
capitalized)  decreased to $229,385 for 1997 from $497,377 in 1996. The decrease
was due to the  repayment  of a large  portion  of the  Company's  debt with the
proceeds of the  Company's  IPO in July 1996,  partially  offset by the interest
expense on the Company's convertible debentures issued in 1997.  Amortization of
debt  discount and deferred  private  placement  fees and expenses  increased to
$1,326,218  for 1997 from $227,657 for 1996.  The  amortization  of the deferred
financing  cost included  therein (see Note 4 to the financial  statements)  was
$1,147,940 for the fiscal year ended December 31, 1997.

     In 1996, the Company made a provision of $348,309 for production  equipment
that ceased operations in 1996 or early 1997.

     The equity in the loss of joint venture in 1997 of $63,722  represents  the
Company's 50% share of the loss of the joint venture which was formed in October
1997.

     The foregoing  resulted in the Company  having a net loss of $7,569,793 for
1997 as  compared  with  $4,534,195  for 1996.  Increases  in sales  revenue and
decreases   in  interest   expense   were  more  than  offset  by  increases  in
manufacturing,   selling,   general  and   administrative   expenses,   and  the
amortization of debt discount applicable to the convertible debentures.

Liquidity and Capital Resources

     Prior to its IPO from which it received  $9.9  million in net  proceeds and
used $4.3  million to reduce  debt,  the Company  had  financed  its  operations
through private  placements of debt and equity securities and from income from a
patent  immunity  agreement.  Some of this  financing had come from officers and
directors  of the Company.  In May through  August  1997,  the Company  received
approximately  $5.9  million of net proceeds  from the  issuance of  Debentures,
which was used for working capital and the purchase of equipment.

     The Company had been a development  stage company through December 31, 1996
and  has  had  limited  revenues  from  the  sale  of  laminates,  has  incurred
significant  losses and has substantial  negative cash flow since its inception.
The Company's  independent  auditors have included an  explanatory  paragraph in
their  report  covering  the  December  31,  1997  financial  statements,  which
expresses  substantial  doubt about the Company's ability to continue as a going
concern.  The Company expects significant  operating losses to continue in 1998.
As of December 31,  1997,  the Company had  approximately  $624,000 of available
cash resources. In January and February 1998, in connection with a joint venture
in Taiwan,  the Company  received net proceeds  aggregating  approximately  $1.9
million from the receipt of a license fee down payment and the issuance of stock
and anticipates  receiving an additional $900,000 in the second quarter of 1998,
net of expenses.  However,  the Company will require additional funding to cover
current  operations and  expenditures of  approximately  $500,000 for additional
production  equipment  until  revenues from  operations are sufficient for these
purposes.  Current  operations require  approximately  $400,000 a month based on
current  levels of  production.  Such  additional  funding may be raised through
sources  including license fees, sales of equipment in connection with licensing
operations,  joint  ventures or other  collaborative  relationships,  as well as
equity or debt  financing.  The Company  plans to obtain $5 million or more from
these  sources.  There can be no assurance  that funding will be sufficient  and
available or, if it is available, that it will be available on acceptable terms.
If adequate  funds are not available to satisfy  either  short-term or long-term
capital  requirements,  the  Company  may be  required  to limit its  operations
significantly.  There can be no  assurance  that the Company  will  successfully
complete  expansion  of  its  production  equipment,  achieve  broad  commercial
acceptance of its product or generate


                                       18
<PAGE>


sufficient revenues to achieve profitable operations.  The foregoing is based on
important  assumptions  regarding a number of factors and future events, some of
which are  beyond  the  Company's  control  including  risks  and  uncertainties
described  in Item 1.  "Description  of Business - Important  Factors  Regarding
Future  Results".  There can be no assurance that  management has identified and
made appropriate assumptions regarding all factors that may affect the Company's
business in the future.

     On  October  16,  1997,  the  Company   closed  its  previously   announced
transaction  with four  Quebec  institutional  investors  to form a 50/50  joint
venture  for  the  establishment  of a plant  in the  greater  Montreal  area to
manufacture  Compositech's laminates. See Item 1. "Description of Business". The
plant  is  planned  to  start  production  late in 1998 or  early  1999  with an
anticipated annual production capacity of approximately 10 million square feet.

     Based on a  preliminary  review of year 2000 issues,  the Company  believes
that the impact will not be material to the  Company's  business,  operations or
financial  condition.  The Company is also assessing how it could be affected by
the failure of third parties (e.g.  vendors and customers) to mitigate their own
Year 2000 issues.

1997 Compared with 1996

     Net cash and temporary  investments used in operating  activities increased
to $5,925,165 for 1997 from  $3,462,491  for 1996. The principal  reason for the
difference was the increased level of activity in 1997,  increases in the levels
of raw material and finished goods inventories,  a temporary increase in prepaid
expenses related to reimbursable expenses billed to the Company's Canadian joint
venture,  partially  mitigated  by increases  in accrued  liabilities  including
interest expense, the effect of the amortization of debt financing costs and the
equity in the loss of the joint venture for 1997.

     Net cash and cash  equivalents  used in  investing  activities  for capital
expenditures and advance payments for equipment decreased to $ 1,953,782 in 1997
from  $2,603,677 for 1996. The decrease is attributable to the decreased rate of
acquisition  of  additional  production  modules that  constituted a significant
portion of the expansion  program and the upgrading of existing  equipment begun
in  1996.  The  $5,695,283  investment  in joint  venture  is  comprised  of the
$5,426,917  purchase of the Company's  50% equity  interest in the joint venture
plus  approximately  $268,000 in commissions and legal costs associated with the
closing of the  transaction.  In 1997,  $2,384,700  was  provided  by  investing
activities representing the redemption of short term U.S. securities for current
working capital needs.

     Cash flows from financing activities increased to $11,261,144 for 1997 from
$8,198,104 for 1996. The principal financing  activities in the 1997 period were
the sale of the Company's  common stock to the Canadian  joint venture  partners
totaling  $5,351,763  net of expenses,  net proceeds from the issuance of the 5%
convertible  debentures  of  $5,891,189  and net  proceeds  from the exercise of
outstanding common stock warrants in the amount of $47,420.

Item 7. Financial Statements

     The required Financial  Statements and the notes thereto are contained in a
separate  section of this report beginning with the page following the signature
page.

Item  8.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure

     No  disagreements  exist  between  the Company and Ernst & Young LLP on any
matters of accounting  principles or practices,  financial statement disclosure,
or auditing scope or procedure.


                                       19
<PAGE>


                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act

     The information  called for by Item 9 with respect to Executive Officers of
the issuer appears as Item 4A under Part I of this Report.

     Other  information  required  by this  item is  included  in the  Company's
definitive  Proxy Statement to be filed in connection with the Company's  Annual
Meeting  of  Stockholders,  and  such  information  is  incorporated  herein  by
reference.

Item 10. Executive Compensation

     The  information  required  by  this  item  is  included  in the  Company's
definitive  Proxy Statement to be filed in connection with the Company's  Annual
Meeting  of  Stockholders,  and  such  information  is  incorporated  herein  by
reference.

Item 11. Security Ownership of Certain Beneficial Owners and Management

     The  information  required  by  this  item  is  included  in the  Company's
definitive  Proxy Statement to be filed in connection with the Company's  Annual
Meeting  of  Stockholders,  and  such  information  is  incorporated  herein  by
reference.

Item 12. Certain Relationships and Related Transactions

     The  information  required  by  this  item  is  included  in the  Company's
definitive  Proxy Statement to be filed in connection with the Company's  Annual
Meeting  of  Stockholders,  and  such  information  is  incorporated  herein  by
reference.


                                       20
<PAGE>


Item 13. Exhibits, Lists and Reports on Form 8K

     (a) Exhibits:

<TABLE>
<CAPTION>
      Exhibit                                                                                                               Note
       Number                                               Exhibit                                                        Number
------------------------------------------------------------------------------------------------------------------------------------
<S>                 <C>                                                                                                      <C>
           3.1      Restated Certificate of Incorporation of the Company.                                                    (3)
           3.3      By-Laws, As Amended, of the Company.                                                                     (2)
           4.1      Specimen Common Stock Certificate.                                                                       (2)
           4.2      Specimen Warrant Certificate.                                                                            (2)
           4.3      Representative's Unit Purchase Option dated as of July 9, 1996.                                          (2)
           4.4      Warrant  Agreement  dated as of July 9, 1996 between the Company and  Continental  Stock  Transfer &
                    Trust Company.                                                                                           (2)
           4.5      Form of 10% Secured Note.                                                                                (2)
         4.5.1      Security Agreement dated August 3, 1995 among the Company and certain secured parties.                   (2)
           4.6      Form of Secured Note.                                                                                    (2)
         4.6.1      Security and  Intercreditor  Agreement  dated as of  October 30,  1992 among the Company and certain
                    secured parties covering listed patent collateral.                                                       (2)
           4.7      Notes issued by the Company between May 28,  1992 and  February 16,  1993 in the aggregate amount of
                    $550,000 payable to Willard Jackson.                                                                     (2)
           4.8      Agreements  between the Company and certain  officers,  directors
                    and stockholder/creditors to defer maturity of Secured Notes, 10%
                    Secured Notes, and certain other notes.                                                                  (2)
           4.9      Agreements  between the Company and certain  officers,  directors
                    and stockholder/creditors to defer maturity of Secured Notes, 10%
                    Secured Notes, and certain other notes.                                                                  (3)
          10.1      Lease Agreement dated August 29, 1990 between the Company and Ricefield Number Six.                      (2)
        10.1.1      First Amendment of Lease dated June 30, 1995 between the Company and Ricefield Number Six.               (2)
          10.2      Patent Immunity Agreement dated March 15, 1994, among the Company and AKZO Electronic  Products B.V.
                    and AMP Incorporated.                                                                                    (2)
          10.3      Stock Purchase  Agreement dated as of June 22, 1990,  between the Company and HT Troplast AG.            (2)
        10.3.1      Amendment No. 1 to Stock Purchase Agreement dated June 22, 1990 between  the Company and HT Troplast
                    AG (Amendment No. 1 dated January 10, 1996).                                                             (2)
          10.4      Technical Cooperation Agreement between the Company and HT Troplast AG dated as of June 22, 1990.        (2)
          10.5      License Agreement between the Company and HT Troplast AG dated as of June 22, 1990.                      (2)
        10.5.1      Amendment to the License Agreement dated May 18, 1994 between the Company and HT Troplast AG.            (2)
          10.6      Consent  to the  transfer  of  rights  of  Huls  Troisdorf  AG in  respect  of the  Company  to Mora
                    Beteiligungs AG (now HT Troplast AG) dated February 4, 1994.                                             (2)
        10.6.1      Acknowledgment  of  assumption  of  obligations  of Huls  Troisdorf  AG in respect of the Company by
                    HT Troplast AG dated August 19, 1994.                                                                    (2)
          10.7      Form of Warrants issued on May 28, 1992.                                                                 (2)
          10.8      Form of Warrants issued on November 16, 1993.                                                            (2)
          10.9      Form of Subscription Agreement for Series A Convertible Preferred Stock issued in 1994.                  (2)
         10.10      Form of Warrants issued or amended between August 3, 1995 and March 12, 1996.                            (2)
         10.11      Common Stock Purchase  Agreement  between the Company and Win Win Venture Capital  Corporation dated
                    as of April 1, 1996.                                                                                     (2)
         10.12      Agreements to defer salary between the Company and certain employees of the Company.                     (2)
         10.13      Form of 18-month lock-up agreement.                                                                      (2)
         10.14      Form of 24-month lock-up agreement.                                                                      (2)
        *10.15      Nonqualified Stock Option Plan dated April 12, 1988.                                                     (2)
</TABLE>


                                       21
<PAGE>


<TABLE>
<CAPTION>
      Exhibit                                                                                                               Note
       Number                                               Exhibit                                                        Number
------------------------------------------------------------------------------------------------------------------------------------
<S>                 <C>                                                                                                      <C>
        *10.16      Stock Award Plan.                                                                                        (2)
      *10.16.1      Compositech Ltd. Amended and Restated Stock Award Plan.                                                  (4)
        *10.17      Employment Agreement dated as of January 1, 1996 between the Company and Samuel S. Gross.                (2)
        *10.18      Employment Agreement dated as of January 1, 1996 between the Company and Fred E. Klimpl.                 (2)
        *10.19      Employment  Agreement  dated as of January 1, 1996  between  the Company and Jonas Medney.               (2)
        *10.20      Common Stock Purchase  Agreement  between the Company and Win Win Venture Capital  Corporation dated
                    as of June 26, 1996.                                                                                     (2)
         10.21      Form of Securities Purchase Agreement between the Company and certain investors.                         (5)
         10.22      Form of 5% Convertible Debenture between the Company and certain investors.                              (5)
         10.23      Form of Registration Rights Agreement between the Company and certain investors.                         (5)
         10.24      Form of Security Agreement between the Company and certain investors.                                    (5)
         10.25      Form of License Security Agreement between the Company and certain investors.                            (5)
         10.26      Technology Licensing Agreement dated October 16, 1997, by and between the Company and Lamines CTEK       (6)
                    Inc.
         10.27      Subscription Agreement dated October 16, 1997, by and among:  Societe Innovatech du  Grand Montreal,     (6)
                    Industries  Devma  Inc. (a  subsidiary of  Societe  generale  de financement  du Quebec),  Fonds  de
                    solidarite  des travailleurs  du Quebec  (F.T.Q.), Fonds  regional de solidarite Ile de Montreal and
                    the Company.
         10.28      Registration  Rights  Agreement  dated  October 16, 1997,  by and among: Societe Innovatech du Grand     (6)
                    Montreal, Industries Devma  Inc.,  Fonds de solidarite des  travailleurs  du Quebec  (F.T.Q.), Fonds
                    regional de solidarite Ile de Montreal and the Company.
         10.29      Subscription Agreement dated October 16, 1997, by and between the Company and Lamines CTEK Inc.          (6)
         10.30      Shareholders Agreement dated October 16, 1997, among the Shareholders of Lamines CTEK Inc.               (6)
         10.31      Stock Exchange Agreement dated October 16, 1997, by and among: Societe Innovatech du Grand Montreal,     (6)
                    Industries Devma Inc., Fonds de solidarite des  travailleurs du Quebec  (F.T.Q.), Fonds  regional de
                    solidarite Ile de Montreal and the Company.
         10.32      Sales  Agency and Marketing  Agreement dated October 16, 1997, by and  between Lamines CTEK Inc. and     (6)
                    the Company.
         10.33      Agreement  with respect to  electing a nominee  of the Quebec Investors to the Board of Directors of     (6)
                    Compositech Ltd.  dated October 16, 1997, by  and  among:  Societe  Innovatech  du  Grand  Montreal,
                    Industries Devma Inc., Fonds de  solidarite des  travailleurs du Quebec  (F.T.Q.), Fonds regional de
                    solidarite Ile de Montreal and the Company and certain of its principal shareholders.
         10.34      Agreement to Form a Joint Venture by and between the  Company and Fidelity Venture Capital Corp. and     (1)
                    Fidelity Investors, dated February 9, 1998.
         10.35      Patent,  Information and Trademark  Agreement by and between the Company and Compositech  Taiwan (or     (1)
                    Compositech  Technologies,  Inc.).  Portions of the Exhibit have been omitted  pursuant to a request
                    for confidential treatment.
       10.35.1      Patent,  Information  and  Trademark  Agreement  -  Amendment  No. 1 by and  between the Company and     (1)
                    Compositech Taiwan (or Compositech Technologies, Inc.).
         10.36      Purchase Agreement by and between the Company and Compositech  Taiwan (or Compositech  Technologies,     (1)
                    Inc.).
          23.1      Consent of Ernst & Young LLP                                                                             (1)
</TABLE>



                                       22
<PAGE>


----------
     * Management contract, compensatory plan or arrangement.

     (1) Filed herewith.

     (2)  Incorporated  by  reference  to a  previously  filed  Exhibit  to  the
     Company's Registration Statement on Form SB-2, Reg. No. 333-3564-NY.

     (3)  Incorporated  by  reference  to a  previously  filed  Exhibit  to  the
     Company's Form 10-KSB for the year ended December 31, 1996.

     (4)  Incorporated  by  reference  to a  previously  filed  Exhibit  to  the
     Company's Form 10-QSB for the quarterly period ended June 30, 1997.

     (5)  Incorporated  by  reference  to a  previously  filed  Exhibit  to  the
     Company's  Registration  Statement on Form S-3, Reg. No. 333-32241-NY filed
     on July 28, 1997.

     (6)  Incorporated  by  reference  to a  previously  filed  Exhibit  to  the
     Company's Form 8-K dated October 27, 1997.

(b) Form 8-K Reports:

<TABLE>
<CAPTION>
                                                                                 Financial Statements
     Date of Report                          Item Reported                              Filed
-------------------------   ------------------------------------------------    ----------------------
<S>                         <C>                                                          <C>
    October 27, 1997        Item 5 - Other Events                                        No
                            (Announcing consummation of joint venture for
                            establishing manufacturing plant in greater
                            Montreal area.)

    December 2, 1997        Item 5 - Other Events                                        No
                            (Announcing consummation of joint venture for
                            establishing manufacturing plant in greater
                            Montreal area and presentation of pro forma
                            balance sheet as at September 30, 1997.)
</TABLE>



                                       23
<PAGE>


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

                                        COMPOSITECH LTD.

Date:  March 31, 1998                   By: /s/ Jonas Medney
                                            ------------------------------------
                                            Jonas Medney
                                            Chairman and Chief Executive Officer

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


        /s/ Jonas Medney                                          March 31, 1998
------------------------------------------
Jonas Medney
Chairman of the Board; Director
(Principal Executive Officer)


        /s/ Fred E. Klimpl                                        March 31, 1998
------------------------------------------
Fred E. Klimpl
President, Secretary and Director


        /s/ Samuel S. Gross                                       March 31, 1998
------------------------------------------
Samuel S. Gross
Executive Vice President, Treasurer,
Assistant Secretary and Director
(Principal Financial and Accounting Officer)


        /s/ Willard T. Jackson                                    March 31, 1998
------------------------------------------
Willard T. Jackson, Director


        /s/ Pierre Laflamme                                       March 31, 1998
 ------------------------------------------
Pierre Laflamme, Director


        /s/ Heinz-Gerd Reinkemeyer                                March 31, 1998
 ------------------------------------------
Heinz-Gerd Reinkemeyer, Director


        /s/ James W. Taylor                                       March 31, 1998
------------------------------------------
James W. Taylor, Director


        /s/ Robert W. Middleton                                   March 31, 1998
------------------------------------------
Robert W. Middleton, Director



                                       24
<PAGE>


                          Index to Financial Statements

                                                                           Pages
                                                                           -----

Report of Independent Auditors................................................F2

Balance Sheets as of December 31, 1997 and 1996...............................F3

Statements of Operations for the years ended
 December 31, 1997 and 1996...................................................F4

Statements of Stockholders' Equity for the years
  ended December 31, 1997 and 1996............................................F5

Statements of Cash Flows for the years ended
 December 31, 1997 and 1996...................................................F6

Notes to Financial Statements.................................................F7


                                       F1
<PAGE>


                         Report of Independent Auditors

The Board of Directors and Stockholders
Compositech Ltd.

We have  audited  the  accompanying  balance  sheets of  Compositech  Ltd.  (the
"Company")  as of December  31, 1997 and 1996,  and the  related  statements  of
operations, stockholders' equity, and cash flows for the years then ended. These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the 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 audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial  position of Compositech Ltd. at December
31, 1997 and 1996,  and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.

As discussed  in Note 1 to the  financial  statements,  the  Company's  existing
working  capital is  insufficient  to cover  continuing  operating  expenses and
expenditures  for  additional  production  equipment.   These  conditions  raise
substantial  doubt about the Company's  ability to continue as a going  concern.
Management's  plans  as to  these  matters  are  also  described  in Note 1. The
financial  statements do not include any adjustments  that might result from the
outcome of this uncertainty.


                                                Ernst & Young LLP

Melville, New York
February 13, 1998



                                       F2
<PAGE>


                                COMPOSITECH LTD.
                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                       December 31     December 31
                                                                                                          1997            1996
                                                                                                       ------------    ------------
<S>                                                                                                     <C>              <C>
ASSETS
Current assets:
  Cash and cash equivalents                                                                                $624,254        $673,084
  Short-term investments                                                                                                  2,384,700
  Accounts receivable trade - net                                                                            44,725          66,293
  Accounts receivable from joint venture                                                                    201,382
  Inventories                                                                                               401,922         217,974
  Prepaid expenses and other                                                                                 97,371          66,880
                                                                                                       ------------    ------------
        Total current assets                                                                              1,369,654       3,408,931

Property and equipment at cost - net                                                                      5,276,672       3,866,140
Investment in joint venture                                                                               5,631,561
Advance payments on construction-in-progress                                                                274,253         114,712
Deferred debt expense - net of accumulated amortization of $154,858                                         458,953
Other assets and other deferred charges, net of accumulated amortization of $ 6,847 (1997)                  134,796          58,087
                                                                                                       ------------    ------------
Total assets                                                                                            $13,145,889      $7,447,870
                                                                                                       ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                                                                         $609,278        $691,763
  Deferred salaries - $ 1,500 (1997)  and $ 539,904 (1996) - officers                                       192,571         715,728
  Accrued interest - $ 916 (1997) and all (1996) - stockholders                                              26,017          61,816
  Other accrued liabilities                                                                                 370,707         227,889
  Current maturities of  long-term debt - stockholders                                                                      100,000
                                                                                                       ------------    ------------
        Total current liabilities                                                                         1,198,573       1,797,196

Non-current liabilities:
  Notes payable  to directors/stockholders                                                                1,595,000       1,495,000
  5% Convertible debentures, net of unamortized discount of $67,650                                       5,762,350
  Deferred salaries - officers                                                                              551,558
  Accrued interest - directors/stockholders                                                                 100,159
  Capital lease obligations                                                                                  49,047          19,336
  Other                                                                                                      37,500          37,500
                                                                                                       ------------    ------------
        Total non-current liabilities                                                                     8,095,614       1,551,836

Commitments

Stockholders'  equity :
  Undesignated preferred stock; authorized 4,000,000 shares,
    none issued and outstanding
  Series A convertible preferred stock, par value $3.00 per share; authorized shares - 714,161,
    issued and outstanding shares - 614,161 (1997) and 684,161 (1996)                                     1,842,483       2,052,483
  Common stock, par value $.01 per share; authorized shares - 25,000,000,
    issued and outstanding shares -  7,767,921 (1997) and 6,118,939 (1996)                                   77,679          61,189
  Additional paid-in capital                                                                             30,075,100      22,558,933
  Deficit                                                                                               (28,143,560)    (20,573,767)
                                                                                                       ------------    ------------
    Total stockholders' equity                                                                            3,851,702       4,098,838
                                                                                                       ------------    ------------
Total liabilities and stockholders' equity                                                              $13,145,889      $7,447,870
                                                                                                       ============    ============
</TABLE>


See accompanying notes.


                                       F3
<PAGE>


                                COMPOSITECH LTD.
                            STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                                              Year ended
                                                                                                              December 31
                                                                                                     ------------------------------
                                                                                                        1997                1996
                                                                                                     -----------        -----------
<S>                                                                                                  <C>                <C>
Revenues:
  Sales                                                                                                 $507,403           $327,411
                                                                                                     -----------        -----------
       Total revenues                                                                                    507,403            327,411
                                                                                                     -----------        -----------

Costs and expenses:
  Manufacturing expenses                                                                               4,953,123          2,525,619
  Selling, general and administrative                                                                  1,519,763          1,274,476
  Research and development                                                                                76,720            152,870
                                                                                                     -----------        -----------

      Total operating expenses                                                                         6,549,606          3,952,965
                                                                                                     -----------        -----------

(Loss) from operations                                                                                (6,042,203)        (3,625,554)

Other income (expenses):
  Interest income                                                                                         96,201            154,027
  Interest expense
     (net of interest capitalized of $107,000 (1997) and $27,000 (1996))                                (229,385)          (497,377)
  Amortization of debt discount and deferred private placement fees and expenses                      (1,326,218)          (227,657)
  Loss on disposal of property and equipment                                                              (9,613)          (348,309)
  Other                                                                                                    5,147             10,675
                                                                                                     -----------        -----------
                                                                                                      (1,463,868)          (908,641)
                                                                                                     -----------        -----------

Net (loss) before equity in loss of joint venture                                                     (7,506,071)        (4,534,195)

Equity in loss of joint venture                                                                          (63,722)
                                                                                                     -----------        -----------
Net (loss)                                                                                           ($7,569,793)       ($4,534,195)
                                                                                                     ===========        ===========
Net (loss) per common share - basic and diluted                                                           ($1.18)            ($0.98)
                                                                                                     ===========        ===========

Shares used in computing net (loss) per share                                                          6,389,750          4,629,255
                                                                                                     ===========        ===========
</TABLE>


See accompanying notes.


                                       F4
<PAGE>


                                COMPOSITECH LTD.
                STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)

                     Years ended December 31, 1996 and 1997

<TABLE>
<CAPTION>

                                                                                 Series A Convertible            Convertible
                                                                                    Preferred Stock            Preferred Stock
                                                                                ----------------------------------------------------
                                                                                Shares          Amount      Shares         Amount
                                                                                ----------------------------------------------------
<S>                                                                             <C>           <C>          <C>          <C>
Balance at December 31, 1995                                                    714,161       $2,142,483    433,500     $ 2,167,500

Issuance of common stock through private placements, net of related
    costs of $136,941 and 8,000 shares of common stock
Issance of common stock through an initial public offering, net of
    related costs of $2,154,929
Issuance of unit purchase options as a result of the initial public offering
Conversion of Convertible Preferred Stock to common stock
    as a result of the initial public offering                                                             (433,500)     (2,167,500)
Conversion of Series A Convertible Preferred Stock to common stock              (30,000)         (90,000)
Net (loss) for the year ended December 31, 1996
                                                                                ----------------------------------------------------
Balance at December 31, 1996                                                    684,161        2,052,483       --             --

Conversion of Series A Convertible Preferred Stock to common stock              (70,000)        (210,000)
Discount on issuance of 5% Convertible Debentures
Issuance of warrants as compensation for 5% Convertible Debenture financing
Exercise of warrants
Issuance of common stock through a private placement, net of
   related costs of $75,154
Issuance of common stock upon conversion of 5% Convertible Debentures
Services received from stockholder
Net (loss) for the year ended December 31, 1997
                                                                                ----------------------------------------------------
Balance at December 31, 1997                                                    614,161       $1,842,483       --             --
                                                                                ====================================================

<CAPTION>


                                                                                           Common Stock             Additional
                                                                                -------------------------------      Paid-in
                                                                                       Shares         Amount          Capital
                                                                                ----------------------------------------------------
<S>                                                                                  <C>              <C>           <C>
Balance at December 31, 1995                                                         3,014,189        $ 30,142      $ 8,924,140

Issuance of common stock through private placements, net of related
    costs of $136,941 and 8,000 shares of common stock                                 458,000           4,580        1,483,479
Issance of common stock through an initial public offering, net of
    related costs of $2,154,929                                                      2,415,000          24,150        9,895,921
Issuance of unit purchase options as a result of the initial public offering                                                210
Conversion of Convertible Preferred Stock to common stock
    as a result of the initial public offering                                         216,750           2,167        2,165,333
Conversion of Series A Convertible Preferred Stock to common stock                      15,000             150           89,850
Net (loss) for the year ended December 31, 1996
                                                                                ----------------------------------------------------
Balance at December 31, 1996                                                         6,118,939          61,189       22,558,933

Conversion of Series A Convertible Preferred Stock to common stock                      35,000             350          209,650
Discount on issuance of 5% Convertible Debentures                                                                     1,147,940
Issuance of warrants as compensation for 5% Convertible Debenture financing                                              91,070
Exercise of warrants                                                                    16,500             165           47,355
Issuance of common stock through a private placement, net of
   related costs of $75,154                                                          1,066,192          10,662        5,341,101
Issuance of common stock upon conversion of 5% Convertible Debentures                  531,290           5,313          669,687
Services received from stockholder                                                                                        9,364
Net (loss) for the year ended December 31, 1997
                                                                                ----------------------------------------------------
Balance at December 31, 1997                                                         7,767,921        $ 77,679      $30,075,100
                                                                                ====================================================


<CAPTION>
                                                                                                        Total
                                                                                                    Stockholders'
                                                                                                       Equity
                                                                                     Deficit         (Deficiency)
                                                                                ----------------------------------
<S>                                                                               <C>                <C>
Balance at December 31, 1995                                                      $ (16,039,572)     $ (2,775,307)

Issuance of common stock through private placements, net of related
    costs of $136,941 and 8,000 shares of common stock                                                  1,488,059
Issance of common stock through an initial public offering, net of
    related costs of $2,154,929                                                                         9,920,071
Issuance of unit purchase options as a result of the initial public offering                                  210
Conversion of Convertible Preferred Stock to common stock
    as a result of the initial public offering
Conversion of Series A Convertible Preferred Stock to common stock
Net (loss) for the year ended December 31, 1996                                      (4,534,195)       (4,534,195)
                                                                                ----------------------------------
Balance at December 31, 1996                                                        (20,573,767)        4,098,838

Conversion of Series A Convertible Preferred Stock to common stock
Discount on issuance of 5% Convertible Debentures                                                       1,147,940
Issuance of warrants as compensation for 5% Convertible Debenture financing                                91,070
Exercise of warrants                                                                                       47,520
Issuance of common stock through a private placement, net of
   related costs of $75,154                                                                             5,351,763
Issuance of common stock upon conversion of 5% Convertible Debentures                                     675,000
Services received from stockholder                                                                          9,364
Net (loss) for the year ended December 31, 1997                                      (7,569,793)       (7,569,793)
                                                                                ----------------------------------
Balance at December 31, 1997                                                      ($ 28,143,560)     $  3,851,702
                                                                                ==================================
</TABLE>

See accompanying notes.



                                       F5
<PAGE>


                                COMPOSITECH LTD.
                            STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                                              Year Ended
                                                                                                             December 31,
                                                                                                   --------------------------------
                                                                                                       1997                1996
                                                                                                   ------------        ------------
<S>                                                                                                 <C>                 <C>
Cash Flows from Operating Activities
Net (loss)                                                                                          ($7,569,793)        ($4,534,195)
Adjustments to reconcile net (loss) to net cash and
  cash equivalents used in operating activities:
    Depreciation and amortization, including capital leases                                             472,279             324,288
    Loss on disposal of property and equipment                                                            9,613             348,309
    Amortization of debt discount and deferred private placement fees and expenses                    1,326,218             380,734
    Equity in net loss of joint venture                                                                  63,722
    Stockholder services credited to additional paid-in-capital                                           9,364
    Changes in operating assets and liabilities:
       Accounts receivable trade - net                                                                   21,568             (40,427)
       Accounts receivable from joint venture                                                          (164,494)            (36,888)
       Inventories                                                                                     (183,948)            (84,672)
       Prepaid expenses and other                                                                       (30,491)             58,095
       Other assets and other deferred charges                                                                              (35,806)
       Accounts payable                                                                                 (82,485)            473,687
       Deferred salaries                                                                                 28,401            (149,920)
       Accrued interest                                                                                  64,360            (126,223)
       Other accrued liabilities                                                                        110,521             (39,473)
                                                                                                   ------------        ------------
          Net cash and cash equivalents (used) in operating activities                               (5,925,165)         (3,462,491)

Cash Flows from Investing Activities
Purchase of property and equipment - net                                                             (1,794,241)         (2,488,965)
Advance payments on construction-in-progress                                                           (159,541)           (114,712)
Investment in joint venture                                                                          (5,695,283)
Patent costs deferred                                                                                  (120,444)
Short term investments :
     Purchases                                                                                                           (5,305,789)
     Maturities                                                                                       2,384,700           2,921,089
                                                                                                   ------------        ------------
          Net cash and cash equivalents (used in) investing activities                               (5,384,809)         (4,988,377)

Cash Flows from Financing Activities
Net proceeds from issuance of common stock                                                            5,351,763          11,459,410
Net proceeds from notes payable                                                                                             145,687
Net proceeds received from issuance of convertible debentures                                         5,891,189
Net proceeds from exercise of warrants                                                                   47,520
Payment received on notes receivable                                                                                        750,000
Payment of capital lease obligations                                                                    (29,328)            (19,493)
Payment of notes payable                                                                                                 (4,137,500)
                                                                                                   ------------        ------------
        Net cash and cash equivalents provided by financing activities                               11,261,144           8,198,104
                                                                                                   ------------        ------------
        (Decrease) in cash and cash equivalents                                                         (48,830)           (252,764)
        Cash and cash equivalents at beginning of period                                                673,084             925,848
                                                                                                   ------------        ------------
        Cash and cash equivalents at end of period                                                     $624,254            $673,084
                                                                                                   ============        ============

Supplemental disclosures of cash flow information
  Noncash financing activities:
  Capital lease obligations for property and equipment acquisitions                                     $91,336
                                                                                                   ============
Cash paid for:
  Interest                                                                                             $272,025            $477,240
                                                                                                   ============        ============
</TABLE>


See accompanying notes.


                                       F6
<PAGE>


                                COMPOSITECH LTD.

                          Notes to Financial Statements

                                December 31, 1997

1.   Organization and Basis of Presentation, and Significant Accounting Policies

Organization and Basis of Presentation

Compositech  Ltd. (the  "Company") was  incorporated in the State of New York on
June 13, 1984. The Company was merged into a newly formed  Delaware  corporation
on January 29, 1988.  The Company  manufactures  laminates  for printed  circuit
boards and designs the equipment used to manufacture the laminates.

Through December 31, 1996, the Company's  activities were accounted for as those
of a "Development  Stage Enterprise." Based on the level of production and sales
in 1997, the Company has concluded that it is no longer in the development stage
as of January 1, 1997, as reflected in the financial statement presentation.

The Company requires additional funding from financing or other sources to cover
operating expenses and planned expenditures for additional  production equipment
until sufficient  revenues are generated to cover such expenses.  Management has
plans to obtain additional funding (see Note 12). The foregoing conditions raise
substantial  doubt about the Company's  ability to continue as a going  concern.
The accompanying  financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

The board of directors  authorized and the  stockholders  approved a one-for-two
reverse split of the outstanding  common stock  effective June 26, 1996.  Effect
has been given to this reverse  split as if it occurred on the date of inception
of the Company.  All common share,  option and warrant data has been restated to
reflect the reverse split.

Significant Accounting Policies

Cash and Cash Equivalents

Cash and cash  equivalents  are  comprised  of cash in banks and  highly  liquid
investments with maturities of three months or less.

Investments

The Company determines the appropriate  classification of securities at the time
of acquisition and reevaluates  such  designation as of each balance sheet date.
At December 31, 1996, all of the Company's investments, consisting of short-term
U.S. Government  securities,  with original maturities of more than 90 days were
classified as held to maturity and valued at amortized cost.  There were no such
investments as of December 31, 1997.



                                       F7
<PAGE>


Inventories

Inventories  include raw  materials,  finished  goods and  inventories  of spare
parts.  Raw materials and finished goods  inventories are stated at the lower of
cost or market based on the first-in,  first-out  method.  Inventories  of spare
parts are stated at the lower of cost or market based on specific item cost.

                                                     December 31
                                              ----------------------
                                                 1997         1996
                                              ---------    ---------
                Raw Materials                 $ 225,000    $ 101,000
                Finished Goods                  123,000       20,000
                Spare Parts                      53,922       96,974
                                              ---------    ---------
                Total                         $ 401,922    $ 217,974
                                              =========    =========

Patents

The Company has obtained  patents in the United States and  internationally  and
has filed additional patent applications.  Such patent rights are of significant
importance  to  the  Company  to  protect  products,   processes  and  equipment
developed.  Costs incurred in connection with patents are being deferred and are
amortized over the life of the patents  beginning  upon issue.  Costs related to
unsuccessful patent applications will be expensed.

Depreciation and Amortization

Equipment,  furniture and fixtures are being  depreciated  on the  straight-line
method over the  estimated  useful lives of the related  assets which range from
five to ten years. Leasehold improvements are being amortized over the lesser of
their useful lives or the remaining term of the lease.

(Loss) Per Share

In  March  1997,  the  Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial Standards ("SFAS") No. 128, Earnings per Share. Statement
128 replaced the  calculation  of primary and fully  diluted  earnings per share
with basic and diluted  earnings per share.  Unlike primary  earnings per share,
basic earnings per share excludes any dilutive effects of options,  warrants and
convertible  securities.  Diluted  earnings  per  share is very  similar  to the
previously  reported  fully diluted  earnings per share.  All earnings per share
amounts for all periods have been presented, and where appropriate,  restated to
conform  to the  Statement  128  requirements.  Loss  per  share is based on the
weighted average number of shares of common stock outstanding. The conversion of
the Series A convertible  preferred  stock,  the 5%  Convertible  Debentures and
outstanding  options and warrants  into common stock has not been assumed in the
calculation   of  diluted  loss  per  share,   as  such   conversion   would  be
anti-dilutive.

Accounting Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the financial  statements and  accompanying  notes.  Actual results could
differ from these estimates.


                                       F8
<PAGE>


Reclassification

Certain  prior year  amounts  have been  reclassified  or adjusted to conform to
current year financial statement presentation.

Recent Accounting Pronouncements

In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. SFAS
No. 130 requires  disclosure  of all  components of  comprehensive  income on an
annual  and  interim  basis.  Comprehensive  income is  defined as 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
fiscal years  beginning  after  December  15, 1997.  The Company will adopt this
statement for 1998.

In July 1997,  the FASB issued SFAS No. 131,  Disclosures  About  Segments of an
Enterprise and Related Information.  SFAS No. 131 requires certain financial and
supplementary  information  to be disclosed  on an annual and interim  basis for
each reportable  segment of an enterprise.  SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. Unless  impracticable,  companies would
be required to restate prior period information upon adoption.  The Company will
adopt this statement for 1998.

2.  Property and Equipment
                                                               December 31
                                                         -----------------------
                                                            1997         1996
                                                         ----------   ----------
    Production equipment                                 $5,195,823   $1,951,173
    Laboratory equipment                                    160,535      138,702
    Furniture, fixtures and equipment                       422,735      353,624
    Leasehold improvements                                  431,037      243,544
    Construction-in-progress                                343,665    2,086,973
    Equipment under capital leases                          212,106      120,770
                                                         ----------   ----------
                                                          6,765,901    4,894,786
    Less accumulated depreciation and amortization        1,489,229    1,028,646
                                                         ==========   ==========
                                                         $5,276,672   $3,866,140
                                                         ==========   ==========

3. Investment in Joint Venture

On October 16, 1997,  the Company  formed a 50/50 joint venture with four Quebec
institutional   investors   (collectively,   the  "Quebec  Investors")  for  the
establishment   of  a  plant  in  the  greater   Montreal  area  to  manufacture
Compositech's   laminates.   The  Quebec  Investors  are:  Societe  generale  de
financement du Quebec,  Fonds de solidarite des travailleurs du Quebec (F.T.Q.),
Societe  Innovatech du Grand  Montreal and Fonds  regional de solidarite  Ile de
Montreal.  The project cost is estimated to be approximately  $24.5 million with
an initial  capitalization  by the parties of approximately $11 million with the
balance to be in debt  financing for which firm  commitments  have been obtained
from the National Bank of Canada and governmental agencies.



                                       F9
<PAGE>


The Company's  $5,426,917  capital investment in the joint venture was funded by
the Quebec Investors  purchasing  1,066,192 shares of the Company's common stock
at $5.09 per share,  resulting  in an increase in common stock of $10,662 and an
increase in  additional  paid-in  capital of  $5,341,101,  net of expenses.  The
Quebec  Investors have an option to sell their 50% interest in the joint venture
to the Company for a like number of shares and, under certain circumstances, the
Company has an option to purchase  the  interest  for the same number of shares.
The plant is planned to start production in 1999.

The investment in joint venture includes $268,366 in commission and legal costs,
incurred by the Company in connection  with the  negotiation  and preparation of
the various  joint venture  agreements.  The Company has also recorded a loss in
the amount of $63,722,  representing 50% of the joint venture's net loss for the
fiscal year ended December 31, 1997, as a reduction in its investment account.

During  1997,  $107,000 of selling,  general and  administrative  expenses  were
charged to the Canadian  joint  venture,  in  accordance  with the joint venture
agreements.  As of December  31, 1997  (unaudited),  the total  assets and total
liabilities of the joint venture were  approximately  $10,980,000  and $254,000,
respectively.

4.  Long-Term Debt

<TABLE>
<CAPTION>
                                                                       December 31
                                                                -----------------------
                                                                   1997         1996
                                                                ----------   ----------
<S>                                                             <C>          <C>
     Notes payable to stockholders due
       January 2, 1999, as amended,
       interest payable semi-annually
       at prime rate plus 1 1/2% (10% at December  31,
       1997 and 9.5% at December 31, 1996;
       $775,000 collateralized by a second lien on U.S.
       patents and patent applications.)                          $850,000     $850,000

     10% Secured Notes, to stockholders, due
       January 2, 1999, as amended, interest
       payable annually, collateralized by patents,
       patent applications and certain
       production equipment.                                       745,000      745,000

     5% Convertible Debentures, due May 31, 2000,
       interest payable quarterly, net of $67,650 of
       unamortized debt discount, collateralized
       by certain production equipment.                          5,762,350
                                                                ----------   ----------
                                                                 7,357,350    1,595,000
     Less current maturities                                                    100,000
                                                                ==========   ==========
                                                                $7,357,350   $1,495,000
                                                                ==========   ==========
</TABLE>

From May 28  through  August  5,  1997,  the  Company  issued  $6,505,000  of 5%
convertible  debentures (the  "Debentures") in a private placement for which the
Company received net proceeds of  approximately  $5,900,000 after the payment of
commissions and expenses.  The Debentures were issued to provide funds to obtain
additional production equipment and for



                                      F10
<PAGE>


working capital.  Interest is payable quarterly.  The Debentures are due May 31,
2000 and are  partially  collateralized  either by the  equipment to be obtained
with the proceeds or certain existing production  equipment.  The Debentures are
convertible into shares of Common Stock commencing August 26, 1997 at the lesser
of (i) $6.00 per share or (ii) (a) from August 26, 1997 to  November  24,  1997,
85% and (b) from November 25, 1997 to maturity,  80% of the closing bid price of
the Common  Stock as  reported  on The  Nasdaq  SmallCap  MarketSM  for the five
trading days prior to the date of conversion.  The Company may repurchase any of
the  individual  Debentures  at a 25%  premium if the  closing  bid price of the
Common  Stock is less  than  $4.00  for any two  days out of a five day  trading
period.  Trautman Kramer & Company Inc., the placement agent,  received warrants
to buy 182,140  shares of the  Company's  Common Stock,  at $6.00 per share,  as
partial compensation in connection with the sale of Debentures. The value of the
warrants  have been  estimated  at $91,070 and  credited to  additional  paid-in
capital.  The  debt  discount  resulting  from  the  warrants  and  the  related
commissions and expenses is being amortized over the life of the debentures.

Based on a recent SEC  pronouncement,  due to the  difference  between  the fair
market value of the Common Stock on the dates the  Debentures  were sold and the
earliest discounted  conversion price, the Company recognized deferred financing
costs of $1,147,940 which was amortized over the periods from issuance to August
26, 1997, the date on which the Debentures first became convertible.  Management
believes that the proceeds received from the Debentures and the discount offered
on  conversion  of the debt is a fair  representation  of the net  proceeds  the
Company  would  otherwise  expect to receive  from an equity  offering of a like
number of shares after  consideration of all associated  commissions,  costs and
expenses.

During  November and December  1997,  $675,000  face amount of  Debentures  were
converted into 531,290 shares of common stock,  resulting in increases in common
stock of $5,313 and additional paid-in capital of $669,687.

Interest  and debt  expense  includes  interest of $127,212  (1997) and $165,478
(1996) applicable to stockholders.

5.  Stockholders' Equity

As part of the  sale of  stock  in 1990 to HT  Troplast  AG  (successor  to Huls
Troisdorf AG - "HT"),  a German  company  formerly  manufacturing  laminates for
printed circuit boards,  the Company is receiving  contributions of know-how and
technical assistance  services.  The technical and marketing assistance services
provided by HT in 1997 have been valued by  management at $9,364 and included in
expenses and credited to paid-in  capital.  Future  services  will be valued and
recorded when received.

The shares of the Series A convertible  preferred  stock are  convertible at any
time at the option of the  stockholder  into shares of common  stock at the rate
(subject to antidilution  adjustment) of one-half share of common stock for each
share of Series A convertible  preferred stock. Each share will automatically be
converted into shares of common stock (at the then applicable  conversion  rate)
upon the  consummation of an underwritten  public offering  covering the sale of
common stock with  aggregate  net proceeds of not less than  $10,000,000  with a
price per share equal to or greater than $9.00 per share.



                                      F11
<PAGE>


The common  stock and Series A  convertible  preferred  stock vote as one class,
with each share of common stock being  entitled to one vote.  Each holder of the
Series A convertible preferred stock is entitled to the number of votes equal to
the number of shares of common stock into which a share of the  preferred  stock
could have been converted as of the record date for voting.

In the event of any voluntary or involuntary liquidation, dissolution or winding
up of the Company, the holders of the Series A convertible preferred stock shall
be entitled to receive up to $3.00 per share,  as adjusted,  before any payments
are made to the holders of common  stock.  Each  one-half  share of common stock
would then be entitled to receive $3.00, as adjusted,  from the remaining assets
of the Company.  Any remaining  assets will be distributed to the holders of all
shares of stock on a pro rata basis.

On July 9, 1996, the Company  completed an initial public  offering  ("IPO") for
the sale of 2,415,000 units at $5.00 each, aggregating $12,075,000, resulting in
net proceeds of $9,920,071 after discounts,  commissions and expenses. Each unit
consisted of one share of common stock and one redeemable common stock warrant.

6.   Warrants and Options

Warrants and Unit Purchase Option

In  connection  with  sale of  notes  and the  guarantee  agreement  in 1992 and
February 1993, the Company issued  warrants to purchase  65,500 shares of common
stock at $7.50 per share, as adjusted.  The warrants are  exercisable  until May
28, 1999, as amended.

In  connection  with the sale of notes in  November  1993,  the  Company  issued
warrants to purchase 249,000 shares of common stock at $7.50 per share. Warrants
to purchase  225,000  shares are  exercisable  to May 16,  2000 and  warrants to
purchase 24,000 shares are exercisable until November 16, 1998.

In  connection  with the  extension  of the  maturity  date of notes  payable to
stockholders  on May 28, 1994, the Company issued  warrants to purchase  157,500
shares of common stock at $7.50 per share.  The warrants are  exercisable  until
May 28, 1999.

In  connection  with the sale or  refinancing  of  notes in 1995 and  1996,  the
Company issued warrants to purchase  810,476 shares of common stock at $3.00 per
share  (computed  at the lesser of $3.60 per share or 60% of the $5.00 per share
IPO price). The warrants are exercisable at dates ranging from August 3, 2000 to
February 15, 2001.

In February  1996,  in  connection  with a private  placement  of notes  through
Trautman Kramer & Company, Inc., the placement agent, the Company issued to them
warrants to purchase 76,993 shares of common stock at $3.96 a share.
The warrants are exercisable until February 15, 2001.

As part of its IPO,  the Company  sold units which  included  Redeemable  Common
Stock Warrants to purchase  2,415,000  shares of common stock at $6.25 per share
(subject to antidilutive  provisions)  through July 3, 2001. The warrants may be
redeemed  by the  Company  at $.01 per  warrant  upon a minimum of 30 days prior
written notice to the holders thereof if the closing bid quotation of the common
stock has been at least 150% of the then exercise price of the warrants



                                      F12
<PAGE>


on each of the 20  consecutive  trading days ending on a day not more than three
days prior to the date of the notice of redemption.

As part of its IPO,  the Company  sold to the  underwriters  for $.001 per unit,
Unit Purchase  Options to purchase  210,000 units at an exercise  price of $7.50
per unit  exercisable  July 9, 1998 through July 9, 2001. The terms of the units
were  substantially  identical  to the units sold in the IPO and  consist of one
share of common  stock and a warrant to purchase one share of common stock at an
exercise  price of  $7.8125  per share.  The  foregoing  prices  are  subject to
antidilution provisions.

In May 1997,  Trautman  Kramer & Company  Inc.,  the placement  agent,  received
warrants to buy  182,140  shares of the  Company's  Common  Stock,  at $6.00 per
share,  as partial  compensation  in connection with the sale of the Debentures.
The warrants are exercisable until May 28, 2002.

In  connection  with the  extension  of the  maturity  date of notes  payable to
stockholders  on September  30, 1997,  the Company  issued  warrants to purchase
30,000  shares  of  common  stock at $5.86  per  share.  The fair  value of such
warrants is nominal. The warrants are exercisable until September 30, 2002.

In October  1997,  the  Company  issued  warrants  to buy  29,470  shares of the
Company's  Common Stock,  at $5.09 per share,  as partial  compensation  for the
finder's  fee in  connection  with the  signing of the  Canadian  joint  venture
agreement.  The  fair  value of such  warrants  is  nominal.  The  warrants  are
exercisable until October 16, 2001.

In December  1997, in connection  with  resolving a dispute,  the Company issued
warrants to buy 36,000 shares of common stock at $3.00 per share. The fair value
of such warrants is nominal. The warrants are exercisable until August 3, 2000.

In September 1997,  warrants to purchase  16,500 shares of the Company's  common
stock were  exercised at an exercise  price of $3.00 per share,  resulting in an
increase in common stock of $165 and an increase in additional  paid-in  capital
of $ 47,355, net of expenses.

Stock Option Plan

Under the Company's  1988  non-qualified  stock option plan,  150,000  shares of
common  stock  may be  issued  to  selected  key  employees  and  non-employees,
including directors, providing services to the Company. Under the Company's 1994
Stock Award Plan as amended,  1,175,000  shares of common stock may be issued as
Incentive Stock Options,  non-qualified  options or restricted stock to selected
key employees or to non-employees,  including  directors,  providing services to
the Company.  All options  granted have ten year terms and vest and become fully
exercisable between six months and three years.

The Company has elected to follow  Accounting  Principles  Board Opinion No. 25,
"Accounting   for  Stock   Issued  to   Employees"   ("APB   25")  and   related
Interpretations  in  accounting  for its  employee  stock  options  because,  as
discussed below,  the alternative fair value accounting  provided for under SFAS
No. 123,  "Accounting  for  Stock-Based  Compensation",  requires  use of option
valuation  models  that were not  developed  for use in valuing  employee  stock
options.



                                      F13
<PAGE>


Under APB 25, because the exercise price of the Company's employee stock options
equals  the  market  price of the  underlying  stock on the  date of  grant,  no
compensation expense is recognized.

Pro forma information  regarding net loss and loss per share is required by SFAS
123,  which also requires that the  information  be determined as if the Company
has accounted for its employee stock options granted  subsequent to December 31,
1994 under the fair  value  method of that  statement.  The fair value for these
options was estimated at the date of grant using a Black-Scholes  option pricing
model  with the  following  weighted-average  assumptions  for  1997  and  1996:
risk-free interest rates of 5.52% and 6.278%,  respectively;  dividend yields of
0%;  volatility  factors of the expected  market price of the  Company's  common
stock of .795 and .50, respectively; and a weighted-average expected life of the
option of 6 years.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded  options which have no vesting  restrictions  and are fully
transferable.  In addition,  option valuation models require the input of highly
subjective  assumptions  including the expected stock price volatility.  Because
the  Company's  employee  stock  options  have   characteristics   significantly
different from those of traded  options,  and because  changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion,  the  existing  models do not  necessarily  provide a  reliable  single
measure of the fair value of its employee stock options.

For purposes of pro forma  disclosures,  the estimated fair value of the options
is amortized to expense over the options' vesting period.

The Company's pro forma information for 1997 and 1996 are as follows:

                                                    1997               1996
                                                 -----------        -----------
     Pro Forma Net (Loss)                        ($7,953,996)       ($4,903,063)
     Pro Forma (Loss) Per Share
         Basic                                        ($1.27)            ($1.07)

Because SFAS is applicable  only to options  granted  subsequent to December 31,
1994, its pro forma effect will not be fully reflected until 1998.

A summary of the Company's stock option activity and related information for the
years ended December 31 follows:

<TABLE>
<CAPTION>
                                                               1997                                1996
                                                   -----------------------------       ----------------------------
                                                                Weighted-Average                   Weighted-Average
                                                   Options       Exercise Price        Options      Exercise Price
                                                   =============================       ============================

<S>                                                <C>                <C>              <C>               <C>
Outstanding-beginning of year                      600,600            $4.08            474,600           $3.59
Granted                                            205,810             4.60            135,000            5.75
Forfeited                                           35,920             5.26              9,000            3.03
                                                   -----------------------------       ----------------------------
Outstanding - end of year                          770,490            $4.16            600,600           $4.08
                                                   =============================       ============================

Exercisable - end of year                          491,528             3.94            387,700           $3.75

Weighted average fair value of
options granted during the year                                       $3.32                              $3.20
</TABLE>


                                      F14
<PAGE>


A summary of options outstanding as of December 31, 1997 follows:


                                                               Weighted Average
                                                                   Remaining
                           Options             Options          Contractual Life
    Exercise Price       Outstanding         Exercisable           (Years)
    --------------       -----------         -----------       -----------------
        $2.375              61,390                --                9.93
         2.500             299,633             266,672              8.00
         4.375               3,000                --                9.34
         4.750              12,000                --                9.28
         5.000             124,800             124,800              4.93
         5.750             230,167              60,556              8.92
         7.500              39,500              39,500              0.28
                           -------             -------              ----
                           770,490             491,528              7.56
                           =======             =======              ====

Included in the total  outstanding  as of December 31, 1997 are 409,800  options
for directors.

The Company has reserved  9,512,169  shares of common stock for  conversions  of
preferred  stock and  convertible  debentures  and issuances for stock  options,
warrants and stock exchange agreements.

7.  Income Taxes

The  Company  accounts  for  income  taxes in  accordance  with  SFAS  No.  109,
"Accounting for Income Taxes".  Under SFAS No. 109, the liability method is used
in  accounting  for income  taxes.  Under this  method,  deferred tax assets and
liabilities are determined based on differences  between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.

Deferred income taxes reflect the net effects of temporary  differences  between
the carrying amounts of assets and liabilities for financial  reporting purposes
and the amounts used for income tax purposes.

At December 31, 1997, the Company has net operating loss  carryforwards  ("NOL")
of approximately  $25,600,000 for Federal income tax purposes,  expiring at 2003
through 2012.  In addition,  the Company has research and  development  credits,
targeted  job credits  and  alternative  minimum  tax  credits of  approximately
$1,120,000  which  generally  expire  through 2012, to offset future taxes.  The
Internal Revenue Code ("IRC")  includes  provisions  which  significantly  limit
potential use of net operating  losses and tax credits in situations where there
is a change in  ownership,  as  defined,  of more than 50%  during a  three-year
period.  Accordingly,  if a change in ownership  occurs,  the  ultimate  benefit
realized from these  carryovers may be  significantly  reduced in total, and the
amount that may be utilized in any given year may be significantly  limited. The
limitation  is computed  based upon the fair market  value of the Company at the
time of the  ownership  change  multiplied by the Federal  long-term  tax-exempt
borrowing  rate.  The common stock  issuance in the IPO combined  with the other
stock  issuances  completed by the Company during the three years ended December
31, 1996 have initiated a change in ownership as defined



                                      F15
<PAGE>


in  the  IRC.  Accordingly,  the  Company  is  currently  subject  to an  annual
limitation of approximately  $1,170,000 on $17 million of its NOL  carryforward.
Additionally,   because   there  is  a  limit  on  the  time  during  which  NOL
carryforwards and tax credits may be applied against future taxable income,  the
Company  may not be able to take full  advantage  of these  attributes  when the
Company generates taxable income.

As the Company has had  cumulative  losses and there is no  assurance  of future
taxable income,  a valuation  allowance has been  established to offset deferred
tax assets. The components of the Company's net deferred tax for the years ended
December 31 are as follows:

                                                             December 31
                                                     ---------------------------
                                                         1997           1996
                                                     -----------    -----------
    Deferred tax assets:
       Deferred salaries                             $   253,000    $   243,000
       Net operating loss carryforwards                8,688,000      6,426,000
       Research and development and other credits      1,121,000        940,000
                                                     -----------    -----------
    Total deferred tax assets                         10,062,000      7,609,000
    Less:  Valuation allowance                        (9,642,000)    (7,367,000)
                                                     -----------    -----------
    Net deferred tax assets                              420,000        242,000
    Deferred tax liability:
       Tax over book depreciation                       (420,000)      (242,000)
                                                     -----------    -----------
     Net deferred tax                                $      --      $      --
                                                     ===========    ===========
fs8.  Commitments

Operating Leases

At December 31, 1997,  future  minimum annual rentals for leases with initial or
remaining terms in excess of one year are as follows:

                  1998              $193,000
                  1999               183,000
                  2000               121,000
                  2001                 5,000
                                    ========
                                    $502,000

The Company  leases its plant under a net lease  expiring  August 31, 2000.  The
lease is renewable  for an  additional  five years and requires that the Company
pay real estate taxes as additional rent.

Rent  expense  was  approximately  $235,000 in 1997 and  $236,000  in 1996.  The
foregoing  amounts  include  $79,000 and $80,000,  respectively,  of real estate
taxes paid as additional rent.


                                      F16
<PAGE>


Capital Leases

Future minimum lease payments under capital leases for equipment with a net book
value of  approximately  $124,000,  included in property and  equipment  for the
years ending December 31, are as follows:

         1998                                                   56,360
         1999                                                   47,264
         2000                                                    6,309
                                                               -------
         Total payments                                        109,933
         Less: Amount representing interest                     15,884
                                                               -------
         Present value of minimum lease  payments              $94,049
                                                               =======

Employment Contracts

The Company has employment  agreements with three  officers/directors  providing
for  employment  through  1998  and for one  divisional  officer  providing  for
employment through 2000 for aggregate salaries of $430,000 per annum,  severance
pay if  terminated  of one times their annual  salary  (aggregate  $430,000) and
severance pay if they terminate due to a change in control,  as defined,  of two
times their annual salaries (aggregate $860,000).

Equipment Purchases

At December 31, 1997, the Company had commitments for the purchase of production
equipment of approximately $500,000.

9.  Officers' Life Insurance

The Company is the owner and  beneficiary  of insurance  policies of  $2,000,000
each on the lives of two of its officers for an aggregate of $4,000,000.

10.  Dependence on a Major Supplier

Owens Corning, a major fiberglass  manufacturer,  has developed and continues to
develop  products to meet the  Company's  processing  and product  requirements.
Should this  manufacturer  not  continue  supplying  the  Company's  quality and
quantity needs,  the Company would have to secure another  supplier.  Such event
could  have a  material  adverse  effect  on the  Company's  ability  to  supply
customers and could reduce expected sales and increase the costs of manufacture.
No assurances can be given that an alternative supplier could meet the Company's
quality and quantity needs on satisfactory terms.

11.  Significant Customers

Customers who individually represent 10% or more of net sales for the respective
years are as follows:

                                                   Years Ended December 31
                                                   -----------------------
                                                     1997            1996
                                                   --------        -------
        HADCO Corporation                            74.8%          50.8%
        Merix Corporation                            17.6%          46.4%



                                      F17
<PAGE>


12.  Financing and Subsequent Events

Subsequent  to December  31, 1997,  $2,590,000  face amount of  Debentures  were
converted  into  1,773,106  shares of common  stock,  resulting  in increases of
common stock of $17,731 and additional paid-in capital of $2,572,269.

Subsequent to December 31, 1997,  the Company  issued stock options to employees
to purchase 243,000 shares of common stock at $1.375 per share, the market price
of the stock on the date of the grant.

On February 9, 1998,  the Company  entered into a joint  venture  agreement  and
patent,  information and trademark agreement with a Taiwanese investor group led
by Fidelity  Venture  Capital Corp. of Taiwan  ("Fidelity") to establish a joint
venture to manufacture the Company's  laminates in Taiwan.  The Company received
$1 million as a license  down payment and it will  receive  additional  up-front
license  payments of $1 million and, will in turn,  invest $500,000 in the joint
venture, upon the achievement of certain milestones. As part of the transaction,
the joint venture  acquired  587,372 shares of the Company's common stock for $1
million and agreed to buy a like amount of shares for another $1 million  within
30 days  following  approval of the joint  venture  license by the science  park
where it is proposed to be located.  The Company will receive an approximate 10%
interest in the joint  venture and royalty  payments  based on sales.  A related
letter of intent with  Fidelity  provides for entering  into a contract with the
Company  for it to supply the joint  venture  with the  requisite  manufacturing
equipment.

In addition to the funds mentioned in the preceding paragraph, the Company plans
to obtain  additional  funding  of $5  million  or more from  sources  including
license fees, sales of equipment in connection with licensing operations,  joint
ventures  or  other  collaborative  relationships,  as  well as  equity  or debt
financing.



                                      F18