<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549
                                        
              [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
                 For the fiscal year ended: December 31, 1997

            [  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
           For transition period from __________ to _______________


                        Commission File Number: 0-25548
                                        

                            ORBIT TECHNOLOGIES INC.
                            ---------------------- 
                (Name of small business issuer in its charter)

                     Delaware                           84-100269
           (State or other jurisdiction             (I.R.S. Employer
         of incorporation or organization)         Identification No.)
 


                        5950 La Place Court, Suite 140
                          Carlsbad, California 92008
                   (Address of principal executive offices)


       Registrant's telephone number, including area code: 760/930-8944
       Securities registered pursuant to Section 12(b) of the Act: None

         Securities registered pursuant to Section 12 (g) of the Act:
                          Common Stock, no par value
                               (Title of class)
                                        

     Check whether the issuer (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 the filing requirements for at least
the past 90 days.   Yes  ____   No   X
                                    --------

     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form and no disclosure will 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-KSB
or any amendment to this Form 10-KSB.       X
                                          -----

     Issuer's revenues for the year ended December 31, 1997 were $ -0-.

     On December 31, 1997, the aggregate market value of the voting stock held
by non-affiliated totaled approximately $5,075,757 based on the closing stock
price as reported by The OTC-BB of the NASDAQ Stock Market.

     At December 31,1997; 24,619,364 shares of Common Stock were outstanding.
     Transitional Small Business Disclosure Format: Yes _______ No      X
                                                                      -----   
<PAGE>
 
Ceramic Silicone Foam

The Company has acquired and is developing the technology to produce a non-
flammable, non-toxic foam material known as "Ceramic Silicone Foam" ("CSF").
CSF possesses the familiar nature of standard foams manufactured by others and
may be used in myriad products from household goods to space craft seating, but
differs in that it remains intact above the melting point of many metals.  This
characteristic affords CSF the possibility of becoming the product of
specification wherever flammability is a concern, such as in aircraft, public
ground transportation and health care and penal institutions.  CSF also has the
potential to be effective as a sound suppresser and in toxic waste containment
environments.  Examples of applications, which take advantage of these
qualities, include sound suppression and flame resistance under automobile hoods
and side body panels.  Patents are pending for this technology and no CSF has
been sold to date.

Additional testing will be required on CSF to determine its fire retardance,
anti-flammability, non-toxicity, physical resiliency, thermal resistance,
thermal insulation properties, tensile strength and resistance to atmospheric
decay.

In May 1996, the Company was awarded a contract to participate in the Department
of Energy's Landfill Stabilization Project to evaluate materials for treating
existing hazardous waste at the Idaho National Engineering Laboratory's
Subsurface Disposal Areas.  These landfill sites are composed of a variety of
mixed waste materials including radioactive waste.  Several different materials
have been selected for testing and Orbit was awarded a category sole source
contract to test and evaluate its CSF.  The contract provides for initial bench
testing with options that can be exercised for more extensive field-testing.

In November 1996, the Company signed a Teaming Agreement with Ecology and
Environment, Inc. (International Specialists in the Environment), for the sole
purpose of identifying and pursuing mutually agreeable business opportunities
within the U. S. Departments of Energy and Defense, and other federal and state
government agencies and the private sector where the environmental application
of the CSF technology is possible.  Identification and pursuit of business
opportunities includes technology development (i. e. both system design and
application identification and construction), sales and client development
efforts, the bid/proposal process, and the contract negotiation process
regarding awarded projects.

In May 1997, the Company was awarded a subcontract by Lockheed Martin Idaho
Technologies Company to test and evaluate Orbit's CSF as a stabilizing media for
sodium and nitrate salts which include chromium, as part of the contract awarded
by the Idaho National Engineering and Environmental Laboratory`s (INEEL)
Radioactive Waste Management Complex (RWMC).  Subcontractors under the contract
to Orbit are the University of Akron's Microscale Physiochemical Engineering
Center, Department of Civil Engineering and Pierpoint Environmental Management
Services.

In August 1997, Lockheed Martin expanded the initial subcontract to include two
additional nitrate-type surrogate waste materials containing cadmium and an
organic solvent.

In September 1997, Orbit Technologies, Inc., Ecology and Environmental, Inc.,
and The University of Akron submitted a proposal entitled "Low-activity Waste
Stabilization using Ceramic Silicon Foam (CSF)" to the Department of Energy -
Idaho Operations Office.

In March 1998, Orbit Technologies, Inc., was awarded a contract to evaluate
Orbit's proprietary polymer system as an encapsulating agent for radioactive
ash.

                                       2
<PAGE>
 
In July 1998, this contract was modified to test Orbit's polymer system with a
low-level calcine waste surrogate material.

In August 1998, Orbit's mixed waste encapsulation technology was selected for
presentation at the 216th Annual American Chemical Society National Meeting.

Nuclear/Toxic Waste Containment Technology

The Company's nuclear waste containment technology has proven effective in a
laboratory setting in containing nuclear waste and radioactive particles.  The
Company uses CSF as a base material to create a unique compound through the
addition of certain proprietary materials.  The final CSF material is specially
designed and formulated to be application specific based on the required
performance factors.

In 1994, the Company engaged the Kurchatov Institute for Nuclear Physics in
Moscow, Russia to conduct a six stage study involving the determination of
structural peculiarities, component distribution, radioactive absorption
elements, the influence of temperature, pressure and the investigation of
resistance in corrosion active mediums.  Additional factors in the study
included the impact of internal alpha and gamma radiation, and the manner in
which liquid and solid radioactive wastes are encapsulated in the CSF matrix.

At that time, the Chairman of the State Committee on Atomic Energy of Ukraine
agreed to a two pronged testing protocol for the Chernobyl problem: (1) to
continue laboratory testing on the basis of the Kurchatov Institute's
recommendations called for under the "Implementation Program", and (2) on-site
technological testing at the Chernobyl site.  If the Company's CSF is chosen as
the material of choice, the Ukraine may pay the Company a license fee
concurrently with the execution of any such license.  The subsequent test and
evaluation phases required additional funding.  Adequate funding has not been
available for the follow-on test and evaluation.  No assurances can be given
that the necessary funding can be obtained or that further testing will prove
successful or any such license will be consummated or any license fee paid.

Successful completion of these tests, in whole or in part, could permit the
Company to pursue contracts for the encapsulation and disposal of significant
quantities of high, medium and low levels of nuclear/toxic waste.

Metafusion Process

Metafusion describes a material coating process (the "Metafusion Process").  The
Metafusion Process encompasses the fusion, by chemical or physical means, of
materials at the atomic level.  The reaction takes place at room temperature and
at ambient pressure.  The process uses very little power, no toxic materials are
used and no contaminated waste is produced.  The Metafusion Process permits the
surface of a metal or alloy to be coated with another metal or alloy so that the
applied material is actually fused onto and into the atomic structure of the
surface of the substrate material.  The process is achieved by electrical
excitation of the electrons of the coating and substrate materials by the
application of a mid-range frequency pulsed electrical current that has been
generated to coincide with the natural resonance of the atoms.  The process
results in the fusion of the materials and an intermingling of the atoms at the
boundary causing an interdispersion of the materials.  The Metafusion Process
does not generate excessive heat that can alter the properties of the substrate
material.  The Metafusion Process can be accomplished without expensive or
sophisticated equipment.

The Metafusion Process has been scientifically corroborated by a number of
independent entities, including Ontario Research Foundation of Mississauga,
Ontario, which validated the solid Metafusion Process by analyzing the coating

                                       3
<PAGE>
 
of steel and copper with titanium carbide.  The results of the analysis showed
the presence of the coating material to a depth of five (5) microns into the
substrate.  Hardness tests conducted at the Materials Sciences Laboratory of the
University of California at Los Angeles and the Surface Science Laboratory of
Mountain View, California revealed significant penetration of the applied
materials into the substrate.

The Company believes that the Metafusion Process has myriad commercial
applications.  Potential applications include printed circuits, cutting blades,
tools and dies, jewelry, automotive parts, corrosion resistance in extreme
conditions, and multi-layer applications for the reduction of heat expansion
coefficients.

The Company holds patents for the original Metafuse Process.  The Company is
working on upgrades to the TiTRODE application of the Metafuse Process and also
on specific application patents as the development of the Ceramic Silicone Foam
and a new Polymer Encapsulation Technology (PET) continues.

Other Technologies Inc.

The Company is, and has been since 1996, involved in the reevaluation of other
technologies which it possesses.  Additional funding is, and has been required
for this effort.  The Company has endeavored to prudently marshall its assets.

In this vein, the Company has devoted its resources to the development of its
Cermaic Silicone Foam and is developing a new Polymer Encapsulation Technology
(PET)System. Once resources become available efforts to determine the viability
of its other technologies can be pursued. There is, however, no assurance that
such funding will be obtained to facilitate these efforts.

The Company is currently evaluating other technologies. The Company is
continually searching for technologies, which may yield commercially viable
products and would fit specifically into the Company's area of expertise.

Government Regulation

The production and marketing of the Company's products and technologies and its
ongoing research and development activities are subject to regulation for
safety, efficacy and quality by numerous governmental authorities in the United
States and other countries.  Failures or delays by the Company or its affiliates
or licensees in obtaining the required regulatory approvals would adversely
affect the marketing of products being developed by the Company and the
Company's ability to receive product revenues or royalties.  See Risk Factors,
Exhibit 99.

Human Resources

As of December 31, 1997, the Company had three full time employees.  The Company
also retains independent engineers, research consultants, institutes,
independent business entities, and other technical and business consultants as
needed to develop and analyze technologies and create business strategies.

Research and Development

Research and development expenses for the years ended December 31, 1997 and 1996
were $1,141 and $15,364, respectively.

Item 2.  DESCRIPTION OF PROPERTY

The Company maintains its principal executive offices in Carlsbad, California
where it occupies a 1,500 square foot office at 5950 La Place Court, Suite 140,
Carlsbad, California 92008 pursuant to a lease expiring in July 2001.

                                       4
<PAGE>
 
Item 3.  LEGAL PROCEEDINGS (Also see Item 12. Certain Relationships and Related
Transactions)

The Company is involved in certain legal proceedings incidental to its normal
business activities.  As of the date hereof, the Company is not party to any
material litigation except as described below, nor to the knowledge of
Management is there any material litigation or claim threatened or contemplated
against the Company.

Most of the litigation is related to or actions by past Directors and Officers,
and their affiliates in which a determination of the respective rights and
duties of the parties is sought.  This includes an adjudication of the validity
of common stock issued to Messrs. Joseph, Singletary, Wall, and others. Other
actions deal specifically with the collection of debts owed by the Company.

The Company is a party to the following proceedings:

Jane Martin Emerson v. Richard A. Wall, Ruffa & Ruffa, Orbit Technologies Inc.,
------------------------------------------------------------------------------ 
Case No. 95 - 1866R (CGA), was commenced on October 24, 1995, in the United
States District Court, Southern District of California.  Plaintiff seeks money
damages from Richard A. Wall, Ruffa & Ruffa, and Orbit emanating from the sales
of her residence to Mr. Wall. Although the court has dismissed Ruffa & Ruffa and
Wall, it is Orbit's belief that Emerson's claim to Orbit stock and money damages
has no merit.  Plaintiff and Orbit have entered into a settlement agreement and
this action has been dismissed.

In the wake of the Company's demand to surrender stock to the Company for
cancellation, Mr. Joseph initiated the case, Adrian Joseph v. Orbit Technologies
                                             -----------------------------------
Inc., in the Superior Court of California, County of San Diego, Case No. 701380
-----                                                                          
on June 27, 1996.  Mr. Joseph sought money damages for the Company's refusal to
acknowledge the validity of his claims to the Company's stock.  Alternately, Mr.
Joseph sought return of consideration he allegedly provided the Company for
stock.  The Company filed a Cross Complaint against Messrs. Joseph, Singletary,
and their affiliates, to cancel all Company stock claimed to be owned by them,
their affiliates, and to recover money damages for fraud, breach of fiduciary
duties and negligence. The trial began on September 29, 1997. On October 21,
1997, in a Judgment rendered by the San Diego Superior Court of California, the
Court ordered the surrender and cancellation of approximately 11,000,000 shares
claimed by Adrian Joseph; et al.; Mikimak, Ltd., a Bahamian corporation
controlled by Mr. Joseph; and shares claimed by Tatum C. Singletary.

In addition the Court found by clear and convincing evidence that Joseph
committed actual fraud with respect to the issuance of shares and also that
stock approved by Orbit's Board of Directors on September 15, 1992, was in large
measure, to replace stock which had previously been awarded by the Board of
Directors for OTI Technologies, Inc., a Canadian corporation, and thus was
fraudulent.  Joseph filed an appeal but the appeal was later dropped by the
Court.  The Company is continuing to identify additional shares that may be
subject to cancellation.

Jeffer, Mangels, Butler & Marmaro, LLP v. Orbit Technologies, Inc.  Action filed
------------------------------------------------------------------              
in Los Angeles Superior Court, on September 17, 1996, Case No. BS 041 354, by
former attorneys of Orbit to recover attorneys' fees.  Orbit stipulated to
arbitration of fee dispute and entry of an interim arbitration award in the
amount of approximately $110,000, subject to any defenses, offsets or claims,
which Orbit asserted in the form of a legal malpractice claim. The company's
legal malpractice action was denied as a result of the retainer agreement signed
by Mr. Joseph in his capacity when he was with the Company.  Mr. Joseph was a
personal client of Jeffer, Mangels, Butler & Marmaro prior to Orbit's
involvement with the firm.  Orbit declined to participate in the arbitration and
Judgment has 

                                       5
<PAGE>
 
been awarded pursuant to the interim arbitration award.

Richard and Edgar R. Benveniste v. Orbit Technologies Inc. and Its Officers.
---------------------------------------------------------------------------  
The action was filed on March 6, 1997 in the Los Angeles Superior Court as Case
No. BC167043. The action is to collect principal, interest and other fees and
damages relating to various promissory notes executed between the plaintiffs and
Orbit during 1995 aggregating $600,000 and loans made during 1992 aggregating
$197,000.

The plaintiffs allege that the defendants violated the securities laws of the
state of California and made negligent misrepresentations related to the
Company's technologies, thereby inducing them to loan monies to the Company.
The plaintiffs also allege that, pursuant to an oral agreement with an officer
of the Company, the exercise price for various stock options to acquire Orbit
stock was reduced to $0.10 per share and the conversion price under various
convertible loan agreements between the plaintiffs and Orbit was also reduced to
$0.10.  Further, the plaintiffs allege that they have not received 500,000
shares of Orbit stock promised as additional compensation under such agreements.

Orbit contends that the plaintiffs loaned money to another entity (other than
Orbit) in 1992 for which Orbit has no liability.  Additionally, Orbit contends
that the plaintiffs hold substantial shares of Orbit common stock which are void
and/or voidable. Orbit has filed a Cross Complaint seeking to cancel invalidly
issued stock and recover money damages in excess of $7 million.

Management denies the contention that there was an oral agreement to reduce the
exercise and conversion prices of certain financial instruments.  Management
further denies the contentions there were violations of securities laws, that
misrepresentations were made to plaintiffs and that other complaints possess any
merit.

Since February 1996, management has attempted to contact the subject note
holders on numerous occasions via correspondence and telephone in an attempt to
discuss the issues surrounding the loan agreements, set-off, and the respective
claims against both parties.  Attempts to amiably resolve the issues have been
unsuccessful to date.

In June 1998, Orbit announced that it had reached a tentative accord to
eliminate litigation pending litigation with various claimants. The parties are
currently in the process of meeting those conditions as established in the
settlement and are scheduled to be in the Los Angeles Superior Court with a
completed action by November 23, 1998 or the Court has indicated that it will
dismiss the action without predjudice.

Orbit Technologies Inc., et al. v. Lahey, et al.  The action filed by Richard
------------------------------------------------                             
Benveniste and Edgar R. Benveniste on June 2, 1997 in the Delaware Court of
Chancery, Case No. 15720-NC, on behalf of themselves and purportedly on behalf
of the Company against James B. Lahey, James A. Giansiracusa, Ian C. Gent,
Stephen V. Prewett, and William N. Whelen.  The Complaint sought a determination
by the Court of Chancery ( i ) as to who constituted the valid Directors of the
Company in connection with a written consent action initiated by the plaintiffs
{and signed by  Richard A. Wall & Associates GmbH (Authorized representative
Kurt Seifman), Kurt Seifman, JTR Associates (Authorized representative William
P. Ruffa, Jr.), William P. Ruffa, Jr., Pacific Equities, Inc. (Authorized
representative Richard A. Wall), Richard A. Wall, Cynthia L. Wall,  Eleanor
Moscatel (By her attorney-in-fact, Richard Benveniste), Julie Benveniste (By her
attorney-in-fact, Richard Benveniste), Chad Nellis (Son of Cynthia Wall and step
son of Richard A. Wall), Mikimak Limited, and Frank A. Visco}, and ( ii ) in the
alternative, that the Company be required to hold an annual meeting of
shareholders.  In response to the Complaint, on June 20, 1997 the defendants
filed their motion to dismiss or, in the alternative, to stay the Delaware
litigation in favor of litigation relating to the validity of claimed holdings
in the Company that was pending in the state courts of California (Joseph v.

                                       6
<PAGE>
 
Orbit Technologies Inc.).  On September 2, 1997, a hearing on the defendant's
motion to dismiss was held at which time the Court of Chancery decided to defer
a decision on the defendant's motion to dismiss until such time as an annual
meeting of the Company's shareholders ws held.  The Court thereafter ordered
that the Company hold its annual meeting.  The date for the shareholder meeting
is scheduled to occur in the second quarter of 1998.

Brian Jacobs v. Orbit Technologies Inc.   This action was filed on June 27,
---------------------------------------                                    
1997, in the Superior Court of California, County of Los Angeles as Case No. BC
173600. Brian Jacobs, the plaintiff, who has provided legal representation for
Orbit, OTI Technologies Inc. (a Canadian Corporation), Adrian Joseph, Richard A.
Wall, Ruffa & Ruffa, and other individuals who have brought groundless actions
against the Company, seeks money damages allegedly attributable to his inability
to sell restricted stock. Management believes this action has no merit.
However, this action is included as part of the global settlement including
other claimants.

William A. Wilson v. Orbit Technologies Inc.  This action was filed on September
-------------------------------------------                                     
15, 1997, in the Superior Court of California, County of Los Angeles as Case No.
BC 177867. Amb. William A. Wilson, the plaintiff, seeks money damages allegedly
attributable to his inability to sell restricted stock.  Management believes
this action has no merit. However, this action is included as part of the global
settlement including other claimants.

Howdy Kabrins v. Orbit Technologies, Inc.  This action was filed on September 4,
----------------------------------------                                        
1998 in the Superior Court of California, For the County of San Diego, North
County Branch, Case No. N079127.  Plaintiff seeks payment pursuant to a
Convertible Promissory Note upon which the defendant has not paid.

While the outcome of any such proceedings cannot be accurately predicted, the
Company does not believe the ultimate resolution of any such existing matters
would have a material adverse effect on its financial position or results of
operation.

Moreover, on April 9,1998, the Company entered into a tentative settlement
agreement, which will result in a dismissal of the Benveniste v. Orbit,
                                                   --------------------
Benveniste v. Lahey, Jacobs v. Orbit and Wilson v. Orbit actions, supra.
------------------------------------     ---------------                
Additionally, the settlement will result in the cancellation of approximately
5,000,000 shares of the Company's common stock and the retirement of
approximately $2,000,000 of corporate debt, partially through the issuance of
additional stock.  It is anticipated that the settlement will be consummated by
the end of 1998.  If not settled, the Court has indicated it will dismiss the
case without prejudice.

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

No matters were submitted during the fourth quarter of the year ended December
31, 1997 to a vote of the Company's securities holders.

                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

On April 29, 1994, the Company's Common Stock became reported by the NASD OTC
Electronic Bulletin Board (the "OTC-BB") and continues to be traded on such
reporting market on a limited basis.  The table below shows the high and low bid
prices as reported by the OTC-BB.  The bid prices represent inter-dealer
quotations, without adjustments for retail mark-ups, markdowns or commissions
and may not necessarily represent actual transactions.

                                       7
<PAGE>
 
Calendar Year ended December 31:

<TABLE>
<CAPTION>
1996
<S>                                           <C>    <C>
First Quarter                                 $0.50   0.15
Second Quarter                                 0.80   0.18
Third Quarter                                  0.43   0.15
Fourth Quarter (through December 15)           0.40   0.15
 
1997
 
First Quarter                                 $0.34  $0.16
Second Quarter                                 0.36   0.16
Third Quarter                                  0.49   0.28
Fourth Quarter                                 0.67   0.32
</TABLE>

There were approximately 1300 shareholders of record of Common Stock as of
December 31, 1997.  The Company has not paid cash dividends on its Common Stock
and does not intend to do so in the foreseeable future.

During 1997 the Company converted $92,250 of principal and related accrued
interest of $11,184 into 742,576 shares of common stock pursuant to exemptions
under Section 4(2) and or Regulation D., under the Securities Act of 1933, as
amended.  Substantially all of the debt conversions were executed at a
conversion rate of $0.22.

ITEM 6.  MANAGEMENT'S PLAN OF OPERATION

Overview

This discussion contains forward-looking statements.  Such statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those projected.  See Risk Factors, Exhibit 99. Readers
are cautioned not to place undue reliance on these forward-looking statements
that speak only as of the date hereof.  The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking statements
that may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.

Since its inception, the Company has been engaged in the acquisition and
development of certain technologies in the fields of coatings technologies and
material science.  The Company's net operating losses incurred since inception
are primarily the result of two factors: (1) the Company's unsuccessful search
for license, joint venture, or partnership arrangements with entities in
industries aligned with the Company's technologies, and (2) a lack of
technological and business focus.  Net losses for the fiscal years ended
December 31, 1997 and 1996, were $882,223 and $2,027,506, respectively.  It is
anticipated that net operating losses will continue and will possibly increase
through at least the next two years.

The Company's business plan and near term strategy will focus the Company's
limited human resources and funding on developing its new Polymer Encapsulation
Technology (PET).  One of management's primary objectives is the successful
commercialization of this technology.  Once this is accomplished, the Company
will be better poised to assess and develop the technology for multiple market
applications.

Financial Condition

For the fiscal years ended December 31, 1996 and 1997, the Company had revenues
of $0.  General and administrative expenses decreased from $854,727 in 1996 to

                                       8
<PAGE>
 
$882,000 in 1997.  For the years ending December 31, 1996 and December 31, 1997,
the Company incurred an operating loss of $2,027,506 and $882,223, respectively.

Plan of Operation

The Company's business plan and near term strategy will focus the Company's
limited human resources on the commercial development of its new Polymer
Encapsulation Technology (PET).   Orbit's primary objective is the successful
commercialization of this technology.  The Company has initiated strategic plans
and is actively seeking partnership arrangements and joint ventures in addition
to potential licensees.  Once this is accomplished, the Company will be better
poised to develop each technology for multiple market applications.

In August 1995, the Company entered into an agreement with an automation firm
for the development of manufacturing equipment for producing TiTRODEs.  The
first automated machine has been completed with partial completion of the second
machine.  The company is searching for qualified partners for product
commercialization.  The selected partner would either license the specific
application of the Metafuse technology or become a party of a joint venture
agreement with Orbit.  To date, the funding necessary to move the TiTRODE
Project forward has not been available and the Company remains focused on
progress in developing its new polymer technology.

In May 1996, the Company was awarded a sole source contract, within its
category, to participate in the Department of Energy's Landfill Stabilization
Project.  This Project evaluates materials for treating existing hazardous waste
at the Idaho National Engineering Laboratory's Subsurface Disposal Areas.
Several materials in other categories have also been selected for testing.  The
contract provides for initial bench testing with an option that can be exercised
for more extensive field-testing.

The results of preliminary testing and analysis in Idaho was the development of
a "White Paper" which recommended a much more extensive evaluation of Orbit's
CSF be conducted to evaluate its use for Calcine Waste Stabilization at the
Idaho facility.  Calcine waste is specific to the Idaho facility and there are
about 13,000,000 pounds of material to be processed.  Part of this study
actually produced three non-radioactive samples of CSF, which produced
acceptable results. A conceptual process design was also performed as well as
initial cost estimates generated.  This study has had wide spread distribution
within the DOE.

In November 1996, the Company entered into a Teaming Agreement with Ecology &
Environmental, Inc. (International Specialists in the Environment), for the sole
purpose of identifying and pursuing mutually agreeable business opportunities
within the U. S. Departments of Energy and Defense, and other federal and state
government agencies and private sectors where the environmental application of
CSF technology is possible.  Identification and pursuit of business
opportunities includes technology development (i. e. both system design and
application identification and construction), sales and client development
efforts, the bid/proposal process, and the contract negotiation process
regarding awarded projects.

In May 1997, the Company was awarded a contract by Lockheed Martin Idaho
Technologies Company to test and evaluate Orbit's proprietary Ceramic Silicon
Foam (CSF) as a stabilizing media for sodium and nitrate salts which include
chromium, from the Idaho National Engineering and Environmental Laboratory`s
(INEEL) Radioactive Waste Management Complex (RWMC).  Subcontractors under the
contract to Orbit are the University of Akron's Microscale Physiochemical
Engineering Center, Department of Civil Engineering and Pierpoint Environmental
Management Services.

                                       9
<PAGE>
 
In August 1997, Lockheed Martin expanded the initial contract to include two
additional nitrate-type surrogate waste materials containing cadmium and an
organic solvent.

In September 1997, Orbit Technologies, Inc., Ecology and Environmental, Inc.,
and The University of Akron submitted a proposal entitled "Low-activity Waste
Stabilization using Ceramic Silicon Foam (CSF)" to the Department of Energy -
Idaho Operations Office.

Until completion of the development of a technology and the commencement of
sales, the Company will have no operating revenues but will continue to incur
substantial expenses. No assurances can be given that the Company can complete
development of any technology or that, if any technology is fully developed,
that it can be manufactured on a large-scale basis or at a feasible cost.
Further, no assurance can be given that any technology will receive market
acceptance. Being a start-up stage entity, the Company is subject to all the
risks inherent in the establishment of a new enterprise and the marketing and
manufacturing of a new product, many of which risks are beyond the control of
the Company.

Liquidity and Capital Resources

At December 31, 1996, the Company had an accumulated deficit and a working
capital deficit of $13,136,339 and $3,170,881, respectively.   At December 31,
1997, the Company had an accumulated deficit and working capital deficit of
$3,595,000 and $3,453,000, respectively.  The Company had a ratio of liabilities
to tangible assets of approximately 27.4 to 1 as of December 31, 1997.  The
Company is also in default of a significant number of notes that total
approximately $1,150,000 in principal as of December 31, 1997.  However, with
the exception of $100,000, all such defaults will be cured or eliminated by the
comprehensive settlement noted in the litigation section, supra. The report of
the Company's independent certified public accountants includes an uncertainty
paragraph with regard to the ability of the Company to continue as a going
concern.

On May 27, 1997, the Company entered into an installment loan agreement with an
individual shareholder for $300,000 payable in $100,000 installments on May 27,
1997, September 5, 1997 and December 3, 1997.  The installment loan bears
interest at 12% per annum and is due on May 27, 1998.  The loan agreement
provides for a minimum semi-annual interest payment of $6,000 commencing
December 6, 1997.  The Company's rights, titles and patents, to the technology
known as "Ceramic Silicone Foam" collateralize the installment note.   The
Company will record the additional consideration as interest expense amounting
to $42,750 which is based on the fifty percent (50%) of the fair market value at
the common stock at May 27, 1997, the date of the installment loan agreement.
Furthermore, the Company granted the shareholder the right to purchase 150,000
shares of restricted common stock at seventy-five percent (75%) of the fair
market value for a period of 180 days commencing May 27, 1997, the date of the
installment agreement.  (See also Item 12.  Certain Relationships and Related
Transactions)

The Company will require additional financing.  No assurance can be given that
additional financing can be obtained, or if obtainable, that the terms will be
satisfactory to the Company.  The Company has limited working capital.  In order
to finance its proposed business, the Company will need to obtain additional
financing. To date, the Company has funded its operations from the private sales
of Common Stock or convertible notes (many of which have been converted into
Common Stock).  Such sales have been able to fund only minimal operations and
technological developments.  Development and exploitation of technologies have
been delayed by lack of adequate funding.

                                       10
<PAGE>
 
ITEM 7.  FINANCIAL STATEMENTS

See the Financial Statements and Notes thereto.

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

None.

                                   PART III

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

The following table sets forth information concerning the directors and
executive officers of the Company:

<TABLE>
<CAPTION>
Name                             Age      Title
----                             ---      -----
<S>                              <C>      <C>
James B. Lahey                   64       President, Chief Executive Officer, 
                                          and Director
James A. Giansiracusa            50       Vice President - Operations,
                                          Secretary, Chief Financial Officer and
                                          Director
Ian C. Gent                      56       Director  
Stephen V. Prewett               53       Vice President - Technology
                                          Development and Director
William N. Whelen, Jr.           60       Director  
</TABLE>

James B. Lahey became President and a director of the Company in March 1995.
From 1993 through 1994 he was President and Executive Vice President of
Sensotron, Inc., which develops technologically advanced transducer products.
From 1989 to 1992 he was Corporate Executive Vice President of W. S. Shamban &
Co., a manufacturer of engineered sealing systems.  He has previously held
senior management positions with W. R Grace & Co. and Ausimont U.S.A.  Mr. Lahey
holds a degree in Civil Engineering.

James A. Giansiracusa has been the Secretary of the Company since October 1993
and became Vice President-Operations in January 1994.  Before joining the
Company, Mr. Giansiracusa was a Lieutenant Colonel in the United States Marine
Corps where his duties included command billets in both aviation and infantry.
He was also a consultant for Wackenhut Services International, an international
security firm, from 1991 to 1992.  During Mr. Giansiracusa's military service
he, at times, was responsible for over 1,300 persons. Mr. Giansiracusa
participated in strategic planning relative to many global scenarios.  Mr.
Giansiracusa was awarded a Master of Science degree in Systems Management from
the University of Southern California in 1983.

Ian C. Gent has been a consultant to the Company since September 1994.  Mr. Gent
became Chief Financial Officer and a director of the Company in April 1995.  He
has provided advice in the areas of investment banking, corporate structuring,
and organizational strategies.  Mr. Gent has also assisted with securities
compliance and investor relations.  Between 1989 and 1994 he was Vice President
and Director of the Canadian Commerce Group of Fleet Bank of New York, a member
of the Fleet Financial Group.  In January 1994 he became President and Chief
Executive Officer of West Niagara Capital Corporation, a private Canadian
merchant banking company specializing in technology and real estate consulting.
During his 27 years experience in the securities and banking industries, he has
held positions as Vice President, Merrill Lynch Royal Securities in Canada,
Managing Director of a regional broker dealer, President and Chief Operating
Officer of Southern Tier Gas Producers, and President and Chief Executive
Officer 

                                       11
<PAGE>
 
of GDM Securities, a wholly owned subsidiary of Goldome Savings Bank. Mr. Gent
is also Chairman and Director of S. A. Power Corporation USA. Mr. Gent has a
Bachelor of Science in Business Administration from Ashland College, Ohio and
has completed several advanced management and industry programs.

Dr. Stephen V. Prewett has been a consultant to the Company since July 1994 and
has provided technological assessment support, technology transfer guidance, and
license agreement negotiations.  He became Vice President - Technology
Development in July 1994 and a director of the Company in April 1995.  Dr.
Prewett has extensive nuclear industry experience and has served in a variety of
positions with the Department of Energy, including Senior Nuclear Engineer from
1976 to 1982.  Dr. Prewett was also Director of Environmental Safety and Health
and Manager of Environmental Affairs with Gen Corp, a multi-national
manufacturing company from 1982 to 1984.  Dr. Prewett's background includes
market assessment, identifying teaming partners for new technology
implementations, and strategy assessment to identify market trends and industry
growth areas.  Dr. Prewett received a Bachelor of Science in Applied Physics
degree from East Carolina University, and Masters and Doctorate degrees from
Virginia Polytechnic Institute in Nuclear Science and Engineering.

William N. Whelen, Jr. was appointed a director of the Company in September
1996, filling the vacancy following the resignation of Mr. Joseph.  Mr. Whelen
has spent the last thirty years in the investment banking business.  He has
served with two Philadelphia firms, Suplee Mosley, Close and Kerner, and Jenney
Montgomery Scott.   He is currently a Director and Chief Financial Officer for
S. A. Power Corporation USA. Mr. Whelen is a registered representative of Simon
Securities, New Jersey.  Mr. Whelen has an electrical engineering degree from
Widener University of Chester, Pennsylvania.

There is no family relationship between any of the Company's directors and
officers.  There are no arrangements or understandings between any director or
executive officer and any other person pursuant to which any person has been
elected or nominated as a director or executive officer.

SECTION 16(a) - Beneficial Ownership Reporting compliance

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors, and persons who beneficially own more than 10%
of the Company's stock, to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission.  Executive
officers, directors and greater than 10% beneficial owners are required by
applicable regulations to furnish the Company with copies of all Section 16(a)
forms they file.

Based solely upon a review of the copies of such forms furnished to the Company
and information involving securities transactions of which the Company is aware,
the Company believes that during the fiscal year ending December 31, 1996, there
was compliance with all Section 16(a) filing requirements applicable to its
executive officers, directors and greater than 10% beneficial stockholders.

ITEM 10.  EXECUTIVE COMPENSATION

Cash Compensation

The following table presents, for each of the last three fiscal years, the
annual compensation earned by the chief executive officer and the most highly
compensated executive officers of the Company for the three fiscal years ended
December 31, 1997:

                                       12
<PAGE>
 
                          Summary Compensation Table

<TABLE>
<CAPTION>
                                                                      Long Term Compensation
                                                                      ----------------------
                                                                              Awards       
                                                                              ------  
Name                                                              Securities        All Other
Principal                           Annual Compensation           Underlying          Annual
                                    -------------------            
Position                     Year           Salary        Bonus   Options/SAR       Compensation
---------------              ----           ------        -----   -----------       ------------            
<S>                          <C>          <C>             <C>     <C>               <C>  
James B. Lahey,              1997         $120,000(1)       0              0             0
 President                   1996          120,000(1)       0              0             0
                             1995           90,000(1)       0        300,000             0
                                                                                         
James A. Giansiracusa,       1997         $132,000(1)       0              0             0
 Vice President,             1996         $132,000(1)       0              0             0
 Operations                  1995         $132,000(1)       0      1,406,593             0
                                                                                         
Stephen V. Prewett,          1997         $108,000(1)       0              0             0
 Vice President,             1996         $108,000(1)       0              0             0
 Technology Development      1995         $108,000(1)       0              0             0
</TABLE>

(1)    Messrs. Lahey, Giansiracusa, and Prewett are entitled to deferred
compensation in the three fiscal years reflected in the above table and as
outlined in the Financial Report for the Years Ended December 31, 1996 and 1997.
Officers at their choosing may convert monies owed to stock. (See Note 11.
Financial Report for the Years Ended December 31,1997 and 1996.)

The amounts described above do not include other compensation and benefits
provided to Messrs. Lahey, Giansiracusa, and Prewett during the fiscal years
described that in the aggregate did not exceed the lesser of $50,000 or 10% of
the executive's annual salary and bonus.

The Company entered into Employment Agreements effective April 1, 1995, with its
key employees, Messrs. Lahey, Giansiracusa, and Prewett, to serve in the
positions set forth above for a period of two years, and unless otherwise
terminated, to continue year by year thereafter.  The basic annual salaries
under the Employment Agreements are $120,000, $132,000, and $108,000,
respectively, subject to a 40% deferral that will be paid when the Company's
financial condition permits such payment.   Such individuals also received stock
options under the 1995 Stock Option Plan for 300,000 shares, 500,000 shares, and
500,000 shares, respectively.  During portions of 1995, 1996, and 1997 key
officers have deferred salaries in amounts significantly greater than 40% so
that cash could be applied to the Company's operations.

Compensation of Directors

Directors received no payment for their services as directors during 1996 and
1997, although the Company's By-Laws provide that directors shall receive $500
for each meeting.  The compensation of officers and directors is subject to
review and adjustment from time to time by the Board of Directors.

                                       13
<PAGE>
 
Stock Options

The following table presents information for the named officer in the Summary
Compensation Table with respect to options exercised during fiscal year ended
December 31, 1996 and unexercised options held as of the end of the fiscal year.

              Aggregated Option/SAR Exercises in Last Fiscal Year
                          and FY-End Option/SAR Values

<TABLE>
<CAPTION>
                                                                                                Value of Unexercised
                                                                  Number of Securities        In-the-Money Options/SARs
                                                                 Underlying Unexercised       at FY-End
                                                               Options/SARs at FY-End (#)                ($)
                          Shares Acquired                             Exercisable/                   Exercisable/
                                on          Value Realized   ------------------------------  ----------------------------
Name                       Execercie (#)          ($)                Unexercisable                   Unexerciable
-----------------------  -----------------        ---        ------------------------------  ----------------------------
<S>                      <C>                <C>              <C>                             <C>
James B. Lahey                   0                 0                       300,000               $ 54,000    (1)  
James A. Giansiracusa            0                 0                   1,356,593/0               $244,186/$0 (1) (2)  
Stephen V. Prewett               0                 0                     594,783/0               $107,060/$0 (1) (2)   
</TABLE>


(1)  Values reflected above are based on the closing price of $ .18 per share of
the Company's Common Stock for the last business day of the fiscal year.

(2)  During the year ended 1995, options granted under the Option Plan to three
officers of the Company exceeded the 500,000 prescribed limit provided for under
the Plan.  Management believes that the options were granted in compliance with
the Plan and has asked counsel to review the transactions and advise the Company
of the appropriate or necessary action to address the issue.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

As of December 31, 1996 29,405,904 shares of Common Stock were outstanding.
Management maintains that as of December 31, 1997 the Company had approximately
24,658,739 shares of common stock outstanding, par value $.01 per share (the
"Common Stock"). This number of shares is the result of the cancellation of
approximately 6,066,830 shares claimed by Adrian Joseph; et al.; Mikimak, Ltd.,
a Bahamian corporation controlled by Mr. Joseph; and shares claimed by Tatum C.
Singletary under an order dated October 21, 1997, Case No. 701380.  The number
of outstanding shares does include approximately 1,000,000 shares held by other
persons or entities that the Board maintains were not validly issued.

The following table sets forth, as of December 31, 1996, certain information as
to shares of the Common Stock owned by (i) each person known by management to
beneficially own more than 5% of the outstanding Common Stock, (ii) each of the
Company's directors, and (iii) all executive officers and directors of the
Company as a group:

                                       14
<PAGE>
 
<TABLE>
<CAPTION>
Name and Address of                     Amount and Nature of             Percent of Outstanding
Beneficial Owner                       Beneficial Shares Owned                  Ownership
----------------                       -----------------------                  ---------
<S>                                    <C>                               <C>
James B. Lahey(1,4,5)                           800,000                             3%
James A. Giansiracusa (2,4,5)                 1,521,593                             6%
Ian C. Gent(3,5)                                   ----                             *       
Stephen V. Prewett(5)                           594,783                             2%
William N. Whelen, Jr. (5)                         ----                             *       
All Officers and Directors as a               2,916,376                            11%
 group (5 persons)(6)
</TABLE>

______________________________________
*    Amount held represents less than 1%.


(1)  Includes 500,000 shares of Common Stock as part of Mr. Lahey's contact with
     the Company.
(2)  Includes 1,356,593 shares of Common Stock subject to currently exercisable
     options.
(3)  Includes 594,783 shares of Common Stock subject to currently exercisable
     options.
(4)  Includes 100,000 shares in accomplishment of Company goals in 1997. (See
     Note 11. Financial Report for the Years Ended December 31,1997 and 1996,
     Management Compensation Plan.)
(5)  The address for these individuals is the address of the Company.
(6)  Includes 2,251,376 shares of Common Stock subject to currently exercisable
     options.
(7)  Does not include shares owned by Ruth P. Brittingham, 4,022,292, 16%; S. A.
     Power Corporation, 2,000,000, 8%; and O. G. Sansone & Colleen Sansone
     Defined Benefit Pension Fund, 2,758,670, 11%.  Such persons or entities did
     not beneficially hold more than 5% of the Company's outstanding shares as
     of December 31, 1996.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Adrian Joseph, former Chairman and Chief Executive Officer of the Company
previously represented that he or a Bahamian corporation controlled by him,
Mikimak, Ltd., had sold various technologies to the Company in exchange for
Common Stock.  An internal audit has disclosed the apparent inaccuracy of Mr.
Joseph's representations. It appears the Company acquired the technologies from
sources other than Mr. Joseph or Mikimak, Ltd.   As a result, the holdings of
Mr. Joseph, his family and Mikimak, Ltd. have been in question.  On February 12,
1996, the Board of Directors removed Mr. Joseph as Chairman and Chief Executive
Officer.  Mr. Joseph later resigned as a director. In an action filed by Mr.
Joseph that began on September 29, 1997, the San Diego Superior Court cancelled
all the shares of Orbit stock previously claimed by Messrs. Joseph, his family
and his Bahamian corporation, Mikimak, Ltd. and past president and director
Tatum C. Singletary.  Pursuant to the Judgement and Order issued on October 21,
1997 by the San Diego Superior Court of California, Case No. 701380, the Company
has cancelled 6,066,830 shares of common stock.

During fiscal 1993, Richard A. Wall received an advance from the Company in the
amount $35,700 based on an alleged promissory note in favor of the Company due
on or before December 31, 1993.   Pacific Equities, Ltd., of which Mr. Wall is
an officer, also executed an alleged promissory note in favor of the Company in
the original principal amount of $92,572 in connection with payment for warrants
exercised by Pacific Equities during 1993.  Said note was due with interest
computed at the rate of 5% per annum at any time prior to the end of fiscal
1994. Mr. Wall was contacted with regard to the payment for warrants exercised,
and was given an opportunity to provide evidence of the alleged notes or the
required 

                                       15
<PAGE>
 
consideration. Mr. Wall did not respond to correspondence from the Company, and
management considers the shares invalid. The Company is in the process of
canceling the subject shares.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

Exhibit
Number              Exhibit

(1) (i)  Articles of Incorporation.  Restated Certificate of Incorporation. 
/(1)/
    (ii) Amended and Restated Bylaws. /(1)/
(2) Statement re: Computation of per share earnings. /(2)/
(3) Consolidated Balance Sheet at December 31,1996. /(2)/
(4) Consolidated Statement of Operations for the Years Ended December 31, 1996
and 1995. /(2)/
(5) Consolidated Statements of Stockholders' Deficiency for the Years Ended
December 31, 1996 and 1995 /(2)/
(6) Contract with Lockheed Martin Idaho Technologies Company (LMITCO).
(27) Financial Data Schedule
(99) Risk Factors.

Note:  Certain previously filed exhibits are no longer being incorporated by
reference (and therefore not numerically listed) as the underlying documents
have either expired or are no longer material or relevant.

/(1)/ Previously filed as part of the Form 10 filed in May 1995 and which are
hereby incorporated by reference.
/(2)/ Previously filed as part of the Form 10-KSB for the Period Ending December
31, 1996.

(b)  Reports on Form 8-K.

     None.

                                       16
<PAGE>
 
                   ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
                   ----------------------------------------


                               FINANCIAL REPORT
                               ----------------


                              FOR THE YEARS ENDED
                          DECEMBER 31, 1997 AND 1996
                          --------------------------

                                      F-1
<PAGE>
 
To the Stockholders of
Orbit Technologies Inc. and Subsidiaries


                         INDEPENDENT AUDITORS' REPORT
                         ----------------------------


We have audited the accompanying consolidated balance sheet of Orbit
Technologies Inc. and Subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, stockholders' deficiency and cash flows
for the years ended December 31, 1997 and 1996. 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 referred to above present
fairly, in all material respects, the financial position of Orbit Technologies
Inc. and Subsidiaries as of December 31, 1997, and the results of its operations
and its cash flows for the years ended December 31, 1997 and 1996, in conformity
with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern.  As shown in the consolidated
financial statements, the Company incurred a net loss of approximately $882,000
during the year ended December 31, 1997, and, as of that date, had a working
capital deficiency of approximately $3,453,000 and stockholders' deficiency of
approximately $3,595,000.  As described more fully in Notes 1, 7 and 11 to the
consolidated financial statements, the Company is in default on its loan
agreements with various individuals, certain of whom have filed a lawsuit, and
is in arrears on accounts with certain vendor creditors which, among other
things, causes the balances to become due on demand.  The Company is not aware
of any alternate sources of capital to meet such demands, if made.  Those
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1.  The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.



                                    /s/ TABB, CONIGLIARO & McGANN, P.C.
                                   ------------------------------------
                                    TABB, CONIGLIARO & McGANN, P.C.

New York, NY
April 30, 1998
(Except as to Note 11 which is as of June 27, 1998)

                                      F-2
<PAGE>
 
                   ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEET
                             AT DECEMBER 31, 1997



                                    ASSETS
                                    ------

<TABLE>
<S>                                                                                     <C>     
CURRENT ASSET:                                                                                     
    Cash                                                                                $      3,631
                                                                                                   
PROPERTY AND EQUIPMENT - At cost, net of accumulated depreciation and                              
    allowance against equipment expenditures                                                  60,172
                                                                                                   
INTANGIBLE ASSETS - Net of accumulated amortization                                           72,939
                                                                                                   
OTHER ASSETS                                                                                  14,015
                                                                                        ------------

          TOTAL ASSETS                                                                  $    150,757
                                                                                        ============   

                        LIABILITIES AND STOCKHOLDERS' DEFICIENCY
                        ----------------------------------------

CURRENT LIABILITIES:
    Accounts payable and accrued liabilities                                            $  1,743,858
    Notes payable                                                                          1,712,386
                                                                                        ------------
          TOTAL CURRENT LIABILITIES                                                        3,456,244
                       
LONG-TERM NOTE PAYABLE                                                                       290,000
                                                                                        ------------
 
          TOTAL LIABILITIES                                                                3,746,244
                                                                                        ------------
                                                                                     
COMMITMENTS, CONTINGENCIES AND OTHER MATTERS                                         
    (Notes 1, 2, 6, 7, 8, 11 and 13)                                                   
                                                                                      
STOCKHOLDERS' DEFICIENCY:                                                             
    Preferred stock - par value $.01 per share; shares issued and outstanding - none          -
    Common stock - par value $.01 per share; shares authorized 50,000,000; shares     
        issued and outstanding 27,115,768                                                    271,158
    Additional paid-in capital                                                            10,193,132
    Accumulated deficit                                                                  (14,018,562)
    Unearned compensation and finance charges                                                (30,281)
    Notes receivable from stockholders                                                       (10,934)
                                                                                        ------------
                                                                                      
          TOTAL STOCKHOLDERS' DEFICIENCY                                                  (3,595,487)
                                                                                        ------------
                                                                                      
          TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY                                $    150,757
                                                                                        ============
</TABLE> 

See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>
 
                   ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996


<TABLE>
<CAPTION>
                                                            1997          1996
                                                        -----------   ------------
<S>                                                     <C>           <C>
REVENUE                                                 $         -   $         -
                                                        -----------   -----------
COSTS AND EXPENSES:                                   
    Research and development                                  1,141        15,364
    General and administrative                              635,318       854,727
    Compensatory element of common stock and options        140,000       360,000
    Other (income) expense, net (Note 9)                    (85,323)      500,000
    Financing costs                                          12,469        28,450
    Interest expense                                        178,618       268,965
                                                        -----------   -----------
 
        TOTAL COSTS AND EXPENSES                            882,223     2,027,506
                                                        -----------   -----------
 
NET LOSS                                                $  (882,223)  $(2,027,506)
                                                        ===========   ===========
PER SHARE DATA:
---------------
                                                        
BASIC AND DILUTED LOSS PER SHARE                        $      (.03)  $      (.09)
                                                        ===========   =========== 

WEIGHTED AVERAGE COMMON SHARES USED IN
    BASIC AND DILUTED LOSS PER SHARE (NOTE 2)            26,453,643    23,428,059
                                                        ===========   ===========
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>
 
                   ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
                FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
                                    Common Stock                                                                          
                             -------------------------- 
                                                                                       Unearned        Notes                 
                                                          Additional                 Compensation    Receivable    
                                                           Paid-in     Accumulated    and Finance       from         
                                Shares        Amount       Capital       Deficit        Charges     Stockholders    Total
                             -------------  -----------  ------------  ------------  -------------  ------------  ------------  
<S>                          <C>            <C>          <C>          <C>            <C>            <C>           <C>            
Balances at December 31,                                                                                                       
 1995                        20,428,637       $204,287   $ 8,291,736  $(11,108,832)    $(478,450)     $(17,294)   $(3,108,553) 
Issuance of stock for                                                                                                           
 conversion of notes                                                                                                            
 payable                      7,861,091         78,611     1,286,173             -             -             -      1,364,784   
Issuance of stock in                                                                                                             
 settlement of litigation     2,941,176         29,412       220,588             -             -             -        250,000    
Stock issued in connection                                                                                                        
 with compensatory                                                                                                                
 obligations                    175,000          1,750        36,750             -             -             -         38,500     
Payments received on notes                                                                                                         
 receivable from                                                                                                                   
 stockholders                         -              -             -             -             -         6,360          6,360      
Amortization of unearned                                                                                                            
 compensation                         -              -             -             -       360,000             -        360,000       
Amortization of unearned                                                                                                      
 financing fees                       -              -             -             -        28,450             -         28,450 
Net loss                              -              -             -    (2,027,507)            -             -     (2,027,507)
                             ----------       --------   -----------  ------------     ---------      --------    ----------- 
Balances at December 31,                                                                                                      
 1996                        31,405,904        314,060     9,835,247   (13,136,339)      (90,000)      (10,934)    (3,087,966)
Issuance of stock for                                                                                                         
 conversion of notes                                                                                                          
 payable                      1,036,694         10,366       143,067             -             -             -        153,433 
Issuance of stock as                                                                                                          
 additional consideration                                                                                                     
 for loan                       300,000          3,000        39,750             -       (42,750)            -              - 
Issuance of stock in                                                                                                          
 settlement of litigation        40,000            400        18,400             -             -             -         18,800 
Amortization of unearned                                                                                                      
 compensation costs                   -              -             -             -        90,000             -         90,000 
Issuance or stock for                                                                                                         
 payment of debt                200,000          2,000        48,000             -             -             -         50,000 
Amortization of unearned                                                                                                      
 financing fees                       -              -             -             -        12,469             -         12,469 
Cancellation of shares per                                                                                                    
 litigation settlement       (6,066,830)       (60,668)       60,668             -             -             -              - 
Issuance of stock in                                                                                                          
 connection with                                                                                                              
 management compensation                                                                                                      
 plan                           200,000          2,000        48,000             -             -             -         50,000 
Net loss                              -              -             -      (883,223)            -             -       (882,223)
                             ----------       --------   -----------  ------------     ---------      --------    ----------- 
Balances at December 31,                                                                                                      
 1997                        27,115,768       $271,158   $10,193,132  $(14,018,562)    $ (30,281)     $(10,934)   $(3,595,487)
                             ==========       ========   ===========  ============     =========      ========    =========== 
</TABLE> 

See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>
 
                   ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996


<TABLE>
<CAPTION>
                                                                            1997          1996
                                                                         -----------  ------------
<S>                                                                      <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss                                                             $(882,223)  $(2,027,506)
     Adjustments to reconcile net loss to net cash used in operating
         activities:
            Depreciation and amortization                                    16,459        15,773
            Amortization of unearned and deferred finance costs              12,469        28,450
            Compensatory element of common stock and options                140,000       360,000
            Stock issued in settlement of current liabilities                     -        38,500
            Loss on litigation settlements                                   18,800       500,000
            Allowance for loss against equipment expenditures               223,064             -
            Write-off of shareholder loans                                 (200,466)            -
 
            Cash provided by (used in) the change in assets and
               liabilities:
                 Decrease in prepaid expenses                                10,353             -
                 Decrease in advances to officer                              1,341             -
                 Increase in deposits                                       (10,000)            -
                 Increase in accounts payable and accrued liabilities       325,580       721,997
                 Increase in due to shareholders                                  -         1,116
                                                                          ---------   -----------
                  
                  NET CASH USED IN OPERATING ACTIVITIES                    (344,623)     (361,670)
                                                                          ---------   -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:     
     Capital expenditures                                                   (43,734)      (47,583)
                                                                          ---------   -----------

CASH FLOWS FROM FINANCING ACTIVITIES:                                     
    Loan proceeds                                                           391,800       428,250
    Loan repayments                                                               -       (29,872)
    Repayment of notes receivable from stockholders                               -         6,360
                                                                           --------   -----------

                  NET CASH PROVIDED BY FINANCING ACTIVITIES                 391,800       404,738
                                                                          ---------   -----------

INCREASE (DECREASE) IN CASH                                                   3,443        (4,515)

CASH - BEGINNING                                                                188         4,703
                                                                          ---------   -----------

CASH - ENDING                                                             $   3,631   $       188
                                                                          =========   ===========
</TABLE>


See accompanying notes to consolidated financial statements.

                                      F-6
<PAGE>
 
                   ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE  1 - BUSINESS AND CONTINUED OPERATIONS

          Orbit Technologies Inc. (the "Company") was incorporated in the State
          of Delaware on April 29, 1985.  The Company is a commercial technology
          research and development company holding rights to certain patents and
          their technologies.

          The Company's business plan is to develop certain technologies until
          commercially viable products are possible and to license or sell these
          technologies to third parties which would be responsible for the
          production and marketing of any products resulting therefrom.  Since
          its incorporation in 1985, the Company has pursued the research,
          development, acquisition and licensing of certain technologies.  The
          Company concentrated its efforts in the areas of coatings technologies
          and new materials technologies.  While the technologies are undergoing
          certain feasibility studies and testing, none has proved commercially
          feasible, except for the TiTRODE type electrodes.  To date, the
          Company has not financially benefitted from the commercialization of
          the TiTRODE electrode (see Note 11).

          The accompanying financial statements have been prepared in conformity
          with generally accepted accounting principles, which contemplate
          continuation of the Company as a going concern.  However, for the year
          ended December 31, 1997, the Company incurred a net loss of
          approximately $882,000 and, as of that date, had a stockholders'
          deficiency and a working capital deficiency of approximately
          $3,595,000 and $3,453,000, respectively.  The Company is also in
          default on a significant number of loan agreements which total
          approximately $1,611,000 in principal and interest as of December 31,
          1997 and is in arrears with substantially all of its other payables
          and accrued liabilities.  The Company requires additional funds to
          continue research and development efforts and complete the necessary
          work to commercialize its technologies.  Until completion of the
          development of a technology and the commencement of sales, the Company
          will have no operating revenues, but will continue to incur
          substantial expenses and operating losses.  No assurances can be given
          that the Company can complete development of any technology or that,
          if any technology is fully developed, it can be manufactured on a
          large scale basis or at a feasible cost.  Further, no assurance can be
          given that any technology will receive market acceptance.  These
          factors raise substantial doubt about the Company's ability to
          continue as a going concern.

          The Company is exploring additional sources of working capital
          including private borrowings, sales of its securities, joint ventures
          and licensing of technologies.  While no assurance can be given,
          management believes the Company can raise adequate capital to keep the
          Company functioning at a minimum level of operation in 1998. Through
          March 31, 1998, the Company's proceeds from all financing activities
          amounted to approximately $96,100 (see Note 13).

          The Company is exploring ways to reduce its existing liabilities
          including exchanging certain of its liabilities for shares of its
          common stock.  During the first quarter of 1998, the Company exchanged
          $25,000 of principal on a promissory note outstanding at December 31,
          1997 for shares of common stock (see Note 13).

                                      F-7
<PAGE>
 
                   ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE  1 - BUSINESS AND CONTINUED OPERATIONS (Continued)

          To date, the Company has not been successful in restructuring the
          remaining debt and the Company continues to be in default under such
          agreements.  Further, one group of note holders, representing $600,000
          of the promissory notes outstanding as of December 31, 1997, has filed
          a lawsuit against the Company to recover loans and other monies
          provided to the Company.  During June of 1998, the Company and the
          noteholders reached a tentative settlement, which is subject to the
          approval of the majority of shareholders and the approval of the
          residing court (Note 11).

          The Company's ability to continue as a going concern is dependent upon
          obtaining the additional financing, restructuring and/or curing the
          defaults on its debt, completion of research and development and the
          successful marketing of its technologies.  These financial statements
          do not include any adjustments relating to the recoverability of
          recorded asset amounts that might be necessary as a result of the
          above uncertainty.

NOTE  2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          Principles of Consolidation
          ---------------------------

          The consolidated financial statements include the accounts of the
          Company and its wholly-owned subsidiaries.

          All material intercompany balances and transactions have been
          eliminated in consolidation.

          Use of Estimates
          ----------------

          The preparation of financial statements in conformity with generally
          accepted accounting principles requires management to make estimates
          and assumptions that affect the reported amounts of assets and
          liabilities and disclosure of contingent assets and liabilities at the
          date of the financial statements and the reported amounts of revenues
          and expenses during the reporting period.  Actual results could differ
          from those estimates.

          Fair Value of Financial Instruments
          -----------------------------------

          Cash and cash equivalents, note receivable, accounts payable, accrued
          expenses, due to stockholders and notes payable are reflected in the
          accompanying consolidated balance sheets at amounts considered by
          management to reasonably approximate fair value.

          Cash and Cash Equivalents
          -------------------------

          The Company considers all highly liquid investments with a maturity of
          three months or less to be cash equivalents.

                                      F-8
<PAGE>
 
                   ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE  2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

          Concentration of Credit Risk
          ----------------------------

          Financial instruments, which potentially subject the Company to
          concentrations of credit risk, are primarily trade accounts
          receivable.  Ongoing credit evaluations of customers' financial
          condition will be performed and generally no collateral will be
          required.

          Equipment and Fixtures
          ----------------------

          Equipment and fixtures are recorded at cost.  Depreciation is provided
          using the accelerated and straight-line methods over the estimated
          useful lives of the related assets as follows:

                    Description                    Years
                    -----------                    -----

               Furniture and fixtures                7
               Computer hardware and software        5

          Intangible Assets
          -----------------

          Patent costs which include legal costs and filing fees are being
          amortized on the straight-line method over the shorter of the
          estimated economic life of the patents or seventeen years.

          Income Taxes
          ------------

          The Company provides for deferred tax liabilities and assets based on
          the difference between the financial statement carrying amounts and
          tax bases of assets and liabilities using enacted  tax rates in effect
          in the   years in which the differences are expected to reverse.
 
          Deferred and Unearned Finance Costs
          -----------------------------------

          Deferred and unearned finance costs represent expenses incurred and
          common shares issued to obtain financing for the Company and are
          amortized over the life of the related debt obligation.

          Revenue Recognition
          -------------------

          Revenue from license fees will be  recognized in the year received.
          Revenue from the sale of technology will be recognized in the period
          in which it is earned.

                                      F-9
<PAGE>
 
                   ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE  2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

          Research and Development Costs
          ------------------------------

          Research and development costs are charged to expense as incurred,
          unless they are reimbursed under specific contracts.  The costs of
          materials and equipment that are acquired or constructed for research
          and development activities, and have alternative future uses (either
          in research and development, marketing or production), are classified
          as property and equipment and depreciated over their estimated useful
          lives. Certain software development costs are capitalized.

          Stock-Based Compensation
          ------------------------

          As permitted by SFAS No. 123, "Accounting for Stock-Based
          Compensation", the Company accounts for its stock-based compensation
          arrangements pursuant to APB Opinion No. 25, "Accounting for Stock
          Issued to Employees".  In accordance with the provisions of SFAS No.
          123, the Company discloses the proforma effects of accounting for
          these arrangements using the minimum value method to determine fair
          value.

          Loss Per Share
          --------------

          Basic earnings per share ("Basic EPS") is computed by dividing net
          loss available to common stockholders by the weighted average number
          of common shares outstanding during the period.  Diluted earnings per
          share ("Diluted EPS") gives effect to all dilutive potential common
          shares outstanding during a period.  In computing Diluted EPS, the
          treasury stock method is used in determining the number of shares
          assumed to be purchased from the conversion of common stock
          equivalents.   Securities that could potentially dilute Basic EPS in
          the future, that were not included in the computation of Diluted EPS
          because to do so would have been anti-dilutive for the periods
          presented, consist of options, warrants, convertible notes and
          convertible accrued salaries discussed in Notes 7, 8 and 11 to the
          accompanying financial statements.

          Impairment of Long-Lived Assets
          -------------------------------

          During 1996, the Company adopted the Statement of Financial Accounting
          Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived
          Assets and for Long-Lived Assets to be Disposed of".  Under the
          provisions of this statement, the Company has evaluated its long-lived
          assets for financial impairment, and will continue to evaluate them as
          events or changes in circumstances indicate that the carrying amount
          of such assets may not be fully recoverable.

                                     F-10
<PAGE>
 
                   ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE  2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

          The Company evaluates the recoverability of long-lived assets by
          measuring the carrying amount of the assets against the estimated
          undiscounted future cash flows associated with them.  At the time such
          evaluations indicate that the future undiscounted cash flows of
          certain long-lived assets are not sufficient to recover the carrying
          value of such assets, the assets are adjusted to their fair values.
          Based on these evaluations, there were no adjustments to the carrying
          value of long-lived assets in 1996.  In December 1997, the Company
          recorded a charge of $223,064 related to special use assets under
          construction (Note 4).

          Impact of Recently Issued Accounting Standards
          ----------------------------------------------

          Effective January 1, 1998, the Company adopted the provisions of SFAS
          No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes
          standards for reporting comprehensive income, defined as all changes
          in equity from non-owner sources. Adoption of SFAS No. 130 did not
          have a material effect on the Company's financial position or results
          of operations.

          Effective January 1, 1998, the Company adopted the provisions of SFAS
          No. 131, "Disclosures About Segments of an Enterprise and Related
          Information".  SFAS No. 131 establishes standards for the way public
          enterprises report information about operating segments in annual
          financial statements and requires those enterprises to report selected
          information about operating segments in interim financial reports
          issued to stockholders.  Adoption of SFAS No. 131 did not have a
          material effect on the Company's financial position or results of
          operations.

          Effective January 1, 1998, the Company adopted American Institute of
          Certified Public Accountants Statement of Position 97-2, "Software
          Revenue Recognition" ("SOP 97-2").  SOP 97-2 generally requires
          revenue earned on software arrangements involving multiple elements,
          such as software products, upgrades, enhancements, post-contract
          customer support, installation and training to be allocated to each
          element based on the relative fair values of the elements.  The
          adoption of SOP 97-2 did not have an effect on the Company's financial
          position or results of operations.

          In March 1998, the American Institute of Certified Public Accountants
          issued SOP 98-1, "Accounting for the Costs of Computer Software
          Developed or Obtained for Internal Use", which revises the accounting
          for software development costs and will require the capitalization of
          certain costs.  The adoption of SOP 98-1 did not have an effect on the
          Company's financial position or results of operations.  The Company
          recognizes the need to ensure its operations will not be adversely
          impacted by Year 2000 software failures.  Software failures due to
          processing errors potentially arising from calculations using the Year
          2000 date are a known risk.  The Company is addressing this risk to
          the availability and integrity of financial systems and the
          reliability of operational systems.  The Company has established
          processes for evaluating and managing the risks and costs associated
          with this problem.  The computing portfolio was identified and an
          initial assessment has been completed.  The cost of achieving Year
          2000 compliance will not have a material impact on the accompanying
          financial statements.

                                     F-11
<PAGE>
 
                   ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE  3 - COLLABORATION AGREEMENTS

          In May 1996, the Company was awarded a contract to participate in the
          Department of Energy's Landfill Stabilization Project to evaluate
          materials for treating existing hazardous waste at the Idaho National
          Engineering Laboratory's Subsurface Disposal Areas.  These landfill
          sites are composed of a variety of mixed waste materials including
          radioactive waste.  Several different materials have been selected for
          testing and Orbit was awarded a category sole source contract to test
          and evaluate its CSF. The contract provides for initial bench testing
          with options that can be exercised for more extensive field-testing.

          In November 1996, the Company signed a Teaming Agreement with Ecology
          and Environment, Inc. (International Specialists in the Environment),
          for the sole purpose of identifying and pursuing mutually agreeable
          business opportunities within the U.S. Departments of Energy and
          Defense, and other federal and state government agencies and the
          private sector where the environmental application of the CSF
          technology is possible.  Identification and pursuit of business
          opportunities includes technology development (i.e., both system
          design and application identification and construction), sales and
          client development efforts, the bid/proposal process, and the contract
          negotiation process regarding awarded projects.

          In May 1997, the Company signed a contract with Lockheed Martin Idaho
          Technologies Company (LMITCO) for investigating the use of the
          Company's patent pending CSF polysiloxane grouting material for the
          encapsulation and stabilization of certain Department of Energy
          ("DOE") surrogate waste materials in preparation for long-term
          disposal.  Total expenditures for this testing amounted to $106,300
          and was funded entirely by LMITCO.  The testing and analysis
          determined that the Company's CSF produces a stable nonleachable
          cohesive waste material suitable for long-term disposal.

NOTE 4 -  PROPERTY AND EQUIPMENT - NET

          Property and equipment, net, consist of the following at December 31,
          1997:

<TABLE>                                                
          <S>                                           <C>      
          Office furniture and fixtures                 $  46,605
          Research laboratory furniture and fixtures       65,087
          In-process machinery                            223,064
                                                        ---------
                Sub-total                                        
                                                          334,756
          Accumulated depreciation                               
          Writedown of in-process machinery               (51,520)
                                                         (223,064)
                                                        ---------
                                                                 
                                                        $  60,172
                                                        ========= 
</TABLE>

                                     F-12
<PAGE>
 
                   ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE  4 - PROPERTY AND EQUIPMENT (Continued)

          As discussed further in Note 9, during the year ended December 31,
          1997, the Company provided for a $223,064 allowance for a probable
          loss against two machines, which have not been placed in service to
          date.  The allowance is equal to the aggregate cost of the machines.

          Depreciation expense for the years ended December 31, 1997 and 1996
          was $11,327 and $10,641, respectively.

NOTE  5 - INTANGIBLE ASSETS

          Intangible assets consisted of the following at December 31, 1997:

<TABLE>
               <S>                               <C>     
               Patent costs                       $87,212
               Less: Accumulated amortization      14,273
                                                  -------
                                                         
                                                  $72,939
                                                  ======= 
</TABLE>

          Patent costs are being amortized over seventeen years on the straight-
          line method.

          Amortization expense for the years ended December 31, 1997 and 1996
          was $5,132, respectively.

NOTE  6 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

          Accounts payable and accrued liabilities consist of the following at
          December 31, 1997:

<TABLE>
               <S>                                   <C>       
               Salary and related taxes (Note 11)    $  628,856
               Professional fees                        527,672
               Interest                                 408,737
               Consulting fees                           85,648
               Miscellaneous                             92,945
                                                     ----------
                                                               
                                                     $1,743,858
                                                     ========== 
</TABLE>

                                     F-13
<PAGE>
 
                   ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE  7 - NOTES PAYABLE

          Notes payable consisted of the following at December 31, 1997:

<TABLE>
               <S>                                   <C>
               a)  Unsecured notes payable           $  170,000
               b)  Unsecured note payable               165,336
               c)  Unsecured note                       274,250
               d)  Convertible notes                    852,800
               e)  Secured promissory notes             540,000
                                                     ----------
                                                      2,002,386
               Less: Current portion                  1,712,386
                                                     ----------
                     Total Long-term Note Payable              
                                                     $  290,000
                                                     ========== 
</TABLE>

          a)   Represents four promissory notes aggregating $170,000, all of
               which are past due, with interest at 15%.
 
          b)   On June 10, 1993, TiTRODE Corporation, a subsidiary of Orbit
               Technologies, Inc. entered into a loan agreement with a
               shareholder in the amount of $200,000. The loan was due June 30,
               1995 with interest at 15%. During 1995, the entire principal
               balance of $200,000, plus accrued interest aggregating $24,833,
               was replaced by a promissory note payable by the Company. The new
               note provides for monthly payment of $3,000 commencing November
               1, 1995, with entire unpaid principal due November 1, 1998.

               On November 5, 1997, the Company converted $50,000 of principal
               into 294,118 shares of the Company's common stock.  The Company
               remains in default under the note agreement and management of the
               Company is attempting to convert the remaining balance of the
               loan.

          c)   Represents a settlement agreement entered into during 1995 to pay
               past due consulting fees. Under such agreement, the Company is
               required to repay this debt from proceeds of future equity or
               debt financings as follows:

<TABLE>
                                                    Repayment Amount
                                                    ----------------
                    <S>                             <C>            
                    6% of the 1st $1,000,000                        
                    7% of the 2nd $1,000,000                $ 60,000
                    8% of the 3rd $1,000,000                  70,000
                    6.425% of the 4th $1,000,000              80,000
                                                              64,250
                                                            --------
                                                                    
                                                            $274,250
                                                            ======== 
</TABLE>

                                     F-14
<PAGE>
 
                   ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE  7 - NOTES PAYABLE (Continued)

          d)(i)   During the year ended December 31, 1995, the Company received
                  loans from various private investors aggregating $1,665,000.
                  In general, such loans are for one year periods, convertible,
                  together, with any accrued interest, into common shares
                  ranging from $0.50 to $0.75 per share, and provide for
                  interest ranging from 10% to 15% per annum.

                  During the years ended December 31, 1997 and 1996, the Company
                  converted $15,000 and $950,000, respectively, of principal,
                  and $3,405 and $114,783, respectively, of accrued interest,
                  into 87,230 and 4,861,091 shares, respectively, of common
                  stock. The Company is in default under the remaining note
                  agreements (see Note 11).

          d)(ii)  During 1996, the Company borrowed $377,250 in one-year
                  promissory notes bearing interest at 10% per annum.
                  Simultaneously with the execution of the note agreements, two
                  noteholders agreed to convert principal, totalling $300,000,
                  into 3,000,000 shares of common stock. The remaining $77,250
                  of the notes and related accrued interest are convertible into
                  common stock at 50% of the asked market price at any time,
                  with automatic conversion upon the effectiveness of a
                  Registration Statement under the Securities Act of 1933.
                  During the year ended December 31, 1997, the Company converted
                  $77,250 of principal and $7,779 of accrued interest into
                  655,346 shares of common stock.

          d)(iii) During the year ended December 31,1997 and 1996 the Company
                  borrowed $76,800 and $51,000, respectively, from its officers
                  and issued convertible notes to reflect these borrowings. Each
                  note bears interest of 10% per annum and is due one year from
                  the issuance date. The notes principal and accrued related
                  interest are convertible into common stock at prices ranging
                  from $0.10 and $0.22 per share of debt.

          d)(iv)  On July 21, 1997, the Company borrowed $25,000 from a private
                  investor and issued a convertible promissory note that matures
                  July 21, 1998 and bears interest at 10% per annum. The note
                  principal balance and accrued interest can be converted into
                  the Company's common stock at a rate of $0.20 per share of
                  debt.

          e)(i)   The Company entered into a settlement agreement on December
                  27, 1996. Pursuant to the agreement the Company issued a
                  $250,000 secured promissory note that is due on December 27,
                  2000. The promissory note bears interest at 10% per annum and
                  the Company is required to make minimum partial interest
                  payments of $6,000 semi-annually. The promissory note is
                  collateralized by the Company's equipment, rights, titles and
                  patents pertaining to the "TiTRODE/Metafuse" technology.

                                     F-15
<PAGE>
 
                   ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE  7 - NOTES PAYABLE (Continued)

          e)(ii) On May 27, 1997, the Company entered into an installment loan
                 agreement with an individual shareholder to borrow $300,000,
                 payable in $100,000 installments on May 27,1997, September 5,
                 1997 and December 3, 1997. As of December 31, 1997, the
                 shareholder has advanced the Company $290,000 against the
                 $300,000 loan agreement. The installment loan bears interest at
                 12% per annum and is due on May 27, 1999. The loan agreement
                 provides for a minimum semi-annual interest payment of $6,000
                 commencing December 6, 1997, which was paid in January 1998.
                 The installment note is collateralized by the Company's rights,
                 titles and patents, technology known as "Ceramic Silicone
                 Foam." As additional consideration for the original $300,000
                 loan the Company agreed to issue 300,000 shares of the
                 Company's restricted common stock to the noteholder. The
                 Company has recorded this additional consideration as unearned
                 financing costs valued at $42,750, which is based on the fifty
                 percent (50%) of the fair market value of the common stock at
                 May 27,1997, the date of the installment loan agreement.
                 Unearned financing costs are being amortized over two years,
                 which amounted to $12,469 for the year ended December 31, 1997.
                 Furthermore, the Company granted the shareholder the right to
                 purchase 150,000 shares of restricted common stock at seventy-
                 five present (75%) of the fair market value for a period of 180
                 days commencing May 27, 1997, the date of the installment
                 agreement. As of December 31, 1997, the noteholder did not
                 exercise this option.

NOTE  8 - STOCKHOLDERS' EQUITY

          a)     Authorized Shares
                 -----------------

                 The Board of Directors of the Company voted to amend the
                 articles of Incorporation to increase the authorized shares of
                 preferred stock from 10,000 shares to 1,000,000 shares and
                 reduce the par value from $100 per share to $.01 per share. The
                 Board of Directors of the Company has broad discretion to
                 create one or more series of preferred stock and to determine
                 the rights, preferences and privileges of any such series.
                 Effective April 7, 1995, the articles of incorporation was
                 amended to increase the authorized shares of common stock from
                 20,000,000 shares to 50,000,000 shares.

          b)     Preferred Stock
                 ---------------

                 The Company has authorized 1,000,000 shares of preferred stock
                 having $.01 par value. The Company has not issued any stock nor
                 has the Company determined the rights and privileges of the
                 preferred class.
                 
                                     F-16
<PAGE>
 
                    ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE  8 - STOCKHOLDERS' EQUITY (Continued)

          c)   Common Stock Transactions
               ------------------------- 

               1997:
               ---- 

               During November 1997, the Company issued 200,000 shares of common
               stock in settlement of $50,000 of accrued liabilities.

               As discussed further in Note 7(f)(ii), the Company entered into
               an installment loan agreement with an individual shareholder to
               borrow $300,000.  As additional consideration for this loan, the
               Company agreed to issue 300,000 shares of the Company's
               restricted common stock.  The Company has recorded the additional
               consideration as unearned financing costs of $42,750, which is
               based on the fifty percent (50%) of the fair market value of the
               common stock at May 27, 1997, the date of the installment loan
               agreement.

               As discussed further in Note 9, the Company entered into a
               settlement agreement during 1997.   Pursuant to the agreement the
               Company was required to make a payment of 5,000 shares of
               unrestricted common stock and 35,000 shares of restricted common
               stock, which was valued by the Company at $18,800.

               During November of 1997, the Company and certain of its debt
               holders agreed to convert principal of $142,250 and related
               accrued interest of $11,184 into 1,036,694 shares of common
               stock.

               During December 1997, the Company's Board of Directors authorized
               the issuance of 200,000 shares of restrictive common stock under
               the management compensation plan discussed in Note 11.  The
               Company has valued the common stock at $50,000, which
               approximated fifty percent (50%) of the fair value at the date of
               issuance.

               As discussed further in Note 11c), the Company has cancelled
               6,066,830 shares of common stock in connection with a litigation
               judgement.

                                     F-17
<PAGE>
 
                   ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE  8 - STOCKHOLDERS' EQUITY (Continued)

          c)   Common Stock Transactions (Continued)
               -------------------------            

               1996:
               ---- 

               On December 27, 1996, the Company entered into a settlement
               agreement with a shareholder in connection with prior purchases
               of the Company's common stock. The settlement agreement provided
               for the Company to issue a $250,000 promissory note and a
               $250,000 payment through the issuance of 2,941,176 shares of the
               Company's restricted common stock, which was deemed the fair
               market value at December 27, 1996. Included in the year ended
               December 31, 1996 statement of operation, the Company has
               recognized the loss from this settlement amounting to $500,000.

               During the year ended December 31, 1996, the Company issued
               175,000 shares of its common stock in settlement of compensatory
               obligations of $38,500.

               During November of 1996, the Company and certain of its debt
               holders agreed to convert principal of $1,250,000 and related
               accrued interest of $114,785 into 7,861,091 share of common
               stock.

          d)   Stock Options
               -------------

               The Company has granted options to purchase shares of the
               Company's common stock to officers, key employees, consultants
               and financing sources as follows:

               (1)  1995 Stock Option Plan
                    ----------------------

                    The Company's 1995 Stock Option Plan (the "Option Plan") was
                    adopted by the Board of Directors and stockholders of the
                    Company in February 1995.  Under the Option Plan, 5,000,000
                    shares of the Company's common stock (subject to certain
                    adjustments) are reserved for issuance upon the exercise of
                    options.  Options granted under the Option Plan may be
                    either (i) options intended to constitute incentive stock
                    options under Section 422 of the Internal Revenue Code of
                    1986 (the "Code"), as amended, or (ii) non-qualified stock
                    options.  Incentive stock options may be granted under the
                    Option Plan to employees (including officers and directors
                    who are employees) of the Company on the date of grant.
                    Non-qualified options may be granted to (i) officers and
                    directors of the Company on the date of the grant, without
                    regard to whether they are employees, and (ii) consultants
                    or advisors to, agents or independent representatives of the
                    Company.  The Option Plan provides for a limit of up to
                    500,000 options per person.

                                     F-18
<PAGE>
 
                   ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE  8 - STOCKHOLDERS' EQUITY (Continued)

          d)   Stock Options (Continued)
               -------------            

               (1)  1995 Stock Option Plan (Continued)
                    ----------------------            

                    Incentive stock options granted under the Option Plan may
                    not have an exercise price less than the fair market value
                    of the common stock on the date of the grant (or 110% of the
                    fair market value in the case of employees holding ten
                    percent or more of the voting stock of the Company).
                    Options granted under the Option Plan will expire, not more
                    than ten years from the date of the grant (5 years in the
                    case of incentive options of employees holding ten percent
                    or more of the voting stock of the Company)  subject to
                    earlier termination under the Option Plan.  Optionees under
                    the Option Plan may exercise their options by paying cash,
                    by using the cashless exercise procedure allowed under
                    Federal Reserve Regulation T or by tendering shares of
                    Company common stock that they already own.  Options
                    generally become exercisable over a three-year period.

                    For options granted under the non-qualified plan,
                    compensation expense is recorded on the date of grant and is
                    measured by the amount per share that the fair market value
                    of the underlying shares on the date of grant exceeds the
                    grant price.  In August of 1995, in connection with the
                    employment and consulting agreements described in Note 11,
                    the Company granted non-qualified stock options to three
                    officers aggregating 900,000 shares.  The compensatory
                    portion of such grants aggregated $720,000 and is being
                    amortized over the twenty four-month period commencing April
                    1, 1995.  Amortization for the years ended December 31, 1997
                    and 1996 was $90,000 and $360,000, respectively.

               (2)  Non-Qualified Stock Options Outside the Option Plan
                    ---------------------------------------------------

                    From time to time, the Company issues  non-qualified stock
                    options outside the option plan described in (1) above.
                    These options are generally granted to consultants for past
                    services and are granted to note holders in connection with
                    financing agreements.

                    During the years ended December 31, 1997 and 1996, 150,000
                    and -0-, respectively, non-qualified options were issued to
                    noteholders under various financing agreements.  The 1997
                    options entitle the noteholder to purchase shares of
                    restricted common stock for a period of 180 days, commencing
                    May 27, 1997, at a 25% discount to the quoted trading prices
                    at the time of exercise.  As of December 31, 1997, the
                    noteholder did not exercise this option and, accordingly,
                    such options have expired.

                                     F-19
<PAGE>
 
                   ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE  8 - STOCKHOLDERS' EQUITY (Continued)

          d)   Stock Options (Continued)
               -------------            

               (3)  Shares Under Option
                    -------------------

                    There were no options exercised during the years ended
                    December 31, 1997 and 1996.  The following is a summary of
                    activity and information relating to shares (rounded to
                    whole shares) subject to option under the above described
                    plans for the years ended December 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                  Incentive     Weighted Average  Non-Qualified   Weighted Average
                                Stock Options    Exercise Price   Stock Options    Exercise Price
                                -------------    --------------   -------------    --------------
<S>                             <C>             <C>               <C>             <C>
 Total Outstanding - 12/31/95       1,016,400          $ .79          5,380,672         $ .31
 Options granted                            -                                 -           
 Options exercised                          -                                 -           
 Options expired:                                                                   
  Outside the option plan -                                                               
     financing agreements                                                                 
     ($.30-$2.00)                           -                          (500,000)          .58
                                    ---------          -----          ---------         -----
                                                                 
    Outstanding - 12/31/96          1,016,400          $ .79          4,880,672           .28
                                    ---------          -----          ---------         -----
                                                                 
Options granted - 1997:                                          
  Outside the option plan -                                                               
    stockholder loan                                                                   
Options exercised                                                                   
Options expired/cancelled:                  -                           150,000           .35
  Options cancelled                         -                                 -           
  Outside the option plan -                                                           
     financing agreements            (500,000)           .80                  -           
     ($.30-$2.00)                           -                          (200,000)          .40
                                    ---------          -----          ---------         -----
                                                                 
    Outstanding - 12/31/97            516,400            .79          4,830,672           .27
                                    ---------          -----          ---------         -----
                                                                 
Composition at 12/31/97:                                         
-----------------------                                          
  1995 stock option plan                                         
     ($.50-$.87/share)                516,400            .79                                       
  1995 stock option plan                                                              
     ($.01/share)                           -                         2,084,976           .01
  Outside the option plan -                                                        
     consultants                                                                      
     ($.01-$1.06/share)                     -                         1,595,696           .18
  Outside the option plan -                                                               
     financing agreements                                                                 
     ($.30-$2.00)                           -                         1,150,000           .88
                                    ---------          -----          ---------         -----
                                                                                          
     Outstanding - 12/31/97           516,400          $ .79          4,830,672         $ .27
                                    =========          =====          =========         =====

Total Value at Option Price         $ 406,200                        $1,330,407
                                    =========                        ==========
</TABLE>

                                     F-20
<PAGE>
 
                   ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE  8 - STOCKHOLDERS' EQUITY (Continued)

          e)   Warrants to Purchase Common Shares
               ----------------------------------

               Under various promissory notes agreements executed during 1995,
               the Company granted to certain note holders warrants to purchase
               848,323 shares of the Company's common stock.  The warrants,
               which carry certain anti-dilution provisions, become issuable
               upon the conversion of the notes and become exercisable one year
               from such issuance date.  The warrants are exercisable at prices
               ranging from $0.50 per share to $1.50 per share.  No warrants
               were issued or exercised during the years ended December 31, 1997
               and 1996.

NOTE  9 - OTHER (INCOME) EXPENSE

          Other (income) expense, net, consists of the following for the years
          ended December 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                                            1997        1996   
                                                         -----------  ---------
          <S>                                            <C>          <C>      
          a)   Write-off of prior liabilities             $(277,187)  $       -
          b)   Allowance against capital expenditures       223,064           -
          c)   Loss from litigation settlement               28,800           -
          d)   Gain from litigation settlement              (60,000)          -
          e)   Loss from litigation settlement                    -     500,000
                                                          ---------    --------
                   Total                                                       
                                                          $ (85,323)   $500,000
                                                          =========    ======== 
</TABLE>

          a)   On December 29, 1997, the Company's Board of Directors
               unanimously passed a resolution to write-off debt of $200,466
               that was allegedly incurred principally for consulting services
               and was determined by the current Board of Directors to be
               without demand or substantive evidence. Furthermore, the Company
               management wrote-off $76,721 of prior liabilities that was
               determined to be without demand or substantive evidence.

          b)   On May 18, 1995, the Company engaged a machine fabricator to
               build two machines to be used as part of an electrode coating
               system. Project costs paid and accrued by the Company through
               December 31, 1997 amounted to $223,064. The Company has not been
               able to satisfy the estimated remaining $45,000 of progress
               billings related to this project because of the Company's current
               financial condition. Accordingly, the Company has provided for a
               full allowance against its expenditures.

                                     F-21
<PAGE>
 
                   ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE  9 - OTHER (INCOME) EXPENSE (Continued)

          c)   During 1997, the Company entered into a settlement agreement with
               a shareholder in connection with prior purchases of the Company's
               common stock. The settlement agreement provides for the Company
               to pay $10,000 cash and a payment of 35,000 shares of the
               Company's restricted common stock and 5,000 shares of the
               Company's unrestricted common stock.  The shares were valued at
               $18,800, which was the fair market value at the date of
               settlement.  Aggregate loss from this settlement amounted to
               $28,800.

          d)   During 1997, the Company received notice of a settlement of debt
               between a noteholder and the former officers of Orbit
               Technologies.  The settlement agreement provided for the relief
               of a $50,000 note obligation and related accrued interest of
               $10,000 that was recorded as a liability by the Company.
               Accordingly, the Company has written-off the note and related
               interest, aggregating $60,000, as a gain from litigation
               settlement.

          e)   On December 27, 1996, the Company entered into a settlement
               agreement with a shareholder in connection with prior purchases
               of the Company's common stock.  The settlement agreement provided
               for the Company to issue a $250,000 promissory note and a
               $250,000 payment through the issuance of 2,941,176 shares of the
               Company's restricted common stock, which was deemed the fair
               market value at December 27, 1996.  Included in the year ended
               December 31, 1996 statement of operation, the Company has
               recognized the loss from this settlement amounting to $500,000.

NOTE 10 - INCOME TAXES

          The Company was not required to provide for a provision for income
          taxes for the years ended December 31, 1997 and 1996 as a result of
          net operating losses incurred during those years.

          The components of deferred tax assets and liabilities at December 31,
          1997 consist of the following:

<TABLE>
          <S>                                             <C>       
          Deferred Tax Assets:                                      
              Net operating loss carryforwards            $3,649,000
              Tax effects of temporary differences (*)     1,213,000
              Start-up costs                                 279,000
                                                          ----------
                  Total Gross Deferred Tax Assets                   
              Less: Valuation allowance                    5,141,000
                                                           5,141,000
                   Net Deferred Tax Assets                ----------
                                                                    
                                                          $        -  
                                                          ========== 
</TABLE>

          (*)  Temporary differences that give rise to the deferred tax asset at
               December 31, 1997 are primarily:  compensatory element of its
               grants of stock options, allowance against equipment
               expenditures, and deferred officers' compensation.

                                     F-22
<PAGE>
 
                    ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 10 - INCOME TAXES (Continued)

          The net change in the valuation allowance for deferred tax assets was
          an increase of approximately $353,000.

          As of December 31, 1997, the Company had available approximately
          $9,124,000 of net operating losses for income tax purposes that may be
          carried forward to offset future taxable income, if any.  The Tax
          Reform Act of 1986 imposed substantial restrictions on the utilization
          of net operating loss carry forwards in the event of an ownership
          change as defined by the Internal Revenue Code.

          These carryforwards expire in the following approximate amounts:

<TABLE>
               <S>                                        <C>        
               Year of Expiration:               
               -------------------             
                                                           $  557,000
                       2000                                   726,000
                       2001                                    43,000
                       2002                                     2,000
                       2003                                     2,000
                       2004                                     1,000
                       2005                                     1,000
                       2006                                   937,000
                       2007                                 1,937,000
                       2008                                   932,000
                       2009                                 1,814,000
                       2010                                 1,611,000
                       2011                                   561,000
                       2012                                ----------
                                                 
                                                           $9,124,000
                                                           ========== 
</TABLE>

          A reconciliation between the statutory federal income tax rate (34%)
          and the Company's effective rate is as follows:

<TABLE>
<CAPTION>
                                                 Years Ended December 31, 
                                                --------------------------
                                                  1997             1996   
                                                 ------           ------
               <S>                              <C>               <C>         
               Federal statutory rate            (34.0)%          (34.0)%
               Non-deductible expenses              .2               .4 
               Unutilized net operating loss      33.8             33.6 
                                                ------           ------ 
               
               Effective rate                     -0-  %           -0-  %
                                                ======           ======  
</TABLE>

                                     F-23
<PAGE>
 
                    ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 11 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS

          Lease Obligation
          ----------------

          At December 31, 1997, the Company has a remaining obligation of six
          months under a  long-term operating lease for office space.  Monthly
          payments under this lease amount to $2,975 from January 1, 1998
          through June 30, 1998.  Thereafter, the lease converts to a month-to-
          month rental subject to negotiations between the lessor and the
          Company.

          Rental expense for the years ended December 31, 1997 and 1996 was
          $34,743 and $35,695, respectively.

          Employment and Consulting Agreements
          ------------------------------------

          On April 1, 1995, the Company entered into three agreements with its
          then current officers.  The agreements provide for monthly salaries
          aggregating $30,000, over an initial two-year period ending March 31,
          1997, and provide for automatic annual renewals.  In addition to the
          compensation described above, the Company granted these officers
          1,200,000 options, of which 900,000 were exercisable at $.01 per
          share, under the Option Plan as described in Note 8(d).  The officers
          have agreed to defer 40% of their respective salaries until a
          financing of at least $3.5 million is raised by the Company.
          Effective January 1, 1997, one of the three officers elected to
          terminate their contract, which was mutually agreed to by the Company.
          Obligations under the remaining two agreements aggregate $252,000 per
          year.

          For the years ended December 31, 1997 and 1996, the expense recorded
          under these agreements amounted to $252,000 and $360,000,
          respectively.  At December 31, 1997, unpaid obligations under these
          agreements amounted to $601,100 and are convertible into common stock
          at $.22 per share.

          Potential Securities Act Liabilities
          ------------------------------------

          The Company has sold securities and notes without registration under
          the Securities Act of 1933, as amended (the "Act"), or without
          qualification under the securities (blue sky) laws of certain states.
          As a result of such sales, and a subsequent transfer of the shares by
          the original purchasers, the Company has not determined it can claim
          valid exemptions for such sales since the burden of proving any
          exemption is on the Company.

          Therefore, no assurances can be given as to the existence or extent of
          any liability which may result for violating the registration or
          qualification provisions of the federal or state securities laws.  The
          Company thus may have a continuing contingent liability under the
          Securities Act of 1933, as amended, the Securities Exchange Act of
          1934, as amended (the "Exchange Act"), and various state securities
          laws for an undetermined amount for an undetermined period.

                                     F-24
<PAGE>
 
                   ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 11 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)

          Potential Liability for Over-issuances
          --------------------------------------

          Between December 16, 1992 and February 17, 1994, the Company issued
          approximately 15 million more shares of its common stock than it had
          authorized by its Certificate of Incorporation. As a result of
          cancellations during 1997 and a tentative settlement discussed in Note
          11f, the remaining amount has been reduced to approximately 2 million
          shares.

          It is conceivable that some shareholders will try to hold the Company
          responsible for the acts of its former officers and directors with
          respect to the issuance of such stock in excess of the Company's
          authorized shares.  The potential liability is unknown, but could be
          significant.  It could also interfere with the settlement of the
          Benveniste litigation (Note 11f).  Orbit anticipates pursuing an
          action in Delaware to resolve this matter.

          Management Compensation Plan
          ----------------------------

          On January 3, 1997, the Board of Directors instituted an incentive
          compensation plan for the Company's key personnel. The plan provides
          for the issuance of 100,000 shares of common stock for each of the
          five events described as follows:

          1.   An increase in the common stock price to $1.00 per share by
               December 31, 1997.

          2.   First revenue producing contract.

          3.   A singular funding of $1,000,000 or more.

          4.   The filing of registration statement or the reduction of debt
               over $1,000,000 via a stock conversion or other means.

          5.   Cancellation and or the surrender of shares by former officers,
               directors, consultants, etc. who are subject to various legal
               action by the Company.

          If all the events are accomplished by December 31, 1997 an additional
          100,000 shares will be issued to each key personnel.  As of December
          31, 1997, the Company has accrued 200,000 shares valued at $50,000
          under this management compensation plan.

                                     F-25
<PAGE>
 
                    ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 11 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)

          Litigation/Disputes
          -------------------

          a)   The Metafuse technology was utilized to coat copper-alloy
               resistance welding electrodes (welding tips) through the fusion
               of titanium carbide or molybdenum tungsten onto and into copper-
               alloy welding tips ("TiTRODEs"). Chrysler Corporation has
               integrated the TiTRODE type electrodes into certain of its
               manufacturing plants. TiTRODE type electrodes are being sold to
               Chrysler by a Canadian corporation, with which the Company claims
               to have an written agreement beginning in January 1994, whereby
               the two parties would share net revenues derived from the sale of
               TiTRODEs. The Canadian corporation has not acknowledged the
               validity of such agreement, and to-date, no monies or any
               financial information have been received by the Company. The
               Company intends to retain legal counsel to enforce its written
               agreement. No action was taken during 1997.

          b)   Emerson v. Orbit Technologies, Inc. et al..  Plaintiff claims
               ------------------------------------------                   
               that Richard A. Wall, a former officer of Orbit, caused
               restricted stock to be issued to her without disclosing the
               restriction. Emerson seeks damages of approximately $125,000.
               Orbit is named as the issuing corporation. Plaintiff failed to
               timely serve Wall and he has been dismissed in the main action.
               Orbit has filed a cross complaint against Wall for
               indemnification and, in addition, is seeking to invalidate his
               Orbit stock holdings and recover monies as a result of Wall's
               actions. Orbit's Cross Claim for indemnification against Mr. Wall
               was dismissed on procedural grounds. The Company has entered into
               a settlement with Ms. Emerson, under which she will receive
               $10,000, plus 5,000 shares of unrestricted stock, plus 35,000
               shares of restricted stock.

          c)   Joseph vs. Orbit Technologies Inc.  In October 1995, the Company
               ----------------------------------                              
               commenced an internal audit of its debt and equity structure.  In
               February 1996, preliminary findings of the internal audit
               suggested that certain stock issuance to former officers and
               related entities were without consideration. This resulted in a
               request made by the Company upon certain individuals, including
               former directors and officers of the Company, to surrender stock
               issued to and held by them for purposes of cancellation. One of
               the individuals, subject to the internal audit and request to
               surrender stock for cancellation, Adrian Joseph ("Joseph"), the
               Company's former chairman and president, has initiated a judicial
               action in the Superior Court of California, County of San Diego,
               seeking a declaration of his rights in and to Orbit stock. The
               Company has sought to cancel all stock held, possessed or
               controlled by Mr. Joseph either in his individual capacity, his
               family or corporations.  The Company and current management
               prevailed in that action as the court denied the challenge of
               Joseph.  Although Joseph's stock was not canceled in this action,
               the court prevented Joseph from interfering with the business of
               the Company for a period of one year or the length of any action
               brought by the parties.

                                     F-26
<PAGE>
 
                    ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 11 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)

          Litigation/Disputes (Continued)
          -------------------            

          c)   Joseph vs. Orbit Technologies Inc. (Continued).  Adrian Joseph,
               ----------------------------------------------                 
               Orbit former CEO, President and Chairman, filed an action for
               declaratory relief seeking to validate his stock holdings in
               Orbit. Orbit has cross-claimed against Joseph and Tatum
               Singletary, another former officer, seeking to invalidate prior
               issuance of stock in connection with certain questionable
               transactions discussed above.

               On October 21, 1997, the San Diego Superior Court of California
               ordered Joseph, Singletary, Mikimak, Ltd., a foreign corporation
               controlled by Joseph, to surrender 10,418,988 shares of Orbit
               common stock to the extent that said common stock are within
               their possession, custody or control.

               The Company has adjusted its outstanding shares by cancelling the
               shares held by the former Board of Directors at December 31,
               1997.  It was determined the number of shares held by the
               plaintiff amounted to 6,066,830.

          d)   Jeffer, Mangels, Butler & Marmaro, LLP v. Orbit Technologies,
               -------------------------------------------------------------
               Inc..  Action by former attorneys of Orbit to compel arbitration
               -----                                                           
               to recover attorney fees. Orbit stipulated to arbitration of fee
               dispute and stipulated to entry of interim arbitration award in
               the amount of approximately $110,000, subject to any defenses,
               offsets or claims, which Orbit is asserting by way of a separate
               legal malpractice action.

               The Company's legal malpractice action was directed to
               arbitration by a retainer agreement signed by Mr. Joseph, in his
               capacity when he was with the Company.  Prior to Orbit becoming a
               client, Mr. Joseph was a personal client of Jeffer, Mangels,
               Butler & Marmaro.  The retainer agreement signed by Joseph has
               barred Orbit from filing a legal malpractice action.

          e)   Sansone v. Joseph, et al.  Action by shareholder to recover on
               -------------------------                                     
               $50,000 note signed by Joseph and Orbit which Orbit has
               defaulted.  Plaintiff has obtained a judgement against Joseph for
               the full amount of the debt and has attached $60,000 of sales
               proceeds owed to Joseph against which to collect.  Joseph has
               cross-claimed against Orbit for indemnification, which was
               denied.

               During 1997, the plaintiff, Sansone, released the Company from
               the $50,000 note obligation and related accrued interest, which
               was written-off to gain from litigation settlement.

                                     F-27
<PAGE>
 
                   ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 11 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)

          Litigation/Disputes (Continued)
          -------------------            

          f)   Benveniste, et. al. vs. Orbit and Its Officers.  The action was
               ----------------------------------------------                 
               filed on March 6, 1997 in the Los Angeles Superior Court.  The
               action is to collect principal, interest and other fees and
               damages relating to various promissory notes executed between the
               plaintiffs and Orbit during 1992 totalling $197,000 and
               additional loans made during 1995 totalling $600,000.

               The plaintiffs allege that the defendants violated the securities
               laws of the state of California and made negligent
               misrepresentations related to Company's technologies, thereby
               inducing them to loan monies to the Company.  The plaintiffs also
               allege that, pursuant to an oral agreement with an officer of the
               Company, the exercise price for various stock options to acquire
               Orbit stock was reduced to $0.10 per share and the conversion
               price under various convertible loan agreements between the
               plaintiffs and Orbit was also reduced to $0.10.

               Further, the plaintiffs allege that they have not received
               500,000 shares of Orbit stock promised as additional
               compensations under such agreements and that debt related to the
               1992 loans of $197,000 is not reflected on the Company's books.

               Management contends that all of the debt and related fees and
               shares of common stock are properly reflected on Orbit's books as
               of December 31, 1997.  The Company's records reflect that the
               debt related to the 1992 loans of $197,000 and related accrued
               interest was converted into 226,550 common shares of Orbit in
               1993.  Management also contends that there was no oral agreement
               to reduce the exercise and conversion prices of certain financial
               instruments.  Further, management contends that there were no
               violations of securities laws, that no misrepresentations were
               made to plaintiffs and all other complaints are without merit.

               Orbit contends that the plaintiffs loaned money to another
               entity, other than Orbit in 1992, for which Orbit has no
               liability.  Additionally, Orbit contends that the plaintiffs hold
               substantial shares of Orbit common stock which are void and/or
               voidable.  By its Cross Complaint, Orbit seeks to cancel
               invalidly issued stock and recover money damages.

                                     F-28
<PAGE>
 
                   ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 11 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)

          Litigation/Disputes (Continued)
          -------------------            

          f)   Benveniste, et. al. vs. Orbit and Its Officers.  (Continued). In
               ------------------------------------------------------------    
               June of 1998, a tentative comprehensive settlement was reached by
               all parties.  The financial terms of the tentative settlement
               include the conversion of all of the Benveniste's debt to
               5,745,000 shares of common stock.  Because the accord requires
               the surrender and cancellation of approximately 5 million shares
               of Orbit common stock issued by past officers and directors that
               Orbit contends are invalid, the net effect will be to maintain
               the existing equity structure.  The agreement also grants to the
               Benvenistes the option to purchase up to 1,100,000 shares at a
               price ranging from $.23 to $.75 per share.

               The settlement has several contingencies, which need to be
               resolved before the settlement is final.

          g)   Benveniste, et al. vs. Lahey, et al.   On June 2, 1997, Richard
               ------------------------------------                           
               Benveniste and Edgar Benveniste filed suit in the Delaware Court
               of Chancery on behalf of themselves and purportedly on behalf of
               the Company against James B. Lahey, James A. Giansiracusa,
               Stephen V. Prewett, Ian C. Gent and William N. Whelen.  The
               complaint sought a determination by the Court of Chancery for:
               (i) as to who constituted the valid directors of the Company in
               connection with a written consent action initiated by the
               plaintiffs or, (ii) in the alternative, that the Company be
               required to hold a annual meeting of shareholders.

               On September 2, 1997, the Court of Chancery decided to defer a
               decision on the defendants motion to dismiss until such time as
               an annual meeting of the Company's shareholders was held.  The
               Court thereafter ordered that the Company hold its annual
               meeting.  The Company is in the process of complying with the
               Court's requirements.

          h)   Jacobs vs. Orbit.  This action was filed on June 27, 1997, in the
               -----------------                                                
               Superior Court of California, County of Los Angeles as Case No.
               BC 173600.  The plaintiff seeks money damages allegedly
               attributable to his inability to sell restricted stock.  In April
               of 1998, the parties to the above action have entered into a
               mutual release agreement, whereby Jacobs will relinquish 1,000
               shares of Orbit common stock.

          i)   Wilson vs. Orbit.  This action was filed on September 15, 1997 in
               ----------------                                                 
               the Superior Court of California, County of Los Angeles.   The
               plaintiff seeks money damages allegedly attributable to his
               inability to sell restricted stock. This action was settled in
               1998, resulting in the issuance of 45,000 additional common
               shares to Wilson.

                                     F-29
<PAGE>
 
                   ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 12 - SUPPLEMENTAL CASH FLOW INFORMATION

          During the years ended December 31, 1997 and 1996, the Company paid $-
          0- and $9,120 for interest, respectively.

          Non-Cash Transactions
          ---------------------

          During the year ended December 31, 1997:

          a)   The Company issued 300,000 shares of common stock as additional
               consideration for a $300,000 loan obligation, which has been
               valued at $42,750.

          b)   Convertible promissory notes and related accrued interest
               aggregating $153,434 were converted to 1,036,694 shares of common
               stock.

          c)   In connection with a legal settlement agreement, the Company
               issued 5,000 shares of its unrestricted common stock and 35,000
               shares of restricted common stock valued at $18,800.

          d)   The Company issued 200,000 shares of common stock as
               consideration for accrued expenses valued at $50,000.

          e)   The Company reduced notes payable of $50,000 and related accrued
               interest of $10,000 as a result of a favorable outcome in a legal
               settlement.

          f)   During the year, the Company wrote-off old liabilities relating
               to the former Board of Directors valued at $76,721.

          During the year ended December 31, 1996:

          a)   The Company issued 175,000 shares of common stock as
               consideration for current compensatory obligation amounting to
               $38,500.

          b)   Convertible promissory notes and related accrued interest
               aggregating $1,364,784 were converted to 7,861,091 shares of
               common stock.

          c)   In connection with a legal settlement agreement, the Company
               issued a $250,000 promissory note and 2,941,176 shares of its
               common stock valued at $250,000.

                                     F-30
<PAGE>
 
                   ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 13 - SUBSEQUENT EVENTS

          Notes Payable
          -------------

          a)   During the first quarter of 1998, the Company converted $25,000
               of principal, relating to a note payable, into 108,412 shares of
               the Company's common stock.

          b)   During the first quarter of 1998, the Company sold in total
               315,556 shares of common stock to three unrelated individuals.
               Aggregate proceeds received from these stock sales amounted to
               $96,100.

                                     F-31
<PAGE>
 
                                  SIGNATURES

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

Orbit Technologies Inc.



By:  /s/ James B. Lahey
   ------------------------------------  
 James B. Lahey
 Chief Executive Officer and Chairman of the Board of Directors

Date:  April 21, 1999

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

<TABLE>
<CAPTION>
NAME                          TITLE                         DATE
----                          -----                         ----
<S>                           <C>                           <C>
 
/S/ JAMES B. LAHEY            Chief Executive Officer and    April 21, 1999
----------------------------  Chairman of the Board (Chief
James B. Lahey                Executive Officer)
 
/S/JAMES A. GIANSIRACUSA      Vice President- Operations,    April 21, 1999
----------------------------  Chief Financial Officer
James A. Giansiracusa         (Chief Financial and
                              Accounting Officer),
                              Secretary, and Director
 
/S/ IAN C. GENT               Director                       April 21, 1999
----------------------------
Ian C. Gent

/S/STEPHEN V.  PREWETT        Vice President - Technology    April 21, 1999
----------------------------  Development and Director
Stephen V. Prewett
 
/S/WILLIAM N. WHELEN          Director                       April 21, 1999
----------------------------
William N. Whelen, Jr.
</TABLE>