<PAGE>   1
                                                                    Exhibit 13.1

               "Certain Provisions of the ADFlex Solutions, Inc.
                      1996 Annual Report to Stockholders".

Management's Discussion And Analysis Of
Financial Condition And Results Of Operations

    Overview

ADFlex Solutions, Inc. is a major supplier of high-volume flexible
interconnects. Prior to 1996, the Company was engaged primarily in the
fabrication of flexible circuits, capitalizing on its advanced manufacturing
technology and high-volume production capabilities.

On December 31, 1995, in a strategic move towards vertical integration, the
Company purchased the flexible interconnect division and certain net assets of
Xyratex, now operating as ADFlex Solutions Limited (ADFlex U.K.), located in
Havant, England. This division was, and continues to be, engaged in advanced
assembly technology and assembly processes entailing the attachment of
integrated circuits and surface mounted components onto flexible circuits. The
acquisition enables the Company to provide its customers with a single source
solution to their interconnect requirements.

The Company's market includes hard disk drive (HDD) and non-HDD customers. The
HDD industry represents the Company's predominant market, accounting for 62%,
51% and 55% of net sales in 1996, 1995 and 1994, respectively. The Company has
been successful in expanding its product diversity in an effort to reduce its
dependency on the HDD market, as evidenced by a decrease in HDD sales
concentration from 70% in 1993 to 51% by the end of 1995. Immediately following
the acquisition of ADFlex U.K. on December 31, 1995, the Company's concentration
of HDD sales increased to 70%. Through ongoing diversification and new market
expansion efforts, the Company was able to reduce this concentration to 62% by
the end of 1996. Though the Company is continuing in its efforts to reduce its
dependence on the HDD industry, net sales attributable to this market are
expected to increase and to continue to represent the majority of net sales for
the foreseeable future. Accordingly, the occurrence of significant slowdowns or
changes in this industry could have a material adverse effect on the Company's
operating results.

During early 1996, certain of the Company's HDD customers experienced structural
and strategic changes that negatively impacted the Company's results for 1996.
Quantum Corporation (Quantum) announced an exclusive manufacturing agreement to
purchase all of its HDD products from a Japanese company. This relationship
redirected all of Quantum's flex requirements to a local Japanese supplier.
Hewlett-Packard Company announced its complete withdrawal from the HDD business
resulting in unexpected and significant order cancellations in the year. Also,
during the first half of 1996, several key HDD customers experienced product
delays in high-end, high-capacity drive programs relating to the integration of
new magneto-resistive (MR) recording head technology thus reducing anticipated
orders for the year.

In August 1996, the Company expanded its worldwide manufacturing operations,
announcing the establishment of a joint venture located in Lamphun, Thailand
with Hana Microelectronics (Hana) to produce and test advanced chip-on-flex and
surface mount technology assemblies. The joint venture, ADFlex Thailand Limited
(ATL), is 80% owned by the Company. Initial shipments from Thailand began in the
fourth quarter of 1996.

At the close of the third quarter, in response to lower than expected revenues
at its ADFlex U.K. facility, the Company announced that it intended to
restructure its assembly operations at ADFlex U.K. and transfer production to
ATL. The shifting of labor intensive production from the U.K. to Thailand is
expected to reduce manufacturing costs and produce efficiencies derived from the
Thailand facility's proximity to a number of existing and prospective customers
in Southeast Asia. The transition is expected to take place throughout the first
half of 1997 during which time the Company expects minimal gross margins from
its assembly operations. The Company anticipates that the benefits associated
with the restructuring will not be fully realized until the second half of 1997.
Following the restructuring, the Company plans on maintaining a technology
development center and a sales and service organization in the U.K. to support
its European customers.

The Company currently serves the electronics industry, which is subject to rapid
technological change, product obsolescence and price competition. These and
other factors affecting the electronics industry, or any of the Company's major
customers in particular, could have a material adverse effect on the Company's
results of operations.


    Results of Operations

NET SALES The Company experienced an increase in net sales of $55.7 million, or
55%, in 1996 compared to 1995. This was due primarily to the inclusion of sales
from ADFlex U.K. Excluding the additive effect of ADFlex U.K., net sales for the
year decreased by 1%. Net sales for 1996 were negatively impacted (in both the
flex circuit fabrication and flex assembly areas) by customer strategic changes
and a general slow down for mature products. Further, the difficulties
encountered throughout
<PAGE>   2
the industry resulting in the delayed implementation of MR technology had a
significant negative effect on anticipated net sales for 1996, primarily at the
Company's U.K. facility, as high-end, high-capacity drives utilize advance
assembly technology, specifically chip-on-flex, the primary specialty of ADFlex
U.K. Customer structural changes and the delay in MR technology resulted in net
sales at ADFlex U.K. of nearly 40% below levels experienced in the latter part
of 1995.

The Company experienced sales growth in 1995 of 30% as compared to 1994. This
growth reflects the Company's ability to meet short lead times and steep
production ramp schedules as a result of its capacity expansion implemented in
early 1995.

GROSS PROFIT Gross profit as a percentage of net sales (gross margin) was 12%,
28% and 31%, respectively, for 1996, 1995 and 1994. The Company's gross margin
is affected by several factors including product mix, process yields, labor
efficiency and overhead and capacity utilization.

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

The Company's flex fabrication operations located in the U.S. and Mexico also
experienced a decline in gross margins during 1996. In early 1995, in response
to increasing sales demand, the Company began implementation of an aggressive
capacity expansion plan which continued into 1996. As part of this plan, the
Company spent $13.8 million on purchases of capital equipment and expansion of
facilities in 1996, after spending $20.6 million and $5.5 million in 1995 and
1994, respectively. These purchases have resulted in depreciation expense as a
percentage of net sales of 3.7%, 2.3% and 1.2% for 1996, 1995 and 1994,
respectively. The lower than anticipated net sales resulting from customer
structural changes and the slow down for mature products from the Company's U.S.
and Mexico operations resulted in operating inefficiencies, decreased capacity
utilization and the write-offs of inventories adversely impacting related gross
margins in 1996.

As a result of the Company's product diversification and growth strategies, the
product mix between HDD and non-HDD products, as well as individual products
within these groups, is constantly shifting. The material content of products
varies significantly due to the complexity of the design, plating requirements,
component content and a variety of other factors. During 1996, the Company
experienced considerable growth in communications products. The communications
market is subject to intense price competition. As such, the material and labor
content relative to the selling price tends to run higher than that of the
Company's HDD products.

The decrease in gross margins in 1995 as compared to 1994 resulted from
increased depreciation expense, higher costs due to capacity constraints and
additional costs associated with bringing up new processes, expanding existing
processes and changes in product mix. During mid 1995, the Company periodically
encountered situations where demand outpaced capacity in certain production
processes. In order to meet production plans, the Company purchased additional
services from outside sources at higher costs thus negatively impacting gross
margins. To meet these requirements, the Company expanded and enhanced several
production processes including laser and plating. The Company was able to bring
these processes on-line and stabilize process yields in shorter than expected
time; nevertheless, the front-end costs associated with process change
implementation resulted in a reduction of gross margins.

OPERATING EXPENSES Engineering, research and development expenses include
efforts to support customers' designs, programs related to the improvement of
manufacturing processes and yields on specific parts and development of new
materials and processes. Engineering, research and development expenses were
$7.4 million, $4.5 million and $3.7 million for 1996, 1995 and 1994,
respectively, representing 4.7%, 4.5% and 4.8% of net sales for those same
years. The increase in expense in 1996 is due to the addition of ADFlex U.K.
whose advanced assembly technology requires a high level of engineering and
research and development resources. The increase in these expenses as a
percentage of net sales reflects the decreased leverage resulting from the lower
than anticipated assembly-related net sales. In 1995, engineering, research and
development expenses as a percentage of net sales decreased due to increased
utilization of these expenses from higher levels of net sales on existing
products.

As a result of the ADFlex U.K. acquisition, the Company wrote-off $13.9 million
of in-process technology at December 31, 1995. Through the date of restructuring
of ADFlex U.K. operations, the Company incurred $2.4 million in expenses
relating to the amortization of intangible assets purchased in the acquisition
of ADFlex U.K.
<PAGE>   3
Selling, general and administrative expenses as a percentage of net sales were
8.5%, 9.0% and 10.4% for 1996, 1995 and 1994, respectively. The decreases in
both 1996 and 1995 reflect the Company's ability to obtain increased leverage of
such expenses in periods of increasing sales. Expenses for 1994 included
compensation expense of $675,000, or 0.9% of sales, representing the difference
between the option exercise price and the subsequently deemed fair value of
certain employee stock options granted in the last two quarters of 1993 and the
first quarter of 1994.

RESTRUCTURING CHARGE At the close of the third quarter, the Company's Board of
Directors approved a plan to restructure its assembly operation in the U.K. and
transfer production from the U.K. to the Company's manufacturing facility in
Lamphun, Thailand. As part of this restructuring, the Company recorded the
following in the third quarter of 1996: $13.5 million write-off of intangible
assets, $8.8 million write-down of property, plant and equipment and $6.9
million in employee and lease termination charges. Through December 31, 1996,
the Company has paid out $0.3 million in employee termination costs. The Company
expects to pay out $4.1 million of the employee and lease termination costs in
1997 and an additional $2.5 million in 1998.

INTEREST AND OTHER INCOME (EXPENSE) The decrease in interest income in 1996
reflects the decrease in cash and cash equivalent balances available for
investment subsequent to the settlement of the $12.4 million payable related to
the acquisition of ADFlex U.K. The increase in interest income in 1995 reflects
interest earned on the cash proceeds of the initial public offering in
September, 1994 and on the proceeds of the secondary stock offering by the
Company in May, 1995. The increase in interest expense in 1996 reflects $0.8
million in interest expense on the $10.0 million subordinated debenture issued
in conjunction with the ADFlex U.K. acquisition and $0.7 million in interest
expense related to borrowings under the line of credit and capital lease
obligations.

Other income for all years represents the net effect of bank charges and
exchange gains and losses realized on the settlement of transactions associated
with the Company's Mexico and U.K. subsidiaries.

INCOME TAXES The effective tax benefit rate for 1996 was 28% versus an effective
tax rate for 1995, excluding the write-off of in-process technology, of 33% and
42% in 1994. The lower tax benefit rate for 1996 reflects the non-deductibility
of certain losses incurred in relation to the Company's U.K. operations. The
lower rate in 1995 as compared to 1994 reflects the recognition of state tax
refunds received during 1995.


    Liquidity and Capital Resources

SUMMARY The Company has financed its liquidity needs to date primarily through
cash generated from operations, the use of bank credit lines and through
proceeds from the sale of its Common Stock. The primary uses of cash have been
for increased working capital, funding of capital expenditures and investment in
ADFlex U.K. and ATL. At December 31, 1996, cash and cash equivalents totaled
$6.1 million, compared with $15.7 million as of December 31, 1995. Working
capital at December 31, 1996 was $9.1 million versus $20.6 million at December
31, 1995.

BANK FINANCING On October 31, 1995, the Company replaced its existing line of
credit with a two-year, $20.0 million revolving line of credit with The First
National Bank of Boston and First Interstate Bank of Arizona (the FNBB line)
which was later amended on June 18, 1996 and February 18, 1997. Under the
amended FNBB line, all Company assets are pledged as collateral and borrowing is
limited to 80% of the aggregate value of all eligible domestic accounts plus 70%
of the aggregate value of all eligible foreign accounts. Any outstanding balance
bears interest at the bank's prime interest rate or, at the Company's option,
LIBOR plus 1.5%. In addition to leverage and profitability covenants, the FNBB
line prohibits the payment of dividends and certain types of merger transactions
without the prior approval of the banks. The February amendment is effective as
of December 31, 1996 and the Company was in compliance with all covenants of the
amended FNBB line at December 31, 1996. At December 31, 1996, the Company had
$17.1 million available for borrowing under the FNBB line with an outstanding
balance of $10.0 million. At December 31, 1995, there were no amounts
outstanding under the line of credit.

Provisions made during the year for restructuring charges and the results of
operations rendered the Company unable to comply with the financial covenants
under the FNBB line for the quarter ended September 30, 1996. The lenders have
waived compliance with the financial covenants for the quarter ended September
30, 1996.

CASH FLOW At December 31, 1996, the Company's principal sources of liquidity
included $6.1 million in cash and cash equivalents and $17.1 million in
available borrowings under its $20.0 million bank line of credit with an
outstanding balance of $10.0 million.
<PAGE>   4
Total cash provided by operations decreased $14.8 million in 1996, as compared
to 1995, due largely to working capital required to fund the accounts receivable
associated with the U.K. operations as receivables were not purchased in the
acquisition. These working capital requirements were funded in part through the
generation of accounts payable and accrued liability balances with the remainder
financed from borrowings under the existing bank line of credit. The Company
experienced a net loss of $25.0 million in 1996 primarily the result of a $21.1
million after-tax charge related to the restructuring of its U.K. operations.
The charge consisted of write-downs of intangible assets and property, plant and
equipment, as well as the recognition of future obligations for employee and
lease termination charges. The charge, therefore, did not significantly impact
1996 operating cash flows. The Company expects to pay $4.1 million and $2.5
million of the accrued employee and lease termination costs in 1997 and 1998,
respectively.

Cash totaling $25.7 million was used in 1996 investing activities, which
included the settlement of a $12.4 million payable related to the ADFlex U.K.
acquisition and the purchase of buildings and capital equipment totaling $13.8
million. Financing activities in 1996 provided the Company with $11.6 million,
including $10.0 million in net borrowings under the Company's existing line of
credit and $1.8 million from the sale of Common Stock.
<PAGE>   5


Cash provided by operating activities totaled $19.2 and $4.0 million in 1995 and
1994, respectively. In 1995, the Company generated $10.2 million in net income
prior to the write-off of $13.9 million of in-process technology. During 1995,
accounts receivable and inventory increased by $3.5 million and $4.4 million,
respectively, in support of the increased sales volumes and a change in the
product mix towards parts with a higher material content. Additionally, the
Company purchased $6.5 million of inventory in connection with the ADFlex U.K.
acquisition. Payables and accrued liabilities increased $14.9 million due
primarily to the recognition of a $12.4 million payable in conjunction with the
ADFlex U.K. acquisition. In 1994, net income of $7.0 million was used in part to
fund increased working capital requirements resulting from the 59% sales growth
experienced in that year.

Cash totaling $14.0 million was used for 1995 investing activities including
$20.6 million on the purchase of buildings and capital equipment, of which $6.8
million was used to acquire and improve a 160,000 square foot manufacturing
facility adjacent to its existing facilities in Agua Prieta, Mexico, and $18.9
million in net sales of short-term investments. Cash totaling $24.2 million was
used for 1994 investing activities including $5.5 million on the purchase of
buildings and capital equipment and $18.9 million in net purchases of short-term
investments. Financing activities in 1995 and 1994 provided the Company with
$6.4 and $23.8 million, respectively, primarily from the sale of Common Stock.

The Company presently expects to purchase approximately $7.2 million of capital
equipment in 1997, primarily for the following: (i) $2.5 million in expansion of
assembly capabilities at ATL; (ii) $0.7 million for manufacturing enhancements
and new technology; (iii) $1.0 million for the completion of the Mexico
facilities expansion and (iv) $3.0 million for replacement and general
improvement of existing machinery and facilities.

Under the terms of the subordinated debenture issued in the ADFlex U.K.
acquisition, the Company remitted $2.5 million in principal plus $0.8 million in
accrued interest on January 6, 1997. Funding for this payment came from the
Company's existing line of credit. The Company is committed to pay $2.5 million
in January of each year through the year 2000.

The Company may require additional capital to finance enhancement to, or
expansion of, its manufacturing capacity in accordance with its business
strategy. Management believes that the level of working capital should continue
to grow at a rate generally consistent with the growth of the Company's
operations. Although no assurance can be given that future financing will be
available on terms acceptable to the Company, the Company may seek additional
funds from time to time through public or private debt or equity offerings or
through bank borrowings. Management believes, however, that existing cash
balances, funds generated from operations and borrowings under its existing line
of credit will be sufficient to permit the Company to meet its liquidity and
expansion requirements in 1997.


    Other Matters

FOREIGN OPERATIONS The Company's primary finishing and assembly facilities are
located in Agua Prieta, Mexico; Havant, England; and Lamphun, Thailand. While
the Company believes that it has established good relationships with its labor
force and the local governments, the spread of the manufacturing process over
multiple countries subjects the Company to risks inherent in international
operations.

MEXICAN OPERATIONS The Mexican Peso experienced significant devaluation relative
to the U.S. Dollar in December 1994 and early 1995. Peso-based operating costs
are primarily wages and benefits for the Company's Mexican hourly union
employees. The initial devaluation had the effect of reducing Mexican labor
costs by nearly 40%. Since that time, however, these savings have been partially
offset by a series of three wage increases ranging from 7-10% in response to
Mexican government-mandated increases in minimum wages. The Peso has experienced
further devaluation in 1996 prompting the Mexican government to mandate a 17%
increase in the minimum wage effective December 1, 1996. It is expected that the
Company will continue to respond proportionately to minimum wage increases. The
Company does not believe that future wage increases will exceed the benefit of
the devaluation; however, there can be no assurance that future currency
fluctuations and government-mandated wage increases will not have a material
effect on the Company's business, financial condition and results of operations.
The Company maintains all significant assets, including inventory, accounts
receivable and most capital equipment, on the Company's books in U.S. Dollars
and only converts enough U.S. Dollars into Pesos to fund Peso-based operating
costs for one to six weeks.

U.K. OPERATIONS Effective December 31, 1995, the Company completed its
acquisition of the flexible interconnect division of Xyratex (subsequently
renamed ADFlex Solutions Limited). In connection with the acquisition, the
Company delivered cash, a subordinated debenture and Common Stock with a
combined value of approximately $45 million. The cash portion was funded from
cash and cash equivalent balances.
<PAGE>   6
Prior to the acquisition, the Company supplied flexible circuits to Xyratex's
flexible interconnect division. The Company's sales to this division represented
roughly 5% of the Company's 1995 net sales and 25% of the division's flexible
circuit requirements. Xyratex's flex expertise has historically focused on
state-of-the-art assembly technology and processes. The integration of this
expertise with the Company's manufacturing technology and high-volume production
capabilities has allowed the Company to offer customers a single source for
complete flex interconnect solutions.

The division and the Company also supplied to many of the same customers. The
acquisition increased the concentration of sales to two HDD customers increasing
their percentage of net sales by 8.9% of total net sales. The loss of either
customer, or a substantial reduction in orders by any significant customer,
including reductions due to market, competitive or economic conditions, could
have a material adverse effect on the Company's business, financial condition
and results of operations.

THAILAND OPERATIONS During 1996, the Company invested $2.4 million in its
Thailand joint venture with Hana Microelectronics. The Company is in the process
of transferring equipment and technical expertise from its existing operations
to Thailand. Initial shipments from Thailand began in the fourth quarter of
1996; however, the Company does not expect to reach volume production until the
second half of 1997. The Company anticipates an additional $2.5 million will be
invested in the joint venture in 1997, primarily for the purchase of
manufacturing equipment. No assurances can be given that the transition of
operations to Thailand will occur as scheduled or that the Company will realize
the benefits anticipated due to the lower cost structure of the Thailand
operations.

CHANDLER LEASE The Company leases its facility in Chandler, Arizona from an
affiliate of Rogers Corporation (Rogers). The Company is currently in the
process of negotiating the terms of a renewal of the lease which currently
expires on June 30, 1997. Although no assurances can be given that an agreement
regarding the terms of the renewal can be reached, management believes, based on
discussion to date, that an agreement will be reached.

ENVIRONMENTAL MATTERS The Company conducted environmental studies of its
facility in Chandler, Arizona in early 1995. In connection with these studies,
the Company has discovered a limited amount of soil contamination that may
require remediation. While the investigation of the extent of this contamination
is not yet complete, based on the preliminary information currently available,
the Company believes that the costs associated with the investigation and
remediation of this situation will not have a material adverse effect on its
operations or financial condition; however, given the uncertainties associated
with environmental contamination, until a full investigation has been completed,
there can be no assurance that such costs will not have a material adverse
impact on the Company. Pursuant to the acquisition agreements pertaining to the
initial formation of the Company, Rogers retained all environmental liabilities
existing prior to the acquisition. While Rogers currently has sufficient assets
to fulfill its obligations under such acquisition agreements, if pre-closing
environmental liabilities requiring remediation are discovered and the Company
was unable to enforce the acquisition agreements against Rogers, the Company
could become subject to costs and damages relating to such environmental
liabilities. Any such costs and damages imposed on the Company could have a
material adverse effect on the Company's business, financial condition and
results of operations.

In mid 1995, the Company acquired a manufacturing facility located in Agua
Prieta, Mexico. In connection with this acquisition, the Company conducted an
environmental study of the facility which indicated contamination by hazardous
materials in the soil and groundwater. Pursuant to the purchase agreement, the
seller pursued and received verbal approval of a remediation plan from the
appropriate Mexican authorities whereby the seller's obligation for cost of
remediation is limited to $2.5 million. The seller will commence remediation
activities once written approval is obtained from the Mexican authorities. A
total of $1.0 million is being held in escrow pending the seller's performance
of its environmental obligations under the agreement.

The Company is subject to a variety of environmental laws relating to the
storage, discharge, handling, emission, generation, manufacture, use and
disposal of hazardous material used to manufacture the Company's flex
interconnect products. The Company believes that it has been operating its
facilities in substantial compliance in all material respects with existing
environmental laws. However, the Company cannot predict the nature, scope or
effect of legislation or regulatory requirements that could be imposed or how
existing or future laws or regulations will be administered or interpreted with
respect to products or activities to which they have not previously been
applied. Compliance with more stringent environmental laws, as well as more
vigorous enforcement policies of regulatory agencies, could require substantial
expenditures by the Company and could adversely affect the results of operations
of the Company.

"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 This report contains forward-looking statements that involve risks and
uncertainties, including but not limited to, the risks of concentration of sales
in markets, and in particular the HDD market, and customers, which has caused
and in the future could cause materially adverse fluctuations in operating
results; the risks of being a supplier to the electronics industry in general,
which is characterized by rapid technological change, product obsolescence and
price competition, which could materially 
<PAGE>   7
adversely affect operating results; the risk that growth in demand for products
that use flex, and corresponding demand for flex, will not continue to increase
as anticipated; the risk that the Company's transition of manufacturing to
Thailand will be delayed or disrupted, or that such transfer will not result in
increased efficiencies, cost savings or improved margins as anticipated or at
the time anticipated; the risk that margins will continue to be negatively
impacted by higher material content of flex products; general risks inherent in
international operations, including currency fluctuations and
government-mandated wage increases; general manufacturing risks, including
environmental risks related to manufacturing operations and clean-up of the
Mexican manufacturing facility; the risk that all of the foregoing factors or
other facters could cause fluctuations in the price of the Company's Common
Stock and other risks detailed from time to time in the Company's Securities and
Exchange Commission filings.
<PAGE>   8


Consolidated Balance Sheets


<TABLE>
<CAPTION>

                                                                         December 31,
(in thousands, except share data)                                      1996        1995
----------------------------------------------------------------------------------------
<S>                                                                <C>         <C> 
Assets
Current assets:
   Cash and cash equivalents                                       $   6,097   $  15,699
   Accounts receivable, net                                           23,612      13,123
   Accounts receivable from Smartflex Systems, Inc                     1,537       2,469
   Other receivables                                                   1,475          --
   Receivable for taxes                                                   --       6,269
   Inventories                                                        14,990      16,824
   Deferred tax assets                                                 2,505         750
   Prepaid taxes                                                         795          --
   Prepaid expenses and other current assets                             303         544
----------------------------------------------------------------------------------------
Total current assets                                                  51,314      55,678

Property, plant and equipment, net                                    34,297      35,289
Purchased intangibles, net                                                --      15,937
Deferred tax assets                                                    7,546          --
Other assets                                                              24          14
                                                                   $  93,181   $ 106,918
----------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
   Line of credit                                                  $  10,000   $      --
   Acquisition amount payable                                             --      12,375
   Accounts payable                                                   19,882       7,257
   Accrued liabilities                                                 9,679      12,778
   Current portion of long-term debt and capitalized leases            2,651       2,632
----------------------------------------------------------------------------------------
Total current liabilities                                             42,212      35,042

Accrued restructuring charges, non-current                             2,500          --
Deferred tax liabilities                                                  --         471
Long-term debt and capitalized leases                                  7,689       7,851
Minority interest in consolidated joint venture                          491          --
Commitments and contingencies

Stockholders' equity:
   Preferred stock, $.01 par value, 10,000,000 shares authorized;
     none issued and outstanding                                          --          --
   Common stock, $.01 par value, 40,000,000 shares authorized;
     8,633,508 and 8,282,312 issued and outstanding at
     December 31, 1996 and 1995, respectively                             86          83
   Additional paid-in capital                                         60,542      58,786
   Retained earnings (deficit)                                       (20,339)      4,685
Total stockholders' equity                                            40,289      63,554
                                                                   $  93,181   $ 106,918
----------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements
<PAGE>   9


Consolidated Statements of Operations


<TABLE>
<CAPTION>

                                                                      Year ended December 31,
(in thousands, except per share amounts)                            1996        1995        1994
-------------------------------------------------------------------------------------------------
<S>                                                             <C>         <C>         <C>
Net sales                                                       $ 156,836   $ 101,163   $  77,733
Cost of sales                                                     138,273      73,108      53,812
Gross profit                                                       18,563      28,055      23,921
Operating expenses:
   Engineering, research & development                              7,366       4,548       3,697
   Write-off of in-process technology                                  --      13,920          --
   Amortization of intangible assets                                2,386          --          --
   Selling, general & administrative                               13,254       9,119       8,107
   Restructuring charges                                           29,248          --          --
-------------------------------------------------------------------------------------------------
   Total operating expenses                                        52,254      27,587      11,804

Operating income (loss)                                           (33,691)        468      12,117
   Interest income                                                    223         973         274
   Interest expense                                                (1,511)       (101)       (322)
   Other income, net                                                   92          64         107
   Minority interest in earnings of consolidated joint venture        109          --          --
-------------------------------------------------------------------------------------------------
Income (loss) before income taxes                                 (34,778)      1,404      12,176
Income taxes                                                       (9,754)      5,127       5,130
-------------------------------------------------------------------------------------------------
Net income (loss)                                               $ (25,024)  $  (3,723)  $   7,046
-------------------------------------------------------------------------------------------------
Net income (loss) per share                                     $   (2.92)  $   (0.54)  $    1.26
-------------------------------------------------------------------------------------------------
Common and common equivalent shares used
   in the calculation of net income (loss) per share                8,580       6,855       5,578
-------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements
<PAGE>   10


Consolidated Statements Of Equity



<TABLE>
<CAPTION>

                                                                 Common Stock       Additional Retained
                                                                                     Paid-In   Earnings      Total
(in thousands, except share amounts)                           Shares      Amount    Capital   (Deficit)     Equity
-------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>        <C>        <C>        <C>         <C>
   Balance at December 31, 1993                              4,000,000  $      40  $   1,960  $   1,362   $   3,362

Compensation expense
   on stock options                                               --         --          675       --           675

Issuance of common stock, net of
   offering costs of $2,479                                  2,418,096         24     26,394       --        26,418

Issuance of common stock upon
   exercise of stock warrant                                    26,666       --          200       --           200

Issuance of common stock upon
   exercise of stock options                                   119,550          1         62       --            63

Net income                                                        --         --        7,046       --         7,046
-------------------------------------------------------------------------------------------------------------------
   Balance at December 31, 1994                              6,564,312         65     29,291      8,408      37,764
-------------------------------------------------------------------------------------------------------------------
Issuance of common stock through employee
   stock purchase plan and exercise of stock
   options, including tax benefit of $340                      238,153          3      1,104       --         1,107

Issuance of common stock, net of
   offering costs of $273                                      237,500          3      5,453       --         5,456

Issuance of common stock in connection
   with ADFlex U.K. acquisition                              1,242,347         12     22,938       --        22,950

Net loss                                                          --         --         --       (3,723)     (3,723)
-------------------------------------------------------------------------------------------------------------------
   Balance at December 31, 1995                              8,282,312         83     58,786      4,685      63,554
-------------------------------------------------------------------------------------------------------------------
Issuance of common stock through employee
   stock purchase plan and exercise of stock
   options, including tax benefit of $665                      351,196          3      1,756       --         1,759

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

See accompanying notes to consolidated financial statements
<PAGE>   11


Consolidated Statements Of Cash Flows



<TABLE>
<CAPTION>

                                                                          Years ended December 31,
(in thousands)                                                           1996       1995      1994
------------------------------------------------------------------------------------------------------
<S>                                                                  <C>        <C>            <C>
Cash flows provided by (used in) operating activities
Net income (loss)                                                    $ (25,024)  $  (3,723)    $ 7,046
Adjustments to reconcile net income (loss) to net cash
   provided by (used in) operating activities:
     Depreciation and amortization                                       8,208       2,288         930
     Write-off of in-process technology                                   --        13,920        --
     Restructuring charges                                              29,248
     Loss on disposal of assets                                            184        --          --
     Compensation expense on stock options                                --          --           675
     Deferred taxes                                                     (9,772)        656        (334)
     Changes in operating assets and liabilities:
       Accounts receivable                                             (10,489)     (3,455)     (5,182)
       Accounts receivable from Smartflex Systems, Inc.                    932        (376)       (714)
       Inventories                                                       1,834      (4,406)     (3,306)
       Prepaid expenses and other current assets                        (2,029)       (587)        (14)
       Payables and accrued liabilities                                 11,347      14,913       4,892
------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                4,439      19,230       3,993

Cash flows provided by (used in) investing activities
Capital expenditures                                                   (13,763)    (20,636)     (5,450)
Purchase of net assets in ADFlex U.K. acquisition                         --       (12,375)       --
Decrease (increase) in other assets                                        (10)         83         157
Decrease in acquisition payable                                        (12,375)       --          --
Investment in joint venture                                                491        --          --
Sales of available-for-sale investment securities                         --       396,074      63,214
Purchases of available-for-sale investment securities                     --      (377,156)    (82,132)
------------------------------------------------------------------------------------------------------
Net cash used in investing activities                                  (25,657)    (14,010)    (24,211)

Cash flows provided by (used in) financing activities
Issuance of common stock, net of expenses                                1,759       6,563      26,681
Net activity on line of credit                                          10,000        --        (2,805)
Payments on capitalized lease obligations                                 (143)       (109)       (104)
------------------------------------------------------------------------------------------------------
Net cash provided by financing activities                               11,616       6,454      23,772

Net increase (decrease) in cash and cash equivalents                    (9,602)     11,674       3,554
Cash and cash equivalents at beginning of year                          15,699       4,025         471
------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                             $   6,097   $  15,699   $   4,025
------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information 
Cash paid for:
   Interest                                                          $     665   $      68   $     280
   Income taxes                                                          1,409       4,849       5,104
Issuance of common stock in connection with ADFlex U.K. acquisition       --        22,950        --
Issuance of subordinated debenture in connection with ADFlex U.K 
   acquisition                                                            --        10,000        --
Acquisition of assets under capitalized leases                            --          --           696
------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements
<PAGE>   12


Notes to Consolidated Financial Statements


    Note 1        Summary of Significant Accounting Policies

DESCRIPTION OF BUSINESS ADFlex Solutions, Inc. is a high-volume flexible
interconnect manufacturer. The Company combines design, low-cost fabrication,
state-of-the-art flex assembly and functional testing, as a single-source
provider of complete flexible interconnect solutions. The Company supplies
flexible interconnects to leading manufacturers of storage systems, including
hard disk drives, notebook computers, cellular telephones and high-end consumer
products. The Company serves customers located in North America, Europe and
Southeast Asia.

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

On August 27, 1996, the Company announced the establishment of a joint venture
with Hana Microelectronics (Hana), a diversified electronics manufacturer
headquartered in Thailand, to produce and test advanced chip-on-flex and surface
mount technology assemblies. The venture, ADFlex Thailand Limited (ATL), is 80%
owned by the Company. The Company's Consolidated Balance Sheets include 100% of
the assets and liabilities of ATL. Hana's 20% interest in ATL and ATL's earnings
have been reflected as "Minority interest in consolidated joint venture" and
"Minority interest in earnings of consolidated joint venture" on the Company's
Consolidated Balance Sheets and Consolidated Statements of Operations,
respectively.

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

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

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

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

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

PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost
less accumulated depreciation and amortization. Depreciation and amortization is
computed for financial reporting purposes using the straight-line method over
the estimated useful lives of the assets which range from 3 to 40 years. The
Company uses accelerated methods for computing depreciation for tax purposes.

PURCHASED INTANGIBLES Intangible assets were acquired in connection with the
acquisition of ADFlex U.K. Intangible assets included completed technology and
work force in place. At September 30, 1996, as part of a restructuring plan for
the Company's assembly operations in the U.K., all intangible assets acquired in
the acquisition were written off. These assets were being amortized over their
estimated useful lives of five years prior to the write-off.

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

FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards
No. 107, Disclosures About Fair Value of Financial Instruments, requires that
the Company disclose estimated fair values of financial instruments. Cash and
cash equivalents, accounts receivable, borrowings under the Company's line of
credit, accounts payable, accrued liabilities, capitalized leases and accrued
restructuring charges are carried at amounts that reasonably approximate their
fair
<PAGE>   13
values. The Company's long-term debt bears interest at a variable interest rate
which approximates current market interest rates; therefore, the Company
believes that long-term debt approximates its fair value.

IMPAIRMENT OF LONG-LIVED ASSETS On January 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
(SFAS No. 121). SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles to be held and used or disposed of by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company
recognized a charge under SFAS No. 121 in connection with the restructuring of
its U.K. operations (see Note 2).

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

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

INCOME TAXES Income taxes are provided using the liability method based upon the
provisions of Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes.

NET INCOME (LOSS) PER SHARE Net loss per share for the years ended December 31,
1996 and 1995 is calculated using the weighted average number of common shares
outstanding during the period. Net income per share for the year ended December
31, 1994 is calculated using the weighted average number of common and common
equivalent shares outstanding during the periods. Dilutive common equivalent
shares are computed using the treasury stock method.

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


    Note 2        ADFlex U.K.

Effective December 31, 1995, the Company acquired all outstanding capital shares
of Havant International Limited (formerly the flexible interconnect division of
Xyratex and now ADFlex Solutions Limited or ADFlex U.K.). Under the terms of the
agreement, the Company issued 1,242,347 shares of restricted Common Stock valued
at $22.9 million, issued a $10 million subordinated debenture and paid $12.4
million in cash.

The acquisition was accounted for using the purchase method of accounting;
therefore, the accompanying financial statements include the accounts of ADFlex
U.K. since the date of acquisition.

The purchase price of $45.3 million, in addition to the direct costs of the
transaction incurred for investment brokers, professional fees and direct
incremental transaction costs of $1.9 million is allocated as follows (in
millions):

<TABLE>
<S>                            <C>
Receivable for taxes           $   6.3
Inventories                        6.5
Equipment                         11.1
Liability for taxes               (6.3)
Intangible assets                 15.9
In-process technology             13.9
Other assets/liabilities, net     (0.2)
                               $  47.2
</TABLE>

As part of the ADFlex U.K. acquisition, the Company legally assumed the U.K. tax
liability of the predecessor company originally estimated at $6.3 million. The
seller agreed to reimburse the Company for any taxes payable relating to the
predecessor's operations and indemnified the Company for any additional taxes
that may be assessed in relation to the predecessor's operations. Accordingly,
the Company recorded a receivable for taxes due from the predecessor in an
amount equal to the estimated taxes payable. The actual amount of taxes, which
were determined to be $3.4 million, were paid by the Company and reimbursed by
the seller in 1996. The balance of the accrued taxes were offset against the
related receivable from the seller. Intangible assets include completed
technology and work force in place with estimated lives of five years. The $13.9
million allocated to in-process technology was expensed immediately as required
under generally accepted accounting principles.
<PAGE>   14






The unaudited pro forma combined condensed results of operations of the Company
for the year ended December 31, 1995, had the acquisition occurred at January 1,
1995 and which eliminates the non-recurring charge, are as follows (in
thousands, except per share amounts):

<TABLE>
---------------------------------
<S>                   <C>
Revenues              $169,491
Net income              10,422
Net income per share         1.23
---------------------------------
</TABLE>

The unaudited pro forma results for the year ended December 31, 1995 exclude the
effect of the charge for in-process technology as the charge is non-recurring.
The unaudited pro forma results for the year ended December 31, 1995 reflect
intercompany sales elimination, intangible asset amortization and interest
expense on the new debt related to the acquisition.

The unaudited pro forma information is presented for illustrative purposes only
and is not necessarily indicative of the operating results that would have
occurred had the transaction been completed at the beginning of the period
indicated, nor is it necessarily indicative of future operating results.

On September 29, 1996, the Company's Board of Directors approved a plan to
restructure, over the next twelve months, the Company's assembly operation in
the U.K., and during that time period, transfer production from the U.K. to the
Company's manufacturing facility in Thailand. Accordingly, the Company recorded
the following: $13.5 million write-off of intangible assets, $8.8 million
write-down of property, plant and equipment, $2.5 million in lease termination
charges and $4.4 million in employee termination costs for 507 direct labor,
technical and administrative employees. As of December 31, 1996, $0.3 million of
the employee termination charges related to 13 employees had been paid and
charged against the liability. The Company expects to pay out $4.1 million of
the employee and lease termination costs in 1997 and an additional $2.5 million
in 1998. Following the restructuring, the Company will maintain a technology
development center and a sales and service organization in the U.K. to support
its European customers. Total revenue and total operating loss related to this
operation for the year ended December 31, 1996 was $62.8 million and $38.5
million, respectively.


    Note 3        Accounts Receivable

Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>

                                                 December 31,
                                                1996      1995
-----------------------------------------------------------------
<S>                                          <C>        <C>
Accounts receivable trade                    $ 24,223   $ 13,765
Allowance for returns and doubtful accounts      (611)      (642)
                                             $ 23,612   $ 13,123
-----------------------------------------------------------------
</TABLE>

    Note 4        Inventories

Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>

                     December 31,
                    1996     1995
---------------------------------
<S>              <C>      <C>
Raw material     $ 8,152  $ 7,309
Work-in-process    6,690    9,153
Finished goods       148      362
                 $14,990  $16,824
---------------------------------
</TABLE>


    Note 5        Property, Plant and Equipment

Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
                                                 
                                                    December 31,
                                                  1996       1995
-----------------------------------------------------------------
<S>                                               <C>        <C>
Land                                              $ 423  $     -
</TABLE>
<PAGE>   15
<TABLE>
<S>                                                                          <C>       <C>
Building                                                                       9,800      6,763
Leasehold improvements                                                         3,999      3,210
----------------------                                                      -------------------
Manufacturing equipment                                                       26,439     26,750
Computer and office equipment                                                  1,777      1,878
-----------------------------------------------------------------------------------------------
                                                                              42,438     38,601
Accumulated depreciation and amortization of capitalized lease obligations    (8,141)    (3,312)
                                                                            $ 34,297   $ 35,289
-----------------------------------------------------------------------------------------------
</TABLE>

Depreciation expense, including the amortization of capitalized lease
obligations, was $5,794,000, $2,288,000 and $930,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.

    Note 6        Line of Credit and Long-term Debt

Prior to October, 1995, the Company had a $7.5 million revolving line of credit
with First Interstate Bank of Arizona (the FIB Line). The FIB Line was unsecured
and any outstanding balance bore interest at the bank's prime interest rate or,
at the Company's option, LIBOR plus 2%. On October 31, 1995, the Company
replaced the FIB Line with a two-year, $20 million revolving line of credit with
The First National Bank of Boston and First Interstate Bank of Arizona (the FNBB
line). On June 18, 1996, the Company amended the FNBB line. Under the amended
FNBB line, accounts receivable and inventory are pledged as collateral and
borrowing is limited to 80% of the aggregate value of all eligible domestic
accounts plus 70% of the aggregate value of all eligible foreign accounts. Any
outstanding balance bears interest at the bank's prime interest rate or, at the
Company's option, LIBOR plus 1.5%. At December 31, 1996, the weighted average
interest rate was 7.3%. The FNBB line requires the Company to maintain certain
covenants based on leverage and profitability and prohibits the payment of
dividends and certain types of merger transactions without the prior approval of
the banks. At December 31, 1996, the Company had $17.1 million available for
borrowing under the FNBB line with an outstanding balance of $10.0 million. At
December 31, 1995, there were no amounts outstanding under the line of credit.

On February 18, 1997, the Company amended the FNBB line to provide additional
flexibility with respect to certain covenants to allow the Company to more
adequately meet its working capital requirements. This amendment requires the
Company to maintain certain covenants based on leverage and profitability on a
monthly basis through September 30, 1997 and quarterly thereafter and prohibits
the payment of dividends and certain types of merger transactions without the
prior approval of the banks. All assets of the Company are pledged as collateral
and borrowing is limited to 80% of the aggregate value of all eligible domestic
accounts plus 70% of the aggregate value of all eligible foreign accounts. The
amendment became effective as of December 31, 1996 and the Company was in
compliance with all covenants of the amended FNBB line at December 31, 1996.
Provisions made during the year for restructuring charges and the results of
operations rendered the Company unable to comply with the financial covenants
under the FNBB line for the quarter ended September 30, 1996. The lenders have
waived compliance with the financial covenants for the quarter ended September
30, 1996.

Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>

                                                                                      December 31,
                                                                                    1996      1995
---------------------------------------------------------------------------------------------------
<S>                                                                             <C>         <C>
Subordinated debenture issued in connection with the ADFlex U.K. acquisition,
   payable beginning January, 1997 in four equal annual installments (LIBOR +
   2.5%; 7.3% and 8.0% at December 31, 1996 and 1995, respectively)             $ 10,000    $10,000
Capitalized lease obligations                                                        340        483
---------------------------------------------------------------------------------------------------
                                                                                  10,340     10,483
Less current maturities                                                           (2,651)    (2,632)
                                                                                $  7,689    $ 7,851
---------------------------------------------------------------------------------------------------
</TABLE>

The Company was also contingently liable at December 31, 1996 for $240,000
related to outstanding letters of credit guaranteeing the Company's performance
on certain contracts. The amount of these letters of credit is a reasonable
estimate of their fair value as the value for each is fixed over the life of the
commitment.


    Note 7        Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

                                                           December 31,
                                                          1996         1995
---------------------------------------------------------------------------
<PAGE>   16
<TABLE>
<S>                                     <C>      <C>
Salaries and benefits                   $ 2,830  $ 3,138
Income taxes payable                        170    6,782
Accrued interest                            864       33
Accrued restructuring charges, current    4,187     --
Other                                     1,628    2,825
                                        $ 9,679  $12,778
--------------------------------------------------------
</TABLE>

    Note 8        Common Stock and Equity

PREFERRED STOCK The Company's certificate of incorporation authorizes the
issuance of 10 million shares of preferred stock, at $.01 par value,
undesignated as to powers, preferences, rights, limitations or restrictions. As
of December 31, 1996, no shares of preferred stock have been issued.

COMMON STOCK The number of shares of Common Stock reserved for future issuance
at December 31, 1996, was as follows:

<TABLE>
-----------------------------------------------------------------------
<S>                                                             <C>
Employee and director stock options outstanding                 555,162
Reserved for future grants under the 1994 Stock Incentive Plan   67,058
1994 director stock options outstanding                          36,000
Reserved for issuance under the Employee Stock Purchase Plan     56,700
Total reserved for future issuance                              714,920
-----------------------------------------------------------------------
</TABLE>

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

STOCK OPTION PLANS The Company has elected to follow Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) in accounting
for its employee stock options because, as discussed below, the alternative fair
value accounting provided for under Statement of Financial Standards No. 123,
Accounting and Disclosure of Stock-Based Compensation (SFAS No. 123), requires
the use of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.

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

On June 1, 1994, the Company adopted, and the stockholders approved, the 1994
Stock Incentive Plan (1994 Plan) as the successor to the 1993 Plan and reserved
200,000 shares of its Common Stock for issuance under the Plan. On April 18,
1995, the stockholders approved an amendment to the 1994 Plan that increased the
number of shares of Common Stock available for issuance in any year to an amount
equal to 3% of the outstanding shares of Common Stock each January 1 during the
term of the Plan. In 1996, 248,469 shares were reserved for issuance. As part of
the same amendment, the stockholders approved an automatic grant to eligible
non-employee directors of an option to acquire 12,000 shares of Common Stock
upon such directors' initial election to the Company's Board of Directors and
3,000 shares of Common Stock each year thereafter. Options granted to employees
to date under the 1994 Plan either vest over a four year period from the date of
grant or one year from the date of grant, and automatic options granted to
directors vest over a three year period from the date of grant.

Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
pricing model with the following weighted-average assumptions for 1996 and 1995:
risk-free interest rates of 6.28%, dividend yields of 0%, volatility factor of
the expected market price of the Company's Common Stock of .684, and a
weighted-average expected life of the option of 5 years.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics
<PAGE>   17
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of the Company's employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>

                              Years ended December 31,
                                  1996       1995
------------------------------------------------------
<S>                             <C>         <C>
Pro forma net loss              $(25,962)   $(3,970)
Pro forma net loss per share       (3.03)     (0.58)
------------------------------------------------------
</TABLE>

The effects of applying SFAS No. 123 for the years ended December 31, 1996 and
1995 are not likely to be representative of the effects on reported net income
for future years.
<PAGE>   18


Activity in the Plans for the years ended December 31, 1994, 1995 and 1996 was
as follows:
<TABLE>
<CAPTION>

                                                            Outstanding Options
                                    Shares
                                   Available     Number of                     Aggregate
                                  For Options      Shares   Price per Share    Price
-----------------------------------------------------------------------------------------
<S>                               <C>            <C>        <C>                <C>
   December 31, 1993                307,000       393,000   $  0.50            $  196,500
Authorized shares -- 1994 Plan      200,000          --          --                    --
Grants                             (349,950)      349,950   $  0.50 - 16.00     2,483,200
Exercises                              --        (119,550)  $  0.50 -  2.50       (61,775)
Cancellations                      (101,000)         --          --                    --
   December 31, 1994                 56,050       623,400   $  0.50 - 16.00     2,617,925
------------------------------------------------------------------------------------------
Authorized shares -- 1994 Plan      196,929          --          --                    --
Grants                             (198,250)      198,250   $ 24.00 - 27.25     5,353,188
Exercises                              --        (185,437)  $  0.50 - 16.00      (152,827)
Cancellations                       (56,050)         --          --                    --
Forfeitures                           1,850        (1,850)  $ 16.00               (29,600)
------------------------------------------------------------------------------------------
   December 31, 1995                    529       634,363   $  0.50 - 27.25     7,788,686
Authorized shares -- 1994 Plan      248,469          --          --                    -- 
Grants                             (317,725)      317,725   $  8.00 - 17.50     3,374,000
Exercises                              --        (260,612)  $  0.50 - 16.00      (201,267)
Cancellations                          (529)         --          --                    --
Forfeitures/Expirations             136,314      (136,314)  $  9.375- 27.25    (2,707,345)
   December 31, 1996                 67,058       555,162   $  0.50 - 27.25    $8,254,074
-----------------------------------------------------------------------------------------
</TABLE>

There were 149,608 and 335,534 options exerciseable with a weighted-average
price of $15.31 and $2.03 at December 31, 1996 and 1995, respectively. The
weighted-average remaining contractual life of the outstanding options at
December 31, 1996 is 9.1 years. The weighted average fair value of all grants
made during the years ended December 31, 1996 and 1995 are as follows:

     Incentive Stock Options granted in 1996 under the 1994 Plan      $    6.87
     Incentive Stock Options granted in 1995 under the 1994 Plan      $   16.86
     Non-qualified Stock Options granted in 1996 under the 1994 Plan  $    5.93
     Non-qualified Stock Options granted in 1995 under the 1994 Plan  $   16.55

DIRECTOR STOCK OPTIONS On June 2, 1994, the Company granted an option to
purchase 24,000 shares of Common Stock at an exercise price of $10.00 per share
to a newly appointed outside director. The option vests over a four year period.
On October 31, 1996, the Company granted two outside directors an option to
purchase 6,000 shares of Common Stock each at an exercise price of $8.75. The
options vest over a three year period.

DEFERRED COMPENSATION The Company determined that certain stock options in the
quarter ended March 31, 1994 were granted at below the deemed fair value. The
difference between the deemed fair value of the options and the exercise prices
at date of grant of approximately $675,000 was to be charged to operations over
a period beginning on the grant date of the options and ending on the expiration
of the vesting period or, if earlier, upon the completion of the Company's
initial public offering, at which time the options vested automatically.

EMPLOYEE STOCK PURCHASE PLAN On June 2, 1994, the Company adopted and the
stockholders approved the 1994 Employee Stock Purchase Plan (the Purchase Plan)
and the Company reserved 200,000 shares of Common Stock for sale to employees.
The Purchase Plan became effective upon the Company's initial public offering.
The Purchase Plan allows eligible employees of the Company to purchase shares of
Common Stock at 85% of the lesser of the fair value of such shares at the
beginning of the offering period or entry date (whichever is higher) and the end
of each six-month purchase period within such offering period. Contributions are
limited to 15% of an employee's eligible compensation, subject to a maximum fair
value annual purchase of $25,000. There were 90,584 and 52,716 shares issued
under the Purchase Plan during 1996 and 1995, respectively. There were no shares
issued under the Purchase Plan during 1994.


    Note 9        Employee Benefit Plans
<PAGE>   19
During July 1993, the Company established a 401(k) employee salary deferral plan
that allows voluntary contributions by all full-time employees of the Company's
United States and Mexico operations upon commencement of employment. Under the
plan, eligible employees may contribute up to 18% of their pre-tax earnings, not
to exceed the Internal Revenue Service annual contribution limit ($9,500 for
1996). The Company may make contributions each year up to a maximum of 4% of an
employee's total compensation. Total Company contributions during the years
ended December 31, 1996, 1995 and 1994 were $56,000, $59,000 and $48,000,
respectively.

Following the acquisition of ADFlex U.K., an insured money purchase voluntary
pension scheme was established for all full-time United Kingdom employees upon
commencement of employment. Under the plan, a contribution of 3% or 6%,
depending on the job grade, is made by the Company on behalf of employees who
elect to participate. The employees may also make contributions of their pre-tax
earnings up to age-related limits set by U. K. law. Company contributions for
the year ended December 31, 1996 were $237,000.

The Company has adopted a profit sharing plan for its United States and Mexico
employees to provide a financial incentive. The Company makes contributions to
the profit sharing plan in an amount equal to 5% of pre-tax profits. No expenses
were recorded pursuant to this plan for the year ended December 31, 1996. Total
expense pursuant to this plan for the years ended December 31, 1995 and 1994
were $807,000 and $641,000, respectively.

The Company also adopted a profit-related pay scheme for its United Kingdom
employees to provide a financial incentive. Under the plan, all employees would
received 20% of their income tax exempt if the Company achieved minimum profit
levels approved by the U.K. government. The plan was canceled in July 1996 due
to the Company's failure to meet the profit level targets; however, the taxes
which were not withheld from the employees' salary up to this point can not be
recovered from the employees. The Company has accrued a loss of $85,000 for the
employees' tax liability. The liability will be paid by the Company when its tax
return for the United Kingdom is completed in 1997.

The Company has adopted a management bonus plan to provide an additional
financial incentive for management. Total expense pursuant to this plan for the
years ended December 31, 1996, 1995 and 1994 were $136,000, $901,000 and
$944,000, respectively.


    Note 10       Shareholder Rights Plan

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


    Note 11       Income Taxes

Income taxes include the following (in thousands):

<TABLE>
<CAPTION>

                  Years ended December 31,
                  1996       1995     1994
------------------------------------------
<S>            <C>      <C>         <C>
Federal:
Current        $   (77) $   4,091   $4,256
Deferred        (9,623)       520     (284)
------------------------------------------
                (9,700)     4,611    3,972
</TABLE>
<PAGE>   20
   
<TABLE>
<S>                         <C>          <C>      <C>
State:
   Current                          54        70    1,174
   Deferred                       (149)      137      (50)
---------------------------------------------------------
                                   (95)      207    1,124

Foreign, current                    41       309       34
                            $  (9,754)   $ 5,127  $ 5,130
---------------------------------------------------------
</TABLE>

The tax benefits associated with certain stock options reduced taxes currently
payable by $98,000 and $876,000 for 1996 and 1995, respectively. Such benefits
are credited to additional paid-in capital when realized.
<PAGE>   21


Income tax expense (benefit) differs from the amount computed by applying the
federal statutory rate for the years ended December 31, 1996, 1995 and 1994,
respectively, as follows (in thousands):

<TABLE>
<CAPTION>

                                                                          1996        1995      1994
-----------------------------------------------------------------------------------------------------
<S>                                                                    <C>        <C>        <C>
Federal income tax expense (benefit) calculated at the statutory rate  $(12,172)  $    491   $  4,275
State income tax (benefit), net of federal effect                           (62)       135        731
Foreign losses with no tax benefit                                        2,438         --         --
Tax exempt income                                                            --       (249)        --
In-process technology                                                       (54)     4,872         --
Research and development credit                                            (100)      (100)      (300)
Other, net                                                                  196        (22)       424
Income tax expense (benefit)                                           $ (9,754)  $  5,127   $  5,130
-----------------------------------------------------------------------------------------------------
</TABLE>

Deferred taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of deferred tax
assets and liabilities as of December 31, 1996 and 1995 are as follows (in
thousands):
<TABLE>
<CAPTION>

                                                  1996      1995

<S>                                             <C>      <C>
Deferred tax assets:
   Tax benefits related to restructuring        $10,601  $    --
   Inventory valuation                              438       39
   Accrued liabilities                              352      460
   Allowance for returns and doubtful accounts      188      251
----------------------------------------------------------------
                                                 11,579      750
Deferred tax liabilities:
   Tax versus financial reporting depreciation      974      428
   Prepaid expenses and other                       554       43
                                                  1,528      471
----------------------------------------------------------------
Net deferred tax asset                           10,051      279
Less deferred tax asset, current                  2,505      750
----------------------------------------------------------------
Deferred tax asset (liability), non-current     $ 7,546  $  (471)
----------------------------------------------------------------
</TABLE>

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

Pre-tax income (loss) from foreign operations was ($38,749,000), $910,000 and
$28,000 for the years ended December 31, 1996, 1995 and 1994, respectively. The
residual United States tax liability for unremitted foreign earnings is
immaterial.


 Note 12          Commitments and Contingencies

LEASE COMMITMENTS The Company leases its facilities and equipment under capital
and operating leases which expire at various dates through April 30, 2003. As of
December 31, 1996, the future minimum lease commitments under these leases are
payable as follows, including lease payments to Xyratex related to the U.K.
operation through the date of termination (in thousands):

<TABLE>
<CAPTION>

                                        Capitalized    Operating
                                        Leases         Leases
----------------------------------------------------------------
<S>                                     <C>            <C>
Year ended December 31,
     1997                               $189           $4,089
     1998                                189              499
     1999                                 16              379
</TABLE>
<PAGE>   22
<TABLE>
<S>                                                       <C>     <C>
   2000                                                     --        284
   2001                                                     --        247
   2002 and thereafter                                      --        215
-------------------------------------------------------------------------
Total minimum lease payments                               394    $ 5,713
Less amounts representing interest                         (54)
Present value of future net minimum lease payments        $340
-------------------------------------------------------------------------
</TABLE>

The Company is in the process of negotiating the terms of a renewal of the lease
related to its Chandler, Arizona facility, which currently expires on June 30,
1997.

Rent expense for all operating leases for the years ended December 31, 1996,
1995 and 1994 was $4,246,000, $1,147,000 and $856,000, respectively. At December
31, 1996 and 1995, the Company had capitalized $696,000 of assets acquired under
capitalized lease agreements in the accompanying balance sheet.

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


 Note 13          Geographic Segment and Major Customer Information

The Company operates in one business segment, which is the manufacture and sale
of flexible circuit-based interconnect products. Financial information
summarized by geographic area for the year ended December 31, 1996, is as
follows (in thousands) :
<TABLE>
<CAPTION>

                          North               Southeast
                         America     Europe     Asia    Eliminations      Consolidated
--------------------------------------------------------------------------------------
<S>                      <C>       <C>       <C>        <C>               <C>
Customer revenue         $ 93,524  $ 62,767  $    545      $     --        $156,836
Affiliate revenue           6,056        --        --        (6,056)             --
--------------------------------------------------------------------------------------
Total revenue            $ 99,580  $ 62,767  $    545      $ (6,056)       $156,836

Operating income (loss)  $  5,531  $(38,516) $   (570)     $   (136)       $(33,691)

Identifiable assets      $114,655  $ 26,385  $  3,162      $(51,021)       $ 93,181
--------------------------------------------------------------------------------------
</TABLE>

At December 31, 1995, included in the Company's net assets were assets totaling
$47.2 million which were located in Europe.

At any given time, sales to certain customers may account for a significant
portion of the Company's business. Sales to Seagate Technology, Inc. accounted
for 35%, 21% and 19% of net sales for the years ended December 31, 1996, 1995
and 1994, respectively. Sales to two additional customers accounted for 12% and
8%, 19% and 13%, and 18% and 11% of net sales in 1996, 1995 and 1994,
respectively.

Export sales during the years ended December 31, 1996, 1995 and 1994 were $26.6
million, $43.2 million and $27.4 million, respectively.


    Note 14       Related Party Transactions

ACQUISITION AGREEMENTS WITH ROGERS CORPORATION Pursuant to the asset purchase
agreements entered into on June 28, 1993 between the Company and Rogers
Corporation (Rogers) whereby the Company purchased the Flexible Interconnect
Division (the Predecessor) of Rogers, Rogers retained certain existing and
potential liabilities. In particular, Rogers retained all liabilities resulting
from, among other things, the creation, storage, discharge, use or handling of
hazardous or toxic substances by the Predecessor that may exist on or about the
Company's facilities in Arizona and Mexico prior to the acquisition. In
addition, Rogers retained certain other liabilities, including (i) all
liabilities with respect to litigation of the Predecessor pending on the
consummation date of the acquisition; (ii) federal income and certain state
sales tax 
<PAGE>   23
liabilities relating to periods prior to the acquisition; (iii) certain
liabilities related to employment matters of the Predecessor; and (iv) any trade
payables incurred prior to the closing.

In connection with the acquisition, the Company entered into a supply agreement
with Rogers for the supply to the Company of certain raw material components
used in the manufacture of the Company's products. The Company also entered into
a building lease with an affiliate of Rogers to lease the Predecessor's
corporate headquarters and U.S. manufacturing facility. The lease agreement for
the Company's U.S. facility is for five years and provides for fixed payments of
$450,000 per annum for the first three years and mutually agreed market rates
for the remaining two years. Total rent expense paid to Rogers was $450,000 for
each of the years ended December 31, 1996, 1995 and 1994.

AMP COMPONENT PURCHASES The Company purchases certain components from AMP,
Incorporated (AMP), a stockholder of the Company that, through the Company's
initial public offering, had a representative on the Company's Board of
Directors. Purchases from AMP for the years ended December 31, 1996, 1995 and
1994 were $2,582,000, $1,559,000 and $670,000, respectively.

AFFILIATION WITH SMARTFLEX In order to facilitate their manufacturing processes,
the Company's customers often require that the Company sell finished
interconnects to contract assemblers for further assembly. The Company derived
8%, 19% and 19% of its net sales in 1996, 1995 and 1994 respectively, from sales
to Smartflex Systems, Inc. (Smartflex), which is a contract assembler that was
formerly the Joint Venture between Rogers and a third-party, and at December 31,
1995 was partially owned by a major stockholder of the Company. At December 31,
1995, a director of the Company was also a director of Smartflex.


AFFILIATION WITH XYRATEX The Company derived 2% of its net sales in 1996 from
sales to Xyratex, a major shareholder of the Company with a representative on
the Company's Board of Directors. The Company leases the ADFlex U.K.
manufacturing facility from Xyratex. Total lease payments made to Xyratex in
1996 totaled $2,586,000. In addition, $1,924,000 was paid to Xyratex in 1996 for
administrative services.


    Note 15       Quarterly Financial Data (unaudited)

<TABLE>
<CAPTION>

                                            First     Second     Third       Fourth
(in thousands, except per share amounts)   Quarter    Quarter   Quarter      Quarter     Year
--------------------------------------------------------------------------------------------------
<S>                                        <C>        <C>       <C>         <C>        <C>
Net sales
     1996                                  $ 38,082   $35,031   $ 36,898    $ 46,825   $156,836
     1995                                    21,980    24,423     28,461      26,299    101,163
Gross profit
     1996                                     7,198     5,244       (295)      6,416     18,563
     1995                                     6,192     7,076      7,684       7,103     28,055
Net income (loss)   
     1996                                       840      (660)   (25,663)(1)     459    (25,024)(1)
     1995                                     2,206     2,526      2,814     (11,269)    (3,723)
Net income (loss) per share
     1996                                       .10      (.08)     (2.98)        .05      (2.92)
     1995                                       .31       .35        .38       (1.60)      (.54)
--------------------------------------------------------------------------------------------------
</TABLE>

(1) Includes charges of $29.2 million related to restructuring of the Company's
U.K. operations, see note 2 to the consolidated financial statements.
<PAGE>   24



Report of Independent Auditors



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

We have audited the accompanying consolidated balance sheets of ADFlex
Solutions, Inc. (the Company) at December 31, 1996 and 1995, and the related
consolidated statements of operations, equity and cash flows for each of the
three years in the period ended December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

In our opinion, the consolidated financial statements of the Company referred to
above present fairly, in all material respects, the consolidated financial
position of ADFlex Solutions, Inc. at December 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, on January 1,
1996, the Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of."


/s/ Ernst & Young LLP

Phoenix, Arizona
January 20, 1997
<PAGE>   25



Selected Financial Data


<TABLE>
<CAPTION>
(in thousands, except per share amounts) year end position    1996(4)     1995(3)      1994      1993(2)      1992(1)
----------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>         <C>         <C>          <C>        <C>  
    summary of operations

Net sales                                                    $ 156,836   $  101,163  $   77,733  $   48,892  $  46,714
Gross profit                                                    18,563       28,055      23,921      11,241      2,487
Gross profit as a percent of net sales                            11.8%        27.7%       30.8%      23.0%        5.3%
Operating expenses                                              52,254       27,587      11,804      7,267      28,347
----------------------------------------------------------------------------------------------------------------------
Operating expenses as a percent of net sales                      33.3%       27.3%        15.2%      14.9%       60.7%
Operating income (loss)                                        (33,691)         468      12,117       3,974    (25,860)
Operating income (loss) as a percent of net sales                (21.5%)        0.5%       15.6%        8.1%     (55.4%)
Net income (loss)                                              (25,024)      (3,723)      7,046       2,191    (26,062)
----------------------------------------------------------------------------------------------------------------------

    cash flow data

Net cash provided by (used in) operating activities          $   4,439   $   19,230  $    3,993   $   8,382  $  (5,705)
Acquisition of property, plant and equipment                    13,763       20,636       5,450         586      3,189
Depreciation and amortization of property, plant and equipment   5,794        2,288         930          78      2,710
----------------------------------------------------------------------------------------------------------------------
\
    share data

Common and common equivalent shares used
   in the calculation of net income (loss) per share             8,580        6,855       5,578       4,578        n/a
Net income (loss) per share                                   $  (2.92)  $    (0.54) $     1.26   $    0.48        n/a
Book value per share                                              4.67         7.67        5.75        0.84        n/a
----------------------------------------------------------------------------------------------------------------------

    year end position

Total assets                                                  $  93,181  $  106,918  $   47,703  $   10,470  $  15,453
Working capital                                                   9,102      20,636      32,443       2,557      8,534
Long-term debt and capitalized lease obligations                 10,340      10,483         592           -          -
Stockholders' equity                                             40,289      63,554      37,764       3,362        n/a
Return on average stockholders' equity                            (48.2%)      (7.3%)      34.3%       36.8%       n/a
----------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)  1992 financial data represents the results of Rogers Corporation
     (Rogers). The Company was created on February 23, 1993 for the purpose
     of acquiring the Flexible Interconnect Division of Rogers.
(2)  1993 financial data represents the results of Rogers for the period
     January 1, 1993 to June 27, 1993 and the results of the Company for the
     period June 28, 1993 to December 31, 1993. Transactions of the Company
     from inception to June 27, 1993 were not significant and are included
     in the results of Rogers.
(3)  Effective December 31, 1995, the Company wrote off $13.9 million of
     in-process technology in conjunction with the ADFlex U.K. acquisition,
     see note 2 to the consolidated financial statements.
<PAGE>   26
(4)  1996 financial data includes $29.2 million related to restructuring of
     the Company's U.K. operations, see note 2 to the consolidated financial
     statements.
<PAGE>   27

Securities Information

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

Quarter Ended   March 31    June 30  September 30  December 31
---------------------------------------------------------------
<S>             <C>         <C>      <C>           <C>
1996
High            $27.00      $18.00      $11.75      $14.00
Low              10.50        9.88       14.00        7.38

1995
High             22.25       28.50       29.25       31.25
Low              16.00       19.50       19.75       19.75
</TABLE>


There were approximately 106 stockholders of record as of February 14, 1997. The
Company does not currently pay cash dividends on its common stock and intends to
retain earnings for use in the operation and expansion of its business. In
addition, the Company's bank line of credit limits the payment of cash dividends
on its common stock.