<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-K

(Mark One)
[X]      Annual report pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 27, 1998
                                       or

[ ]      Transition report pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934

        For the transition period from _______________ to _______________
                         Commission file number 0-24416

                             ADFlex SOLUTIONS, INC.
             (Exact Name of Registrant as Specified in Its Charter)

           DELAWARE                                              04-3186513
(State or other Jurisdiction of                               (I.R.S. Employer
 Incorporation or Organization)                              Identification No.)

              2001 WEST CHANDLER BOULEVARD, CHANDLER, ARIZONA 85224
               (Address of Principal Executive Offices, Zip Code)

                                 (602) 963-4584
              (Registrant's Telephone Number, Including Area Code)

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

           Securities registered pursuant to Section 12(g) of the Act:
                          COMMON STOCK, $0.01 PAR VALUE

                      Name of Exchange on which registered:
                             NASDAQ NATIONAL MARKET

         Indicate by check mark whether the registrant: (1) has filed all 
reports required to be filed by Section 13 or 15(d) of the Securities Exchange 
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such 
filing requirements for the past 90 days. Yes [X] No

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

         The aggregate market value of the voting stock held by non-affiliates
of the registrant was approximately $21,376,759 based on the closing sale price
as reported by the Nasdaq National Market on March 31, 1999.

         The number of outstanding shares of the registrant's $0.01 par value
Common Stock as of March 31, 1999 was 8,983,018.

                       DOCUMENTS INCORPORATED BY REFERENCE

(1)      Portions of the Proxy Statement in connection with the Annual Meeting
         are incorporated by reference into Part III.
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                                     PART I

ITEM 1. BUSINESS.

OVERVIEW

         ADFlex Solutions, Inc. ("ADFlex") or the ("Company") is a leading
worldwide provider of flexible circuit interconnect solutions to original
equipment manufacturers ("OEMs") in the electronics industry. The Company offers
a full range of customized flexible circuit applications and services from
initial design, development and prototype to fabrication, assembly and test on a
global basis. The Company targets high-volume markets where miniaturization,
form and weight are driving factors and flexible circuits are an enabling
technology. Applications for flexible circuits currently addressed by the
Company include notebook computers, portable communication devices such as
cellular telephones and pagers, data storage devices such as hard disk drives
("HDDs"), tape drives and arrays, and high-end consumer electronics products
such as compact disk players. The Company's principal customers include Acer,
Compaq, Digital Equipment, IBM, Iomega, Maxtor, Motorola, Nokia, Philips,
Seagate, Storage Technology and other leading electronic OEMs. Recent new
customers include Dell, Qualcomm, Samsung, and Xerox Corporation.

         Flexible circuits consist of copper conductive patterns on flexible
substrate materials, such as polyimide, and provide electrical connection
between components in electronic systems. Flexible circuit interconnects
frequently incorporate components such as integrated circuits ("ICs"),
connectors, stiffeners, resistors and capacitors mounted directly on a flexible
circuit. With proliferation of electronic applications, electronic products have
become smaller, lighter and more portable. To meet the challenges represented by
the increased complexity of miniaturization, form and weight requirements, OEMs
have increasingly turned to flexible circuit interconnect solutions because they
decrease the weight and expense of connectors and other packaging components,
conform to contoured, ergonomic shapes or small spaces and provide mechanical
flexure.

         While the trend toward miniaturization and portability increases
product complexity, electronic OEMs face escalating time to market requirements.
In response, the Company acquired ADFlex U.K. in December 1995, as discussed
below, to advance its strategy to provide a "one-stop shop" solution to enable
customers to meet time to market challenges. Time to market and cost issues have
also led OEMs to focus on global sourcing from a limited number of qualified
suppliers. As a result, the Company has established manufacturing facilities in
Mexico and Thailand that have lower cost structures and closer proximity to the
Company's OEM customer base. The Company believes its unique "one-stop shop"
offerings of flexible circuits and assemblies will be a competitive advantage
and thereby allow it to increase its market share with existing customers and
create opportunities to attract new customers. The Company believes it is a
preferred supplier for the majority of its customers' high-end and high-volume
flexible circuit interconnect requirements.

         The Company was organized under Delaware law in February 1993 to
acquire certain assets and assume certain liabilities of the flexible
interconnections division of Rogers Corporation ("Rogers"). The Rogers
acquisition was consummated on June 28, 1993. In December 1995, the Company
purchased ADFlex U.K., an advanced flexible circuit assembly company located in
Havant, England. The acquisition enabled the Company to offer its customers a
single source solution for their interconnect requirements that would shorten
their time to market and lower their costs. This acquisition also changed the
financial metrics of the Company because assembly businesses typically have
significantly lower gross margins than fabrication businesses.

         In an effort to increase its global sourcing opportunities and to
decrease its operating costs, the Company expanded its worldwide manufacturing
operations with the establishment of a joint venture located in Lamphun,
Thailand with Hana Microelectronics ("Hana") in August 1996. The joint venture,
ADFlex Thailand Limited ("ATL"), targeted the production and testing of advanced
chip-on-flex and other surface mount technologies for flexible circuit
assemblies. At inception, ATL was 80% owned by the Company and 20% owned by
Hana. The Company purchased the remaining 20% equity interest in ATL from Hana
in September 1997.


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INDUSTRY OVERVIEW AND TRENDS

         Flexible circuit interconnects provide electrical connection between
components in electronic systems and are increasingly used as a platform to
support the attachment of electronic devices. Flexible circuits offer several
advantages over rigid printed circuit boards ("PCBs") and ceramic hybrid
circuits, particularly for small, complex electronic systems. Flexible circuits,
due to their mechanical flexure and three-dimensional shape, accommodate
packaging contours and motion in a manner that traditional two-dimensional rigid
PCBs cannot. Flexible circuits also provide improved thermal dissipation and
signal propagation as compared to PCBs. In addition, flexible circuits can
reduce the size, weight and expense of: (i) the primary substrate for component
attachment when flexible circuits are used in place of a PCB; (ii) connectors,
cables and other interconnection schemes when flexible circuits provide the
connection to other substrates or subsystems within the system; and (iii)
individual IC die packages by bonding and IC directly to a flexible chip carrier
rather than a ceramic or plastic package.

         These capabilities enable circuits to solve many of the challenges
faced by electronic OEMs who currently use traditional interconnection devices.
Products which currently use polyimide flexible circuit interconnect assemblies
include notebook computers, portable communication devices such as cellular
telephones, pagers and personal digital assistants ("PDAs"), printers, scanners
and data storage devices such as HDDs, tape drives and arrays, and high-end
consumer electronic products such as compact disk players, cameras and
camcorders. Possible new applications for polyimide flexible circuit
interconnect assemblies include high density interposers and other chip carrier
packaging applications.

         The Company considers the following trends important in understanding
the electronic flexible circuit interconnect industry:

         MINIATURIZATION, PORTABILITY AND COMPLEXITY OF ELECTRONIC PRODUCTS.
Electronics OEMs continue to design and introduce more compact and portable
high-performance products with greater functionality. The complexity of these
new products requires smaller size, lighter weight, greater circuit and
component density, better thermal dissipation properties, higher frequencies and
increased reliability as compared to conventional rigid board assemblies. These
requirements necessitate greater sophistication in flexible circuit interconnect
manufacturing and process technologies. The trend toward increasingly
sophisticated products also requires greater engineering expertise and
investment in manufacturing and process technology for suppliers to produce high
quality electronic interconnect products on time, in volume, and at acceptable
cost.

         SHORTER PRODUCT LIFE CYCLES AND TIME TO MARKET. Rapid advances in
technology have significantly shortened the life cycle of complex electronic
products and placed increased pressure on OEMs to quickly develop and introduce
new products. These time to market challenges have in turn increased OEMs'
emphasis on the development, design engineering, prototype development and
ramp-to-volume capabilities of their suppliers. In addition, the importance of
being first to market with new products has heightened the emphasis on
shortening supply channels, reducing the number of suppliers and finding turnkey
sourcing capabilities that are supported by technologically advanced
manufacturing infrastructure.

         GLOBALIZATION AND REDUCTION OF MANUFACTURING COSTS. At the same time
that shorter product life cycles increase time to market pressures, users
continue to demand increased electronic performance at lower prices. Notable
product examples of this trend are notebook computers, desktop computers,
peripherals, portable communications and consumer electronics. Leading OEMs who
often manufacture products in multiple geographic regions are relying more on
suppliers with global sourcing capabilities which can help to shorten the OEMs'
supply chain and provide regionally competitive pricing. As part of global
sourcing, OEMs increasingly require their suppliers to establish local
infrastructure to provide proximity to engineering, manufacturing and sales
support.

         OUTSOURCING AND "ONE-STOP SHOP" SUPPLIERS. To avoid delays in new
product introductions, reduce manufacturing costs and avoid logistical
complexities, OEMs are increasingly turning to fewer suppliers which are capable
of producing electronic interconnect products from development, design,
quick-turn prototype and pre-production through volume production and assembly.
Many OEMs have accelerated this process by outsourcing their


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captive component, subsystem and even system manufacturing to focus on their
core competencies. The accelerated time to market and time to volume needs of
OEMs have resulted in increased collaboration with qualified suppliers capable
of providing a broad and integrated offering. To meet their rapidly changing
electronic interconnect requirements, many OEMs have moved to limit their vendor
base to a smaller number of technically qualified, strategically located
suppliers capable of providing both quick-turn prototype and pre-production
quantities as well as cost-competitive volume production quantities.

         PROLIFERATION OF ELECTRONICS AND CREATION OF NEW MARKETS. The markets
for electronic products are growing as a result of technological change,
increasing demands for a wider variety of electronic product features and more
powerful and less expensive electronic components. Due to this growth, new
markets have emerged in computing, data communications, telecommunications and
multimedia. Moreover, existing markets, such as computer networking and
peripherals, digital and mobile communications, video-on-demand, the Internet,
instrumentation and industrial controls have significantly expanded product
applications.

STRATEGY

         The Company's objective is to become the preferred supplier of flexible
circuit interconnect solutions for electronics OEMs in targeted markets. The
Company's strategy to meet this objective includes the following key elements:

         PROVIDE "ONE-STOP SHOP" FOR FABRICATION AND ASSEMBLY. The Company
provides customers with complete, fully tested flexible circuit interconnects
from custom design through fabrication, assembly and complete functional
testing. Historically, the capital-intensive nature of flexible circuit
production compelled companies to specialize in one of two major segments of the
flexible circuit production process, either design and fabrication or assembly
and testing. Prior to the ADFlex U.K. acquisition, a flexible circuit fabricated
by the Company often was sent elsewhere for assembly and testing before being
shipped to the end customer. The integration of expertise in state-of-the-art
assembly technology and processes with the Company's pre-existing fabrication
technology and high-volume production capabilities enables the Company to offer
significantly shorter cycle times, lower total costs and provide better quality
for customers. In addition, the Company believes that the integration of
assembly technology with manufacturing technology and high-volume production
capabilities will, over time, provide improvements in the Company's production
costs through higher product yields, faster production ramps, reduced
inventories, shortened production cycle times, improved account control and
increased leverage over expenses.

         PROVIDE DESIGN EXPERTISE AND PACKAGING TECHNOLOGY. The Company's
flexible circuit interconnects are designed specifically for each application,
requiring significant joint design activities between the Company and its
customer at the start of a new program. The Company encourages its customers to
outsource much of the flexible circuit design to ADFlex, which creates an
opportunity for the Company to function as an extension of its customers'
product development efforts. The Company assumes the responsibility, and invests
in support thereof, to maintain and advance flexible circuit technology at the
materials, fabrication and assembly levels. The Company believes its extensive
involvement with customers at the design stage, coupled with its use of
technology designed to meet the evolving requirements of its customers, has been
a key competitive advantage.

         EXPAND SERVICE AND MANUFACTURING INFRASTRUCTURE. As OEMs increasingly
require suppliers to support their global operations, the Company is devoting
significant resources to enhance its worldwide service and support organization.
The Company has expanded worldwide by strategically locating manufacturing
facilities in the United States, Mexico and Thailand. In addition, the Company
maintains a technology and pilot production facility in the U.K. to support its
European customers. The Company believes that substantial growth opportunities
exist for sales of its products and services to both U.S. and foreign-based
customers for use in their production operations in Southeast Asia. To increase
sales to customers with foreign manufacturing operations, the Company has design
centers in North America and Europe and has initiated the establishment of
design support capabilities with the Company's own engineers and with third
party independent contractors in Singapore, Korea, Taiwan, Japan and China. By
increasing the scale and scope of the services offered in each region, the
Company believes it can better address the needs of leading OEMs and contract
manufacturers that are increasingly seeking global partners and lower costs in
the high-volume production of advanced products.


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         INCREASE SHARE WITH EXISTING CUSTOMERS. Once established as a supplier
for an application, the Company seeks to gain an increasing share of the
customer's interconnection requirements in two principal ways:

         -        INCREASE SHARE OF TOTAL REQUIREMENTS. The Company's strategy
                  is to become the preferred supplier on as many programs as
                  possible by outperforming its direct competition on the
                  critical factors of quality, cost, delivery, design,
                  responsiveness and overall customer service. The Company's
                  objective is to obtain at least a 60% share of each of its
                  customer's high-end and high-volume flexible circuit
                  interconnect requirements, a position it believes that it
                  currently holds with a majority of its largest customers.

         -        LEVERAGE FABRICATION FOR ASSEMBLY OPPORTUNITIES. The Company
                  offers integrated flexible circuit fabrication and assembly
                  services. The Company seeks to capitalize on the growing trend
                  among electronics OEMs to reduce time to market as well as the
                  number of suppliers. By providing flexible circuit assembly as
                  an extension to existing fabrication services, the Company can
                  deliver savings on both time to market and cost for its
                  customers.

         TARGET HIGH VOLUME APPLICATIONS IN HIGH GROWTH MARKETS. The Company
targets applications for flexible circuit interconnects that have experienced
large volumes, high growth and rapid change such as notebook computers, cellular
telephones and pagers. In these markets, the Company can apply its superior
design skills, manufacturing efficiencies and ability to rapidly ramp to volume
production. Likewise, the Company believes it can leverage technology from its
existing markets into new and emerging markets and applications. Within its
selected markets, the Company targets OEMs (i) that have a market leadership
position, (ii) that need rapid response and value-added assembly, and (iii) that
will reward initiative with a preferred supplier position.

THE ADFlex "ONE-STOP SHOP" APPROACH

         The Company provides its customers with an integrated, "one-stop shop"
fabrication and assembly approach, incorporating superior engineering and
design, low cost/high volume circuit fabrication, flexible circuit assembly and
test along with dedicated customer support.

         SUPERIOR ENGINEERING AND DESIGN TECHNOLOGY. The flexible circuit
interconnects manufactured by the Company are designed specifically for each
application, requiring significant joint design activities between the Company
and the customer at the start of a project. The Company has developed design
methodologies that solve difficult interconnection problems and save the
customer time and money. The Company also designs and produces in volume
flexible circuits that range from high density, single-sided circuits to more
complex double-sided and multi-layer circuits. The Company is continually
investing in and improving its computer-based design tools to more quickly
design new flexible circuit interconnects, to enhance cooperative design and
communication with its customers and to more closely link designs to the
manufacturing process. The Company is recognized as a technology leader in
fine-line, single-sided flexible circuit technology and flexible circuit
assembly technology, including advanced chip on flex, flip-chip on flex and
high-density polyimide assembly technologies.

         CIRCUIT FABRICATION TECHNOLOGY. The Company has extensive experience in
fine-line polyimide flex and has pioneered manufacturing processes that deliver
high unit volumes at cost-effective yields. At the core of the process is
roll-to-roll subtractive fine line circuit processing. The starting materials
are flexible laminates composed of a thin dielectric film which is
adhesive-bonded to treated copper foil. Very accurate images (down to 0.003")
are produced in volume in photoresist. Circuit conductors are then formed by
chemically etching the underlying copper foil. Coverfilm materials with
pre-punched windows are laminated to the circuitry to provide an insulative
coating and to expose contact pads for surface metalization. The exposed
surfaces are then coated with solder for surface mount or bondable gold for
chip-on-flex applications. Laser processing is then used to create various
openings, to drill vias and cut contoured peripheries in substrate materials.

         The Company's key flexible circuit fabrication technologies include:


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         -        FINE FEATURE ROLL-TO-ROLL IMAGING AND ETCHING. Allows the
                  fabrication of circuits with very fine line widths and spaces.
                  This is critical to meeting complex, space constrained
                  interconnection needs. Processing wide web (24 inches) in a
                  continuous roll-to-roll format (as opposed to discrete panels)
                  allows fabrication of high circuit volumes with improved
                  material utilization, resulting in lower cost.

         -        LASER PROCESSING. Laser technology is used to produce low
                  cost, very fine openings, small vias and contoured shapes that
                  solve density problems while avoiding more expensive
                  traditional alternatives. Also, using a laser to cut the
                  periphery of parts allows prototypes and low volume production
                  parts to be built faster and without the cost of blanking die.

         -        BONDABLE GOLD PLATING. Prepares flexible circuits for
                  chip-on-flex bonding, a process which saves space and improves
                  electrical performance (access time) by wire bonding an IC die
                  directly to the flexible circuit.

         -        COVERFILM, LAY-UP AND LAMINATION. A process where
                  polyimide/adhesive based coverfilm materials are pre-punched,
                  then aligned with and laminated to an underlying circuit
                  pattern. This process allows accurate positioning of solder
                  plated pads to support fine pitch surface mount assembly to
                  the finished circuits.

         -        ASSEMBLY AND TEST TECHNOLOGY. The Company applies advanced
                  assembly and test technology to provide flexible circuit
                  interconnect assemblies to its customers. For many years, the
                  Company has assembled passive electrical and various
                  mechanical components, including connectors, stiffeners,
                  diodes, formed metal parts and other devices, to its flexible
                  circuits using primarily manual processes in its plants in
                  Mexico. With the ADFlex U.K. acquisition, the Company expanded
                  its capability to include advanced direct die attach and
                  assembly of integrated circuit devices as well as the
                  functional testing of these flexible circuit assemblies.
                  Assembling these components directly onto the flexible circuit
                  increases performance and reduces space, weight and cost.

         -        CUSTOMER SATISFACTION. A critical component of the Company's
                  growth has been dedicated customer support. The Company has
                  achieved and maintained high levels of customer satisfaction
                  by focusing on continuous quality improvement, reducing total
                  manufacturing cycles, shortening its design and prototype
                  cycles, reducing its general costs of manufacturing through
                  capacity utilization and process improvement, and being
                  responsive and working closely with its customers on a
                  day-to-day basis to quickly address their changing needs.

CURRENT PRODUCT APPLICATIONS

         The Company provides flexible circuit interconnect products to a
diverse group of markets. Historically, the HDD market has represented the
largest component of the Company's sales at 62%, 43%, and 36% of total sales for
1996, 1997 and 1998, respectively. Through new market expansion efforts, the
Company is continuing its efforts to reduce the impact of cyclicality of the HDD
industry on its business. However, net sales attributable to this market are
expected to continue to represent a large component of total sales for the
foreseeable future. Accordingly, the occurrence of significant slowdowns or
changes in this industry has had and may continue to have a material adverse
effect on the Company's operating results.

         Current applications addressed by the Company include:

         HARD DISK DRIVES. The HDD market uses flexible circuits as the
interconnect between the read/write head and disk drive electronics. In HDD
applications, circuits need to mechanically flex hundreds of millions of times
through the life of the drive. Mounting an unpackaged die directly onto the
flexible circuit substrate, or flip chip, is becoming the predominant
interconnect technology for these applications.

         DATA STORAGE. Large individual drive storage systems are being replaced
by arrays of less expensive disk drives or tape drives. The growth of personal
computer networks has generated a growth in small arrays for local area


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network storage. In addition to the flexible circuit interconnects inside each
of the individual drives, controlled impedance flex interconnects are used to
connect the back of the drives to standard interface boards.

         PORTABLE COMMUNICATIONS. The use of polyimide flexible circuits in
portable communications devices is growing as the space, weight and
functionality challenges are becoming more difficult. In some cellular
telephones, flexible circuits replace rigid PCBs, connectors and cables and can
thereby reduce space, weight and cost.

         NOTEBOOK COMPUTERS. Early applications for flexible circuits in
notebooks were mainly as interconnects from the motherboard to the LCD and as
shielded jumpers. More recently, systems have used as many as ten flexible
circuit interconnects per notebook, including PCMCIA connector/flex jumpers,
LED/speaker flexible circuit assemblies, track ball/mouse button flexible
circuit assemblies and various other shielded jumpers.

         CONSUMER AND OTHER APPLICATIONS. CD/DVD-ROMS are growing in consumer
applications where higher capacity and quicker access time, compared to tape
drives, are needed. These devices use flexible circuits as the interconnect
between the read/write head and CD/DVD-ROM drive electronics.

         Computer workstations, document scanners and printers also make use of
flexible circuit interconnects. Certain products and applications have similar
packaging and interconnection requirements and growth opportunities when
compared to the primary end-user markets served by the Company.

         EMERGING PRODUCT APPLICATIONS. Flexible circuit substrates are a
leading candidate for use in semiconductor packaging and as interposers for
high-density interconnect applications.

SALES AND SUPPORT

         Historically, the Company has sold a substantial portion of its
flexible circuit interconnects to a limited number of customers. In 1996, 1997
and 1998, combined sales to Seagate and IBM accounted for 47%, 33%, and 28% of
the Company's net sales, respectively. These sales were substantially in support
of the HDD and notebook computer markets. To facilitate their manufacturing
processes, the Company's customers often require that the Company sell finished
interconnects to contract assemblers for further assembly. In 1996, 1997 and
1998, shipments to contract assemblers were 14%, 24% and 29% of net sales,
respectively.

         Even though the Company's customer mix will likely change from period
to period in the future, the Company expects that sales to relatively few
customers, including contract assemblers, will continue to account for a high
percentage of its net sales in the foreseeable future. The loss of a significant
customer or a substantial reduction in orders by any significant customer,
including reductions due to market, economic or competitive conditions in the
computer, computer peripheral, communications and high-end consumer markets, has
had and may continue to have a material adverse effect on the Company's
business, financial condition, results of operations and cash flows.

FOREIGN SALES AND OPERATIONS

         The Company's primary finishing and assembly facilities are located in
Agua Prieta, Mexico and Lamphun, Thailand. The Company also maintains a
technology and pilot production facility in Havant, England. While the Company
believes it has established good relationships with its local labor forces and
the local governments, the spread of the manufacturing process over multiple
countries subjects the Company to risks inherent in international operations.
Those risks include currency fluctuations, inflationary pressures, unexpected
changes in regulatory requirements, tariffs and barriers, potentially limited
intellectual property protection, potential cross border shipment delays,
changes in political climate, difficulties in coordinating and managing foreign
operations, foreign labor union issues, increases in employee turnover and
potentially adverse tax consequences. Any of the foregoing could have a material
adverse effect on the Company's business, financial condition, results of
operations and cash flows.

         While ADFlex transacts business predominantly in U.S. Dollars and the
majority of its net sales are collected in U.S. Dollars, a portion of its sales
and expenses are denominated in foreign currencies. Changes in the relation of
foreign currencies to the U.S. Dollar will affect the Company's cost of good
sold and operating margins and could


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result in exchange losses. To reduce the impact of certain foreign currency
fluctuations, the Company enters into short-term forward foreign currency
exchange contracts (hedges) in the regular course of business. The forward
exchange contracts generally require the Company to exchange U.S. dollars for
foreign currencies at maturity, at rates agreed to at inception of the
contracts. The gains or losses on hedges of transaction and remeasurement
exposure are included in income in the period in which the exchange rates
change. The gains and losses on unhedged foreign currency transactions are
included in income as incurred. No assurance can be given that the Company's
hedging strategies will prevent future currency fluctuations from adversely
affecting the Company's business, financial condition, results of operations and
cash flows.

         During 1997 and 1998, the Thai Baht experienced significant
fluctuations in relation to the U.S. Dollar. As the majority of the sales and
expenses for the Thailand operation are denominated in U.S. Dollars, the
fluctuations did not have a significant impact on the Company's results of
operations for the years ended December 31, 1997 and December 27, 1998. However,
there can be no assurance that future currency fluctuations will not have a
material adverse effect on the Company's business, financial condition, results
of operations and cash flows.

         The Company's results of operations during 1998 were adversely impacted
by the Asian financial crisis. Among other things, there was increased
competition, including price competition, from Japanese flex manufacturers, and
cancellations of orders by the Company's customers who were impacted by the
Asian economic crisis.

         During 1996, 1997 and 1998, international sales accounted for
approximately 49%, 56% and 61% of net sales, respectively, most of which went to
Asian manufacturing facilities of United States-based customers.

MANUFACTURING

         The Company has developed a manufacturing process that combines the use
of technology with the deployment of human resources in a geographic and
organizational manner that allows the Company to compete on a pure cost basis,
if necessary, with suppliers of similar products throughout the world. Quality
systems are in place that are certified to standards set by demanding customers
in the electronics industry. The Company received ISO 9001 certification of its
U.S. operations in 1996, received ISO 9002 certification of its Mexican
operations in early 1997, and received ISO 9002 certification of its Thailand
operations in late 1997. The Company was re-certified to ISO Standards in 1998.

         The Company believes it enjoys a cost advantage based on a
manufacturing process designed to optimize the utilization of labor and capital,
the close proximity (approximately 200 miles) of its two North American
manufacturing locations, and a manufacturing process and technology with better
yield, material utilization and throughput relative to its competitors. The
Company also believes that integrating assembly technology with manufacturing
technology and high-volume production capabilities will over time provide
improvements in its production costs through higher product yields, faster
production ramps, reduced inventories, shortened production cycle times,
improved account control and increased leverage over expenses. In addition, the
Company is expanding its Thailand manufacturing operation. The Company
anticipates that the new Thailand facility will enable it to attain significant
cost reductions that are crucial to mitigating competitive price pressures in
Asia and help sustain the Company's implementation of a complete flexible
circuit interconnect solution including design, fabrication, assembly and
testing.

SUPPLIERS

         The Company purchases raw circuit materials, process chemicals and
various components from multiple outside sources. For components, the Company
typically makes short-term purchasing commitments to key suppliers for specific
customer programs. These commitments are usually made for three to six month
periods. These suppliers commit to providing cooperative engineering, as
required, and in some cases maintain a local inventory to provide shorter lead
times and reduced inventory levels for ADFlex. In most cases, suppliers are
approved, and are often dictated, by the Company's customers. For process
chemicals, the Company relies on a limited number of key suppliers. Alternate
chemical products are available from other sources, but process chemical changes
would often require requalification of the processes, which could take weeks or
months to complete. The Company has attempted to mitigate these risks by
identifying stable companies with leading technology and delivery positions.


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         The Company currently purchases a number of its components, process
chemicals and other materials from a single source. For example, the Company
purchases certain materials, including laminates, films, bondply, copper foil
and heat-treated polyimide, used in the Company's flexible circuit interconnects
from Rogers. In the United States, these products are available only from a
limited number of suppliers. There can be no assurance that Rogers will continue
to supply the Company with the materials needed at competitive prices.

         While viable alternate suppliers exist, because of the Company's
limited inventory of raw materials, tight manufacturing cycles and the
significant amount of time required to qualify new suppliers, single sourcing is
expected to continue. Consequently, any unanticipated interruption of material
supplies or components would have a short-term material adverse effect on the
Company.

COMPETITION

         The flexible circuit interconnect market is differentiated by
customers, markets and geography, with each niche having its own combination of
complex packaging and interconnection requirements. The Company believes it
competes principally on the basis of design capability, price, quality,
flexibility and technological advancements in underlying applications, and the
ability to offer a total flexible circuit interconnect solution. During periods
of economic slowdown in the electronics industry and other periods when excess
capacity exists, electronic OEMs become more price sensitive. During the year
ended December 27, 1998, there was a worldwide slowdown in the electronics
industry and to maintain market share, many of the Company's primary foreign
competitors with lower cost structures decreased their prices to unprecedented
levels. This had a material adverse effect on the Company's pricing during the
year. The Company believes that once a customer has selected a particular vendor
to design and manufacture a flexible circuit interconnect, the customer
generally relies upon that vendor's design for the life of that specific
application and, to the extent possible, subsequent generations of similar
applications. Accordingly, it is difficult to achieve significant sales to a
particular customer with respect to any application once another vendor has been
selected to design and manufacture the flexible circuit interconnect used in
that application. While this market paradigm may provide a barrier to the
Company's competitors in the markets served by the Company, it also may present
an obstacle to the Company's entry into other markets.

         The flexible circuit interconnect market is highly competitive. The
Company experiences competition worldwide from a number of leading foreign and
domestic providers such as Nippon Mektron ("NOK"), Fujikura Ltd. ("Fujikura"),
Multi-Fineline Electronix, Inc. ("M-Flex"), Sheldahl Inc. ("Sheldahl"), and
Parlex Corporation ("Parlex"). NOK and Fujikura are Japan-based suppliers
substantially larger than the Company with greater financial and other
resources. M-Flex, Sheldahl and Parlex are U.S.-based flexible circuit
manufacturers that have lower sales of polyimide flexible circuits than the
Company and have historically targeted suppliers of computers, communication and
automotive services, and the military, respectively. Expansion of the Company's
existing products or services could expose the Company to new competition.
Moreover, new developments in the electronics industry could render existing
technology obsolete or less competitive and could potentially introduce new
competition into the market. There can be no assurance that the Company's
competitors will not develop enhancements to, or future generations of,
competitive products or services that will offer superior price or performance
features to those of the Company or that new competitors will not enter the
Company's markets. Finally, as many of the Company's competitors are based in
foreign countries, they have cost structures and prices based on foreign
currencies. Accordingly, currency fluctuations could cause the Company's
dollar-priced products to be less competitive than its competitors' products
priced in other currencies.

         The Company also competes in assembly matters with leading flexible
circuit assembly providers such as Smartflex Systems, Inc. ("Smartflex") and
Solectron Corp. ("Solectron"). The Company believes that competition in assembly
is primarily driven by availability of assembly technology, price and cycle
time. The Company believes it competes favorably with these competitors because
it offers its customers a complete flexible circuit interconnect solution
including design, fabrication, assembly and testing (referred to as the
"one-stop shop strategy").

         The Company's competitors can be expected to continue to improve the
design and performance of their products and to introduce new products with
competitive price/performance characteristics. Competitive pressures


                                       9
<PAGE>   10
often necessitate price reductions, which adversely affect operating results.
The Company will be required to make a continued high level of investment in
product development and research, sales and marketing, and ongoing customer
service and support to remain competitive. There can be no assurance that the
Company will have sufficient resources to continue to make such investments or
that the Company will be able to make the technological advances necessary to
maintain its competitive position in the flexible circuit interconnect market.
There can be no assurance that existing or future competitors will not be able
to duplicate the Company's strategies, that the Company will be able to compete
successfully in the future or that competitive pressures faced by the Company
will not have a material adverse effect on the Company's business, financial
condition, results of operations and cash flows.

INTELLECTUAL PROPERTY

         The Company believes that, due to its customers' demands for rapid
technological advances and the resulting limited product life cycles, the
success of its business depends more on the technical and engineering expertise,
creativity and marketing, and service abilities of its employees than on
patents, trademarks and copyrights. Nevertheless, the Company owns patents and
has a policy of seeking patents when appropriate on inventions concerning new
products and improvements as part of its ongoing research, development and
manufacturing activities. There can be no assurance that any patents issued to
the Company will provide a competitive advantage or will not be challenged by
third parties, or that the patents of others will not have an adverse effect on
the Company's ability to do business. Furthermore, there can be no assurance
that others will not independently develop similar products, duplicate the
Company's products or design around the patents issued to the Company. In
addition, there can be no assurance that foreign intellectual property laws or
the Company's agreements will protect the Company's intellectual property rights
in any foreign country. Any failure to protect the Company's intellectual
property rights could have a material adverse effect upon the Company's
business, financial condition, results of operations and cash flows.

ENVIRONMENTAL CONTROLS

         Flexible circuit interconnect manufacturing requires the use of
chemicals. As a result, the Company is subject to a variety of environmental
laws relating to the storage, discharge, handling, emission, generation,
manufacture, use and disposal of chemicals, solid and hazardous waste and other
toxic and hazardous materials used to manufacture the Company's products. The
Company has conducted environmental studies of its facility in Chandler,
Arizona, which revealed a limited amount of soil contamination that may require
remediation. Based on these studies, the Company believes that the costs
associated with the remediation of this situation will not have a material
adverse effect on its operations or financial condition. However, given the
uncertainties associated with environmental contamination, there can be no
assurance that such costs will not have a material adverse impact on the
Company. Pursuant to the agreements governing the Rogers acquisition, Rogers has
retained all environmental liabilities relating to the purchased assets prior to
the closing date of the acquisition. While Rogers currently has sufficient
assets to fulfill its obligations under the acquisition agreements, if
environmental liabilities requiring remediation are discovered and the Company
were unable to enforce the acquisition agreement against Rogers, the Company
could become subject to costs and damages relating to such environmental
liabilities. Any such costs and damages imposed on the Company could materially
adversely affect the Company's business, financial condition, results of
operation and cash flows.

         In mid 1995, the Company acquired a manufacturing facility located in
Agua Prieta, Mexico. In connection with this acquisition, the Company conducted
an environmental study of the facility which indicated there is contamination by
hazardous materials in the soil and groundwater. Pursuant to the purchase
agreement, the sellers submitted a remediation plan to the appropriate Mexican
authorities, which was approved in May 1997. Subsequent remediation was
completed in December 1997. The seller is awaiting acknowledgment that the
remediation plan has been approved and no further action is required by the
Mexican authorities. The seller's obligation for the cost of remediation is
limited to $2.5 million. A total of $1.0 million originally was held in escrow
pending the seller's performance of its environmental obligations under the
agreement. One third of the escrow balance was used to conduct the remediation,
one third was released to the seller according to the agreement and one third
remains in escrow and will be released upon closure of the issue by the Mexican
authorities with certification that no further action is required.


                                       10
<PAGE>   11
         The Company believes it has been operating its facilities in
substantial compliance in all material respects with existing environmental laws
and regulations. However, the Company cannot predict the nature, scope or effect
of legislation or regulatory requirements that could be imposed or how existing
or future laws or regulations will be administered or interpreted with respect
to products or activities to which they have not previously been applied. For
this reason, the Company implemented environmental management systems in 1998
geared toward minimizing the negative impacts and reducing potential financial
risks arising from environmental issues. Compliance with more stringent laws or
regulations, or more vigorous enforcement policies of regulatory agencies could
require substantial expenditures by the Company and could adversely affect the
results of operations of the Company.

         The Company does not anticipate any material amount of
environmental-related capital expenditures in 1999.

BACKLOG

         The Company's backlog at December 31, 1996 and 1997, and December 27,
1998 was approximately $55.9 million, $44.8 million and $20.9 million,
respectively. The Company includes in its backlog only those customer orders for
which it has accepted purchase orders and assigned shipment dates within six
months. Because the Company's sales are made pursuant to purchase orders rather
than long term contracts and are generally subject to cancellation or
modification on short notice and with little or no penalty, the Company does not
believe that its backlog at any particular date is indicative of sales or
operating results for any future periods.

EMPLOYEES

         As of December 27, 1998, the Company had a total of 4,553 employees, of
which 4,527 were regular employees and 26 were temporary employees. Of the
regular employees, 655 were based at the Company's facilities in Chandler,
Arizona; 2,656 were based in Agua Prieta, Mexico; 22 were based in the United
Kingdom; and 1,194 were based in Thailand.

         In response to reduced sales, the Company implemented workforce
reductions during the second, third and fourth quarters of 1998 and required
certain remaining employees to take unpaid time off during the third quarter of
1998.

         Certain of the Company's employees located in Mexico are represented by
a labor union and covered by a collective bargaining agreement that is subject
to revision annually under Mexican labor laws. The Company has not experienced
an employee-related work stoppage. The Company believes its relationship with
its union and other employees is good, but there can be no assurance that the
Company will be able to successfully negotiate with the labor union in Mexico in
the future.

         The Company's future operating results depend in significant part upon
the continued contribution of its officers and other key management and
technical personnel, many of whom would be difficult to replace. None of such
persons has an employment contact with the Company. The loss of any of these
officers or key personnel could have a material adverse effect on the Company's
business, financial condition, results of operations and cash flows. In
addition, the Company's future operating results depend in part upon its ability
to attract and retain other qualified management, technical, manufacturing,
sales and support personnel for its operations. Competition for such personnel
is intense and there can be no assurance that the Company will be successful in
attracting or retaining such personnel. The failure to attract or retain such
persons could materially adversely affect the Company's business, financial
condition, results of operations and cash flows.


                                       11
<PAGE>   12
ITEM 2. PROPERTIES.

         In total, at December 27, 1998, the Company leased or owned
approximately 478,000 square feet of manufacturing and other space. The
Company's significant facilities are as follows:

<TABLE>
<CAPTION>
FUNCTIONS                          LOCATION (NUMBER OF FACILITIES)       SQUARE FEET    OWNED/LEASED      EXPIRATION
---------                          -------------------------------       -----------    ------------      ----------
<S>                                <C>                                   <C>            <C>               <C>
Executive Offices;
  Research and Development;
  Sales and Support; Circuit       Chandler, Arizona (one)                 150,000         Leased          June 2003
  Fabrication

Circuit Finishing and Circuit      Agua Prieta, Mexico (one)               161,000         Owned           N/A
   Assembly

Circuit Finishing and              Lamphun Thailand (two)                  15,000          Owned           N/A
Assembly; Sales and Support
                                                                           140,000         Owned           N/A

Technology and Pilot               Portsmouth, United Kingdom (one)        12,000          Leased          September
Production; Sales and Support                                                                              2007
</TABLE>

         The Company believes its existing facilities in Arizona, Mexico,
Thailand and the U.K. are adequate to meet its current requirements, and that
suitable additional space or substitute space is readily available as needed.

         During 1997, the Company paid $2.5 million for the purchase of land in
Thailand and, in April 1998, the Company commenced expansion of its Thailand
operations with the construction of a new plant. The expansion initially will
provide 100,000 square feet of manufacturing space - 65,000 feet for flex
finishing and 35,000 feet for assembly - bringing the total size of the facility
to 140,000 square feet. The expanded facility, which will increase the total
assembly area by nearly 50%, includes state-of-the-art clean rooms and the
production capability to process up to 750,000 circuit assemblies per week. The
new flex finishing area will feature advanced surface finishing, laser
processing and automated optical profiling technologies. The total estimated
cost of the expansion is approximately $9.0 million (of which approximately $3.0
million has been spent as of December 27, 1998). In February 1999, the
qualification process was completed and production began. The new facility is
expected to be fully operational by the second quarter of 1999, including
customer qualification and ramp to volume production. The Company anticipates
that the new Thailand facility will enable it to obtain significant cost
reductions that are crucial to mitigating competitive price pressures in Asia
and help sustain the Company's implementation of a complete flexible circuit
interconnect solution including design, fabrication, assembly and testing.

ITEM 3. LEGAL PROCEEDINGS

         The Internal Revenue Service ("IRS") has concluded a field audit of the
Company's income tax returns for the tax year 1993. In connection with this
audit, the IRS issued a 90-day letter in January of 1998 proposing adjustments
to the Company's income and tax credits for the year, which would result in an
additional assessment of $1.6 million, excluding interest. The major proposed
adjustment, which relates to the allocation of the purchase price of assets
obtained from Rogers pursuant to acquisition agreements between the Company and
Rogers, would extend the period over which the tax benefit for the purchase
price would be recovered. The Company and the IRS have reached a tentative
agreement to settle all outstanding issues relating to this audit. The terms of
the agreement require a payment of approximately $0.6 million, excluding
interest, most of which will be recoverable by amending subsequent years' tax
returns. The Company believes that the current tax provision is adequate to
cover the estimated liability and the final disposition of these matters will
not have a material adverse effect on the Company's business, financial
condition, results of operations and cash flows.

         The Company is not currently a party to any other material legal
proceedings.


                                       12
<PAGE>   13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         No matters were submitted during the fourth quarter of 1998 to a vote
of the Company's securities holders.


                                       13
<PAGE>   14
                                    PART II

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

Securities Information
--------------------------------------------------------------------------------

ADFlex Solutions, Inc. common stock trades on the Nasdaq National Market (Symbol
AFLX). The high and low sales prices for the common stock as reported by Nasdaq
are set forth in the following table:

<TABLE>
<CAPTION>
QUARTER ENDED                MARCH 31     JUNE 30    SEPTEMBER 30    DECEMBER 31
--------------------------------------------------------------------------------
<S>                          <C>          <C>        <C>             <C>
1998
High                          $17.25      $ 9.13        $ 3.06         $ 7.00
Low                            16.38        8.75          2.91           6.25

1997
High                          $16.13      $19.00        $28.50         $28.13
Low                            10.75       11.75         14.75          14.63

1996
High                          $27.00      $18.00        $11.75         $14.00
Low                            10.50        9.88         14.00           7.38
</TABLE>

There were approximately 89 stockholders of record as of February 12, 1999. The
Company has never paid cash dividends on its common stock and intends to retain
future earnings for use in the operation and expansion of its business. In
addition, the Company's bank line of credit restricts the payment of cash
dividends on its common stock.


                                       14
<PAGE>   15
ITEM 6. SELECTED FINANCIAL DATA



<TABLE>
<CAPTION>
(in thousands, except per share data)                               1998(3)        1997        1996(2)       1995(1)        1994
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>           <C>          <C>           <C>           <C>
    Summary of Operations

Net sales                                                          $ 170,097     $ 213,878    $ 156,836     $ 101,163     $  77,733
Gross profit                                                          17,121        38,052       18,563        28,055        23,921
Gross profit as a percent of net sales                                  10.1%         17.8%        11.8%         27.7%         30.8%
Operating expenses                                                    20,659        23,472       52,254        27,587        11,804
Operating expenses as a percent of net sales                            12.2%         11.0%        33.3%         27.3%         15.2%
Operating income (loss)                                               (3,538)       14,580      (33,691)          468        12,117
Operating income (loss) as a percent of net sales                       (2.1%)         6.8%       (21.5%)         0.5%         15.6%
Net income (loss)                                                     (4,753)        8,596      (25,024)       (3,723)        7,046
------------------------------------------------------------------------------------------------------------------------------------
    Cash Flow Data

Net cash provided by operating activities                          $  13,158     $   4,577    $   4,439     $  19,230     $   3,993
Acquisition of property, plant and equipment                          21,510        14,462        3,763        20,636         5,450
Depreciation and amortization of property, plant and equipment         8,520         6,493        5,794         2,288           930
------------------------------------------------------------------------------------------------------------------------------------
    Share Data

Common shares used in the calculation of net income
     (loss) per basic share                                            8,867         8,712        8,580         6,855         5,028
Net income (loss) per basic share                                  $   (0.54)    $     .99    $   (2.92)    $   (0.54)    $    1.40
Common and common equivalent shares used
     in the calculation of net income (loss) per dilutive share        8,867         8,894        8,580         6,855         5,578
Net income (loss) per dilutive share                               $   (0.54)    $     .97    $   (2.92)    $   (0.54)    $    1.26
Book value per share                                                    5.31          5.81         4.67          7.67          5.75
------------------------------------------------------------------------------------------------------------------------------------
    Year End Position

Total assets                                                       $ 108,304     $ 114,200    $  93,181     $ 106,918     $  47,703
Working capital (deficiency)                                         (16,132)       24,944        9,102        20,636        32,443
Long-term debt and capitalized lease obligations                      24,682        25,189       10,340        10,483           592
Stockholders' equity                                                  47,449        50,907       40,289        63,554        37,764
Return on average stockholders' equity                                  (9.7%)        18.9%       (48.2%)        (7.3%)        34.3%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)   Effective December 31, 1995, the Company wrote off $13.9 million of
      in-process technology in conjunction with the ADFlex U.K. acquisition.

(2)   1996 financial data includes $29.2 million related to restructuring of the
      Company's U.K. operations, see Note 2 to the Consolidated Financial
      Statements.

(3)   For the year ended December 27, 1998, the Company recorded a charge of
      $1.6 million related to work force reduction and the closing of two plants
      in Mexico in an effort to address current adverse industry trends. See
      Note 4 to the Consolidated Financial Statements.


                                       15
<PAGE>   16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

OVERVIEW

         ADFlex is a leading worldwide provider of flexible circuit interconnect
solutions to OEMs in the electronics industry. The Company offers a full range
of customized flexible circuit applications and services from initial design,
development and prototype to fabrication, assembly and test on a global basis.
The Company targets high-volume markets where miniaturization, form and weight
are driving factors and flexible circuits are an enabling technology.
Applications for flexible circuits currently addressed by the Company include
notebook computers, portable communication devices such as cellular telephones
and pagers, data storage devices such as HDDs, tape drives and arrays, and
high-end consumer electronics products such as compact disk players. The
Company's principal customers include Acer, Compaq, Digital Equipment, IBM,
Iomega, Maxtor, Motorola, Nokia, Philips, Seagate, Storage Technology and other
leading electronic OEMs. Recent new customers include Dell, Qualcomm, Samsung,
and Xerox Corporation.

         The Company provides flexible circuit interconnect products to a
diverse group of markets. Historically, the HDD market has represented the
largest component of the Company's sales at 35.7%, 43.0%, and 61.8% of total
sales for 1998, 1997 and 1996, respectively. Through new market expansion
efforts, the Company is continuing its efforts to reduce the impact of the
cyclicality of the HDD industry on its business. However, net sales attributable
to this market are expected to continue to represent the largest component of
total sales for the foreseeable future. Accordingly, the occurrence of
significant slowdowns or changes in this industry has had and may continue to
have a material adverse effect on the Company's operating results.

         In December 1995, the Company purchased ADFlex U.K., an advanced
flexible circuit assembly company located in Havant, England. The acquisition
enabled the Company to offer its customers a single source solution for their
interconnect requirements that would shorten their time to market and lower
their costs. This acquisition also changed the financial metrics of the Company
because assembly businesses typically have significantly lower gross margins
than fabrication businesses.

         In an effort to increase its global sourcing opportunities and to
decrease its operating costs, the Company expanded its worldwide manufacturing
operations with the establishment of a joint venture located in Lamphun,
Thailand with Hana in August 1996. The joint venture, ATL, targeted the
production and testing of advanced chip-on-flex and other surface mount
technologies for flexible circuit assemblies. At inception, ATL was owned 80% by
the Company and 20% by Hana. The Company purchased the remaining 20% equity
interest in ATL from Hana in September 1997.

         During 1996, the Company's U.K. operations experienced a substantial
reduction in net sales from levels maintained in the latter part of 1995
primarily related to a decrease in its HDD business. The reduction in net sales
resulted in decreased capacity utilization. Additionally, manufacturing yields
on certain new parts related to magneto-resistive ("MR") recording technology in
the third quarter of 1996 were substantially lower than anticipated by the
Company. As a result of lower revenues, under-utilized capacity and the
resulting negative financial performance, the Company began restructuring its
volume assembly operations in the U.K. and transferring these operations to
Thailand during the third quarter of 1996. As part of this restructuring, the
Company recorded the following in the third quarter of 1996: $13.5 million
write-off of intangible assets, $8.8 million write-down of property, plant and
equipment, and $6.9 million in employee and lease termination charges. Through
December 31, 1997, the Company paid and charged to the liability $5.8 million
related to employee and lease termination costs. In addition, the Company
reallocated $0.8 million of the reserve for employee and lease termination costs
to be used for additional write-down of property, plant and equipment. During
the year ended December 27, 1998, the Company paid and charged to the liability
$0.2 million related to termination costs for 3 employees. The remaining accrual
for employee termination costs is approximately $0.1 million and the Company
believes it is adequate to cover the remaining liabilities.

         The transfer of the Company's U.K. assembly operations to Thailand was
completed during the third quarter of 1997. Initial shipments from Thailand
began in the fourth quarter of 1996 and the Company reached volume production in
the third quarter of 1997. No assurances can be given that the Company will
sustain the 


                                       16
<PAGE>   17
benefits anticipated due to the lower cost structure of the Thailand operations.
The Company maintains a technology and pilot production facility and a sales and
service organization in the U.K. to support its European customers.

         During the year ended December 27, 1998, the Company implemented new
cost and productivity improvement measures designed to address current adverse
industry trends such as intense price competition from Asian suppliers and
decreased demand by certain customers supplying the markets the Company serves,
in particular the HDD and communications segments. These actions included the
consolidation of administrative functions, an aggregate 27% reduction in
staffing, the closing of two manufacturing plants in Mexico and the transfer of
selected manufacturing programs from Mexico to Thailand. As a result, the
Company incurred a special charge of approximately $1.6 million for the year
ended December 27, 1998, $1.0 million related to the workforce reduction and
$0.6 million related to employee and termination costs associated with the
closing of the two plants in Mexico. During the year ended December 27, 1998,
the Company paid and charged to the liability $0.6 million related to employee
severance and lease termination costs and $0.5 million related to workforce
reduction involving 97 employees at its Chandler facility, 5 employees at its
U.K. facility and 77 employees at its Mexico facility. The remaining accrual
related to workforce reduction is approximately $0.5 million and the Company
believes it is adequate to cover the remaining liabilities.

RESULTS OF OPERATIONS

         The following table sets forth certain Consolidated Statements of
Operations data and other data as a percentage of net sales. The table and the
discussion below should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto.

<TABLE>
<CAPTION>
                                                 YEAR ENDED       YEARS ENDED
                                                 DECEMBER 27,     DECEMBER 31,
                                                 ----------------------------------
                                                   1998(2)(3)   1997       1996(1)
                                                     -----      -----      -----
<S>                                                <C>          <C>        <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:         
Net sales                                            100.0%     100.0%     100.0%
Cost of sales                                         89.9       82.2       88.2
                                                 ----------------------------------
         Gross profit                                 10.1       17.8       11.8
Engineering, research & development                    4.4        3.7        4.7
Selling, general & administrative                      7.5        7.2        8.5
Amortization of intangible assets                      0.3        0.1        1.5
Restructuring charges                                   --         --       18.6
                                                 ----------------------------------
         Total operating expenses                     12.2       11.0       33.3
                                                 ----------------------------------
Operating income (loss)                               (2.1)       6.8      (21.5)
Interest income (expense), net                        (1.6)      (0.9)      (0.7)
Other income, net                                     (0.2)        --         --
                                                                            
Minority interest in earnings of consolidated       
   joint venture                                        --       (0.1)        --
                                                 ----------------------------------
Income (loss) before income taxes                     (3.9)       5.8      (22.2)
Income taxes                                          (1.1)       1.8       (6.2)
                                                 ---------------------------------
Net income (loss)                                     (2.8)%      4.0%     (16.0)%
                                                 ==================================
</TABLE>
                                                   
(1)   For the year ended December 31, 1996, the Company recorded a charge of
      $29.2 million (pre-tax) related to the restructuring of the Company's U.K.
      operations.

(2)   For the year ended December 27, 1998, the Company recorded a charge of
      $1.6 million (pre-tax) related to work force reduction and the closing of
      two plants in Mexico in an effort to address current adverse industry
      trends. See Note 4 of the Notes to Consolidated Financial Statements.

(3)   The Company's fiscal year consists of 52 or 53 weeks ending on the Sunday
      closest to the last day of December each year. Fiscal year 1998 contained
      52 weeks and ended December 27, 1998. Fiscal years 1997 and 1996 contained
      52 weeks each and ended on December 28 and December 29, respectively.
      Activity from the end of the reporting period to December 31 is immaterial
      for 1997 and 1996.

         NET SALES. Net sales for the year ended December 27, 1998 decreased
$43.8 million or 20.5% as compared to the comparable period in 1997. During the
year ended December 27, 1998, the Company experienced weak demand by certain
customers, in particular those supplying the personal computer, HDD and
communications 


                                       17
<PAGE>   18
segments. Sales to one major customer, Seagate Technology, decreased
approximately 55% during the year ended December 27, 1998 compared to the same
period in 1997 primarily due to reduced demand and Seagate's decision to
insource a majority of its manufacturing requirements. In addition, sales were
negatively impacted by intense price competition of Asian suppliers as they
inherited benefits from currency devaluation and tried to mitigate the demand
void that was created by the Asian financial crisis. Net sales for the year
ended December 31, 1997 increased $57.0 million or 36.4% over the same period in
1996. For the year ended December 31, 1997, the Company experienced a strong
demand for its products, especially in flexible circuits provided to the
communications and storage array markets as a result of the Company's focus on
high-growth and high-volume markets. In addition, the Company reached volume
production at its Thailand facility during the year ended December 31, 1997 with
sales for the year of $28.5 million. Net sales for the year ended December 31,
1996 were negatively impacted by program delays involving new MR recording
technology among customers in the HDD market. As high-end, high-capacity drives
utilize advance assembly technology, specifically chip-on-flex (the primary
specialty of ADFlex U.K.), the decrease in sales primarily impacted the
Company's U.K. facility. In addition, the Company experienced a slow down for
mature products and order cancellations from certain major customers in 1996.

         GROSS PROFIT. Gross profit as a percentage of net sales (gross margin)
for the year ended December 27, 1998 was 10.1% as compared to 17.8% and 11.8%
for the comparable periods in 1997 and 1996, respectively. The Company's
decrease in gross margin during the year ended December 27, 1998 was
attributable to several factors: underutilization of factories caused by reduced
demand, low yields on new product ramps as customers accelerated new programs to
bolster demand, intense price competition from Asian suppliers and special
charges of approximately $1.6 million, of which $1.0 million related to
workforce reduction and $0.6 million related to employee severance and
termination costs associated with the closing of the two plants in Mexico.

         For the year ended December 31, 1997, the Company's gross profit was
positively impacted by high levels of sales from increased demand for flex
products and the benefits associated with the transfer of production from the
U.K. to Thailand which provided a lower cost structure. These benefits were
partially offset by decreased utilization of capacity in the U.K. operations.
The transfer was complete in the third quarter of 1997.

         The integration of ADFlex U.K. operations resulted in significantly
lower gross margins during 1996. Due to the additional components and high
dollar value of integrated circuits added in the assembly process, full
assemblies contain a material content which, on average, is significantly higher
than that of the flex circuit. As the Company is not able to obtain a comparable
margin on this additional material content, the overall gross margins on
assemblies are lower than those of flex circuits. The U.K. operations also
experienced initial difficulties achieving expected manufacturing yields on
certain new parts involving MR technology in 1996. Although the majority of the
processing problems were resolved by the end of the third quarter, the delayed
attainment of expected yields adversely affected gross margins for 1996. Lastly,
and most significantly, the lower than anticipated net sales levels caused by
order delays and program cancellations resulted in reduced efficiencies and
capacity utilization, further eroding gross margins for 1996.

         The Company's flexible circuit fabrication operations located in the
U.S. and Mexico also experienced a decline in gross margins during 1996. The
lower than anticipated net sales resulting from customer structural changes and
the slow down for mature products from the Company's U.S. and Mexico operations
resulted in operating inefficiencies, decreased capacity utilization and the
write-offs of inventories adversely impacting related gross margins in 1996.

         OPERATING EXPENSES. Engineering, research and development expenses were
$7.4 million, $8.0 million and $7.4 million for 1998, 1997 and 1996,
respectively, representing 4.4%, 3.7% and 4.7% of net sales for those same
years. Sales, general and administrative ("SG&A") expenses were $12.7 million,
$15.4 million and $13.3 million for 1998, 1997 and 1996, respectively,
representing 7.5%, 7.2% and 8.5% of net sales for those same years. The results
for 1998 reflect the Company's reduction in workforce, general reductions in
discretionary spending and elimination of management bonus and profit sharing
expenses for the year ended December 27, 1998. In 1997, the increase in sales
volume during the year outpaced the Company's growth in such expenses, as a
significant portion of the Company's SG&A expenses are fixed in nature. The
level of SG&A expenses was reduced in 1997 by the 


                                       18
<PAGE>   19
transfer of production from the U.K. to Thailand, where such costs generally are
lower. These benefits were partially offset by a $0.3 million write-off in the
fourth quarter of 1997 for costs incurred in connection with a proposed public
offering of Common Stock which was withdrawn due to unfavorable market
conditions.

         In 1996, engineering, research and development expenses and SG&A
expenses were 4.7% and 8.5%, respectively, as a percentage of sales. These
expenses are similar to 1998 as they also reflect elimination of management
bonuses and profit sharing and include special charges such as employee
severance and termination charges.

         In connection with the acquisition of Hana's 20% interest in ADFlex
Thailand Limited (ATL) in September 1997, the Company recorded goodwill which is
being amortized over its estimated useful life of five years. Amortization of
intangible assets was $0.5 million, or 0.3% of net sales, for the year ended
December 27, 1998.

         INTEREST AND OTHER INCOME (EXPENSE). For the year ended December 27,
1998, interest expense includes $2.9 million of interest expense related to
borrowings under the line of credit, the term loan and capital lease obligations
and $0.1 million of interest expense related to the outstanding loan with Hana
Microelectronics. For the year ended December 31, 1997, interest expense
includes $0.3 million of interest expense on the subordinated debenture and $1.8
million of interest expense related to borrowings under the line of credit, the
term loan and capital lease obligations. For the year ended December 31, 1996,
interest expense represents $0.8 million of interest expense on the subordinated
debenture and $0.7 million on interest expense related to borrowings under the
line of credit, the term loan and capital lease obligations. Other income
(expense) for all years represents the net impact of bank fees and exchange
gains and losses realized on the settlement of transactions associated with the
Company's foreign subsidiaries. Exchange gains and losses associated with
short-term forward foreign currency exchange contracts also are included in
other income (expense) in 1998 and 1997.

         INCOME TAXES. The Company's effective tax benefit rate for 1998 was
28%. As the actual rate for each of the Company's entities varies in accordance
with the taxing authority in whose jurisdiction it resides, a significant change
in operating income at any one location can result in a change in the overall
effective tax rate for the Company. The Company monitors the effective tax rate
on a continuous basis and makes adjustments as conditions warrant.

         The Company has recorded net deferred tax assets of $8.4 million at
December 27, 1998 for which no valuation allowance has been established. The
Company believes that future levels of taxable income will, more likely than
not, be sufficient to realize the tax benefit.

         The Company's effective tax rate increased from 28% to 32% for the
second half of 1997 in order to reach an estimated annual rate of 31% based upon
projected profit levels at each of the Company's entities. The effective tax
benefit rate for 1996 was 28%. The lower tax benefit rate for 1996 reflects the
non-deductibility of certain losses incurred in relation to the Company's U.K.
operations.

         The Internal Revenue Service (IRS) has concluded a field audit of the
Company's income tax returns for the tax year 1993. In connection with this
audit, the IRS issued a 90-day letter in January 1998 proposing adjustments to
the Company's income and tax credits for the year, which would result in an
additional assessment of $1.6 million, excluding interest. The major proposed
adjustment related to the allocation of the purchase price of assets obtained
from Rogers and would extend the period over which the tax benefit for the
purchase price would be recovered. The Company and the IRS have reached a
tentative agreement to settle all outstanding issues relating to this audit. The
terms of the agreement would require a payment of approximately $0.6 million,
excluding interest, most of which will be recoverable by amending subsequent
years' tax returns. The Company believes that the current tax provision is
adequate to cover the estimated liability and the final disposition of these
matters will not have a material adverse effect on the Company's business,
financial condition, results of operations and cash flows.

         SPECIAL CHARGES. During the year ended December 27, 1998, the Company
implemented new cost and productivity improvement measures designed to address
current adverse industry trends such as intense price 


                                       19
<PAGE>   20
competition from Asian suppliers and decreased demand by certain customers
supplying the computer, HDD and communications segments. These actions included
the consolidation of administrative functions, a 27% reduction in staffing, the
closing of two manufacturing plants in Mexico and the transfer of selected
manufacturing programs from Mexico to Thailand. As a result, the Company
incurred a special charge of approximately $1.6 million: $1.0 million related to
the workforce reduction and $0.6 million related to employee severance and
termination costs associated with the closing of the two plants in Mexico.
During the year ended December 27, 1998, the Company paid and charged to the
liability $0.6 million related to employee severance and lease termination costs
and $0.5 million related to workforce reduction involving 97 employees at its
Chandler facility, 5 employees at its U.K. facility and 77 employees at its
Mexico facility. The remaining accrual related to workforce reduction is
approximately $0.5 million and the Company believes it is adequate to cover the
remaining liabilities.

         FLUCTUATIONS IN OPERATING RESULTS. The Company has experienced
substantial fluctuations in its quarterly and annual operating results in the
past, and the Company's future operating results could vary substantially from
quarter to quarter. The Company's operating results for a particular quarter or
longer periods can be materially and adversely affected by numerous factors,
such as the receipt and shipment of large orders, or conversely the cancellation
or delay of orders, plant utilization, product mix, manufacturing process
yields, the timing of expenditures in anticipation of future sales, raw material
availability, product and price competition, the length of sales cycles and
economic conditions in the electronics industry. Variations in orders and in the
mix of products sold by the Company, together with increased price competition,
have significantly negatively impacted net sales and gross profit. Many of these
factors are outside the control of the Company.


LIQUIDITY AND CAPITAL RESOURCES

         Summary. The Company has financed its operations to date primarily
through cash generated from operations, the use of bank credit lines and through
proceeds from the sale of its Common Stock. The primary uses of cash have been
for increased working capital, funding of capital expenditures, expansion of ATL
and funding operating losses. At December 27, 1998, cash and cash equivalents
totaled $5.3 million. At December 31, 1997 and 1996, cash and cash equivalents
totaled $9.1 million and $6.1 million, respectively.

         Bank Financing. On June 5, 1997, the Company entered into a new credit
facility arranged by BancBoston Securities, Inc., which included a number of
banks as lenders. The credit facility consisted of a $20.0 million, three-year
revolving line of credit and a $25.0 million, five-year term loan. Under the
terms of the credit facility, any outstanding balance bears interest at
BankBoston, N.A.'s prime interest rate or LIBOR plus an applicable margin
ranging from 1.5% to 2.25% based on the Company achieving certain financial
objectives at the end of each quarter. At December 31, 1997, $25.0 million was
outstanding under the term loan and $7.0 million was outstanding under the
revolving line of credit. The weighted average interest rate at December 31,
1997 for the revolving line of credit was 8.5%.

         In February 1998, the Company amended its existing credit facility to
more adequately meet its working capital requirements by increasing the existing
revolving line of credit from $20.0 million to $25.0 million. In addition, the
existing $25.0 million term loan was replaced with a $35.0 million term loan. In
July 1998, the Company reevaluated its financial needs and determined that
credit facility commitments of a $20.0 million revolving line of credit and a
$30.0 million term loan were sufficient to meet its liquidity requirements.
Accordingly, the Company canceled $10.0 million of existing credit facility
commitments, $5.0 million relating to the revolving line of credit and $5.0
million relating to the term loan.

         On October 30, 1998, the Company amended its existing credit facility
to revise certain financial covenants, reduce the term loan by $10.0 million and
revise the debt amortization schedule. Upon closing of the third amendment, the
$30.0 million term loan was reduced by $5.0 million to $25.0 million from
borrowings from the Company's revolving line of credit. The amendment required a
$5.0 million principal payment no later than January 20, 1999 (which was timely
remitted), plus four equal principal payments of $0.8 million each quarter
beginning with the quarter ending December 31, 1998 through the quarter ending
September 30, 1999, increasing to twelve equal principal payments of $1.3
million each quarter thereafter with the last payment due December 31, 2002.
Borrowing under the line of credit is limited to 80% of the aggregate value of
all eligible domestic accounts receivable plus 70% of the aggregate value of all
eligible foreign accounts receivable. Under the terms of the credit 


                                       20
<PAGE>   21
facility, any outstanding balance bears interest at a Base Rate which is defined
as BankBoston N.A.'s prime rate plus 0.50% or LIBOR plus an applicable margin
ranging from 1.50% to 2.25%, based on the Company achieving certain financial
objectives at the end of each quarter. The credit facility is secured by all
assets of the Company and a pledge by the Company of 66 2/3% of the stock of its
subsidiaries. Under the third amendment to the credit agreement, the Company is
required to meet certain minimum profitability covenants, maintain certain
financial ratios and meet certain net worth and indebtedness tests for which the
Company was in compliance at December 27, 1998. The amended credit facility
prohibits the payment of dividends. In connection with the third amendment, the
Company issued to its lenders a warrant to purchase an aggregate of 50,000
shares of Common Stock at an exercise price of $5.00 per share. The warrant
vested on March 14, 1999 (subject to certain conditions) and terminates (if not
sooner exercised) on December 29, 2002. The Company also granted to the lenders
certain customary demand and piggyback registration rights in connection with
the warrant. At December 27, 1998, $24.6 million was outstanding under the term
loan and $13.0 million was outstanding under the revolving line of credit. The
weighted average interest rate at December 27, 1998 for the revolving line of
credit was 8.6%.

                  During February 1999, the Company failed to meet certain
financial covenants of the credit agreement discussed above and expects to fail
to meet another covenant at March 31, 1999. The lenders have rights to exercise
certain remedies under the agreement but have not chosen to do so to date. In
accordance with Statement of Financial Accounting Standards No. 78,
Classification of Obligations That Are Callable by the Creditor, the Company has
classified all of the outstanding balance under the credit agreement as a
current liability. Accordingly, the report of the Company's independent auditors
on the Company's consolidated financial statements for the year ended December
27, 1998 is qualified as to going concern.

         Management of the Company meets regularly with the lenders in an
attempt to restructure the credit facility, or otherwise satisfactorily resolve
the non-monetary defaults. While management believes that the best interests of
the lenders and the Company would be served through a restructured credit
facility that allows the Company to work through the current market dynamics for
flex products, there can be no assurance that the lenders will ultimately agree
or that such a restructured credit facility will ultimately be consummated. In
the meantime, the Company has been aggressively seeking other sources of debt
and equity financing and until a resolution of these financing matters can be
adequately addressed, the Company continues to take steps necessary to conserve
and manage cash flow to allow operations to continue. No assurance can be given
that the outcome of the Company's negotiating efforts with the lenders will not
adversely affect the Company's business, financial condition, results of
operations and cash flows.

         Cash Flow. During 1998, the Company generated $13.2 million of cash
from operations, compared to $4.6 million and $4.4 million for the same periods
in 1997 and 1996, respectively. Net income (loss) was ($4.8) million, $8.6
million and ($25.0) million for the same periods, respectively, with
depreciation and amortization expense of $9.0 million, $6.6 million and $8.2
million, respectively. Decreased sales levels for the year ended December 27,
1998 resulted in the Company maintaining a low level of working capital,
primarily a decreased level of accounts receivable and inventory which was
offset by an increase in current liabilities. During the year ended December 31,
1997, working capital increased 175% to $25.0 million from $9.1 million in 1996
primarily as a result of increased business activity, the payment of $5.8
million of the accrued restructuring charges for employee and lease terminations
and the start-up of a new manufacturing facility in Thailand. In 1996, the
Company experienced a net loss of $25.0 million for the year ended December 31,
1996 principally due to a $29.2 million charge (pre-tax) related to the
restructuring of its U.K. operations. This charge consisted of write-downs in
intangible assets and plant equipment as well as the recognition of future
obligations for employee and lease termination charges.

         The 1998 and 1997 results reflect $0.5 million and $0.1 million of
amortization expense, respectively, for intangible assets related to the
acquisition of Hana's 20% interest in ATL. The 1996 results reflect $2.4 million
of amortization expense for intangible assets related to the ADFlex U.K.
acquisition. The remaining intangible assets acquired in the U.K. acquisition
were written off in the third quarter 1996 as part of the U.K.
restructuring.

         Cash totaling $21.5 million was used in 1998 for investing activities
compared with $15.0 million and $25.7 million for the same periods in 1997 and
1996, respectively. Capital expenditures for the twelve months ended December
27, 1998 were $21.5 compared with $14.5 million and $13.8 million for 1997 and
1996, 


                                       21
<PAGE>   22
respectively as the Company continued to invest in property, plant and equipment
for its North America and Thailand operations. During the year ended December
27, 1998, the Company invested a total of $5.4 million related to the
implementation of the SAP R/3 software manufacturing/cost control system,
including software, implementation, hardware and training. The cost of acquiring
and implementing the new system is recorded as an asset by the Company and is
being amortized over its estimated benefit period of five years. In addition,
capital expenditures during the year ended December 27, 1998 included $3.0
million related to the Thailand operations expansion and $13.1 million related
to machinery and equipment additions. Capital expenditures during these periods
were financed from existing cash balances and from borrowings under the
Company's bank line of credit. In January 1996, the Company paid $12.4 million
in connection with its acquisition of the ADFlex U.K. operations. This payment
was financed from existing cash and cash equivalent balances.

         Financing activities in 1998 provided the Company with $4.6 million
compared with $13.4 million and $11.6 million in 1997 and 1996, respectively.
During year ended December 27, 1998, the Company borrowed an additional $5.0
million on its term loan which was used to pay down the Company's bank line of
credit and also remitted approximately $5.8 million in principal in late 1998
for payment on the term loan. Funding for this payment came from the Company's
line of credit. Net borrowings on the Company's bank line of credit totaled $6.0
million during the year ended December 27, 1998. Net repayments on the Company's
bank line of credit totaled $3.0 million during the year ended December 31, 1997
compared to net borrowings of $10.0 million for the same period in 1996. Under
the original credit agreement as discussed above, the Company borrowed $25.0
million under the term loan during the year ended December 31, 1997. From the
proceeds of the $25.0 million term loan arranged in 1997, discussed above,
approximately $7.5 million in principal plus $2.0 million in accrued interest
were used to retire, ahead of schedule, the subordinated debenture issued in the
acquisition of ADFlex U.K., approximately $15.0 million was used to repay
borrowings under the Company's existing line of credit and the remainder was
used to finance working capital of the Company. In addition, the Company
remitted $2.5 million in principal plus $0.8 million in accrued interest in
January 1997 in payment of the subordinated debenture. Funding for this payment
came from the Company's line of credit. The Company generated $1.3 million, $2.0
million and $1.8 million in 1998, 1997 and 1996, respectively, through sales of
its Common Stock. During the year ended December 31, 1997, the Company paid $0.5
million at closing and issued a note in the principal amount of $1.0 million and
agreed to pay $1.3 million at various dates through December 31, 1998 in
connection with the acquisition of Hana's 20% interest in ATL. The Company
remitted $2.2 million during the year ended December 27, 1998. Funding for this
payment came from the Company's line of credit. As of December 27, 1998, $0.1
million was outstanding under the note and was paid in January 1999.

         Management believes that the level of working capital should continue
to grow at a rate generally consistent with the growth of the Company's
operations. As discussed above, the Company is aggressively seeking to
restructure its existing credit facility while at the same time pursuing
alternate sources of debt and equity capital. No assurances can be given that
such financing or capital will be available on terms acceptable to the Company.
The current stock price is adversely affecting the Company's ability to procure
equity financing. If the Company is unable to restructure its existing debt or
obtain new financing, its ability to continue operations will be jeopardized and
the Company may be forced to seek protection from its creditors.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

         In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed for or Obtained for Internal-Use, which requires the
capitalization of certain costs incurred in connection with developing or
obtaining computer software. The Company elected to adopt SOP 98-1 effective
January 1, 1998 in connection with the purchase of a manufacturing cost control
system. Capitalized costs of $5.4 million are being amortized on a straight-line
basis over a period of five years after completion of the project in October
1998.

OTHER MATTERS


                                       22
<PAGE>   23
         Foreign Operations

         The Company's primary finishing and assembly facilities are located in
Agua Prieta, Mexico and Lamphun, Thailand, and the Company maintains a
technology and pilot production facility in Havant, England. While the Company
believes it has established good relationships with its local labor forces and
the local governments, the spread of the manufacturing process over multiple
countries subjects the Company to risks inherent in international operations.
Those risks include currency fluctuations, inflationary pressures, unexpected
changes in regulatory requirements, tariffs and barriers, potentially limited
intellectual property protection, potential cross border shipment delays,
changes in political climate, difficulties in coordinating and managing foreign
operations, foreign labor union issues, increases in employee turnover and
potentially adverse tax consequences. Any of the foregoing could have a material
adverse effect on the Company's business, financial condition, results of
operations and cash flows.

         While the Company transacts business predominately in U.S. Dollars and
most of its net sales are collected in U.S. Dollars, a portion of its sales and
expenses are denominated in foreign currencies. Changes in the relation of
foreign currencies to the U.S. Dollar will affect the Company's cost of goods
sold and operating margins and could result in exchange gains or losses. To
reduce the impact of certain foreign currency fluctuations, the Company enters
into short-term forward foreign currency exchange contracts (hedges) in the
regular course of business to manage its exposure. The forward exchange
contracts generally require the Company to exchange U.S. Dollars for foreign
currencies at maturity, at rates agreed to at inception of the contracts. The
gains or losses on hedges of transaction exposure are included in income in the
period in which the exchange rates change. The gains and losses on unhedged
foreign currency transactions are included in income. No assurance can be given
that the Company's hedging strategies will prevent future currency fluctuations
from adversely affecting the Company's business, financial condition, results of
operations and cash flows.

         Expansion of Thailand Operations

         In April 1998, the Company commenced expansion of its Thailand
operations with the construction of a new plant. The expansion will initially
provide 100,000 square feet of manufacturing space - 65,000 feet for flex
finishing and 35,000 feet for assembly - bringing the total size of the facility
to 140,000 square feet. The expanded facility, which will increase the total
assembly area by nearly 50%, includes state-of-the-art clean rooms and the
production capability to process up to 750,000 circuit assemblies per week. The
new flex finishing area will feature advanced surface finishing, laser
processing and automated optical profiling technologies. The total estimated
cost of the expansion is approximately $9.0 million. In February 1999, the
qualification process was completed and production began. The new facility is
expected to be operational by the second quarter of 1999, including customer
qualification and ramp into volume production. The Company anticipates that the
new Thailand facility will enable it to attain significant cost reductions that
are crucial to mitigating competitive price pressures in Asia and help sustain
the Company's implementation of a complete flexible circuit interconnect
solution including design, fabrication, assembly and testing. No assurance can
be given that the Thailand expansion will be completed at the time anticipated
or that the Company's expansion strategies will not have a material, adverse
effect on the Company's business, financial condition, results of operations and
cash flows.

         Environmental Regulations

         The Company is subject to a variety of environmental laws relating to
the storage, discharge, handling, emission, generation, manufacture, use and
disposal of chemicals, solid and hazardous waste and other toxic and hazardous
materials used to manufacture the Company's products. The Company has conducted
environmental studies of its facility in Chandler, Arizona, which revealed a
limited amount of soil contamination that may require remediation. Based on
these studies, the Company believes that the costs associated with remediation
will not have a material adverse effect on its operations or financial
condition. However, given the uncertainties associated with environmental
contamination, there can be no assurance that such costs will not have a
material adverse impact on the Company. Pursuant to the agreements governing the
Rogers acquisition, Rogers has retained all environmental liabilities relating
to the purchased assets prior to the closing date of the acquisition. While
Rogers currently has sufficient assets to fulfill its obligations under the
acquisition agreements, if environmental liabilities requiring remediation are
discovered and the Company was unable to enforce the acquisition agreement
against Rogers, the Company could become subject to costs and damages relating
to such environmental liabilities. Any such costs and 


                                       23
<PAGE>   24
damages imposed on the Company could materially adversely affect the Company's
business, financial condition, results of operations and cash flows.

         In mid 1995, the Company acquired a manufacturing facility located in
Agua Prieta, Mexico. In connection with this acquisition, the Company conducted
an environmental study of the facility which indicated the contamination by
hazardous materials in the soil and groundwater. Pursuant to the purchase
agreement, the seller submitted a remediation plan to the appropriate Mexican
authorities, which was approved in May 1997. Subsequent remediation was
completed in December 1997. The seller is awaiting acknowledgement that the
remediation plan has been approved and no further action is required by the
Mexican authorities. The seller's obligation for cost of remediation is limited
to $2.5 million. A total of $1.0 million was originally held in escrow pending
the seller's performance of its environmental obligations under the agreement.
One third of the escrow balance was used to conduct the remediation, one third
was released to the seller according to the agreement and one third remains in
escrow and will be released to the seller upon closure of the issue by the
Mexican authorities with certification that no further action is required.

         The Company believes it has been operating its facilities in
substantial compliance in all material respects with existing environmental
laws. However, the Company cannot predict the nature, scope or effect of
legislation or regulatory requirements that could be imposed or how existing or
future laws or regulations will be administered or interpreted with respect to
products or activities to which they have not previously been applied.
Compliance with more stringent laws or regulations, or more vigorous enforcement
policies of regulatory agencies, could require substantial expenditures by the
Company and could adversely affect the Company's business, financial condition,
results of operations and cash flows.

         Dependence on Electronics Industry

         The Company's principal customers are electronics original equipment
manufacturers and contract manufacturers. The electronics industry as a whole is
characterized by intense competition, relatively short product life cycles and
significant fluctuations in product demand. In addition, the electronics
industry is generally subject to rapid technological change and product
obsolescence. Discontinuance of products or modifications developed in
connection with next generation products containing flexible circuit
interconnects manufactured by the Company could have a material adverse effect
on the Company's business, financial condition, results of operations and cash
flows. Further, various sectors of the electronics industry are subject to
economic cycles and have in the past experienced, and are likely in the future
to experience, periods of slowdown. A slowdown or any other event leading to
excess capacity or a downturn in the electronics industry has resulted and may
continue to result in intensified price competition, reduced gross margins and a
decrease in unit volume, all of which have had and would continue to have a
material adverse effect on the Company's business, financial condition, results
of operations and cash flows.

         Concentration Risk

         The Company provides flexible interconnect products to a diverse group
of markets. Through ongoing diversification and new market expansion efforts,
primarily directed toward the communications and consumer markets, the Company
is continuing its efforts to reduce its dependence on the HDD market. Sales to
the HDD market accounted for 36%, 43% and 60% of net sales for the years ended
December 27, 1998 and December 31, 1997 and 1996, respectively. Though the
Company is continuing its efforts to reduce its dependence on the HDD industry,
net sales attributable to this market are expected to continue to represent the
largest portion of net sales for the foreseeable future and could return to a
majority of the Company's net sales. The loss of any HDD customer, or a
substantial reduction in orders by any significant customer, including
reductions due to market, competitive or economic conditions, have had and would
continue to have a material adverse effect on the Company's business, financial
condition, results of operations and cash flows.

         Competition

         The flexible circuit interconnect market is differentiated by
customers, applications and geography, with each niche having its own
combination of complex packaging and interconnection requirements. The Company
believes that it competes principally on the basis of design capability, price,
quality and response time to design changes and technological advancements in
underlying applications and the ability to offer a total flexible circuit
interconnect solution. During periods of economic slowdown in the electronics
industry and other periods when 


                                       24
<PAGE>   25
excess capacity exists, electronic OEMs become more price sensitive. During the
year ended December 27, 1998, there was a worldwide slowdown in the electronics
industry and to maintain market share, many of the Company's primary foreign
competitors with lower cost structures decreased their prices to unprecedented
levels. This had a material adverse effect on the Company's pricing during those
periods. The Company believes that once a customer has selected a particular
vendor to design and manufacture a flexible circuit interconnect, the customer
generally relies upon that vendor's design for the life of that specific
application and, to the extent possible, subsequent generations of similar
applications. Accordingly, it is difficult to achieve significant sales to a
particular customer with respect to any application once another vendor has been
selected to design and manufacture the flexible circuit interconnect used in
that application. While this market paradigm may provide a barrier to the
Company's competitors in the markets served by the Company, it also may present
an obstacle to the Company's entry into other markets.

         The Company experiences competition worldwide from a number of leading
foreign and domestic providers, such as Nippon Mektron ("NOK"), Fujikura Ltd.
("Fujikura"), Multi-Fineline Electronix, Inc. ("M-Flex"), Sheldahl, Inc.
("Sheldahl"), Parlex Corporation ("Parlex"). NOK and Fujikura are Japan-based
suppliers substantially larger than the Company with greater financial and other
resources. M-Flex, Sheldahl and Parlex are U.S.-based flexible circuit
manufacturers that have lower sales of polyimide flexible circuits than the
Company and have historically targeted suppliers of computers, communication and
automotive services, and the military, respectively. Expansion of the Company's
existing products or services could expose the Company to new competition.
Moreover, new developments in the electronics industry could render existing
technology obsolete or less competitive and could potentially introduce new
competition into the market. There can be no assurance that the Company's
competitors will not develop enhancements to, or future generations of,
competitive products or services that will offer superior price or performance
features to those of the Company or that new competitors will not enter the
Company's markets. Finally, as many of the Company's competitors are based in
foreign countries, they have cost structures and prices based on foreign
currencies. Accordingly, currency fluctuations could cause the Company's
dollar-priced products to be less competitive than its competitors' products
priced in other currencies.

         The Company also competes in assembly matters with leading flexible
circuit assembly providers such as Smartflex Systems, Inc. and Solectron. The
Company believes that competition in assembly matters is primarily driven by
availability of assembly technology, price and cycle time. The Company believes
that it will compete favorably with these competitors because it offers its
customers a complete flexible circuit interconnect solution including design,
fabrication, assembly and testing (referred to as the one-stop-shop strategy).

         The Company's competitors can be expected to continue to improve the
design and performance of their products and to introduce new products with
competitive price/performance characteristics. Competitive pressures often
necessitate price reductions which can adversely affect operating results. The
Company will be required to make a continued high level of investment in product
development and research, sales and marketing and ongoing customer service and
support to remain competitive. There can be no assurance that the Company will
have sufficient resources to continue to make such investments or that the
Company will be able to make the technological advances necessary to maintain
its competitive position in the flexible circuit interconnect market. There can
be no assurance that existing or future competitors will not be able to
duplicate the Company's strategies, that the Company will be able to compete
successfully in the future, or that competitive pressures faced by the Company
will not have a material adverse effect on the Company's business, financial
condition, results of operations and cash flows.

         Volatility of Stock Price

         The trading price of the Company's Common Stock is expected to continue
to be subject to wide fluctuations in response to quarter-to-quarter variations
in operating results, announcements of technological innovations or new products
by the Company's customers, general conditions in the disk drive and computer
industries, and other events or factors. In addition, stock markets have
experienced extreme price volatility in recent years. This volatility has had a
substantial effect on the market price of securities issued by many high
technology companies, in many cases for reasons unrelated to the operating
performance of the specific companies, and the Company's Common Stock has
experienced volatility not necessarily related to announcements of Company
performance. Broad market fluctuations may adversely affect the market price of
the Company's Common Stock.


                                       25
<PAGE>   26
         Cancellation and Regrant of Stock Option Grants

         On June 22, 1998, the Compensation Committee of the Company's Board of
Directors approved the cancellation of all outstanding options granted on June
3, 1997, October 1, 1997 and April 7, 1998 (with an original exercise price of
$15.50, $22.063 and $17.063 per share, respectively) and the regrant and
replacement of these options with new options at an exercise price per share of
$8.50, the fair market value of the Company's Common Stock on the date of the
Committee's determination. Each optionee who was offered the right to
participate elected to accept a new option with an exercise price of $8.50 per
share. Each new option has a term of ten years and becomes exercisable for 25%
of the option share on June 22, 1999 and for the balance of the shares in a
series of equal monthly installments over the 36-month period thereafter,
assuming continued employment with the Company or one of its subsidiaries. The
Compensation Committee elected not to reprice any other outstanding options at
that time. On July 2, 1997, the Company canceled 92,250 options held by certain
employees issued under the 1994 Plan with an exercise price per share of $27.25
and granted 92,250 options with an exercise price per share of $14.88 to the
same employees. The new options started a new vesting schedule over a four-year
period from the new date of grant.

         The Compensation Committee approved the cancellation-regrant program
because it believes that equity interests are a significant factor in the
Company's ability to attract and retain key employees who are critical to the
Company's long-range success. During the years ended December 27, 1998 and
December 31, 1997, the market value of the Common Stock had fallen, in part, as
a result of market factors that affected many stocks in the industry in which
the Company engaged including the stock of the Company's customers. As a result
of the decrease in the fair market value of the Common Stock, the Committee
believed that the Company's ability to retain existing employees was adversely
affected and to attract talented individuals in the future would be impaired.
Accordingly, the Committee approved the cancellation-regrant program as a means
to ensuring that optionees have a meaningful equity interest in the Company.

         Impact of Year 2000

         The Year 2000 issue is a result of computer programs being written
using two digits rather than four to define the applicable year which, if left
uncorrected, could result in a system failure or miscalculations causing
disruptions of operations. With the complete implementation of the SAP R/3
software system in October 1998, the Company's manufacturing and cost control
system functions properly with respect to dates in the year 2000 and beyond. The
software replaced the Company's previous manufacturing and cost control system
and its implementation took place for a variety of reasons, not separately
identified as a Year 2000 remediation. Therefore, the Company does not consider
the implementation of the SAP R/3 system a direct Year 2000 remediation cost and
the direct costs associated with addressing the Company's Year 2000 issues have
been immaterial to date. In addition, the Company is in the process of
implementing a formal remediation plan to ensure the Company is compliant with
respect to Year 2000 issues. The plan includes five phases representing a major
Year 2000 activity or segment - awareness, assessment, renovation, validation
and implementation.

         Awareness. All Year 2000 projects with regard to internal systems are
approved at the Board of Directors level and evaluated and reviewed by a Senior
Management Steering Committee on a monthly basis. The Company's plan of action
applies to all geographic locations where products and services are provided to
customers and project managers have been assigned to each location to coordinate
Year 2000 projects worldwide.

         Assessment and Renovation. The Company has completed a detailed
inventory of processes, applications, hardware, operating systems and databases
where Year 2000 issues may exist. To date, an assessment of all information
technology (IT)-related systems (e.g. hardware and software systems) has been
fully carried out. With the complete implementation of SAP finalized in October
1998, all worldwide application-driven processes for the Company are Year 2000
compliant. For example, processes required to support production and fulfillment
of customer orders (order entry, receiving/warehousing, procurement/materials,
manufacturing, product test, distribution/shipping and invoicing) are in
compliance with the Year 2000 issue after complete implementation of SAP in
October 1998. In addition, 97% of internal network hardware and software systems
are Year 2000 compliant to date. The scope of the Company's full assessment also
includes non-IT areas such as all facilities/plant equipment, manufacturing
process and testing equipment, lab equipment and telephone communications
systems which are in the process of being analyzed and, if necessary, a plan for
renovation will be approved by the Steering 


                                       26
<PAGE>   27
Committee in March 1999. In addition, the Company has implemented programs with
outside suppliers to ensure their readiness with respect to Year 2000 issues.
The Company is currently tracking and managing this through periodic
questionnaires to suppliers. To date, the Company has received and analyzed
questionnaires related to 100% of the critical suppliers of the Company and 85%
of non-critical suppliers. Based on the information provided, all critical
suppliers are in compliance with the Year 2000 issue.

         Validation. Upon completion of the SAP software implementation, the
Company began its validation phase by testing, verifying and validating the
performance, functionality, and integration of the SAP manufacturing and cost
control software system in an operational environment. The Company anticipates
this phase of IT-related systems to continue throughout 1999.

         Implementation. Upon completion of the validation phase of all IT as
well as non-IT areas for Year 2000 compliance, the Company plans to identify and
implement any necessary contingency plans and modify existing disaster recovery
plans throughout 1999.

         In addition, the Company has evaluated software and hardware systems
associated with IT areas and concluded that there are no identified risks that
would have a material exposure to contingencies related to the Year 2000 issue.
With respect to non-IT areas, it is uncertain what risks are associated with the
Year 2000 issue and any identified risks could have a material adverse effect on
the Company's business, financial condition, results of operations and cash
flows. The Company plans to implement a full analysis and any necessary
renovation plan of this area of uncertainty by March 1999. There can be no
assurances that the systems of customer, suppliers and other companies on which
the Company relies will be timely converted and will not have an adverse effect
on the Company' systems or operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The Company's earnings and cash flows are subject to fluctuations due
to changes in foreign currency exchange rates. While the Company transacts
business predominately in U.S. Dollars and most of its net sales are collected
in U.S. Dollars, a portion of its sales and expenses are denominated in foreign
currencies. Changes in the relation of foreign currencies to the U.S. Dollar
will affect the Company's cost of goods sold and operating margins and could
result in exchange gains or losses. To reduce the impact of certain foreign
currency fluctuations, the Company enters into short-term forward foreign
currency exchange contracts (hedges) in the regular course of business to manage
its risk exposure only-not as speculative instruments. Typically, these
contracts have maturities of 1 month or less. The forward exchange contracts
generally require the Company to exchange U.S. Dollars for foreign currencies at
maturity, at rates agreed to at inception of the contracts. The gains or losses
on hedges of transaction exposure are included in income in the period in which
the exchange rates change. The gains and losses on unhedged foreign currency
transactions are included in income.

         Each month, the Company's chief financial officer approves the outlook
for expected currency exchange rate movements as well as the policy on desired
future foreign currency cash flow positions (long, short, balanced) for those
currencies in which the Company has significant activity. The Company's chief
financial officer also receives a daily report on currency exchange rates, cash
flow exposure and open foreign currency hedges. Expected future cash flow
positions and strategies are continuously monitored. At December 27, 1998, there
were no open forward exchange contracts. At December 31, 1997, there were no
material open forward exchange contracts. No assurance can be given that the
Company's hedging strategies will prevent future currency fluctuations from
adversely affecting the Company's business, financial condition, results of
operations and cash flows.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

         This report contains forward-looking statements that involve risks and
uncertainties, including but not limited to, the risks of concentration of sales
in markets, and in particular the HDD market, and customers, which have caused
and in the future could cause materially adverse fluctuations in operating
results; the risks of being a supplier to the electronics industry in general,
which is characterized by rapid technological change, product obsolescence and
price competition, which have and could materially adversely affect operating
results; the risk of 


                                       27
<PAGE>   28
loss of market share through competition and pricing pressures from competitors
and/or customers; the risk that growth in demand for products that use flex, and
the corresponding demand for flex, will not continue to increase as anticipated;
the risk that the Company's fully integrated one-stop shop strategy will not
continue to be accepted by customers, and the risk that competitors may seek to
duplicate this strategy, which could materially adversely affect operating
results; the risk that the outcome of the Company's negotiating efforts with the
lenders and other sources of debt and equity capital will not adversely affect
the Company's business, financial condition, results of operations and cash
flows; the risk that the Company's expansion of manufacturing facilities in
Thailand will not result in sustainable, increased efficiencies, cost savings or
improved margins as anticipated or at the time anticipated; general risks
inherent in international operations, including currency fluctuations and
government-mandated wage increases; general manufacturing risks, including
environmental risks related to manufacturing operations and clean-up of the
Mexican manufacturing facility; the risk that other computer systems on which
the Company relies, such as suppliers and customers, will function properly with
respect to dates in the year 2000 and thereafter; the risk that all of the
foregoing factors or other factors could cause fluctuations in the price of the
Company's Common Stock; and other risks detailed from time to time in the
Company's Securities and Exchange Commission filings. Actual results in the
future could differ materially from those described in forward-looking
statements as a result of such risks and uncertainties. The Company undertakes
no obligation to publicly release the results of any revisions to these
forward-looking statements that may be made to reflect any future events or
circumstances.


                                       28
<PAGE>   29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.


CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
                                                                              DECEMBER 27,   DECEMBER 31,
(IN THOUSANDS, EXCEPT SHARE DATA)                                                 1998          1997
-------------------------------------------------------------------------------------------------------
<S>                                                                             <C>           <C>
ASSETS
Current assets:
   Cash and cash equivalents                                                    $   5,325     $   9,092
   Accounts receivable, net                                                        24,747        31,581
   Other receivables                                                                1,161         1,167
   Inventories                                                                      9,397        19,297
   Deferred tax assets                                                              2,072         1,823
   Prepaid taxes                                                                       --           647
   Prepaid expenses and other current assets                                        1,952         1,400
-------------------------------------------------------------------------------------------------------
   Total current assets                                                            44,654        65,007

Property, plant and equipment, net                                                 55,351        42,257
Intangible assets                                                                   1,933         2,449
Deferred tax assets                                                                 6,326         4,463
Other assets                                                                           40            24
                                                                                $ 108,304     $ 114,200
-------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Notes payable                                                                $      63     $   2,250
   Line of credit                                                                  13,000         7,000
   Accounts payable                                                                15,927        22,692
   Accrued liabilities                                                              7,183         6,162
   Current portion of long-term debt  and capitalized leases                       24,613         1,959
-------------------------------------------------------------------------------------------------------
   Total current liabilities                                                       60,786        40,063

Long-term debt                                                                         69        23,230
Commitments and contingent liabilities
Stockholders' Equity:
   Preferred stock, $.01 par value, 10,000,000 shares authorized;
     None issued and outstanding
   Common stock, $.01 par value, 40,000,000 shares authorized; 8,928,249 and
     8,768,472 shares issued and outstanding at
     December 27, 1998 and December 31, 1997, respectively                             89            88
   Additional paid-in capital                                                      63,856        62,562
   Retained earnings (deficit)                                                    (16,496)      (11,743)
-------------------------------------------------------------------------------------------------------
     Total stockholders' equity                                                    47,449        50,907
-------------------------------------------------------------------------------------------------------
                                                                                $ 108,304     $ 114,200
-------------------------------------------------------------------------------------------------------
</TABLE>

See Accompanying Notes to Consolidated Financial Statements.


                                       29
<PAGE>   30
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                            YEARS ENDED
                                                                 DECEMBER 27,         DECEMBER 31,

(IN THOUSANDS, EXCEPT PER SHARE DATA)                                1998          1997          1996
-------------------------------------------------------------------------------------------------------
<S>                                                               <C>           <C>           <C>      
Net sales                                                         $ 170,097     $ 213,878     $ 156,836
Cost of sales                                                       152,976       175,826       138,273
-------------------------------------------------------------------------------------------------------
Gross profit                                                         17,121        38,052        18,563
Operating expenses:
   Engineering, research & development                                7,437         7,990         7,366
   Amortization of intangible assets                                    516           129         2,386
   Selling, general & administrative                                 12,706        15,353        13,254
   Restructuring charges                                                 --            --        29,248
-------------------------------------------------------------------------------------------------------
   Total operating expenses                                          20,659        23,472        52,254
-------------------------------------------------------------------------------------------------------
Operating income (loss)                                              (3,538)       14,580       (33,691)
   Interest income                                                      287           218           223
   Interest expense                                                  (2,972)       (2,102)       (1,511)
   Other income (loss), net                                            (379)         (101)           92
   Minority interest in earnings of consolidated joint venture           --          (181)          109
-------------------------------------------------------------------------------------------------------
Income (loss) before income taxes                                    (6,602)       12,414       (34,778)
Income tax expense (benefit)                                         (1,849)        3,818        (9,754)
-------------------------------------------------------------------------------------------------------
Net income (loss)                                                 $  (4,753)    $   8,596     $ (25,024)
-------------------------------------------------------------------------------------------------------
Net income (loss) per share:
Basic                                                             $   (0.54)    $    0.99     $   (2.92)
     Diluted                                                      $   (0.54)    $    0.97     $   (2.92)
-------------------------------------------------------------------------------------------------------
Common and common equivalent shares used
   in the calculation of net income (loss) per share:

   Basic                                                              8,867         8,712         8,580
   Diluted                                                            8,867         8,894         8,580
-------------------------------------------------------------------------------------------------------
</TABLE>

See Accompanying Notes to Consolidated Financial Statements.


                                       30
<PAGE>   31
CONSOLIDATED STATEMENTS OF EQUITY


<TABLE>
<CAPTION>
                                                    COMMON STOCK         ADDITIONAL    RETAINED
                                                                          PAID-IN      EARNINGS       TOTAL
(IN THOUSANDS, EXCEPT SHARE DATA)                SHARES       AMOUNT       CAPITAL     (DEFICIT)      EQUITY
--------------------------------------------------------------------------------------------------------------
<S>                                             <C>          <C>         <C>           <C>           <C>
   Balance at December 31, 1995                 8,282,312    $      83    $  58,786    $   4,685     $  63,554
--------------------------------------------------------------------------------------------------------------
Issuance of common stock through employee
   stock purchase plan and exercise of stock
   options, including tax benefit of $665         351,196            3        1,756           --         1,759

Net loss                                               --           --           --      (25,024)      (25,024)
--------------------------------------------------------------------------------------------------------------
   Balance at December 31, 1996                 8,633,508           86       60,542      (20,339)       40,289
--------------------------------------------------------------------------------------------------------------

Issuance of common stock through employee
   stock purchase plan and exercise of stock
   options, including tax benefit of $402         134,964            2        2,020           --         2,022

Net income                                             --           --           --        8,596         8,596
--------------------------------------------------------------------------------------------------------------
   Balance at December 31, 1997                 8,768,472           88       62,562      (11,743)       50,907
--------------------------------------------------------------------------------------------------------------

Issuance of common stock through employee
   stock purchase plan and exercise of stock
   options, including tax benefit of $125         159,777            1        1,294           --         1,295

Net loss                                               --           --           --       (4,753)       (4,753)
--------------------------------------------------------------------------------------------------------------
   Balance at December 27, 1998                 8,928,249    $      89    $  63,856    $ (16,496)    $  47,449
--------------------------------------------------------------------------------------------------------------
</TABLE>

See Accompanying Notes to Consolidated Financial Statements.


                                       31
<PAGE>   32
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows                                            YEARS ENDED
                                                                       DECEMBER 27,       DECEMBER 31,
----------------------------------------------------------------------------------------------------------
(IN THOUSANDS)                                                            1998         1997         1996
----------------------------------------------------------------------------------------------------------
<S>                                                                    <C>           <C>          <C>
Operating activities:
Net income (loss)                                                       $ (4,753)    $  8,596     $(25,024)
Adjustments to reconcile net income (loss) to net cash
   provided by operating activities:
     Depreciation and amortization                                         9,035        6,622        8,208
     Restructuring charges                                                    --           --       29,248
     (Gain) loss on disposal of assets                                      (103)          --          184
     Minority interest                                                        --          181           --
     Deferred taxes                                                       (2,112)       5,683       (9,772)
     Changes in operating assets and liabilities:
       Accounts receivable                                                 6,834       (6,432)      (9,557)
       Inventories                                                         9,900       (4,307)       1,834
       Prepaid expenses and other current assets                             101       (2,945)      (2,029)
       Payables and accrued liabilities                                   (5,744)      (2,821)      11,347
----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                 13,158        4,577        4,439

Investing activities:
Capital expenditures                                                     (21,510)     (14,462)     (13,763)
(Increase) in other assets                                                   (16)          --          (10)
Decrease in acquisition payable                                               --           --      (12,375)
Investment in joint venture                                                   --         (491)         491
----------------------------------------------------------------------------------------------------------
Net cash used in investing activities                                    (21,526)     (14,953)     (25,657)

Financing activities:
Issuance of common stock, net of expenses                                  1,295        2,022        1,759
Net activity on line of credit                                             6,000       (3,000)      10,000
Payments on capitalized lease obligations                                   (160)        (151)        (143)
Payments on current notes payable                                         (2,187)        (500)          --
Payments on long-term debt                                                (5,749)     (10,000)          --
Issuance of debt                                                           5,402       25,000
----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities                                  4,601       13,371       11,616

Net increase (decrease) in cash and cash equivalents                      (3,767)       2,995       (9,602)
Cash and cash equivalents at beginning of year                             9,092        6,097       15,699
----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                                $  5,325     $  9,092     $  6,097
----------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid for:
   Interest                                                             $  2,326     $  2,714     $    665
   Income taxes                                                              212          520        1,409
----------------------------------------------------------------------------------------------------------
Supplemental disclosure of non-cash financing activities:
    Equipment acquired under capital lease obligations                  $    102     $     --     $     --
    Debt issuance costs valued at $0.3 million payable in March 1999         300           --           --
     Issuance of note payable in connection with acquisition of Hana
      interest in ATL                                                         --        2,750           --
----------------------------------------------------------------------------------------------------------
</TABLE>

See Accompanying Notes to Consolidated Financial Statements


                                       32
<PAGE>   33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS ADFlex Solutions, Inc. (the Company) is a worldwide
provider of flexible circuit interconnect solutions to original equipment
manufacturers in the electronics industry. The Company offers customized
flexible circuit applications and services from initial design, development and
prototype to fabrication, assembly and test on a global basis. The Company
targets high-volume markets where miniaturization, form and weight are driving
factors and flexible circuits are an enabling technology. Applications for
flexible circuits currently addressed by the Company include notebook computers,
portable communication devices such as cellular telephones and pagers, data
storage devices such as hard disk drives, tape drives and arrays, and high-end
consumer electronics products such as compact disk players. The Company serves
customers located in North America, Europe and Southeast Asia.

BASIS OF PRESENTATION

The accompanying consolidated financial statements have been prepared on the
basis that the Company will continue as a going concern. The Company has failed
to meet certain provisions of its credit agreement in February 1999 and expects
to fail to meet another covenant at March 31, 1999. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying 1998 consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.

Management is currently negotiating with funding sources to provide additional
capital to the Company. In addition, management of the Company has met with the
lenders in an attempt to restructure the credit facility, or otherwise
satisfactorily resolve the existing defaults. It is not possible, however, to
predict at this time the success of management's efforts. No assurance can be
given that the outcome of the Company's negotiating efforts with the lenders
will not adversely affect the Company's business, financial condition, results
of operations and cash flows.

PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements
include the accounts of the Company and its subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.

On August 27, 1996, the Company announced the establishment of a joint venture
with Hana Microelectronics (Hana), a diversified electronics manufacturer
headquartered in Thailand, to produce and test advanced chip-on-flex and surface
mount technology assemblies. The venture, ADFlex Thailand Limited (ATL), was 80%
owned by the Company. On September 26, 1997, the Company acquired the 20%
interest held by Hana (See Note 3). Hana's 20% interest in ATL's earnings
through September 26, 1997 have been reflected as "Minority interest in earnings
of consolidated joint venture" on the Company's Consolidated Statements of
Operations.

FISCAL YEAR The Company's fiscal year consists of 52 or 53 weeks ending on the
Sunday closest to the last day of December each year. Fiscal year 1998 contained
52 weeks and ended December 27, 1998. Fiscal years 1997 and 1996 contained 52
weeks each and ended on December 28 and December 29, respectively. Activity from
the end of the reporting period to December 31 is immaterial for 1997 and 1996.

FOREIGN CURRENCY TRANSLATION The Company uses the United States Dollar as its
functional currency for its subsidiaries in Mexico, England and Thailand.
Remeasurement gains and losses, resulting from the process of remeasuring the
financial statements of these foreign subsidiaries into U.S. Dollars, are
included in operations. To date, the effect on income of remeasurement gains and
losses has been immaterial.

FOREIGN EXCHANGE INSTRUMENTS The Company enters into short-term forward foreign
currency exchange contracts in the regular course of business to manage its
exposure against foreign currency fluctuations, primarily relating to
nonfunctional currency monetary assets and liabilities. The forward exchange
contracts generally require the 


                                       33
<PAGE>   34
Company to exchange U.S. Dollars for foreign currencies at maturity, at rates
agreed to at inception of the contracts. The gains or losses on hedges of
transaction exposure are included in income in the period in which the exchange
rates change. The gains and losses on unhedged foreign currency transactions are
included in income. At December 27, 1998, there were no open forward foreign
currency exchange contracts.

CASH AND CASH EQUIVALENTS Cash and cash equivalents include demand deposits,
money market accounts and repurchase agreements since they represent highly
liquid investments with maturities of three months or less when purchased.

CONCENTRATION OF CREDIT RISK Financial instruments, which potentially subject
the Company to concentration of credit risk, consist principally of trade
receivables. A majority of the Company's trade receivables are derived from
sales in various geographic areas to large companies within the electronics
industry.

The Company has adopted credit policies and standards to accommodate the
electronics industry's growth and inherent risk. The Company performs ongoing
credit evaluations of its customers' financial condition but generally does not
require collateral, such as letters of credit or security agreements.

INVENTORIES Inventories are stated at the lower of cost or market. Cost is
computed on a currently adjusted standard basis (which approximates actual cost
on a first-in, first-out basis).

PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost
less accumulated depreciation and amortization. Depreciation and amortization is
computed for financial reporting purposes using the straight-line method over
the estimated useful lives of the assets which range from three to 25 years. The
Company uses accelerated methods for computing depreciation for tax purposes.

INTANGIBLE ASSETS In connection with the acquisition of Hana's 20% interest in
ATL in September 1997, the Company recorded goodwill which is being amortized
over its estimated useful life of five years.

The recoverability of intangible assets attributable to the Company's
acquisitions is analyzed periodically based on actual and projected levels of
profitability and cash flows of the operations acquired on an undiscounted
basis. Based on its most recent analysis, the Company believes that no material
impairment of intangible assets exists at December 27, 1998.

REVENUE RECOGNITION Sales are recognized upon shipment. The Company warrants its
products to be free of defects and repairs customer shipments as required. The
Company records a provision for the estimated cost of repairing returns at the
time of shipment.

FAIR VALUE OF FINANCIAL INSTRUMENTS Cash and cash equivalents, accounts
receivable, borrowings under the Company's line of credit, notes payable,
accounts payable, accrued liabilities and capitalized leases are carried at
amounts that reasonably approximate their fair values. The Company's long-term
debt bears interest at a variable interest rate which approximates current
market interest rates; therefore, the Company believes that long-term debt
approximates its fair value. The fair value of short-term foreign exchange
contracts is based on exchange rates at the end of the fiscal year.

IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews long-lived assets and
certain identifiable intangibles to be held and used or disposed of for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company recognized a
charge in 1996 in connection with the restructuring of its U.K. operations (see
Note 2).

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

RESEARCH AND DEVELOPMENT Research and development costs are expensed as
incurred.


                                       34
<PAGE>   35
INCOME TAXES Income taxes are provided using the liability method based upon the
provisions of Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes.

STOCK BASED COMPENSATION The Company grants stock options for a fixed number of
shares to employees with an exercise price equal to the fair value of the shares
at the date of grant. The Company accounts for employee stock option grants in
accordance with APB Opinion 25 (APB 25), Accounting for Stock Issued to
Employees, and accordingly, recognizes no compensation expense for stock option
grants.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In March 1998, the American
Institute of Certified Public Accountants issued Statement of Position (SOP)
98-1, Accounting for the Costs of Computer Software Developed for or Obtained
for Internal-Use, which requires the capitalization of certain costs incurred in
connection with developing or obtaining computer software. The Company elected
to adopt SOP 98-1 effective January 1, 1998 in connection with the purchase of a
manufacturing cost control system. Capitalized costs of $5.4 million are being
amortized on a straight-line basis over a period of five years after completion
of the project in October 1998.

NET INCOME (LOSS) PER SHARE In February, 1997, the Financial Accounting
Standards Board (FASB) issued SFAS No. 128, Earnings per Share. SFAS No. 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 SFAS No. 128 requirements. The difference in common equivalent
shares used in the computation of basic and diluted earnings per share is
primarily due to the inclusion of stock options in the dilutive computations,
unless they were anti-dilutive.

COMPREHENSIVE INCOME In June 1997, the FASB issued SFAS No. 130, Reporting
Comprehensive Income, which establishes standards for reporting and displaying
comprehensive income components in a full set of general-purpose financial
statements. Comprehensive income includes certain non-owner changes in equity
that are currently excluded from net income for certain companies. Because the
Company historically has not experienced transactions which would be included in
comprehensive income, adoption of SFAS 130 did not have a material effect on the
consolidated financial position or results of operations or cash flows of the
Company.

SEGMENT REPORTING In June 1997, the FASB issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, which revises disclosure
requirements about operating segments and establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 requires that public business enterprises report financial and
descriptive information about their reportable operating segments. The Company
operates in one business segment which is the manufacture and sale of flexible
circuit interconnect solutions. Financial information is summarized by
geographic area (see Note 15).

PRIOR PERIOD RECLASSIFICATION Certain prior period amounts have been
reclassified to conform to the current presentation.

         NOTE 2 ADFLEX U.K.

         On September 29, 1996, the Company's Board of Directors approved a plan
to restructure, over the next twelve months, the Company's assembly operation in
the U.K., and during that time period, transfer production from the U.K. to the
Company's manufacturing facility in Thailand. Accordingly, the Company recorded
the following: $13.5 million write-off of intangible assets, $8.8 million
write-down of property, plant and equipment, $2.5 million in lease termination
charges and $4.4 million in employee termination costs for 507 direct labor,
technical and administrative employees. As of December 31, 1996, $0.3 million of
the employee termination charges related to 13 employees had been paid and
charged against the liability. As of December 31, 1997, production has ceased at
the U.K. facility. During the year ended December 31, 1997, the Company paid and
charged to the liability $5.5 million related to termination costs for 124
employees and lease termination costs. In addition, the Company reallocated $0.8
million of the reserve for employee and lease termination costs to be used 


                                       35
<PAGE>   36
for additional write-down of property, plant and equipment. During the year
ended December 27, 1998, the Company paid and charged to the liability $0.2
million related to termination costs for 3 employees and lease termination
costs. The remaining accrual for employee termination costs is approximately
$0.1 million and the Company believes it is adequate to cover the remaining
liabilities. Total revenue and total operating loss related to this operation
for the year ended December 27, 1998 was $2.5 million and $2.0 million,
respectively. Total revenue and operating loss related to this operation for the
year ended December 31, 1997 was $38.4 million and $0.5 million, respectively.
Subsequent to the restructuring, the Company maintains a technology development
center and a sales and service organization in the U.K. to support its European
customers.

         NOTE 3 ADFLEX THAILAND

         In an effort to increase its global sourcing opportunities and to
decrease its operating costs, the Company established a joint venture, ATL,
located in Lamphun, Thailand with Hana in August 1996. On September 26, 1997,
the Company increased its ownership in ATL from 80% to 100% through the purchase
of Hana's 20% equity interest. Under the terms of the Equity Purchase Agreement,
the Company paid $0.5 million at closing and issued a note in the principal
amount of $1.0 million and agreed to pay $1.3 million at various dates through
December 31, 1998 in connection with the acquisition of Hana's 20% interest in
ATL. The Company remitted $2.2 million during the year ended December 27, 1998.
Funding for this payment came from the Company's line of credit. At December 27,
1998, $0.1 million was outstanding under the note. Goodwill related to the
excess purchase price over fair value of the net tangible assets acquired of
$1.9 million, net of accumulated amortization of $0.5 million at December 27,
1998, is being amortized on a straight-line basis over five years.

         NOTE 4 SPECIAL CHARGES

         During the year ended December 27, 1998, the Company implemented new
cost and productivity improvement measures designed to address current adverse
industry trends such as intense price competition from Asian suppliers and
decreased demand by certain customers supplying the personal computer markets -
in particular the hard disk drive (HDD) segment. These actions included the
consolidation of administrative functions, a 27% reduction in staffing, the
closing of two manufacturing plants in Mexico and the transfer of selected
manufacturing programs from Mexico to Thailand. As a result, the Company
incurred a special charge of approximately $1.6 million: $1.0 million related to
the workforce reduction and $0.6 million related to employee severance and
termination costs associated with the closing of the two plants in Mexico.
During the year ended December 27, 1998, the Company paid and charged to the
liability $0.6 million related to employee severance and lease termination costs
and $0.5 million related to workforce reduction involving 97 employees at its
Chandler facility, 5 employees at its U.K. facility and 77 employees at its
Mexico facility. The remaining accrual related to workforce reduction is
approximately $0.5 million and the Company believes it is adequate to cover the
remaining liabilities.

         NOTE 5 ACCOUNTS RECEIVABLE

Accounts receivable consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                        December 27,  December 31,
                                                            1998          1997
--------------------------------------------------------------------------------
<S>                                                       <C>          <C>     
Accounts receivable trade                                 $ 25,748     $ 33,331
Allowance for returns and doubtful accounts                 (1,001)      (1,750)
--------------------------------------------------------------------------------
                                                          $ 24,747     $ 31,581
--------------------------------------------------------------------------------
</TABLE>


                                       36
<PAGE>   37
         NOTE 6 INVENTORIES

Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                       December 27,   December 31,
                                                           1998          1997
--------------------------------------------------------------------------------
<S>                                                      <C>           <C>     
Raw material                                             $  7,437      $ 12,688
Work-in-process                                             3,743         8,849
Finished goods                                              1,105           595
--------------------------------------------------------------------------------
                                                           12,285        22,132
Allowance for obsolescence and excess inventory            (2,888)       (2,835)
--------------------------------------------------------------------------------
                                                         $  9,397      $ 19,297
--------------------------------------------------------------------------------
</TABLE>

         NOTE 7 PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                            December 27,   December 31,
                                                                               1998           1997
------------------------------------------------------------------------------------------------------
<S>                                                                           <C>            <C>     
Land                                                                          $  2,740       $  2,740
Buildings                                                                       11,923         10,845
Leasehold improvements                                                           4,772          4,312
Manufacturing equipment                                                         47,335         34,279
Computer and office equipment                                                    9,628          2,608
------------------------------------------------------------------------------------------------------
                                                                                76,398         54,784
Accumulated depreciation and amortization of capitalized lease obligations     (21,047)       (12,527)
------------------------------------------------------------------------------------------------------
                                                                              $ 55,351       $ 42,257
------------------------------------------------------------------------------------------------------
</TABLE>

Depreciation expense, including the amortization of capitalized lease
obligations, was $8.5 million, $6.5 million and $5.8 million for the years ended
December 27, 1998 and December 31, 1997 and 1996, respectively.

         NOTE 8 LINE OF CREDIT AND LONG-TERM DEBT

         On June 5, 1997, the Company entered into a new credit facility
arranged by BancBoston Securities, Inc., which included a number of banks as
lenders. The credit facility consisted of a $20.0 million, three-year revolving
line of credit and a $25.0 million, five-year term loan. Under the terms of the
credit facility, any outstanding balance bears interest at BankBoston,
prime interest rate or LIBOR plus an applicable margin ranging from 1.5% to
2.25% based on the Company achieving certain financial objectives at the end of
each quarter. At December 31, 1997, $25.0 million was outstanding under the term
loan and $7.0 million was outstanding under the revolving line of credit. The
weighted average interest rate at December 31, 1997 for the revolving line of
credit was 8.5%.

         In February 1998, the Company amended its existing credit facility to
more adequately meet its working capital requirements by increasing the existing
revolving line of credit from $20.0 million to $25.0 million. In addition, the
existing $25.0 million term loan was replaced with a $35.0 million term loan. In
July 1998, the Company reevaluated its financial needs and determined that
credit facility commitments of a $20.0 million revolving line of credit and a
$30.0 million term loan were sufficient to meet its liquidity requirements.
Accordingly, the Company canceled $10.0 million of existing credit facility
commitments, $5.0 million relating to the revolving line of credit and $5.0
million relating to the term loan.

         On October 30, 1998, the Company amended its existing credit facility
to revise certain financial covenants, reduce the term loan by $10.0 million and
revise the debt amortization schedule. Upon closing of the third amendment, the
$30.0 million term loan was reduced by $5.0 million to $25.0 million from
borrowings from the Company's revolving line of credit. The amendment required a
$5.0 million principal payment no later than January 20, 1999 (which was timely
remitted), plus four equal principal payments of $0.8 million each quarter
beginning with the quarter ending December 31, 1998 through the quarter ending
September 30, 1999, increasing to twelve equal principal payments of $1.3
million each quarter thereafter with the last payment due December 31, 


                                       37
<PAGE>   38
2002. Borrowing under the line of credit is limited to 80% of the aggregate
value of all eligible domestic accounts receivable plus 70% of the aggregate
value of all eligible foreign accounts receivable. Under the terms of the credit
facility, any outstanding balance bears interest at a Base Rate which is defined
as BankBoston N.A.'s prime rate plus 0.50% or LIBOR plus an applicable margin
ranging from 1.50% to 2.25%, based on the Company achieving certain financial
objectives at the end of each quarter. The credit facility is secured by all
assets of the Company and a pledge by the Company of 66 2/3% of the stock of its
subsidiaries. Under the third amendment to the credit agreement, the Company is
required to meet certain minimum revenue and profitability covenants, maintain
certain financial ratios and meet certain net worth and indebtedness tests for
which the Company was in compliance at December 27, 1998. The amended credit
facility prohibits the payment of dividends. In connection with the third
amendment, the Company issued to its lenders a warrant to purchase an aggregate
of 50,000 shares of Common Stock at an exercise price of $5.00 per share. The
warrant vested on March 14, 1999 (subject to certain conditions) and terminates
(if not sooner exercised) on December 29, 2002. The Company also granted to the
lenders certain customary demand and piggyback registration rights in connection
with the warrant. At December 27, 1998, $24.6 million was outstanding under the
term loan and $13.0 million was outstanding under the revolving line of credit.
The weighted average interest rate at December 27, 1998 for the revolving line
of credit was 8.6%.

         During February 1999, the Company failed to meet certain financial
covenants of the credit agreement discussed above and expects to fail to meet
another covenant at March 31, 1999. The lenders have rights to exercise certain
remedies under the agreement but have not chosen to do so to date. In accordance
with Statement of Financial Accounting Standards No. 78, Classification of
Obligations That Are Callable by the Creditor, the Company has classified all of
the outstanding balance under the credit agreement as a current liability.
Management of the Company has met with the lenders in an attempt to restructure
the credit facility, or otherwise satisfactorily resolve the defaults. It is not
possible, however, to predict at this time the success of management's efforts.
No assurance can be given that the outcome of the Company's negotiating efforts
with the lenders will not adversely affect the Company's business, financial
condition, results of operations and cash flows.

Long-term debt consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                         December 27,  December 31,
                                                                                             1998          1997
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                        <C>           <C>
Term loan agreement; interest at LIBOR + margin ranging from 1.50% to 2.25% (8.25% at
    December 27, 1998)                                                                     $ 24,550      $ 25,000
                                                                                                       
Capitalized lease obligations                                                                   132           189
-------------------------------------------------------------------------------------------------------------------
                                                                                             24,682        25,189
Less current maturities                                                                     (24,613)       (1,959)
-------------------------------------------------------------------------------------------------------------------
                                                                                           $     69      $ 23,230
-------------------------------------------------------------------------------------------------------------------
</TABLE>

         NOTE 9 ACCRUED LIABILITIES

Accrued liabilities consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                         December 27,  December 31,
                                                            1998          1997
----------------------------------------------------------------------------------
<S>                                                        <C>           <C>   
Salaries and benefits                                       $1,987        $3,259
Accrued interest                                               769           138
Accrued restructuring charges, current                         172           339
Accrued severance costs                                        500            --
Accrued relocation                                              92           429
Accrued commissions                                            304           346
Accrued SAP expenses                                           917            --
Other                                                        2,442         1,651
----------------------------------------------------------------------------------
                                                            $7,183        $6,162
----------------------------------------------------------------------------------
</TABLE>


                                       38
<PAGE>   39
         NOTE 10  COMMON STOCK AND EQUITY

PREFERRED STOCK The Company's certificate of incorporation authorizes the
issuance of 10 million shares of preferred stock, at $.01 par value,
undesignated as to powers, preferences, rights, limitations or restrictions. As
of December 27, 1998, no shares of preferred stock have been issued.

COMMON STOCK The number of shares of Common Stock reserved for future issuance
at December 27, 1998, was as follows:

<TABLE>
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                                       <C>
Employee and director stock options outstanding                                                             896,122
Reserved for future grants under the 1994 Stock Incentive Plan                                                7,615
1994 director stock options outstanding                                                                      36,000
Reserved for issuance under the Employee Stock Purchase Plan                                                172,982
1998 outstanding warrants, exercisable March 14, 1999                                                        50,000
-------------------------------------------------------------------------------------------------------------------

Total reserved for future issuance                                                                        1,162,719
-------------------------------------------------------------------------------------------------------------------
</TABLE>

In conjunction with the ADFlex U.K. acquisition, the Company issued 1,242,347
shares of restricted Common Stock. The holder agreed not to sell or otherwise
dispose of the shares for a two year period, which ended in January 1998.

In October 1998, in connection with the third amendment to the credit facility
(see Note 8), the Company issued to its lenders a warrant to purchase an
aggregate of 50,000 shares of Common Stock at an exercise price of $5.00 per
share. The warrant vested on March 14, 1999 (subject to certain conditions) and
terminates (if not sooner exercised) on December 29, 2002. The Company also
granted to the lenders certain customary demand and piggyback registration
rights in connection with the warrant.

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

Under the Company's 1993 Equity Incentive Plan (1993 Plan) adopted June 29,
1993, qualified employees received options to purchase 599,000 shares of Common
Stock. The options granted under this Plan were to vest over approximately four
years, but automatically vested at the time of the Company's initial public
offering on September 27, 1994. The remaining shares available for grant under
the 1993 Plan have been eliminated.

Under the 1994 Stock Incentive Plan (1994 Plan), qualified employees may receive
options to purchase the Company's common stock. The number of shares of Common
Stock available for issuance in any year under the Plan is equal to 3% of the
outstanding shares of Common Stock each January 1 during the term of the Plan.
In 1998, 263,054 shares were reserved for issuance. As part of the same
amendment, the stockholders approved an automatic grant to eligible non-employee
directors of an option to acquire 12,000 shares of Common Stock upon such
directors' initial election to the Company's Board of Directors and 3,000 shares
of Common Stock each year thereafter. Options granted to employees to date under
the 1994 Plan vest over a four year period from either the date of grant or one
year from the date of grant, and automatic options granted to directors vest
over a three year period from the date of grant.

On July 2, 1997, the Company canceled 92,250 options held by certain employees
issued under the 1994 Plan with an exercise price per share of $27.25 and
granted 92,250 options with an exercise price per share of $14.88 to the same
employees. The new options started a new vesting schedule over a four-year
period from the new date of grant. On June 22, 1998, the Company canceled
336,500 outstanding options granted on June 3, 1997, October 1, 1997 and April
7, 1998 (with an original exercise price of $15.50, $22.063 and $17.063 per
share, respectively) and approved the regrant and replacement of these options
with new options at an exercise price per share of $8.50, the fair market value
of the Company's Common Stock on the date of the Company's determination. The
new options vest over a four-year period from the new date of grant.

Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been 


                                       39
<PAGE>   40
determined as if the Company had accounted for its employee stock options 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 pricing model with the
following weighted-average assumptions for 1998: risk-free interest rates of
4.42%, dividend yields of 0%, volatility factor of the expected market price of
the Company's Common Stock of .871 and a weighted-average expected life of the
option of 5 years. The assumptions used in 1997 were: risk-free interest rates
of 5.24%, dividend yields of 0%, volatility factor of the expected market price
of the Company's Common Stock of .644 and a weighted-average expected life of
the option of 5 years. The assumptions used in 1996 were: risk-free interest
rates of 6.28%, dividend yields of 0%, volatility factor of the expected market
price of the Company's Common Stock of .684 and a weighted-average expected life
of the option of 5 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 the Company's 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 follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                                  Years ended
                                                                        December 27,         December 31,
                                                                           1998          1997             1996
----------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>          <C>               <C>      
Pro forma net income (loss)                                             $ (6,420)    $   7,262         $(25,962)
Pro forma net income (loss) per basic share                                (0.72)         0.83            (3.03)
Pro forma net income (loss) per diluted share                              (0.72)         0.82            (3.03)
----------------------------------------------------------------------------------------------------------------
</TABLE>

The effects of applying SFAS No. 123 for the years ended December 27, 1998 and
December 31, 1997 and 1996 are not likely to be representative of the effects on
reported net income for future years.

A summary of the Company's stock option activity and related information
follows:

<TABLE>
<CAPTION>
                                                    Year ended December 27,   Year ended December 31,   Year ended December 31,
                                                              1998                      1997                      1996
------------------------------------------------------------------------------------------------------------------------------
                                                                  Weighted                  Weighted                  Weighted
                                                                  Average                   Average                   Average
                                                                  Exercise                  Exercise                  Exercise
                                                     Options        Price      Options        Price      Options        Price
                                                    ----------------------    ----------------------    ----------------------
<S>                                                 <C>           <C>         <C>           <C>         <C>           <C>    
Outstanding - beginning of year                       684,761      $ 14.08      555,162      $ 14.52      634,363      $ 12.18
Granted                                               798,751        12.59      400,750        15.78      317,725        10.55
Exercised                                             (43,873)        6.49      (67,150)       10.74     (260,612)        0.77
Forfeitures/Expirations                              (543,517)       16.28     (204,001)       19.74     (136,314)       19.74
                                                    ----------------------    ----------------------    ----------------------
Outstanding - end of year                             896,122        11.86      684,761        14.08      555,162        14.52
                                                    ----------------------    ----------------------    ----------------------
Exerciseable at year end                              186,750      $ 13.62      136,460      $ 11.92      149,608      $ 15.31
                                                    ----------------------    ----------------------    ----------------------
Weighted-average fair value of options                                                                                
granted during the year:                                                                                              
                                                                                                                      
Incentive Stock Options granted under the 1994                                                               
Plan                                                $    8.88                                $  8.93                   $  6.87
                                                                                                                      
Non-qualified Stock Options granted under the                                                                
1994 Plan                                           $    8.53                                $ 10.00                   $  5.93
</TABLE>

Exercise prices for options outstanding as of December 27, 1998 ranged from
$0.50 to $27.25. The weighted-average remaining contractual life of those
options is 8.7 years.

DIRECTOR STOCK OPTIONS On October 31, 1996, the Company granted two outside
directors an option to purchase 6,000 shares of Common Stock each at an exercise
price of $8.75. The options vest over a three-year period. On November 20, 1996,
the Company granted an option to purchase 12,000 shares of Common Stock at an
exercise price of $8.00 per share to a newly appointed outside director. The
option vests over a four-year period. On April 22, 1997, the Company granted two
outside directors an option to purchase 3,000 shares of Common Stock


                                       40
<PAGE>   41
each at an exercise price of $14.00. The options vest over a three-year period.
On April 28, 1998, the Company granted three outside directors an option to
purchase 3,000 shares of Common Stockeach at an exercise price of $20.00. The
options vest over a three-year period. All of the above options to directors
were granted under the 1994 Plan.

EMPLOYEE STOCK PURCHASE PLAN On June 2, 1994, the Company adopted and the
stockholders approved the 1994 Employee Stock Purchase Plan (the Purchase Plan)
and the Company reserved 200,000 shares of Common Stock for sale to employees.
The Purchase Plan became effective upon the Company's initial public offering.
On April 22, 1997, the Company adopted and the stockholders approved an
amendment to the Purchase Plan and the Company reserved an additional 300,000
shares of Common Stock for sale to employees. The Purchase Plan allows eligible
employees of the Company to purchase shares of Common Stock generally at 85% of
the lower of the fair market value per share of Common Stock on (i) the first
day of the offering period or (ii) the purchase date. Contributions are limited
to 15% of an employee's eligible compensation, subject to a maximum fair value
annual purchase of $25,000. There were 115,904, 67,814 and 90,584 shares issued
under the Purchase Plan during 1998, 1997 and 1996, respectively.

         NOTE 11  EMPLOYEE BENEFIT PLANS

The Company has a 401(k) employee salary deferral plan that allows voluntary
contributions by all full-time employees of the Company's United States and
Mexico operations upon commencement of employment. Under the plan, eligible
employees may contribute up to 18% of their pre-tax earnings, not to exceed the
Internal Revenue Service annual contribution limit ($10,000 for 1998). The
Company may make contributions each year up to a maximum of 4% of an employee's
total compensation. Total Company contributions were $0.1 million for each of
the years ended December 27, 1998 and December 31, 1997 and 1996.

The Company has adopted a profit sharing plan for its United States and Mexico
employees to provide a financial incentive. The Company makes contributions to
the profit sharing plan in an amount equal to 5% of pre-tax profits. Total
expenses pursuant to this plan for the year ended December 31, 1997 were $0.7
million. No expenses were recorded pursuant to this plan for the years ended
December 27, 1998 and December 31, 1996.

The Company has adopted a management bonus plan to provide an additional
financial incentive for management. No expenses were recorded pursuant to this
plan for the year ended December 27, 1998. Total expenses pursuant to this plan
for the years ended December 31, 1997 and 1996 were $1.3 million and $0.1
million, respectively.

         NOTE 12  SHAREHOLDER RIGHTS PLAN

On July 10, 1996, the Board of Directors adopted a Shareholder Rights Plan (the
Plan). Under the terms of the Plan, each shareholder of record at the close of
business on July 22, 1996, received as a dividend one Preferred Share purchase
right (Right) for each share of Common Stock of the Company. Each Right entitles
the registered holder to purchase from the Company one one-hundredth of a share
of Series A Participating Preferred Stock of the Company at a price of $100.00
per share, subject to adjustment. The Rights will separate from the Common Stock
and become exerciseable following the twentieth day after a person or group
acquires beneficial ownership of more than 20.5% of the Company's Common Stock
or announces a tender or exchange offer, the consummation of which would result
in ownership by a person or group of more than 20.5% of the Company's Common
Stock. Upon such events, the Company's Board of Directors may exchange the
Rights for one share of Common Stock per Right. Any unexercised Rights not
exchanged will have the right to receive Common Stock having a value of two
times the purchase price of the Right. The Rights expire on July 21, 2006,
unless redeemed at the Company's option for $0.001 per Right at any time on or
prior to the twentieth day after public announcement that a person or group has
acquired beneficial ownership of more than 20.5% of the Common Stock. Preferred
shares purchasable upon exercise of the right will not be redeemable. Each
Preferred Share will be entitled to an aggregate dividend of 100 times the
dividend declared per share of Common Stock. Preferred shares will have 100
votes.


                                       41
<PAGE>   42
         NOTE 13  INCOME TAXES

Income taxes include the following (in thousands):                          

<TABLE>
<CAPTION>
                                                                                       Years ended
                                                                          December 27,          December 31,
                                                                             1998           1997           1996
----------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>             <C>            <C>
Federal:
  Current                                                                  $     -        $  (305)       $   (77)
  Deferred                                                                  (2,079)         3,452         (9,623)
----------------------------------------------------------------------------------------------------------------
                                                                            (2,079)         3,147         (9,700)
State:
  Current                                                                        -              -             54
  Deferred                                                                     (33)           313           (149)
----------------------------------------------------------------------------------------------------------------
                                                                               (33)           313            (95)
Foreign, current
                                                                               263            358             41
----------------------------------------------------------------------------------------------------------------
                                                                           $(1,849)       $ 3,818        $(9,754)
================================================================================================================
</TABLE>

The tax benefits associated with certain stock options reduced taxes currently
payable by $0.1 million, $0.4 million and $0.7 million for 1998, 1997 and 1996,
respectively. Such benefits are credited to additional paid-in capital when
realized.

Income tax expense (benefit) differs from the amount computed by applying the
federal statutory rate for the years ended December 27, 1998 and December 31,
1997 and 1996, respectively, as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                           Years Ended
                                                                                December 27,     December 31,
                                                                                   1998         1997       1996
-----------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>          <C>        <C>
Federal income tax expense (benefit) calculated at the statutory rate           $ (2,245)    $  4,219   $(12,172)
State income tax (benefit), net of federal effect                                   (218)         409        (62)
Foreign losses (income) with no tax benefit (charge)                                (416)        (648)     2,438
In-process technology                                                               (346)        (346)       (54)
Research and development credit                                                        -            -       (100)
Other, net                                                                         1,376          184        196
-----------------------------------------------------------------------------------------------------------------

Income tax expense (benefit)                                                    $ (1,849)    $  3,818   $ (9,754)
-----------------------------------------------------------------------------------------------------------------
</TABLE>

Deferred taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of deferred tax
assets and liabilities as of December 27, 1998 and December 31, 1997 are as
follows (in thousands):

<TABLE>
<CAPTION>
                                                          December 27,   December 31,
                                                              1998           1997
-------------------------------------------------------------------------------------
<S>                                                       <C>            <C>
Deferred tax assets:
   Tax benefits related to restructuring                    $ 3,327        $ 5,279
   Inventory valuation                                        1,148          1,118
   Accrued liabilities                                          781            519
   Allowance for returns and doubtful accounts                  254            358
   State tax NOL carryforward                                   131             14
   Federal tax NOL carryforward                               3,243              -
   Alternative minimum tax credit                               443            443
   Other state credits                                           29             29
-------------------------------------------------------------------------------------
                                                              9,356          7,760
Deferred tax liabilities:
   Tax versus financial reporting depreciation                  847          1,302
   Prepaid expenses and other                                   111            172
-------------------------------------------------------------------------------------
                                                                958          1,474
-------------------------------------------------------------------------------------
Net deferred tax asset                                        8,398          6,286
Plus (minus) deferred tax liability (asset) - current        (2,072)        (1,823)
-------------------------------------------------------------------------------------

Deferred tax asset, non-current                             $ 6,326        $ 4,463
-------------------------------------------------------------------------------------
</TABLE>


                                       42
<PAGE>   43
Management has concluded that no valuation allowance is required based on its
assessment that future levels of taxable income will, more likely than not, be
sufficient to realize the tax benefits.

At December 27, 1998, the Company has a federal and state net operating loss of
$9.5 million and $4.0 million, respectively, which are available for carryover
to future periods. The federal net operating loss begins expiring in the year
2019 while the state net operating loss begins expiring in 2003. In addition,
the Company has $0.4 million of alternative minimum tax credit carryovers at
December 27, 1998 which do not expire.

The Internal Revenue Service (IRS) has concluded a field audit of the Company's
income tax returns for the tax year 1993. In connection with this audit, the IRS
issued a 90-day letter in January 1998 proposing adjustments to the Company's
income and tax credits for the year, which would result in an additional
assessment of $1.6 million, excluding interest. The major proposed adjustment,
which relates to the allocation of the purchase price of assets obtained from
Rogers Corporation (Rogers) pursuant to acquisition agreements between the
Company and Rogers, would extend the period over which the tax benefit for the
purchase price would be recovered. The Company and the IRS have reached a
tentative agreement to settle all outstanding issues relating to this audit. The
terms of the agreement would require a payment of approximately $0.6 million,
excluding interest, most of which will be recoverable by amending subsequent
years' tax returns. The Company believes that the current tax provision is
adequate to cover the estimated liability and the final disposition of these
matters will not have a material adverse effect on the Company's business,
financial condition, results of operations and cash flows.

Pre-tax income (loss) from foreign operations was $1.8 million, $3.2 million and
($38.8) million for the years ended December 27, 1998 and December 31, 1997 and
1996, respectively. The residual United States tax liability for unremitted
foreign earnings is immaterial.



         NOTE 14  COMMITMENTS AND CONTINGENCIES

LEASE COMMITMENTS The Company leases its facilities and equipment under capital
and operating leases which expire at various dates through January 15, 2008. As
of December 27, 1998, the future minimum lease commitments under these leases
are payable as follows (in thousands):

<TABLE>
<CAPTION>
                                                                              Capitalized                  Operating
                                                                                Leases                       Leases
--------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>                         <C>
   1999                                                                       $       74                  $   1,451
   2000                                                                               40                      1,198
   2001                                                                               36                      1,175
   2002                                                                                -                      1,105
   2003                                                                                -                        624
   2004 and thereafter                                                                                          526
--------------------------------------------------------------------------------------------------------------------
Total minimum lease payments                                                         150                  $   6,079
Less amounts representing interest                                                   (18)
--------------------------------------------------------------------------------------------------------------------
Present value of future net minimum lease payments                            $      132
--------------------------------------------------------------------------------------------------------------------
</TABLE>


Rent expense for all operating leases for the years ended December 27, 1998 and
December 31, 1997 and 1996 was $2.3 million, $3.9 million and $4.2 million,
respectively. At December 27, 1998 and December 31, 1997, the Company had
capitalized $0.8 million and $0.7 million, respectively, related to assets
acquired under capitalized lease agreements in the accompanying balance sheet.

ENVIRONMENTAL REMEDIATION CONTINGENCY The nature of the Company's business
exposes the Company to potential environmental remediation liabilities arising
from the manufacture, use and disposal of hazardous materials used to
manufacture flex interconnect products. Management believes that any cost
associated with maintaining the Company's compliance with current environmental
remediation laws will not have a material adverse effect on the Company's
financial statements.

MEXICAN UNION RELATIONS At December 27, 1998, 1,990 of the Company's employees
located in Mexico were represented by a labor union and covered by a collective
bargaining agreement expiring December 31, 1999 that is subject to revision
annually under Mexican labor laws. The Company has not experienced any
employee-


                                       43
<PAGE>   44
related work stoppage and believes that its relationship with its union and
other employees is good, but there can be no assurance that the Company will be
able to successfully negotiate with the labor union in the future.

         NOTE 15  GEOGRAPHIC AND MAJOR CUSTOMER INFORMATION

The Company operates in one business segment which is the manufacture and sale
of flexible circuit interconnect solutions. Financial information summarized by
geographic area for the years ended December 27, 1998 and December 31, 1997 is
as follows (in thousands):

<TABLE>
<CAPTION>
                                      Years Ended
                              December 27,     December 31,
                                  1998             1997
----------------------------------------------------------
<S>                           <C>              <C>
Revenue:
  North America                $ 135,000        $ 157,743
  Europe                           2,509           38,410
  Southeast Asia                  47,350           28,430
  Eliminations                   (14,762)         (10,705)
----------------------------------------------------------
Total                            170,097          213,878
Operating Income (loss):
  North America                $  (5,096)       $  11,292
  Europe                          (1,974)             392
  Southeast Asia                   3,364            2,927
  Eliminations                       168              (31)
----------------------------------------------------------
Total                             (3,538)          14,580
Total Assets:
  North America                $ 139,354        $ 141,473
  Europe                          12,570           13,721
  Southeast Asia                   9,582            9,672
  Eliminations                   (53,202)         (50,666)
----------------------------------------------------------
Total                            108,304          114,200
</TABLE>

At any given time, sales to certain customers may account for a significant
portion of the Company's business. Customers who individually represent 10% or
more of net sales for the respective year are as follows:


<TABLE>
<CAPTION>
                                         Years ended
                           December 27,           December 31,
                              1998            1997            1996
---------------------------------------------------------------------------------------------------------------------------
<S>                        <C>                <C>             <C>  
IBM                           16.0%           11.5%           11.7%
Seagate                       12.4%           21.9%           34.9%
</TABLE>


Export sales during the years ended December 27, 1998 and December 31, 1997 and
1996 were $56.2 million, $66.6 million and $26.6 million, respectively.

         NOTE 16  RELATED PARTY TRANSACTIONS

ACQUISITION AGREEMENTS WITH ROGERS CORPORATION Pursuant to the asset purchase
agreements entered into on June 28, 1993 between the Company and Rogers
Corporation (Rogers) whereby the Company purchased the Flexible Interconnect
Division (the Predecessor) of Rogers, Rogers retained certain existing and
potential liabilities. In particular, Rogers retained all liabilities resulting
from, among other things, the creation, storage, discharge, use or handling of
hazardous or toxic substances by the Predecessor that may exist on or about the
Company's facilities in Arizona and Mexico prior to the acquisition.

In connection with the acquisition, the Company entered into a building lease
with an affiliate of Rogers to lease the Predecessor's corporate headquarters
and U.S. manufacturing facility. The lease agreement for the Company's U.S.
facility was for five years and provided for fixed payments of $0.5 million per
annum for the first three years and mutually agreed market rates for the
remaining two years. As provided for in the lease agreement, the Company
exercised its option to renew the lease for an additional five years in June
1997, twelve months prior to the lease expiration date. The renewed lease
provides for fixed payments of $0.8 million per annum for years four through
eight and mutually agreed-upon market rates adjusted for the Consumer Price
Index for years nine and ten. Total 


                                       44
<PAGE>   45
rent expense paid to Rogers was $0.8 million for the year ended December 27,
1998 and $0.6 million and $0.5 million for each of the years ended December 31,
1997 and 1996, respectively.

AFFILIATION WITH XYRATEX The Company derived 0.1% and 1.1% of its net sales in
1998 and 1997, respectively from sales to Xyratex, a major shareholder of the
Company with a representative on the Company's Board of Directors. Through
September 30, 1997, the Company leased the ADFlex U.K. manufacturing facility
from Xyratex. Total lease payments made to Xyratex in 1997 totaled $1.5 million.
In addition, $0.5 million was paid to Xyratex in 1997 for administrative
services.

AFFILIATION WITH HANA MICROELECTRONICS In August 1996, the Company established a
joint venture located in Lamphun, Thailand with Hana. The joint venture was 80%
owned by the Company and 20% owned by Hana. The Company purchased the remaining
20% equity interest in ATL from Hana in September 1997. The Company entered into
a building lease with Hana on October 1, 1996 to lease the Thailand
manufacturing facility. The lease term expired on March 31, 1999. Total lease
payments made to Hana in 1998 and 1997 totaled $0.6 million and $0.4 million,
respectively. In addition, $0.3 million was paid to Hana in 1997 for
administrative services. No administrative service payments were made in 1998.


                                       45
<PAGE>   46
         NOTE 17  QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                          First          Second            Third           Fourth
(in thousands)                           Quarter         Quarter          Quarter          Quarter            Year
--------------------------------------------------------------------------------------------------------------------
<S>                                     <C>             <C>              <C>              <C>              <C>
Net sales
   1998                                 $  50,023       $  44,304        $  36,142        $  39,628        $ 170,097
   1997                                    48,221          56,244           55,058           54,355          213,878
   1996                                    38,082          35,031           36,898           46,825          156,836
Gross profit
   1998                                    10,518           1,153            1,586            3,864           17,121
   1997                                     7,432           9,090           10,145           11,385           38,052
   1996                                     7,198           5,244             (295)           6,416           18,563
Net income (loss)
   1998                                     2,631          (3,574)(2)       (2,610)          (1,200)(2)       (4,753)(2)
   1997                                       873           1,880            2,597            3,246            8,596
   1996                                       840            (660)         (25,663)(1)          459          (25,024)(1)
Net income (loss) per basic share
   1998                                       .30            (.40)            (.29)            (.13)            (.54)
   1997                                       .10             .22              .30              .37             . 99
   1996                                       .10            (.08)           (2.98)             .05            (2.92)
Net income (loss) per diluted share
   1998                                       .30            (.40)            (.29)            (.13)            (.54)
   1997                                       .10             .21              .29              .36              .97
   1996                                       .10            (.08)           (2.98)             .05            (2.92)
</TABLE>

(1)      Includes charges of $29.2 million related to restructuring of the
         Company's U.K. operations.

(2)      During the quarter ended June 30, 1998, $1.1 million charges were
         incurred related to work force reduction and the closing of two plants
         in Mexico in an effort to address current adverse industry trends and
         during the quarter ended December 27, 1998, charges of $0.5 million
         were incurred related to work force reduction. See Note 4.


                                       46
<PAGE>   47
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS



         The Stockholders and Board of Directors of ADFlex Solutions, Inc.

We have audited the accompanying consolidated balance sheets of ADFlex
Solutions, Inc. (the Company) at December 27, 1998 and December 31, 1997, and
the related consolidated statements of operations, equity and cash flows for
each of the three years in the period ended December 27, 1998. 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 consolidated financial statements of the Company referred to
above present fairly, in all material respects, the consolidated financial
position of ADFlex Solutions, Inc. at December 27, 1998 and December 31, 1997,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared on the
basis that the Company will continue as a going concern. The Company has failed
to meet certain provisions of its credit agreement in February 1999 and expects
to fail to meet another covenant at March 31, 1999. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying 1998 consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.

                                                   /s/ Ernst & Young LLP



Phoenix, Arizona
January 25, 1999, except as to
basis of presentation in Note 1
   to the consolidated financial statements
   as to which the date is April 2, 1999.


                                       47
<PAGE>   48
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

         Not applicable.


                                       48
<PAGE>   49
         PART III

         Certain information required by Part III is omitted from this Report by
virtue of the fact that the Company will file with the Securities and Exchange
Commission (the "SEC"), pursuant to Regulation 14A, within 120 days after the
end of the fiscal year covered by this Report, a definitive proxy statement (the
"Proxy Statement") relating to the Company's Annual Stockholders' Meeting.
Certain information to be included in the Proxy Statement is incorporated herein
by reference.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         The information concerning the Company's directors and executive
officers and compliance with Section 16(a) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), required by this item will be contained
in the sections captioned "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" of the Proxy Statement, and is incorporated
herein by reference.

ITEM 11. EXECUTIVE COMPENSATION.

         The information required by this item will be contained in the sections
captioned "Executive Compensation," "Compensation Committee Report on Executive
Compensation" and "Comparison of Stock Performance" of the Proxy Statement and,
except as noted below, is incorporated herein by reference.

         Notwithstanding anything to the contrary set forth in any of the
Company's previous filings under the Securities Act of 1933, as amended, or the
Exchange Act that might incorporate future filings, including this Report on
Form 10-K, the "Compensation Committee Report on Executive Compensation" and
"Comparison of Stock Performance" graph in the Proxy Statement shall not be
incorporated by reference into any such filings, and such information shall be
entitled to the benefits provided in Item 402(a)(9) of SEC Regulation S-K.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The information required by this item will be contained in the section
captioned "Security Ownership of Certain Beneficial Owners and Management" of
the Proxy Statement, and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The information required by this item will be contained in the section
captioned "Certain Relationships and Related Transactions" of the Proxy
Statement, and is incorporated herein by reference.


                                       49
<PAGE>   50
         PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.


(a)      1.  CONSOLIDATED FINANCIAL STATEMENTS

         (i)      Report of Independent Auditors

         (ii)     Consolidated Balance Sheets - December 27, 1998 and December
                  31, 1997

         (iii)    Consolidated Statements of Operations - Years ended December
                  27, 1998 and December 31, 1997 and 1996

         (iv)     Consolidated Statements of Equity - Years ended December 27,
                  1998 and December 31, 1997 and 1996

         (v)      Consolidated Statements of Cash Flows - Years ended December
                  27, 1998 and December 31, 1997 and 1996

         (vi)     Notes to Consolidated Financial Statements



         2.  FINANCIAL STATEMENT SCHEDULE.

         The following financial statement schedule of ADFlex Solutions, Inc.
for the years ended December 27, 1998 and December 31, 1997 and 1996 is filed as
part of this Report and should be read in conjunction with the Consolidated
Financial Statements.

         Independent Auditor's Report on Schedule                            S-1
         Schedule  II - Valuation and Qualifying Accounts and Reserves       S-2

         Schedules not listed above have been omitted because they are not
applicable or are not required or because the information required to be set
forth therein is included in the Consolidated Financial Statements or Notes
thereto.

         2. EXHIBITS.

              Number       Description

              2.1(1)       Asset Purchase Agreement between the Registrant and
                           Rogers Corporation dated June 28, 1993

              2.2(1)       Asset Purchase Agreement between ADFlex Mexico S.A.
                           de C.V. ("ADMex") and Rogers Mexicana, S.A. de C.V.
                           dated June 28, 1993

              2.3(2)       Share Sale and Purchase Agreement, dated January 7,
                           1996, between the Registrant and Havant International
                           Holdings Limited

              2.4(2)       Letter, dated January 7, 1996, constituting the
                           Disclosure Letter under the Share Sale and Purchase
                           Agreement included as Exhibit 2.3

              3.1(1)       Restated Certificate of Incorporation

              3.2(1)       Bylaws

              3.3(5)       Amendment to Bylaws Adopted January 31, 1996

              4.1(1)       Specimen Common Stock Certificate

              4.2(6)       Rights Agreement, dated as of July 10, 1996, between
                           the Registrant and First National Bank of Boston, NA,
                           including the Certificate of Designation of Rights,
                           Preferences and Privileges of Series A Participating
                           Preferred Stock, the form of Rights Certificate and
                           the Summary of Rights attached thereto as Exhibits A,
                           B and C, respectively.

              *10.1(1)     1993 Equity Incentive Plan

              *10.2(1)     1994 Stock Incentive Plan


                                       50
<PAGE>   51
              *10.3(3)     Amendment No. 1 to 1994 Stock Incentive Plan,
                           effective as of April 18, 1995

              *10.4        Amendment No. 2 to 1994 Stock Incentive Plan,
                           effective August 26, 1996

              *10.5(1)     401(k) Profit Sharing Plan

              *10.6(1)     1994 Employee Stock Purchase Plan

              *10.7(1)     Form of Indemnification Agreement entered into
                           between the Registrant and its Directors

              10.8(1)      Equipment Lease Agreement, dated February 23, 1994,
                           between the Registrant and Ally Capital Corporation

              10.9(1)      Registration Rights Agreement, dated March 31, 1994,
                           among the Registrant, AMP Incorporated, Ampersand and
                           Ampersand II

              10.10(1)     Letter, dated June 15, 1994, between the Registrant
                           and Rogers Corporation

              *10.12(1)    Stock Option Agreement, dated June 2, 1994, between
                           the Registrant and Steve Sanghi 

              10.15(1)     Lease, dated June 28, 1993, between the Registrant
                           and TL Properties, Inc.
              
              10.16(1)     Noncompetition and Nondisclosure Agreement, dated
                           June 28, 1993, between the Registrant and Rogers
                           Corporation

              10.17(1)     FID Intellectual Property Assignment and License
                           Agreement, dated June 28, 1993, between the
                           Registrant and Rogers Corporation

              10.18(1)     Joint and Several Guaranty, among the Registrant,
                           ADFlex Mexico S.A. de C.V., Rogers Corporation and TL
                           Properties, Inc.

              *10.22(1)    ADFlex Solutions, Inc. Profit Sharing Bonus Plan

              *10.23(1)    ADFlex Solutions, Inc. Management Bonus Plan

              10.25(1)     First Amendment to Lease, dated June 1994, between
                           the Registrant and TL Properties, Inc.

              10.26(2)     Deed of Tax Covenant, dated January 7, 1996, between
                           the Registrant and Havant International Holdings
                           Limited

              10.28(2)     Registration Rights and Standstill Agreement, dated
                           January 7, 1996, between the Registrant and Havant
                           International Holdings Limited

              10.29(2)     License Agreement, dated January 8, 1996, between
                           Havant International Limited and Polene Limited

              10.32(2)     Assignment of Intellectual Property, dated January 8,
                           1996, between Polene Limited and Havant International
                           Limited

              10.33(2)     Agreement for the Sale and Purchase of the Businesses
                           and Assets of Havant International Limited, dated
                           January 3, 1996, between Havant International Limited
                           and Polene Limited

              10.34(2)     Agreement for the Sale of the Debtors and the
                           Assumption of Certain of the Liabilities of Havant
                           International Limited, dated January 4, 1996, between
                           Havant International Limited and Polene Limited

              10.37(2)     Corporate Guarantee, dated January 7, 1996, by the
                           Registrant in favor of IBM United Kingdom Limited and
                           International Business Machines Corporation

              10.38(2)     Operating Confidentiality Agreement, dated January 3,
                           1996, between Havant International Limited and Polene
                           Limited

              10.39(2)     Deed of Assignment of UK Patent Applications, dated
                           January 8, 1996, between Polene Limited and Havant
                           International Limited

              10.40(2)     Deed of Assignment of Non-UK Patent Applications,
                           dated January 8, 198, between Polene Limited and
                           Havant International Limited

              10.41(4)     Bilateral Purchase and Sale Agreement, dated August
                           31, 1995, among Telson, S.A. de C.V., Zenith
                           Electronics Corporation, ADFlex Mexico S.A. de C.V.
                           and the Registrant

              10.50(7)     Equity Purchase Agreement dated September 26,1997
                           between the Registrant and Hana Microelectronics
                           Public Co., Ltd.

              10.51(7)     Promissory Note dated September 30, 1997 between the
                           Registrant and Hana Microelectronics Public Co., Ltd.

              10.53 (8)    Collective Bargaining Contract dated December 10,
                           1997 (Translation)

              10.54 (8)    Compensatory Control Agreement dated January 22, 1997
                           between the Registrant and Rolando C. Esteverena.

              10.56 (9)    Third Amendment to Credit Agreement, dated October
                           30, 1998, among the Registrant, BankBoston, N.A. and
                           BankBoston, N.A. as agent for Lenders

              10.57        Fourth Amendment to Credit Agreement, dated January
                           15, 1999, among the


                                       51
<PAGE>   52
                           Registrant, BankBoston, N.A. and BankBoston, N.A. as
                           agent for Lenders

              10.58        Fifth Amendment to Credit Agreement, dated February
                           19, 1999, among the Registrant, BankBoston, N.A. and
                           BankBoston, N.A. as agent for Lenders

              16.1(1)      Letter from KPMG Peat Marwick

              21.1         Subsidiaries of the Registrant

              23.1         Consent of Ernst & Young LLP



(1) Incorporated by reference from the Company's Registration Statement on Form
S-1 (No. 33-80324) or amendments thereto, filed with the Securities and Exchange
Commission on June 16, 1994.

(2) Incorporated by reference from the Company's Current Report on Form 8-K
dated January 7, 1996.

(3) Incorporated by reference from the Company's Form 10-Q for the quarter ended
September 30, 1995.

(4) Incorporated by reference from the Company's Form 10-Q for the quarter ended
September 30, 1995.

(5) Incorporated by reference from the Company's Form 10-K for the fiscal year
ended December 31, 1995.

(6) Incorporated by reference from the Company's Form 8-K dated July 10, 1996.

(7) Incorporated by reference from the Company's Form 10-Q for the quarter ended
September 30, 1997.

(8) Incorporated by reference from the Company's Form 10-K for the fiscal year
ended December 31, 1997.

(9) Incorporated by reference from the Company's Form 10-Q for the quarter ended
September 30, 1998.

* Constitutes a management contract or compensatory plan or arrangement.

(b) REPORTS ON FORM 8-K.

         None.


                                       52
<PAGE>   53
         SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                 ADFLEX SOLUTIONS, INC.
                                        (Registrant)

Date: April 5, 1999              By /s/ Rolando Esteverena
                                 Rolando C. Esteverena
                                 President, Chief Executive Officer and Director

         Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Name                                       Title                                           Date
---------------------------------------    --------------------------------------------    ----------------------
<S>                                        <C>                                             <C>
/s/ Rolando C. Esteverena
Rolando C. Esteverena                      President, Chief Executive Officer and          April 5, 1999
                                           Director (Principal Executive Officer)

/s/ Donald E. Frederick
Donald E. Frederick                        Vice President, Chief Financial Officer,        April 5, 1999
                                           Secretary (Principal Financial Officer and
                                           Principal Accounting Officer)

/s/ Steve Sanghi                         
Steve Sanghi                               Director                                        April 5, 1999

/s/ Richard P. Clark                    
Richard P. Clark                           Director                                        April 5, 1999

/s/ William Kennedy Wilkie
William Kennedy Wilkie                     Director                                        April 5, 1999

/s/ Wade Meyercord
Wade Meyercord                             Director                                        April 5, 1999
</TABLE>


                                       53
<PAGE>   54
                Report of Ernst & Young LLP, Independent Auditors

     The Stockholders and Board of Directors of ADFlex Solutions, Inc.

We have audited the accompanying consolidated balance sheets of ADFlex
Solutions, Inc. (the Company) at December 27, 1998 and December 31, 1997, and
the related consolidated statements of operations, equity and cash flows for
each of the three years in the period ended December 27, 1998, and have issued
our report thereon dated January 25 ,1999, except as to basis of presentation in
Note 1 to the consolidated financial statements as to which the date is April
2, 1999. Our audits also included the financial statement schedule listed in
Item 14(a). This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.

As discussed in Note 1 to the consolidated financial statements, the Company
has failed to meet certain provisions of its credit agreement in February 1999
and expects to fail to meet another covenant at March 31, 1999. These 
conditions raise substantial doubt about the Company's ability to continue as 
a going concern. Management's plans as to those matters are also described in
Note 1 to the consolidated financial statements. The 1998 consolidated 
financial statements and the accompanying schedule do not include any 
adjustments to reflect the possible future effects on the recoverability and 
classification of assets or the amounts and classification of liabilities 
that may result from the outcome of this uncertainty.

                                                   /s/ Ernst & Young LLP


Phoenix, Arizona
January 25, 1999, except as to
basis of presentation in Note 1
to the consolidated financial statements
 as to which the date is April 2, 1999.


                                       54
<PAGE>   55
                                   SCHEDULE II

                             ADFLEX SOLUTIONS, INC.

                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

          YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 31, 1997 AND 1996
                                 (in thousands)


<TABLE>
<CAPTION>
                                                        Beginning           Charges to                               Ending
                                                         Balance             Costs and          Deductions           Balance
                                                                             Expenses
------------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                 <C>                 <C>                  <C>
 1996
Allowance for Returns and Doubtful Accounts               $  642              $1,292              $1,323              $  611
                                                                                                                      
 1997                                                                                                                 
Allowance for Returns and Doubtful Accounts                  611               1,817                 678               1,750
Allowance for Obsolescence and Excess Inventory (1)        1,401               1,956                 522               2,835
                                                                                                                      
 1998                                                                                                                 
Allowance for Returns and Doubtful Accounts                1,750               2,411               3,160               1,001
Allowance for Obsolescence and Excess Inventory (1)        2,835               3,351               3,298               2,888
</TABLE>



(1) 1996 Allowance for Obsolescence and Excess Inventory balances are not
presented due to immateriality.
<PAGE>   56
                                 EXHIBIT INDEX


              Number       Description

              2.1(1)       Asset Purchase Agreement between the Registrant and
                           Rogers Corporation dated June 28, 1993

              2.2(1)       Asset Purchase Agreement between ADFlex Mexico S.A.
                           de C.V. ("ADMex") and Rogers Mexicana, S.A. de C.V.
                           dated June 28, 1993

              2.3(2)       Share Sale and Purchase Agreement, dated January 7,
                           1996, between the Registrant and Havant International
                           Holdings Limited

              2.4(2)       Letter, dated January 7, 1996, constituting the
                           Disclosure Letter under the Share Sale and Purchase
                           Agreement included as Exhibit 2.3

              3.1(1)       Restated Certificate of Incorporation

              3.2(1)       Bylaws

              3.3(5)       Amendment to Bylaws Adopted January 31, 1996

              4.1(1)       Specimen Common Stock Certificate

              4.2(6)       Rights Agreement, dated as of July 10, 1996, between
                           the Registrant and First National Bank of Boston, NA,
                           including the Certificate of Designation of Rights,
                           Preferences and Privileges of Series A Participating
                           Preferred Stock, the form of Rights Certificate and
                           the Summary of Rights attached thereto as Exhibits A,
                           B and C, respectively.

              *10.1(1)     1993 Equity Incentive Plan

              *10.2(1)     1994 Stock Incentive Plan
               
              *10.3(3)     Amendment No. 1 to 1994 Stock Incentive Plan,
                           effective as of April 18, 1995

              *10.4        Amendment No. 2 to 1994 Stock Incentive Plan,
                           effective August 26, 1996

              *10.5(1)     401(k) Profit Sharing Plan

              *10.6(1)     1994 Employee Stock Purchase Plan

              *10.7(1)     Form of Indemnification Agreement entered into
                           between the Registrant and its Directors

              10.8(1)      Equipment Lease Agreement, dated February 23, 1994,
                           between the Registrant and Ally Capital Corporation

              10.9(1)      Registration Rights Agreement, dated March 31, 1994,
                           among the Registrant, AMP Incorporated, Ampersand and
                           Ampersand II

              10.10(1)     Letter, dated June 15, 1994, between the Registrant
                           and Rogers Corporation

              *10.12(1)    Stock Option Agreement, dated June 2, 1994, between
                           the Registrant and Steve Sanghi 



<PAGE>   57

              10.15(1)     Lease, dated June 28, 1993, between the Registrant
                           and TL Properties, Inc.
              
              10.16(1)     Noncompetition and Nondisclosure Agreement, dated
                           June 28, 1993, between the Registrant and Rogers
                           Corporation

              10.17(1)     FID Intellectual Property Assignment and License
                           Agreement, dated June 28, 1993, between the
                           Registrant and Rogers Corporation

              10.18(1)     Joint and Several Guaranty, among the Registrant,
                           ADFlex Mexico S.A. de C.V., Rogers Corporation and TL
                           Properties, Inc.

              *10.22(1)    ADFlex Solutions, Inc. Profit Sharing Bonus Plan

              *10.23(1)    ADFlex Solutions, Inc. Management Bonus Plan

              10.25(1)     First Amendment to Lease, dated June 1994, between
                           the Registrant and TL Properties, Inc.

              10.26(2)     Deed of Tax Covenant, dated January 7, 1996, between
                           the Registrant and Havant International Holdings
                           Limited

              10.28(2)     Registration Rights and Standstill Agreement, dated
                           January 7, 1996, between the Registrant and Havant
                           International Holdings Limited

              10.29(2)     License Agreement, dated January 8, 1996, between
                           Havant International Limited and Polene Limited

              10.32(2)     Assignment of Intellectual Property, dated January 8,
                           1996, between Polene Limited and Havant International
                           Limited

              10.33(2)     Agreement for the Sale and Purchase of the Businesses
                           and Assets of Havant International Limited, dated
                           January 3, 1996, between Havant International Limited
                           and Polene Limited

              10.34(2)     Agreement for the Sale of the Debtors and the
                           Assumption of Certain of the Liabilities of Havant
                           International Limited, dated January 4, 1996, between
                           Havant International Limited and Polene Limited

              10.37(2)     Corporate Guarantee, dated January 7, 1996, by the
                           Registrant in favor of IBM United Kingdom Limited and
                           International Business Machines Corporation

              10.38(2)     Operating Confidentiality Agreement, dated January 3,
                           1996, between Havant International Limited and Polene
                           Limited

              10.39(2)     Deed of Assignment of UK Patent Applications, dated
                           January 8, 1996, between Polene Limited and Havant
                           International Limited

              10.40(2)     Deed of Assignment of Non-UK Patent Applications,
                           dated January 8, 198, between Polene Limited and
                           Havant International Limited

              10.41(4)     Bilateral Purchase and Sale Agreement, dated August
                           31, 1995, among Telson, S.A. de C.V., Zenith
                           Electronics Corporation, ADFlex Mexico S.A. de C.V.
                           and the Registrant

              10.50(7)     Equity Purchase Agreement dated September 26,1997
                           between the Registrant and Hana Microelectronics
                           Public Co., Ltd.

              10.51(7)     Promissory Note dated September 30, 1997 between the
                           Registrant and Hana Microelectronics Public Co., Ltd.

              10.53 (8)    Collective Bargaining Contract dated December 10,
                           1997 (Translation)

              10.54 (8)    Compensatory Control Agreement dated January 22, 1997
                           between the Registrant and Rolando C. Esteverena.

              10.56 (9)    Third Amendment to Credit Agreement, dated October
                           30, 1998, among the Registrant, BankBoston, N.A. and
                           BankBoston, N.A. as agent for Lenders

              10.57        Fourth Amendment to Credit Agreement, dated January
                           15, 1999, among the Registrant, BankBoston, N.A. and 
                           BankBoston, N.A. as agent for Lenders
<PAGE>   58

              10.58        Fifth Amendment to Credit Agreement, dated February
                           19, 1999, among the Registrant, BankBoston, N.A. and
                           BankBoston, N.A. as agent for Lenders

              16.1(1)      Letter from KPMG Peat Marwick

              21.1         Subsidiaries of the Registrant

              23.1         Consent of Ernst & Young LLP



(1) Incorporated by reference from the Company's Registration Statement on Form
S-1 (No. 33-80324) or amendments thereto, filed with the Securities and Exchange
Commission on June 16, 1994.

(2) Incorporated by reference from the Company's Current Report on Form 8-K
dated January 7, 1996.

(3) Incorporated by reference from the Company's Form 10-Q for the quarter ended
September 30, 1995.

(4) Incorporated by reference from the Company's Form 10-Q for the quarter ended
September 30, 1995.

(5) Incorporated by reference from the Company's Form 10-K for the fiscal year
ended December 31, 1995.

(6) Incorporated by reference from the Company's Form 8-K dated July 10, 1996.

(7) Incorporated by reference from the Company's Form 10-Q for the quarter ended
September 30, 1997.

(8) Incorporated by reference from the Company's Form 10-K for the fiscal year
ended December 31, 1997.

(9) Incorporated by reference from the Company's Form 10-Q for the quarter ended
September 30, 1998.

* Constitutes a management contract or compensatory plan or arrangement.