<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, 1998


            [_] 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: 760/918-9168
       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, 1998 were $ -0-.

     On December 31, 1998, the aggregate market value of the voting stock held
by non-affiliated totaled approximately $6,398,052 based on the closing stock
price as reported by The OTC-BB of the NASDAQ Stock Market.

   At December 31, 1998; 31,990,261 shares of Common Stock were outstanding.

    Transitional Small Business Disclosure Format: Yes [_]    No  [X]
<PAGE>
 
                                    PART I
                                        
Forward-Looking Statements

This Form 10-KSB contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" in Exhibit 99 and elsewhere in
this Form 10-KSB. The following summary is qualified in its entirety by the
more detailed information and the consolidated financial statements, including
the notes thereto, appearing elsewhere in this Form 10-KSB.

Due to financial conditions the Company has not filed the Form 10-QSB's for 1998
and the Form 10-KSB encompasses the material developments during the year.
Moving forward the Company intends to file all quarterly reports as required by
current regulations.

Item 1.  DESCRIPTION OF BUSINESS

Orbit Technologies, Inc. (the "Company" or "Orbit") was incorporated under the
laws of the state of Delaware in 1985.  The Company's mandate is to develop base
technologies into commercially viable products, which are licensed or sold to
affiliated and/or unaffiliated entities that are responsible for the production
and marketing of such products.  The technologies described herein are
undergoing certain feasibility studies and testing, and none has proved
commercially feasible.

The Company is the owner of various patents pending and issued related to a
number of core technologies.  The Company intends to file patents to cover new
technologies it develops or acquires and to cover improvements to existing
patents.

General

The Company retains independent engineers, research consultants, institutes,
independent business entities, and other technical and business consultants as
needed to develop and analyze technologies. The Company is focusing on its
Polymer Encapsulation Technology (PET) which it believes has potential to yield
a significant and commercially viable environmental product. PET provides
certain benefits to generators of radioactive and toxic wastes with a method to
stabilize and encapsulate such materials for environmentally safe disposal. The
Company may license the technology, seek a strategic alliances or establish
joint venture relationships with specific industry leaders.

The Company evaluates the commercial viability for each technology.  When a
commercial application is developed, the Company will license the technology to
a licensee for a license fee and royalty payments.  The licensee undertakes the
process of bringing applications of the technology to market independently or
through manufacturing and marketing utilizing joint ventures, selected partners,
or sublicensing.  Specific applications of a particular technology may be
licensed to separate entities, each of whom is responsible for that particular
application.  Additional funding may be required during these various phases of
technology development and commercialization

Polymer Encapsulation (PET) Technology

The Company has filed a new patent covering specific applications of its Polymer
Encapsulation Technology (PET).  PET is a non-flammable, non-toxic polymer
formulation specifically designed for nuclear waste remediation, toxic waste
containment, and encapsulation of difficult to treat hazardous waste materials.

                                       2
<PAGE>
 
Previously referred to as Orbit's "Ceramic Silicone Foam" ("CSF"), Orbit's new
Polymer Encapsulation Technology includes enhanced material properties and
formulations and improved application processes. PET remains intact above 1000
degrees C and exceeds the melting point of many metals. These properties make
PET a potentially viable solution to permanently contain many hazardous wastes.
Applications may exist in aerospace, public transportation, and health care. PET
also has the potential to be effective in providing chemical or thermal
barriers.

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

Nuclear/Toxic Waste Containment Technology

The Company's nuclear/toxic waste containment technology has proven effective in
a laboratory setting in containing nuclear waste and radioactive particles.  The
Company uses polydimethylsiloxane (PDMS) polymers as a base material to create a
unique compound through the addition of certain proprietary materials and
formulation methods. The final encapsulation material is specially designed and
formulated to be application specific based on the required performance
criteria.

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,
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
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. Plan include a continuation of the commercialization evaluation
phase when additional funding becomes available.

The Company holds patents for the original Metafuse Process and has filed
specific patents for the Polymer Encapsulation Technology (PET).

                                       3
<PAGE>
 
Other Technologies

Since 1996, the Company has been reevaluating and prioritizing other
technologies which it possesses. While the Company has devoted its efforts to
the development of its Polymer Encapsulation Technology (PET) system, efforts to
determine the viability of its other technologies will be pursued when
additional funding becomes available. There is, however, no assurance that such
funding will be obtained to facilitate these efforts.

The Company is continually searching for and evaluating other technologies which
may yield commercially viable products and would fit vertically or horizontally
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, 1998, the Company employs three individuals.  The Company
also retains independent engineers, research consultants, institutions,
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, 1998 and 1997
were $7,416 and $1,141, 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.

Item 3.  LEGAL PROCEEDINGS

Introduction

The Company is involved in 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. 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, Mikimak, Ltd., Joseph's Bahamian company, Tatum Singletary, Richard A.
Wall, Richard and Edgar Benveniste, and others. Other actions deal specifically
with the collection of debts owed by the Company.  Subsequently, paragraphs 1
through 6 describe those actions.

The Company is a party to the following proceedings:

1.  Benveniste, et. al. v. Orbit 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

                                       4
<PAGE>
 
aggregating $600,000 and loans made during 1992 aggregating $197,000.

The plaintiffs, Richard and Edgar Benveniste, 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 $7,000,000.

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 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.

In June 1998, Orbit announced that it had reached a tentative accord to
eliminate pending litigation with various claimants.

In December 1998, the parties entered into a settlement agreement which resolves
all of the claims and the cross-claims.  As part of the settlement,
approximately 5 million shares will be surrendered for cancellation by a variety
of parties including the Benvenistes. The Benvenistes have agreed to convert
debt to equity and will be issued approximately 5.7 million shares of stock.
(Also see Item 3., Introduction.)

2.   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 been awarded pursuant to the interim arbitration
award.

3.   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 

                                       5
<PAGE>
 
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 court of California (Adrian Joseph
v. 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 was held. The Court thereafter ordered that the Company hold its
annual meeting. As part of the global settlement involving the Benvenistes, it
is anticipated that this case will be dismissed unless Orbit decides to use it
as a vehicle for addressing issues to be resolved as part of the settlement in
the State of Delaware. The Company is hoping that the resolution of all these
issues will allow the Company to call a shareholders meeting in the second
quarter of 1999. (Also see Item 3., Introduction.)

4.   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, sought money damages allegedly attributable to his
inability to sell restricted stock. Management believes this action has no
merit.

This action is included as part of the global settlement including other
claimants. Jacob's claims have been settled as part of the Benveniste litigation
and Jacobs will surrender all claimed stock to the Company.  Orbit did not
contribute to that settlement and the action has been dismissed. (Also see Item
3., Introduction.)

5.   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. The plaintiff, Ambassador William A. Wilson, sought money
damages allegedly attributable to his inability to sell restricted stock.
Management believes this action has no merit.

This action is included as part of the global settlement including other
claimants. Orbit settled the claim by agreeing to issue 75,000 shares of stock
to Wilson and accept the surrender of 30,000 shares of stock claimed by
Ambassador Wilson and the action has been dismissed. (Also see Item 3.,
Introduction.)

6.   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. N0 79127. Plaintiff seeks payment pursuant
to a Convertible Promissory Note upon which the defendant has not paid.

The action has been settled by the plaintiff agreeing to convert half of the
outstanding balance of the debt, approximately $68,280, into stock at a
conversion price of $0.25 per share and Kabrins has agreed to accept a 10% Note

                                       6
<PAGE>
 
for the remainder of the debt.

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

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

No matters were submitted during the year ended December 31, 1998 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 was 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.

Calendar Year ended December 31:
 
1997                High     Low
 
First Quarter       $0.34   $0.16
Second Quarter       0.36    0.16
Third Quarter        0.49    0.28
Fourth Quarter       0.67    0.32

 
1998
 
First Quarter       $0.62   $0.34
Second Quarter       0.52    0.30
Third Quarter        0.42    0.20
Fourth Quarter       0.30    0.16
 
1999
 
First Quarter       $0.33   $0.18
 
There were approximately 1500 shareholders of record of Common Stock as of
December 31, 1998.  The Company has not paid cash dividends on its Common Stock
and does not intend to do so in the foreseeable future.

During 1998 the Company converted $440,332 of principal and related accrued
interest of $93,903 into 4,340,059 shares of common stock pursuant to exemptions
under Section 4(2) and or Regulation D., under the Securities Act of 1933, as
amended.

Item 6.  MANAGEMENT'S PLAN OF OPERATION

Since 1996, the Company has focused on the development and use of its
polydimethalsiloxane-based Polymer Encapsulation Technology (PET) as a method
for stabilizing and encapsulating various radioactive and toxic waste materials
leading to a final waste form for disposal.

                                       7
<PAGE>
 
Significant progress has been attained as evidenced by the success achieved on
test and evaluation contracts completed for Lockheed Martin Idaho Technologies
Company (LMITCO) in conjunction with the U. S. Department of Energy, Idaho
Operations Office, at their Idaho Falls waste site.  The Company's business plan
and near term strategy will focus the Company's human resources and funding on
developing the Polymer Encapsulation Technology (PET) as a modern technology
solution to various radioactive and toxic waste materials identified for
environmentally safe disposal.

As a next step in product acceptance, Lockheed Martin Idaho Technologies Company
and Orbit, together with input from the Microscale Physiochemical Laboratory at
the University of Akron and Ecology and Environmental, Inc. (Orbit's Teaming
Partner) have recently completed the Scope of Work that will lead to a follow-on
calcine evaluation contract utilizing Orbit's PET as a potential transportation
medium in addition to a stabilization and encapsulation material. The
elastomeric properties and material characteristics provided by PET are of
particular benefit in eliminating the potential risk that would occur in the
transportation of the waste from one site to another for long term storage or
disposal.  It is estimated that this evaluation phase will be completed in late
1999.

After product performance evaluations are successfully completed for stabilizing
and encapsulating the waste, a pilot plant evaluation is normally conducted.
The pilot plant demonstrates actual processing methods and applications
incorporating both PET and selected waste materials.

Building on the successes achieved under the Lockheed Martin contracts, the
marketing strategy is to build a substantial government and private sector
business in which Orbit's system will be used in the containment of various
radioactive and heavy metal wastes. Work has begun with initial contacts being
made with industry leaders in the waste management and waste remediation sectors
and potential end-users of the technology.  Ultimately, the Company plans to
develop strategic relationships with prime contractors throughout the waste
management industry.

Until completion of the final 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.

Background

In May 1996, the Company was awarded a sole source contract, within its
category, to participate in the U. S. 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 that produced acceptable
results. A conceptual process design was also performed as well as initial cost
estimates 

                                       8
<PAGE>
 
generated. This study has had wide distribution within the Department of Energy.
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
Orbit's 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 (LMITCO) to test and evaluate Orbit's material as a
stabilizing media for sodium and nitrate salts, which included 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.

In August 1997, Lockheed Martin expanded the initial contract to include two
additional nitrate-type surrogate waste materials containing cadmium and an
organic solvent. Conclusions from a report published in November 1997 by
Lockheed Martin indicated that Orbit's material appears to be suitable for the
stabilization of DOE complex salt wastes.  The final waste form passed the TCLP
protocol and DOT oxidizer tests.

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.  The proposal received wide dissemination within the
U.S. Department of Energy.

In March 1998, the Company was awarded a contract by Lockheed Martin Idaho
Technologies Company to evaluate encapsulation of both surrogate and actual WERF
(Waste Experimental Reduction Facility) low level waste with its Polymer
Encapsulation Technology (PET).

In July 1998, the Statement of Work was modified and redirected the Company to
focus on a low level calcine material.  These new tests included mixing studies
and enhanced treatment methodologies. Test reports by Lockheed Martin indicated
that encapsulation of the low-level mixed waste fraction from INTEC calcined
waste has potential as an encapsulating media for final disposal and the report
recommended exploration of further treatment formulations.

In August 1998, a paper detailing the Company's mixed waste encapsulation
technology, entitled "Encapsulation of Nitrate Salt Waste Using Polysiloxane,"
was selected for presentation at the 216th Annual American Chemical Society
National Meeting. The paper examined the use of a new waste management solution
to encapsulate the U.S. Department of Energy's approximately 250 million-kg of
dry nitrate salt waste which is laden with heavy metals and radioactive
isotopes.

In October 1998, the Company filed a new patent application for its Polymer
Encapsulation Technology (PET).  The new patent was the result of rigorous test
and evaluation over the last year and included the results of enhanced
formulations and improved process applications. The Company's system involves a
method for stabilizing granular salts generated by solidifying neutralized
acidic solutions used to recover and reformulate weapons material.

                                       9
<PAGE>
 
In the last six months the Company has included new surfactant additives, or
binding agents, that enable the system to encapsulate and stabilize waste
material which may include soluble chromium compounds, sodium nitrate, potassium
nitrate, plutonium 238 and 239, uranium 238, and other harmful contaminants.

Orbit's encapsulation system is designed to form a cohesive material suitable
for transportation and final disposal, featuring a low leaching index as well as
the ability to perform at increased waste loading factors. The system has been
developed for the treatment of waste material to prevent environmental damage,
because certain wastes that cannot be easily or economically rendered
environmentally harmless still pose significant disposal problems.

In October 1998, Orbit's new and recently patented Polymer Encapsulation
technology (PET) was selected for presentation at the 19th U. S. Department of
Energy Low-Level Radioactive Waste Management Conference. The goal of the
conference was to provide an opportunity for information exchange between
representatives of the commercial and defense related low-level radioactive
waste management communities.

Financial Condition

For the fiscal years ended December 31, 1997 and 1998, the Company had no
revenues.  General and administrative expenses decreased from $635,318 in 1997
to $484,711 in 1998.  For the years ending December 31, 1998 and December 31,
1997, the Company incurred an operating loss of $877,054 and $882,223,
respectively. It is anticipated that net-operating losses will continue through
the next two years.

Liquidity and Capital Resources

On December 31, 1998, the Company had an accumulated deficit and a working
capital deficit of $14,895,616 and $3,477,841, respectively. The Company had a
ratio of liabilities to tangible assets of approximately 28.2 to 1 as of
December 31, 1998. The Company is also in default on a significant number of
notes that total approximately $1,600,000 in principal as of December 31, 1998.
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, and September 5, 1997, and December 6, 1997.  The installment loan bears
interest at 12% per annum.  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 its polymer technology collateralize the
installment note. The interest payments are currently in default.  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.

The Company will require additional financing to finance it proposed business
plan.  No assurance can be given that additional financing can be obtained, or
if obtainable, that the terms will be satisfactory to the Company. 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

                                       10
<PAGE>
 
lack of adequate funding.

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:

Name                    Age   Title
----                    ---   -----
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   Director
William N. Whelen, Jr.   61   Director

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 Bachelors degree in Civil Engineering from Manhattan College.

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 in the securities and banking industries, he has held
positions as Vice President, Merrill Lynch Royal Securities in Canada, Managing

                                       11
<PAGE>
 
Director of a regional broker dealer, President and Chief Operating Officer of
Southern Tier Gas Producers, and President and Chief Executive Officer of GDM
Securities, a wholly owned subsidiary of Goldome Savings Bank.  Mr. Gent is
currently Chairman and a Director with 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. Today Mr. Whelen is a Director with S. A. Power Corporation
USA.  He is a registered representative of Simon Securities, New Jersey.  Mr.
Whelen has an electrical engineering degree from Widener University of Chester,
Pennsylvania.

There are no family relationships 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, 1998, there
was compliance with all Section 16(a) filing requirements applicable to its
executive officers, directors and greater than 10% beneficial stockholders.

                                       12
<PAGE>
 
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, 1998:

                           Summary Compensation Table
<TABLE>
<CAPTION>
                                                                
                                                                      -------------------------------
    Name and                                                           Long Term Compensation Awards 
Principal Position                 Annual Compensation                -------------------------------                     
------------------         ------------------------------------        Securities         All Other   
                           Year          Salary           Bonus        Underlying          Annual    
                           ------------------------------------       Options/SAR        Compensation 
                                                                      -----------        ------------
<S>                        <C>           <C>              <C>         <C>                <C>
James B. Lahey,                                                                                      
President                  1998          $120,000(1)       0               0                  0
                           1997           120,000(1)       0               0                  0
                           1996           120,000(1)       0               0                  0

James A. Giansiracusa,     1998          $132,000(1)       0               0                  0
Vice President,            1997          $132,000(1)       0               0                  0       
Operations                 1996          $132,000(1)       0               0                  0

Stephen V. Prewett,        1998          $   0             0               0                  0
Vice President,            1997          $108,000(1)       0               0                  0
Technology Development     1996          $108,000(1)       0               0                  0
</TABLE> 

(1)  The amounts stated above have not been fully paid and Messrs. Lahey,
     Giansiracusa, and Prewett have agreed to deferred compensation in the
     amount totaling $823,100 from deferrals in the three fiscal years reflected
     in the above table. (Also see Notes 6 and 11 to Consolidated Financial
     Statements.)

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, 1997 and 1998, 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 1998,
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, 1998 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>
                                                           Number of Securities       Value of Unexercised
                           Shares                         Underlying Unexercised          In-the-Money
                        Acquired on         Value        Options/SARs at FY-End (#)  Options/SARs at FY-End ($)
Name                    Exercise (#)     Realized ($)    Exercisable/Unexercisable   Exercisable/Unexercisable 
----                    ------------     ------------    -------------------------   --------------------------
<S>                     <C>              <C>             <C>                         <C>
James B. Lahey              0                 0                  300,000/0                    $54,000/$0
James A. Giansiracusa       0                 0                1,356,593/0                   $244,186/$0
                                                            
Stephen V. Prewett          0                 0                  594,783/0                   $107,060/$0
                                         
</TABLE>

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.

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

The following table sets forth, as of December 31, 1998, 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>                              Amount and Nature    Percent of
Name and Address of                      of Beneficial     Outstanding
 Beneficial Owner                        Shares Owned       Ownership
-------------------                    -----------------   -----------
<S>                                    <C>                 <C>
James B. Lahey (1,3,5)                     900,000             3%
James A. Giansiracusa (2,3,5)            1,621,593             5%
Ian C. Gent (5)                            100,000             *
Stephen V. Prewett (4,5)                   594,783             2%
William N. Whelen, Jr. (5)                   ----              *
                                   
All Officers and Directors as a    
 group (5 persons) (6)                   3,216,376            10%
Ruth P. Brittingham (7)                  4,022,292            13%
S. A. Power Corporation (7)              2,000,000             6% 
O. G. Sansone & Colleen Sansone (7)      6,303,606            20%
</TABLE>
-----------------------------------
 *     Amount held represents less than 1%.
(1)    Includes 500,000 shares of Common Stock as part of an employment
       contract.
(2)    Includes 1,356,593 shares of Common Stock subject to currently
       exercisable options.
(3)    Includes 100,000 shares of Common Stock awarded as Part of Incentive
       Compensation Plan. (See Note 11 Management Compensation Plan, Financial
       Report for the Years Ended December 31,1997 and 1996.)
(4)    Includes 594,783 shares of Common Stock subject to currently exercisable
       options.
(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)    Not Directors or Officers.

Item 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

Item 13.  EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

Exhibit
Number      Exhibit

(3)  (i)    Articles of Incorporation.(1)
     (ii)   Amended and Restated By-laws.(1)
(10) (i)    Lockheed Martin Idaho Technologies Company (LMITCO) Purchase Order
No. F98-179335, Polysiloxane Encapsulation of Calcined Surrogate Material.
     (ii)   1995 Stock Option Plan and Form S-8 Registration Statement. (1)
     (iii)  Employment Agreements dated April 1, 1995 of Messrs. Lahey,
Giansiracusa, and Prewett. (1)
(11) Form 10-KSB for the Period Ending December 31, 1997. (2)
(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

                                       15
<PAGE>
 
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 10KSB for the Period Ending December 
     31, 1997.

(b)  Reports on Form 8-K

None.

                                       16
<PAGE>
 
                    ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES

                           INDEX TO FINANCIAL REPORT

                           DECEMBER 31, 1997 AND 1998



<TABLE>
<CAPTION>
                                                                                       Page Nos.
                                                                                     -------------
<S>                                                                                  <C> 
INDEPENDENT AUDITORS' REPORT                                                              F-2
 
CONSOLIDATED BALANCE SHEET
At December 31, 1998                                                                      F-3
 
 
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1997 and 1998                                            F-4
 
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
For the Years Ended December 31, 1997 and 1998                                            F-5
 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997 and 1998                                            F-6
 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                                      F-7 to F-31
</TABLE>

                                      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, 1998, and the related
consolidated statements of operations, stockholders' deficiency and cash flows
for the years ended December 31, 1997 and 1998. These financial statements are
the responsibility of the Company's management.  Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Orbit Technologies
Inc. and Subsidiaries as of December 31, 1997 and 1998, and the results of its
operations and its cash flows for the years then ended, 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 $877,000
during the year ended December 31, 1998, and, as of that date, had a working
capital deficiency of approximately $3,589,000 and stockholders' deficiency of
approximately $3,447,000.  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
March 5, 1999

                                      F-2
<PAGE>
 
                    ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET
                              AT DECEMBER 31, 1998


                                     ASSETS
                                     ------

CURRENT ASSET:
  Cash                                                             $    20,367
                                                                  
PROPERTY AND EQUIPMENT - At cost, net of                          
  accumulated depreciation and allowance against equipment       
  expenditures                                                          39,735
                                                                  
INTANGIBLE ASSETS - Net of accumulated amortization                     67,809
                                                                  
OTHER ASSETS                                                             4,800
                                                                  ------------
     TOTAL ASSETS                                                 $    132,711
                                                                  ============


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

CURRENT LIABILITIES:
  Accounts payable and accrued liabilities                        $  1,977,161
  Notes payable                                                      1,632,591
                                                                  ------------
     TOTAL LIABILITIES                                               3,609,752
                                                                  ------------


COMMITMENTS, CONTINGENCIES AND OTHER                              
  MATTERS (Notes 1, 2, 6, 7, 8, 11 and 13)
 
STOCKHOLDERS' DEFICIENCY:
  Preferred stock - par value $.01 per share; shares
    authorized 1,000,000; shares issued and outstanding -
    none                                                                     - 
  Common stock - par value $.01 per share; shares                             
    authorized - 50,000,000; shares issued and outstanding -        
    32,484,716                                                         324,848 
  Additional paid-in capital                                        11,093,727 
  Accumulated deficit                                              (14,895,616) 
                                                                  ------------  
     TOTAL STOCKHOLDERS' DEFICIENCY                                 (3,477,041)
                                                                  ------------  
     TOTAL LIABILITIES AND STOCKHOLDERS'                            
       DEFICIENCY                                                 $    132,711
                                                                  ============
                                                                 

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 1998


<TABLE>
<CAPTION>
                                                               1997          1998
                                                           -----------   ------------
<S>                                                        <C>           <C>
REVENUE                                                    $         -    $         -
                                                           -----------    -----------
COSTS AND EXPENSES:
    Research and development                                     1,141          7,416  
    General and administrative                                 635,318        484,711  
    Compensatory element of common stock and options           140,000         83,334  
    Financing costs                                             12,469         36,281  
    Debt conversion expense                                          -         59,000  
    Interest expense                                           178,618        198,762  
    Other (income) expense, net (Note 9)                       (85,323)         7,550  
                                                           -----------    -----------  
        TOTAL COSTS AND EXPENSES                               882,223        877,054                            
                                                           -----------    -----------  
NET LOSS                                                   $  (882,223)   $  (877,054) 
                                                           ===========    ===========  

PER SHARE DATA:
--------------
BASIC AND DILUTED LOSS PER SHARE                           $      (.03)   $      (.03)
                                                           ===========    =========== 
WEIGHTED AVERAGE COMMON SHARES USED IN
    BASIC AND DILUTED LOSS PER SHARE (NOTE 2)               26,453,643     30,997,491
                                                           ===========    ===========
</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 1998

<TABLE>
<CAPTION>
                                                                                             Unearned      Notes
                                          Common Stock                                       Compensation  Receivable
                                    ------------------------  Additional       Accumulated   and Finance   from
                                      Shares        Amount    Paid-in Capital  Deficit       Charges       Stockholders    Total
                                    -----------   ----------  ---------------  ------------  ------------  ------------ ----------- 
<S>                                 <C>           <C>         <C>              <C>           <C>           <C>          <C> 
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)        60,688               -           -             -             -
Issuance of stock in connection with
  management compensation plan           200,000        2,000         48,000              -           -             -        50,000
Net loss                                       -            -              -       (882,223)          -             -      (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)

Issuance of stock for       
  conversion of notes payable          4,340,059       43,401        490,834              -           -             -       534,235
Issuance of stock in
  settlement of litigation                40,000          400          7,150              -           -             -         7,550
Stock issued in connection    
  with compensatory               
  obligations                            250,000        2,500         52,500              -           -             -        55,000
Stock option issued in
  connection with consulting
  agreement                                    -            -         20,000              -           -             -             -
Cancellation of stock for
  non-payment of note
  receivable                            (260,000)      (2,600)             -              -           -         2,600             -
Satisfaction of notes
  receivable in exchange for
  services                                     -            -              -              -           -         8,334         8,334
Issuance of stock                        998,889      998,889        271,111              -           -             -       281,100
Amortization of unearned
  financing fees                               -            -              -              -      30,281             -        30,281
Debt conversion loss                           -            -         59,000              -           -             -        59,000
Net loss                                       -            -              -       (877,054)          -             -      (877,054)
                                     -----------    ---------    -----------   ------------   ---------    ----------   ----------- 
Balances at December 31, 1998         32,484,716    $ 324,848    $11,093,727   $(14,895,616)  $       -    $        -   $(3,477,041)
                                     ===========    =========    ===========   ============   =========    ==========   ===========
</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 1998



<TABLE>
<CAPTION>
                                                                              1997          1998
                                                                           -----------   -----------
<S>                                                                        <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss                                                               $(882,223)    $(877,054)
     Adjustments to reconcile net loss to net cash used in operating
         activities:
            Depreciation and amortization                                      16,459        25,567
            Amortization of unearned and deferred finance costs                12,469        30,281
            Compensatory element of common stock and options                  140,000        83,334
            Debt conversion expense                                                 -        59,000
            Loss on litigation settlements                                     18,800         7,550
            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) decrease in deposits                              (10,000)        9,215
                 Increase in accounts payable and accrued liabilities         325,580       327,202
                                                                            ---------     ---------
          NET CASH USED IN OPERATING ACTIVITIES                              (344,623)     (334,905)
                                                                            ---------     ---------

CASH FLOWS USED IN INVESTING ACTIVITIES:                                   
    Capital expenditures                                                      (43,734)            -
                                                                            ---------     --------- 

CASH FLOWS FROM FINANCING ACTIVITIES:                                     
    Proceeds from sale of stock                                                     -       281,100  
    Proceeds from loans                                                       391,800        94,500
    Repayment of officer loan payable                                               -       (23,959)
                                                                            ---------     --------- 
          NET CASH PROVIDED BY FINANCING ACTIVITIES                           391,800       351,641 
                                                                            ---------     ---------
INCREASE IN CASH                                                                3,443        16,736                          
                                                                                                   
CASH - BEGINNING                                                                  188         3,631
                                                                            ---------     ---------
CASH - ENDING                                                               $   3,631     $  20,367                          
                                                                            =========     ========= 
</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, 1998, the Company incurred a net loss of
          approximately $877,000 and, as of that date, had a stockholders'
          deficiency and a working capital deficiency of approximately
          $3,447,000 and $3,589,000, respectively.  The Company is also in
          default on a significant number of loan agreements which total
          approximately $2,045,000 in principal and interest as of December 31,
          1998 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 1999. From
          January 1, 1999 through March 12, 1999, the Company's proceeds from
          all financing activities amounted to approximately $25,000 (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 1999, the Company exchanged
          $25,000 of principal on a promissory note outstanding at December 31,
          1998 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 completed its restructuring of the
          remaining debt and the Company continues to be in default under such
          agreements.  On March 6, 1997, 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 1998, the Company and the
          note holders reached a tentative settlement, which is subject to the
          approval of the majority of the shareholders and approval of the
          residing court (see 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 December 29, 1997, the Company adopted Statement of
          Financial Accounting Standards (SFAS) No. 132, "Employers' Disclosures
          About Pensions and Postretirement Benefits", which standardizes the
          disclosure requirements for pensions and other postretirement
          benefits.  The Statement addresses disclosure only.  It does not
          address liability measurement or expense recognition.  There was no
          effect on financial position or net income as a result of adopting
          SFAS No. 132.

          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

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE  2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

          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.

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.

          In March 1998, the Company signed a contract with Lockheed Martin
          Idaho Technologies Company (LMITCO) for evaluating Orbit's proprietary
          polymer system, as an encapsulating agent for radioactive ash.  In
          July 1998, this contract was modified to test Orbit's polymer system
          with a low level calcine waste surrogate material.  The results
          concluded that pre-treatment options be explored in more detail for
          chromium and cadmium and, therefore, be recommended as a treatment
          option leading to the disposal of the low level waste stream.

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 4 -  PROPERTY AND EQUIPMENT - NET

          Property and equipment, net, consisted of the following at December
          31, 1998:

            Office furniture and fixtures                     $  46,605
            Research laboratory furniture and fixtures           65,087
            In-process machinery                                223,064
                                                              ---------

                  Sub-total                                     334,756

            Accumulated depreciation                            (71,957)
            Valuation allowance for in-process machinery       (223,064)
                                                              ---------

                                                              $  39,735
                                                              ========= 
                                               

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

          Depreciation expense for the years ended December 31, 1997 and 1998
          was $11,327 and $20,437, respectively.

NOTE  5 - INTANGIBLE ASSETS

          Intangible assets consisted of the following at December 31, 1998:

            Patent costs                        $ 87,212
            Less: Accumulated amortization       (19,403)
                                                --------
 
                                                $ 67,809
                                                ========

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

          Amortization expense for the years ended December 31, 1997 and 1998
          was $5,132 and $5,130, respectively.

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE  6 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

          Accounts payable and accrued liabilities consist of the following at
          December 31, 1998:

            Salary and related taxes (Note 11)      $  843,804
            Professional fees                          499,609
            Interest                                   499,044
            Consulting fees                             25,505
            Miscellaneous                              109,199
                                                    ----------
                                                    $1,977,161
                                                    ==========

NOTE  7 - NOTES PAYABLE

          Notes payable consisted of the following at December 31, 1998:
<TABLE> 
<C>           <S>                                                            <C> 
          a)  Represents four promissory notes aggregating $170,000,
              all of which are past due, with interest at 15%.                $170,000
 
          b)  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: 6% of the 1st $1,000,000 - $60,000; 7% of the
              2nd $1,000,000 - $70,000; 8% of the 3rd $1,000,000 -
              $80,000; 6.425% of the 4th $1,000,000 - $64,250.                 274,250
 
          c)  Represents $100,000 in a one-year promissory note
              bearing interest at 10% per annum, due September 13,
              1996.  The note and related accrued interest is
              convertible into common stock at $0.60 per share, with
              automatic conversion upon the effectiveness of a
              Registration Statement under the Securities Act of 1933.
              The Company is in default under this note agreement
              (see Note 13).                                                   100,000
 
</TABLE>

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE  7 - NOTES PAYABLE (Continued)

<TABLE>
<C>           <S>                                                                <C> 
          d)  During the years 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 interest are convertible into 
              common stock at prices ranging from $0.10 and $0.22 per 
              share of debt. During the year ended December 31, 1998,
              the Company repaid $23,959 in principal and $24,941 in 
              interest to an officer. The remaining notes are in default.        $103,841

          e)  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.  In October of
              1998, the note, with principal of $25,000 and related
              accrued interest of $2,500, was converted at the above
              rate into 137,500 shares of common stock.                             - 0 -
 
          f)  During the year ended December 31, 1998, the Company
              borrowed $85,000 from three private investors and
              issued convertible promissory notes that mature during
              November 1999.   The interest rate on these promissory
              notes range between 8% and 10%.  The notes principal
              balance and accrued interest can be converted into the
              Company's common stock at the market price discounted
              by 20% of the average bid price for the period five days
              prior to the date of conversion.                                     85,000
 
          g)  Represents one-year promissory notes due at various
              dates during 1996 at interest rates ranging from 10% to
              15% per annum.  Notes with principal amounting to
              $350,000 and related accrued interest are convertible into
              common stock at prices ranging from $.10 - $.22 per
              share.
 
              The Company is in default under these obligations.  In 
              June of 1998, a tentative settlement was reached, which 
              is subject to shareholder and court approvals (see Note
              11 - Benveniste Litigation).                                        600,000
          
</TABLE>

                                      F-15
<PAGE>
 
                    ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE  7 - NOTES PAYABLE (Continued)

<TABLE>
<C>           <S>                                                            <C> 
           h)  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, 1998, the shareholder has
               advanced the Company $299,500 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 Company has
               defaulted on the remaining semi-annual payments.  The
               installment note is collateralized by the Company's
               rights, titles and patents, technology known as "Ceramic
               Silicone Foam."                                                  $  299,500
 
           i)  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.  On November 1, 1998, the
               Company converted the remaining principal of $165,332
               and accrued interest of $58,071 into 869,242 shares of
               the Company's common stock.  The November 1, 1998
               conversion agreement includes the issuance of
               unrestricted shares of common stock at market discount
               of 20%.  The value of the market discount of $59,000
               has been charged to operations during 1998.                           - 0 -
 
           j)  The Company entered into a settlement agreement on
               December 27, 1996.  Pursuant to the agreement the
               Company issued a $250,000 secured convertible
               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.  In April of 1998, the note, with principal of
               $250,000 and accrued interest of $33,332 was converted
               into 3,333,317 shares of the Company's common stock.                  - 0 -
                                                                                ----------
               
                      Total Notes Payable                                       $1,632,591
                                                                                ==========
</TABLE> 

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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

               1998:
               ---- 

               During the year ended December 31, 1998, the Company sold 998,889
               shares of common stock for $281,100.

               During the year ended December 31, 1998, the Company and certain
               of its debt holders agreed to convert $440,332 of principal and
               $93,903 of accrued interest into 4,340,059 shares of common
               stock.

               As discussed further in Note 9, the Company entered into a
               settlement agreement during 1998.  Pursuant to the agreement, the
               Company was required to issue an additional 40,000 shares of
               common stock, valued at $7,550, which was deemed the fair market
               value at the settlement date.

               During the year ended December 31, 1998, the Company awarded
               250,000 shares of common stock to a former employee, who
               performed consulting services during 1998.  The Company has
               valued these shares at $55,000.

               During the year ended December 31, 1998, the Company cancelled
               260,000 shares of common stock for non-payment of a note
               receivable originating from a stock option that was exercised
               during 1995.

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE  8 -  STOCKHOLDERS' EQUITY (Continued)

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

               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 to the noteholder.  The Company has
               recorded the 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
               were initially being amortized over two years, which amounted to
               $12,469 for the year ended December 31, 1997.  For the year ended
               December 31, 1998, the Company amortized the remaining balance of
               $30,281, resulting from the Company's default on the semi-annual
               interest payments.

               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.  In 1998, the
               Company fulfilled its obligations.

               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-18
<PAGE>
 
                    ORBIT TECHNOLOGIES INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE  8 -  STOCKHOLDERS' EQUITY (Continued)

           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.

                    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.

                                      F-19
<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)
                    ----------------------            

                    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 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 1998
                    was $90,000 and $-0-, 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 year ended December 31, 1997, the Company granted
                    a noteholder the right to purchase 150,000 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.

                    The Company entered into a consulting agreement with a
                    scientist on February 1, 1998.  Pursuant to the terms of the
                    agreement, the Company granted the consultant two options to
                    purchase 100,000 shares each of restricted common stock.
                    Each stock option provides for an exercise price of $.01 per
                    share and expires on March 31, 2000.  The February 1, 1998
                    agreement provides for an additional option to purchase
                    100,000 shares at the above price if the consultant
                    completes a phase of the project by a date to be determined
                    by the Company and the consultant.  The options for 200,000
                    shares of common stock were valued at $20,000 and were
                    charged to operations during 1998.

                                      F-20
<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 1998.  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 1998:

<TABLE>
<CAPTION>
                                    Incentive      Weighted Average   Non-Qualified    Weighted Average
                                  Stock Options     Exercise Price    Stock Options     Exercise Price
                                  --------------   ----------------   --------------   ----------------
<S>                               <C>              <C>                <C>              <C>
Outstanding - 12/31/96                1,016,400               $ .79       4,880,672            $    .28
                                      ---------               -----       ---------            --------
Options granted - 1997:
   Outside the option plan -
      stockholder loan                        -                             150,000                 .35
Options exercised                             -                                   -                    
Options expired/cancelled:                                                                             
  Options cancelled                    (500,000)                .80               -                    
  Outside the option plan -                                                                            
     financing agreements                                                                              
     ($.30-$2.00)                             -                            (200,000)                .40
                                      ---------               -----       ---------            -------- 
Outstanding - 12/31/97                  516,400                 .79       4,830,672                 .27
                                      =========               =====       =========            ========                       
Options granted - 1998:                         
  Outside the option plan -           
     consultants                              -                   -         200,000                 .01
Options expired:
  Outside the option plan -                                       
     financing agreements             
     ($.88)                                   -                   -        (890,000)                .88
                                      ---------               -----       ---------            --------  
Outstanding - 12/31/98                  516,400               $ .79       4,140,672            $    .08
                                      =========               =====       =========            ======== 

Composition at 12/31/98:              
-----------------------             
  1995 stock option plan            
    ($.50-$.87/share)                   516,400               $ .79      
  1995 stock option plan
    ($.01/share)                              -                           2,344,976            $    .01
  Outside the option plan -                                
    consultants                               -                           1,795,696                 .17
    ($.01-$1.06/share)
  Outside the option plan -                                        
    financing agreements
    ($.30-$2.00)                              -                                   -                   -
                                      ---------               -----       ---------            --------  

Outstanding - 12/31/98                  516,400               $ .79       4,140,672            $    .08
                                      =========               =====       =========            ========
Total Value at Option Price                       $ 406,200                          $ 328,718
                                                  =========                          =========
</TABLE>

                                      F-21
<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 1998.

NOTE  9 - OTHER (INCOME) EXPENSE

          Other (income) expense, net, consists of the following for the years
          ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
                                                              1997           1998
                                                           -----------      -------
          <C>  <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                      -         7,550
                                                            ---------        ------
                 Total                                      $ (85,323)       $7,550
                                                            =========        ======

</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-22
<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.  In 1998, the Company fulfilled its obligations.

           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)  During November 1998, 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 additional 40,000 shares of the
               Company's common stock, valued at $7,550, which was deemed the
               fair market value at the settlement date.

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 1998 as a result of
           net operating losses incurred during those years.

           The components of deferred tax assets and liabilities at December 31,
           1998 consist of the following:
 
             Deferred Tax Assets:
 
                Net operating loss carryforwards              $3,960,000
                Tax effects of temporary differences (*)       1,344,000
                Start-up costs                                   186,000
                                                              ----------
                   Total Gross Deferred Tax Assets             5,490,000

                Less: Valuation allowance                      5,490,000
                                                              ----------
                   Net Deferred Tax Assets                    $        -
                                                              ==========

          (*)  Temporary differences that give rise to the deferred tax asset at
               December 31, 1998 are primarily:  compensatory element of grants
               of stock options, awards of common stock, allowance against
               equipment expenditures, and deferred officers' compensation.

                                      F-23
<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 $349,000.
 
           As of December 31, 1998, the Company had available approximately
           $9,897,000 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:

             Year of Expiration:
             ------------------
                        
                2000                      $  557,000
                2001                         726,000
                2002                          43,000
                2003                           2,000
                2004                           2,000
                2005                           1,000
                2006                           1,000
                2007                         937,000
                2008                       1,937,000
                2009                         932,000
                2010                       1,814,000
                2011                       1,611,000
                2012                         561,000
                2018                         773,000
                                          ----------
                                                    
                                          $9,897,000   
                                          ==========

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

                                                      Years Ended December 31,
                                                    --------------------------
                                                        1997           1996
                                                    -----------     ----------
               Federal statutory rate                   (34.0)%       (34.0)%
               Non-deductible expenses                     .1            .4
               Unutilized net operating loss             33.9          33.6
                                                       ------        ------
               Effective rate
                                                          -0- %         -0- %
                                                       ======        ======

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 11 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS

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

          The Company has relocated and has signed a new operating lease for
          office space effective July 1, 1998.  Monthly payments under this
          lease amount to: $1,450 per month from July 1, 1998 to June 30, 1999;
          $1,510 per month from July 1, 1999 to June 30, 2000; and $1,570 per
          month from July 1, 2000 to June 30, 2001.

          Rental expense for the years ended December 31, 1997 and 1998 was
          $34,743 and $27,723, respectively.

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

          On April 1, 1995, the Company entered into three employment 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.  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.

          For each of the years ended December 31, 1997 and 1998, the expense
          recorded under the remaining agreements amounted to $252,000.  At
          December 31, 1998, unpaid obligations under these agreements amounted
          to $823,100 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-25
<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
          11e, 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 11e).  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 two of the Company's key personnel. The plan
          provides that each executive would be issued 100,000 shares of common
          stock for the achievement of each of the five events described as
          follows:

          1. An increase in the common stock price to $1.00 per share.

          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.

          For the years ended December 31, 1997 and 1998, the Company has
          accrued 200,000 shares valued at $50,000 and $-0- shares,
          respectively, under this management compensation plan.

                                      F-26
<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 agreement.
               No action was taken during 1998.

          b)   Emerson v. Orbit Technologies, Inc. et al.  In 1997, the Company
               ------------------------------------------                       
               settled the Emerson litigation for $10,000, plus 5,000 shares of
               unrestricted stock, plus 35,000 shares of restricted stock.

          c)   Joseph v. Orbit Technologies, Inc.  In June 1996, Adrian Joseph,
               ----------------------------------                              
               the Company's 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
               issuances of stock to former officers and related entities, which
               the Company believed were without consideration.

               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 officers and related entities at December 31, 1997.  It
               was determined that the number of shares held by the plaintiff
               amounted to 6,066,830.

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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

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

          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)  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.

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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

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

          e)  Benveniste, et. al. vs. Orbit and Its Officers.  (Continued).
              ------------------------------------------------------------  
              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.

              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 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 essentially 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 $0.23 to $0.75 per share, which depend on the
              period of time from the option grant date that the options are
              exercised. The settlement has several contingencies, which need to
              be resolved before the settlement is final.

          f)  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.

          g)  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
              stock.

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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

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

          h)  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 75,000 shares of common stock
              in exchange for cancellation of his 30,000 shares.

NOTE 12 - SUPPLEMENTAL CASH FLOW INFORMATION

          During the years ended December 31, 1997 and 1998, the Company paid 
          $-0- and $30,941 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.

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 12 -  SUPPLEMENTAL CASH FLOW INFORMATION (Continued)

           Non-Cash Transactions (Continued)
           ---------------------            

           During the year ended December 31, 1998:

           a)  The Company issued 250,000 shares of common stock as 
               consideration for current compensatory obligation 
               amounting to $55,000.

           b)  Convertible promissory notes and related accrued interest
               aggregating $310,833 were converted to 3,470,817 shares of its
               common stock.

           c)  In connection with a legal settlement agreement, the Company
               issued 40,000 shares of its common stock valued at $7,450.

           d)  As an inducement for a noteholder to convert, a debt conversion
               expense of $59,000 was incurred.  The noteholder converted
               $223,402 of principal and accrued interest into 869,242 shares.

           e)  Notes receivable of $8,334 from a shareholder, relating to an
               exercise of prior stock options, were satisfied through services
               rendered.

           f)  Pursuant to a consulting agreement, the Company issued two (2)
               stock options that had an aggregate value of $20,000.
 

NOTE 13 -  SUBSEQUENT EVENTS

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

           a)  During the first quarter of 1999, the Company converted $25,000
               of principal and $362 of accrued interest, relating to a note
               payable outstanding at December 31, 1998, into 120,771 shares of
               the Company's common stock.

           b)  As part of a settlement agreement with a noteholder, during the
               first quarter of 1999, the Company agreed to convert principal of
               $50,000 and accrued interest of $18,281, relating to a note
               payable outstanding at December 31, 1998, into 273,123 shares of
               the Company's common stock.

           c)  During the first quarter of 1999, the Company received the
               proceeds of a $25,000 loan from an unrelated individual. The loan
               is due in one year, bears interest at 8% per annum, and is
               convertible into common stock at a 20% discount to the average 5-
               day market price at the conversion date.

                                      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 30, 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.

NAME                            TITLE                           DATE
----                            -----                           ----

/s/ JAMES B. LAHEY              Chief Executive Officer and     April 30, 1999
----------------------------    Chairman of the Board (Chief    
    James B. Lahey              Executive Officer)              
                                                                
/s/JAMES A. GIANSIRACUSA        Vice President - Operations,    April 30, 1999 
----------------------------    Chief Financial Officer         
   James A. Giansiracusa        (Chief Financial and            
                                Accounting Officer),            
                                Secretary, and Director         
                                                                
/s/ IAN C. GENT                 Director                        April 30, 1999
----------------------------                                    
    Ian C. Gent                                                 
                                                                
/s/ STEPHEN V.  PREWETT         Director                        April 30, 1999 
----------------------------                                    
    Stephen V. Prewett                                          
                                                                
/s/ WILLIAM N. WHELEN           Director                        April 30, 1999
---------------------------- 
    William N. Whelen, Jr.