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                    U.S. SECURITES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                            ----------------------
                                  FORM 10-KSB

[X]             ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended June 30, 1997

[ ]            TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934

                        Commission File Number 0-27102

                                 ROMTECH, INC.
            (Exact name of registrant as specified in its charter)

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<S>                                                                <C>
                          Pennsylvania                                         23-2694937
 (State or other jurisdiction of incorporation or organization)   (IRS Employer Identification Number)

         2000 Cabot Boulevard, Suite 110, Langhorne, PA                        19047-1833
            (Address of principal executive offices)                           (Zip code)

       Registrant's telephone number, including area code                     215-750-6606
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:

     Title of each class               Name of each exchange on which registered
     -------------------               -----------------------------------------
 Common stock, no par value                              NASDAQ

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

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

State issuer's revenues for its most recent fiscal year:  $4,382,693

State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked price of such common equity, as
of a specified date within the past 60 days. $10,493,629 as of September 24,
1997.

                  ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
                       DURING THE PRECEDING FIVE YEARS:

Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes ( ) No ( )

                   APPLICABLE ONLY TO CORPORATE REGISTRANTS

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 8,545,295 shares of common stock, no
par value per share, as of September 24, 1997. Transitional Small Business
Disclosure Format (check one):      Yes (  )      No (X)

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of Registrant's definitive proxy statement for its 1997 Annual
Meeting are incorporated by reference into Part III as set forth herein. With
the exception of those portions which are expressly incorporated by reference,
said proxy statement is not deemed filed as a part hereof.

Exhibit Index located on page 39      Page 1 of 41

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                                 RomTech, Inc.

                                  Form 10-KSB
                    For the Fiscal Year Ended June 30, 1997

                                     INDEX


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                                                                                                              Page
                                                PART I

<S>         <C>                                                                                               <C>
Item 1.     Business.....................................................................................        3

Item 2.     Properties...................................................................................       13

Item 3.     Legal Proceedings............................................................................       13

Item 4.     Submission of Matters to a Vote of Security Holders..........................................       13

                                                PART II

Item 5.     Market for the Registrant's Common Stock and Related Stockholder Matters....................        14

Item 6.     Management's Discussion and Analysis of Results of Operations
            and Financial Condition.....................................................................        15

Item 7.     Financial Statements .......................................................................        18

Item 8.     Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure....................................................................        37

                                                PART III

Item 9.     Directors and Executive Officers of the Registrant..........................................        38

Item 10.    Executive Compensation......................................................................        38

Item 11.    Security Ownership of Certain Beneficial Owners and Management..............................        38

Item 12.    Certain Relationships and Related Transactions..............................................        38

                                                PART IV

Item 13.    Exhibits and Reports on Form 8-K............................................................        39


Index of Exhibits.......................................................................................        39
Signatures..............................................................................................        41
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                                    PART I

This annual report on Form 10-KSB contains forward-looking statements
regarding future events or the future financial performance of the Company
that involve certain risks and uncertainties. Actual events or the actual
future results of the Company may differ materially from the results discussed
in the forward-looking statements due to various factors, including, but not
limited to, those discussed in "Factors Affecting Future Performance" below at
pages 8 to 13.

Item 1.           Business

GENERAL

RomTech, Inc. (the "Company") a Pennsylvania corporation incorporated in July
1992, develops, publishes, markets and resells a diversified line of personal
computer software for consumer, educational and business applications. In
October 1995, the Company completed its initial public offering coincident
with its acquisition of Applied Optical Media Corporation ("AOMC"), a
developer of educational and reference software titles. In April 1996, the
Company acquired Virtual Reality Laboratories, Inc. ("VRLI"), a software
developer of landscape generation, space exploration, scheduling and business
forms manipulation programs. As a result of these acquisitions, the Company
offers software titles and personal productivity application products in the
game, personal/business productivity, education/edutainment, reference and
lifestyle markets for use at home and in the office. The Company's product
line enables it to serve customers who are seeking a broad range of
high-quality, value priced software.

The Company believes that consumers base their software purchase decisions on
the same criteria as other consumer product purchases, relying on recognized
brands for consistent quality, value and ease of use. The Company promotes the
Galaxy of Games(TM), Galaxy of Home Office Help(TM) and Galaxy Deluxe(TM)
brand names (the "Galaxy Series") in order to generate customer loyalty,
encourage repeat purchases and differentiate the Galaxy Series products to
retailers and consumers. The Company targets the growing market of home
personal computer ("PC") users who value fully-featured and easy-to-use
software. The Company's Galaxy of Games and Galaxy of Home Office Help
products generally sell for under $15, a price point intended to generate
impulse purchases in mass market shopping environments. The Company's Galaxy
Deluxe products generally sell for $19.95 but feature packaging and content
usually found in $50 software titles.

BUSINESS STRATEGY

The worldwide market of personal computer users in the home and small office
represents the primary market for the Company's products. A March 1996 study
estimated the total United States installed base for home personal computers
at forty-seven million units during 1996 and projected the installed base to
grow to sixty-nine million units by 1999. The Company believes that brand name
recognition of its products, developing new brands and capitalizing upon the
success of top selling titles in existing brands is critical to its success as
a software publisher. The Company's business strategy is to be a leading
publisher of high-quality, value-priced consumer software by offering products
in the game, Galaxy of Games, and productivity, Galaxy of Home Office Help,
segments of the market for under $15 and the education/reference and
lifestyle, Galaxy Deluxe, segments of the market for $19.95. To implement its
business strategy, the Company intends to execute the following tactics.

Rely On Consumer Research and Marketplace Data. The Company utilizes consumer
research and marketplace sales data to determine which products are achieving
favorable sales results in the consumer software categories that the Company
serves. The Company then focuses on its top selling products that have a
sustainable product life and which also appeal to the broadest age group of
consumers regardless of gender. The Company then either develops or procures
similar products that meet these criteria while complementing and supporting
the Company's branding strategy.

Deliver Products To Market Quickly To Maximize Sales Opportunities. The
Company believes that one of its significant competitive strengths, primarily
as a result of its direct selling activity at weekend computer trade shows, is


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its ability to identify products that consumers are buying and which they will
continue to buy. The Company leverages this competitive strength by quickly
developing or procuring a product offering that the Company believes will
achieve favorable sales results in its category when the product is combined
with the Company's attractive, distinctive and informative packaging that is
designed to encourage impulse purchases in retail stores. The Company's
development efforts focus primarily on product design, features, consistent
and user friendly interfaces, ease of use, product quality and consistency.
The Company's internal product development activities are supplemented by
utilizing existing technologies and externally developed programming and
content. The Company maintains control over the creative and market-driven
aspects of its product development activities while utilizing outside
resources to reduce its development costs and minimize risks.

Develop Products That Are Simple To Use. Based on information from
registration cards returned by buyers of the Company's products, a large
portion of the Company's customers are new computer owners and so the
installation and use of the Company's products must require only a minimum of
technical expertise. The Company provides technical support for all of the
products that it sells and revises or upgrades products in response to
consumer feedback gained from consumers' registration of products they have
purchased.

Develop Efficient Distribution Relationships. The Company intends to rely on
larger, well established, merchandising and distribution organizations to
distribute its products to retailers in the U.S. and international markets.
Developing a direct sales force and a distribution organization to serve
today's U.S. retailers and retailers worldwide requires a commitment of
considerable financial and managerial resources and entails significant
competitive risk. In order to reduce the resources required for effective
distribution, the Company intends to incorporate Internet capabilities into
many of its new products. Customers or prospective customers can then review
the Company's products at its website, (http: www.romt.com.), and download
trial versions of selected software.

Market Brand Names That Deliver Consistent Quality. The Company is currently
focusing its marketing resources on developing brands that represent
consistency, quality and value to the consumer. The Company believes that to
the consumer, brands offer a safe and secure choice in an otherwise confusing,
fast changing and often intimidating software marketplace. Consumers view
successful brand logos as friendly marks of quality assurance. Once a consumer
becomes highly satisfied with a brand in any given product category, that
consumer will typically tend to actively seek out that brand versus competing
brands. The Company believes that successful brands can often command premium
prices relative to other competitive products and one of the Company's goals
is to achieve such success with its branding strategy.

Achieve and Maintain Profitable Operations. Since its inception the Company
has not achieved profitability. During the second half of fiscal 1997 the
Company undertook changes in its operations and business strategy to focus on
the value priced segment of the consumer software market while structuring the
Company to achieve profitability. The value priced segment is currently the
largest and most rapidly growing category of the consumer software market.
This trend is expected to continue for the foreseeable future as consumers
demand lower prices for software. In order to achieve and maintain profitable
operations the Company has developed plans and systems that will focus on:
delivering top selling branded titles with predictable, controllable
development costs and risks; outsourcing production and warehousing while
achieving high quality, low product costs, timely and efficient deliveries and
predictable overhead costs during periods of rapid and high sales volume
growth; and controlling operating expenses.

SALES AND MARKETING

The Company relies primarily on three basic sales channels for most of its
sales: distributors, direct mail and computer trade shows. The Company intends
to continue to explore opportunities using the Internet to market and
distribute software. Internet sales currently account for an insignificant
portion of the Company's sales. The Company presently has an exclusive
distribution agreement with Slash Corporation ("Slash") a division of GT
Interactive Software Corp., ("GTIS") covering distribution of the Company's
products to retailers in North America. Slash accounted for approximately 35%
of the Company's net sales during fiscal 1997. The Company believes that for
the year ending June 30, 1998, Slash could account for more than 70% of the


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Company's net sales (see Customer Concentration and Credit Risk on page 8 of
this report). GTIS is currently the largest distributor of consumer software
to mass merchants in the United States. The Company believes that GTIS is the
primary supplier of its own and third party consumer software to approximately
2,320 Wal-Mart(TM) stores and approximately 760 Target(TM) stores and supplies
value-priced software under specially designed programs to approximately 2,150
Kmart(TM) stores. Retailers that purchase the Company's products through
distributors include Wal-Mart, Target, Kmart, Best Buy(TM), CompUSA(TM),
Staples(TM), Office Depot(TM), OfficeMax(TM), Computer City(TM), Electronic
Boutique(TM), Zainy Brainy(TM), Babbages(TM), Software Etc. (TM) and
Fry's(TM). The Company also sells to international distributors primarily in
the United Kingdom and Japan and is currently negotiating distribution
relationships in Australia, Germany, Belgium, France, Singapore and South
Africa. The Company maintains a database of its registered customers and from
time to time uses direct mail to sell upgrade versions and new products. Sales
of software titles in jewel case packaging at computer trade shows are made
through the Company's Multimedia Warehouse(TM) Product Group.

The Company's product line is based on branded content focused in the game,
productivity, education/reference and lifestyle markets. By maintaining a
branded product category focus, the Company believes that its advertising,
promotion, merchandising and packaging expenditures will accrue long-term
benefits for all the products in each category.

The Company uses a small internal staff to work with a distributor's sales
personnel in order to maximize the business potential with retail accounts.
The Company's salespeople work closely with its distributors and retail buyers
to determine that appropriate Company products are inventoried for each retail
outlet, that stocking levels are adequate, that promotions and advertising are
coordinated with product releases and that in-store merchandising plans are
properly implemented.

The Company's marketing department is responsible for creating and marketing
programs to generate product sell-in (sales to retailers) and sell-through
(sales to end user customers). These programs generally are based on
established consumer product marketing techniques that the Company believes
are becoming more important as software becomes more of a consumer product.
The Company uses consumer product graphic designers and copywriters to attempt
to create effective package designs, catalogs, brochures, advertisements and
related materials. The Company's marketing and sales personnel and outside
contractors work together to coordinate retail and publicity programs so that
those programs are in place when products are initially shipped to retailers
and consumers. Public relation campaigns, in-store advertising, catalog
mailings and advertisements are designed in advance of product availability.

The Company has limited exposure to returns by distributors and retailers
because its distribution agreements generally do not provide for returns
unless there are defects in a product related to workmanship. The Company does
have some limited exposure to returns by consumers. Reserves for these returns
are established at levels that the Company believes are adequate based on
product sell-through, inventory levels and historic return rates (See Note 1,
Summary of Significant Accounting Policies, Revenue Recognition, page 26). The
Company typically accepts returns from customers, even when not legally
required to do so, in order to maintain good customer relations which the
Company believes enhances repeat purchasing by consumers. The Company sells to
its distributors and retailers on credit, with varying discounts and credit
terms.

COMPETITION

The market for software in the categories in which the Company competes is
intensely competitive. The Company believes that the principal competitive
factors generally include content quality, brand name recognition, ease of
use, merchandising, product features, quality, reliability, on-line
technology, distribution channels and price. Based on its current and
anticipated future product offerings, the Company believes that it competes or
will compete effectively in these areas, particularly in brand name
recognition, quality, ease of use, and product features.

The Company competes primarily with other software publishers, although
certain book publishers, magazine publishers, entertainment companies and
media companies may expand their product lines to compete with the Company's
products. The Company's competitors vary in size from very small companies


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with limited resources to very large corporations with greater financial,
marketing, distribution, technical and other resources. Although there are a
variety of consumer and business software publishers, based on product lines
and price points, GT Interactive, The Learning Company, CUC Software, IMSI,
Expert Software, Nova Development Corporation, Cosmi, Electronic Arts,
Mindscape, Hasbro Interactive, Virgin, Interplay and Media Graphics are the
Company's primary competitors. In addition, it is possible that certain large
software companies, hardware companies and media companies may increasingly
target the value line segment of the software market resulting in additional
competition.

The Company believes that increasing competition in the consumer software
market may result in lower selling prices, which could adversely affect the
Company's business, operating results and financial condition. To the extent
that competitors achieve performance, price or other selling advantages, the
Company could be adversely affected. In addition, commercial acceptance of new
technologies such as the Internet may reduce demand for the Company's existing
products. Extensive price competition, reduced demand or distribution channel
changes may have a material adverse effect on the Company's business,
financial condition and operating results. There can be no assurance that the
Company will have the resources required to respond to market forces,
technological change or compete successfully against current or future
competitors or that the competitive pressures faced by the Company will not
materially and adversely affect its business, operating results and financial
condition.

PRODUCT DEVELOPMENT

The Company seeks to develop a broad line of branded products in rapidly
growing and sustainable market categories. The Company utilizes consumer
research and marketplace sales data, (reported industry sales data, computer
trade show sales data and retail sell-through data), to determine which
products are achieving top ranked sales results in the consumer software
categories that the Company serves. New product ideas are evaluated based upon
market research in the subject area, the type and demographics of the target
consumer, and the existence and characteristics of competitive products. The
Company then either develops or procures similar or like-kind products that
meet these criteria while complementing and supporting the Company's branding
strategy. The Company believes that its development process has certain
material advantages over other software companies, including consistent
product quality, reliable delivery schedules and predictable cost estimates.
The Company has also acquired products through the acquisition of other
software companies or the acquisition or licensing of software products or
technologies and will most likely continue to do so in the future.

The Company's product or marketing manager ("project manager") oversee the
development of a product from conception through completion, and controls the
scope, design, content, and management of the project. The Company seeks to
design new products that incorporate all of the important functions and
features of the leading competitive products and to add innovative, helpful
concepts and upgrades. Once a product is approved for development, a design
specification is created that includes the product's features, estimated
development time and cost, projected delivery availability date and projected
selling price. Whenever possible, the software is designed to incorporate
technology used in the Company's current products in an effort to shorten the
development cycle and improve quality and consistency. The overall product,
including packaging and documentation, is designed to comply with a
manufacturing specification that will meet the Company's margin requirements
at consumer price points.

The project manager executes the project with a project team that typically
may include programmers, designers, artists, writers and testers. The project
team members may be employees of the Company or independent contractors
depending on the scheduling of and skills required for each project. The
Company's internal development efforts focus primarily on product design and
features, consistent user interfaces, and product quality and consistency. The
Company supplements its internal product development resources by utilizing
existing technologies and externally developed programming and content when
such utilization results in a more efficient method of creating a higher
quality product. Using this method, the Company maintains internal control
over the creative and market-driven aspects of product development while using
external resources to shorten development time and lower development costs and
risks. Development costs associated with externally up front licensed
technology are generally paid through royalties based on actual sales which
reduces the Company's investment risk in a product.

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Developed products are tested for quality assurance before being released for
production. Products are typically tested for bugs, compatibility with the
numerous popular PC configurations, typical installation issues,
functionality, and ease-of-use. Marketing managers, or marketing employees
under a manager's supervision, are responsible for reviewing customer
feedback, competitive products, product performance and market positioning in
order to introduce upgrades that keep abreast of consumer tastes and trends
while satisfying the Company's business strategy.

BACKLOG

The Company typically ships its products within a short period of time after
accepting a customer's order, which is common in the computer software
industry. Consequently, the Company does not generate a significant backlog of
orders which would be a significant or important indicator of future revenues
or earnings.

CUSTOMER AND TECHNICAL SUPPORT

Customer and technical support standards are very high in the computer
software market. The Company provides telephone and Internet technical support
to its customers at no additional charge. In order to remain competitive, the
Company currently provides customer support. However, costs associated with
these activities are not significant. The Company believes that high-quality,
user-friendly support will aid in the product development process and,
therefore, the Company's growth, by providing valuable feedback to its
marketing and software development personnel.

OPERATIONS

The Company's accounting, purchasing, inventory control, scheduling, order
processing, warehousing and shipping, operations and development activities
are conducted at its headquarters location in Langhorne, PA. Production and
most shipments to major vendors are performed by independent contractors
working under the Company's direction. The Company's management information
system handles order entry, order processing, picking, billing, accounts
receivable, accounts payable, general ledger, inventory control, and mailing
list management. Subject to credit terms and product availability, orders are
typically shipped from the Company's facilities within 24 hours of receiving
an order. Third party contractors replicate the software and assemble manuals,
catalog inserts and boxes in which the Company's products are shipped. The
Company has multiple sources for all components of its products, and has not
experienced any material delays in production or assembly.

EMPLOYEES

As of June 30, 1997, the Company had 33 full-time employees of which 9 were
employed in software development; 10 in sales, marketing and customer support;
and 14 in operations, finance and administration. In addition, the Company
utilizes approximately 6 independent contractors in connection with its
product development activities. No employees are represented by labor unions,
and the Company has never experienced a work stoppage.

INTELLECTUAL PROPERTY RIGHTS

The Company generally sells a portion of its published software under licenses
from independent developers and, in such cases, does not acquire the
copyrights for the underlying work. The Company relies primarily on a
combination of trademark, copyright, trade secret and other proprietary rights
laws, license agreements, employee and third-party nondisclosure agreements
and other methods to protect its proprietary rights and the rights of its
developers. United States copyright law, international conventions and
international treaties, however, may not provide meaningful protection against
unauthorized duplication or infringement of the Company's software.

Policing unauthorized use of an easily duplicated and broadly disseminated
product such as computer software is very difficult, time consuming and
costly. Software piracy is expected to be a persistent problem for the
software industry. These problems are particularly acute in certain
international markets such as South America, the Middle East, the Pacific Rim


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and the Far East. If a significant amount of unauthorized copying of the
Company's products were to occur, the Company's business, operating results
and financial condition could be adversely affected.

 Software developers and publishers are subject to infringement claims. There
can be no assurance that third parties will not assert infringement claims
against the Company in the future with respect to current or future products.

There has been substantial litigation in the industry regarding copyright,
trademark and other intellectual property rights. Any such claims or
litigation, with or without merit, would be costly and result in a diversion
of management's attention, which could have a material adverse effect on the
Company's business, operating results and financial condition. Adverse
determinations with respect to such claims or litigation would have a material
adverse effect on the Company's business, operating results and financial
condition.

FACTORS AFFECTING FUTURE PERFORMANCE

This report and the Company's Annual Report to Stockholders for the year ended
June 30, 1997 contain certain forward-looking statements that involve risks
and uncertainties that could cause actual results to differ materially from
those anticipated, including, but without limitation, economic and competitive
conditions in the software business affecting the demand for the Company's
products, the Company's need for additional funds, the ability to hire key
management personnel to manage anticipated growth, the development, market
acceptance and timing of new products, access to distribution channels and the
renewal of licenses for key software products. Those factors and the factors
discussed below and elsewhere in this report, should be considered by
investors in the Company.

Early Stage Company; Consumer Software Business; Losses. The Company commenced
operations in July 1992. The Company has experienced losses since inception.
The accumulated deficit for the Company through June 30, 1997 is approximately
$7,865,000. The Company's operations to date have been funded primarily
through proceeds from the Company's initial public offering of common stock in
October 1995 and through the sale in private offerings of preferred stock and
common stock warrants in November 1996 and in January and April 1997. The
Company's operations are subject to all of the risks inherent in the
development of an early stage business, particularly in a highly competitive
industry, including, but not limited to, development, production and marketing
difficulties, competition and unanticipated costs and expenses. The Company's
future success will depend upon its ability to increase revenues from the
development and marketing of its current and future software products. The
development of multimedia software products, which combine text, sound, high
quality graphics, images and video, is difficult and time consuming, requiring
the coordinated participation of various technical and marketing personnel.
Other factors affecting the Company's future success include, but are not
limited to, the ability of the Company to overcome problems and delays in
product development, market acceptance of products and successful
implementation of sales and marketing programs. There can be no assurance the
Company will successfully develop a sustainable game or personal productivity
software business and achieve profitability.

Customer Concentration and Credit Risk. The Company presently has an exclusive
distribution agreement with Slash Corporation ("Slash"), a division of GT
Interactive Software Corp. ("GTIS") covering distribution of the Company's
products to retailers in North America. GTIS is currently the largest
distributor of consumer software to mass merchants in the United States.
During the year ended June 30, 1997, Slash accounted for approximately 35% of
the Company's net sales. The Company believes that for the year ending June
30, 1998, Slash could account for 70% or more of the Company's net sales. The
Company's agreement with Slash does not specify minimum purchase requirements
and could be terminated at any time by Slash. There can be no assurance that
Slash will continue to distribute the Company's consumer software. The loss of
Slash as a distributor or an inability to collect receivables from Slash or
any other adverse change in the Company's relationship with Slash would have a
material adverse effect on the Company's business, operating results and
financial condition.

Potential Inability to Manage Growth. The Company's ability to manage growth
effectively will depend on its ability to improve and expand its operations,
including its financial and management information systems, and to recruit,
train and manage additional marketing, sales, software development, operations


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and administrative personnel. There can be no assurance that management will
be able to manage growth effectively, or that it will be able to recruit and
retain personnel. The failure to do either will have a material adverse effect
on the Company.

Need for Additional Funds. The Company's future capital requirements will
depend on many factors, including cash flow from operations, continued
progress in its software development program, competing technological and
market developments and the Company's ability to market its products
successfully. If the Company is not able to increase cash flow from operations
to a level sufficient to support continued growth of its business, the Company
may require additional funds to sustain and expand its product development,
marketing and sales activities. Adequate funds for these purposes may not be
available or may be available only on terms that would result in significant
dilution or otherwise be unfavorable to existing stockholders. If the Company
is unable to secure additional funding, or if the Company is unable to obtain
adequate funds from operations or external sources when required, the
Company's inability to do so would have a material adverse effect on the
long-term viability of the Company. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources" in Part II, Item 6 of this document.

Shares Eligible for Future Sale. Shares of a substantial number of the
Company's Common Stock in the public market could adversely affect the market
price for the Common Stock. Of the 6,535,614 shares of Common Stock
outstanding on June 30, 1997, approximately 4,637,271 shares are "restricted
securities" which may be sold publicly pursuant to an effective registration
statement under the Securities Act or in reliance upon an applicable exemption
from the registration requirements of the Securities Act. Of the 4,637,271
shares of restricted securities, 634,667 shares have been registered pursuant
to a registration statement on Form S-3, 7,000 shares are subject to piggyback
registration rights and 4,043,461 shares are presently eligible for sale under
Rule 144 promulgated under the Securities Act. As of June 30, 1997, options
and warrants to purchase 1,685,859 shares of Common Stock were outstanding of
which 1,507,109 were immediately exercisable, and 1,000,000 shares of Class
One Convertible Preferred Stock ("Class One Preferred Stock") will be
convertible into 303,030 shares of Common Stock beginning on October 17, 1997.
Shares issuable upon the exercise of these options and warrants and upon
conversion of the Class One Preferred Stock will be eligible for sale pursuant
to an effective registration statement or in reliance upon an applicable
exemption from the registration requirements of the Securities Act.

Recent Sales of Securities. On January 30, 1997, the Company completed a
private placement to accredited investors of 1,271,340 shares of Class Two
Convertible Preferred Stock (the "Class Two Preferred") and 355,975 Common
Stock Warrants (the "Warrants") which entitle the holders to purchase 355,975
shares of the Company's Common Stock. The Class Two Preferred is currently
convertible into shares of Common Stock equal to the number of shares of Class
Two Preferred surrendered for conversion divided by $1.40. (See Note 10,
Preferred Stock, page 31).

On April 22, 1997, the Company completed a private placement to accredited
investors of 1,250,000 shares of Class Three Convertible Preferred Stock (the
"Class Three Preferred") and 62,500 Common Stock Warrants (the "Class Three
Warrants") to purchase 62,500 shares of the Company's Common Stock. The
conversion price per share (the "Conversion Price") for the Class Three
Preferred Stock ranges from a high of 80% of the average closing bid price of
the Company's Common Stock (the "Average Quoted Price") for the five (5)
trading days immediately preceding the date of conversion to a low of 70% of
the Average Quoted Price for the five (5) trading days immediately preceding
the date of conversion; provided that the Conversion Price will not exceed
$5.95 or be less than $.66. All of the Class Three Preferred has been
converted into Common Stock.

The issuance of the Class Two Preferred and the Class Three Preferred may
result in significant dilution to the current holders of Common Stock. In
addition, due to specific accounting guidance promulgated by the SEC, the
Company's loss per share will be negatively impacted since the Class Two
Preferred and the Class Three Preferred contain beneficial conversion features
that are accounted for in a manner similar to a preferred stock dividend.

Rapid Technological Change; Product Development. The market for the Company's
products is characterized by rapid technological developments, evolving
industry standards, swift changes in customer requirements and frequent new
product introductions and enhancements. The Company's continued success will
be dependent upon its ability to continue to enhance its existing products,
develop and introduce in a timely manner new products incorporating


                                    Page 9
<PAGE>

technological advances and respond to customer requirements. To the extent one
or more of the Company's competitors introduce products that more fully
address customer requirements, the Company's business could be adversely
affected. There can be no assurance that the Company will be successful in
developing and marketing enhancements to its existing products or new products
on a timely basis or that any new or enhanced products will adequately address
the changing needs of the marketplace. If the Company is unable to develop and
introduce new products or enhancements to existing products in a timely manner
in response to changing market conditions or customer requirements, the
Company's business and operating results could be adversely affected. From
time to time, the Company or its competitors may announce new products,
capabilities or technologies that have the potential to replace or shorten the
life cycles of the Company's existing products. There can be no assurance that
announcements of currently planned or other new products will not cause
customers to delay their purchasing decisions in anticipation of such
products, which could have a material adverse effect on the Company's business
and operating results.

Uncertainty of Future Operating Results; Fluctuations in Quarterly Operating
Results. Historical results of the Company's revenue and operating results
should not necessarily be considered indicative of future growth, or of future
operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" in
Part II, Item 6 of this document for a discussion of the Company's historical
operating results. Future operating results will depend upon many factors,
including the demand for the Company's products, the level of product and
price competition, the length of the Company's sales cycle, seasonality of
individual customer buying patterns, the size and timing of new product
introductions and product enhancements by the Company and its competitors, the
mix of sales by products, services and distribution channels, levels of
international sales, acquisitions by competitors, changes in foreign currency
exchange rates, the ability of the Company to develop and market new products
and control costs, and general domestic and international economic and
political conditions. As a result of these factors, revenues and operating
results for any quarter are subject to variation and the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful until a representative historical time period is established and
should not be relied upon as indications of future performance.

Highly Competitive Market; Pricing Concerns; Rapidly Changing Marketing
Environment. The markets for personal computer software for games,
productivity or education/reference and lifestyle applications are highly
competitive particularly at the retail shelf level where a rapidly increasing
number of software titles are competing for the same amount of shelf space.
There are certain competitors of the Company with substantially greater sales,
marketing, development and financial resources. The Company believes that the
competitive factors affecting the market for its products and services include
the traditional attributes used in determining a products value such as:
vendor and product reputation; product quality, performance and price; the
availability of products on multiple platforms; product functionality and
features; product ease-of-use; and the quality of customer support services
and training. The relative importance of each of these factors depends upon
the specific customer involved and while the Company believes it competes
favorably in each of these areas, there can be no assurance that it will
continue to do so. Moreover, the Company's present or future competitors may
be able to develop products comparable or superior to those offered by the
Company, offer lower price products or adapt more quickly than the Company to
new technologies or evolving customer requirements. Competition is expected to
intensify. In order to be successful in the future, the Company must respond
to technological change, customer requirements and competitors current
products and innovations. There can be no assurance that it will be able to
continue to compete effectively in its market or that future competition will
not have a material adverse effect on its business operating results and
financial condition.

Possible Inadequacy of Protection of Software Technology; Tradenames and Other
Proprietary Rights. The Company's success depends in part on its ability to
protect its proprietary rights to the technologies and concepts used in its
principal products. The Company relies on a combination of copyrights,
trademarks, trade secrets, confidentiality procedures and contractual
provisions to protect its proprietary rights. There can be no assurance that
the Company's existing or future copyrights, trademarks, trade secrets or
other intellectual property rights will be of sufficient scope or strength to
provide meaningful protection or commercial advantage to the Company. The
Company has applied for one software patent. Also, in selling certain of its
products, the Company relies on "shrink wrap" licenses that are not signed by
licensees and, therefore, may be unenforceable under the laws of certain


                                   Page 10
<PAGE>

jurisdictions. In addition, the laws of some foreign countries do not protect
the Company's proprietary rights to the same extent as do the laws of the
United States. There can be no assurance that such factors would not have a
material adverse effect on the Company's business or operating results. The
Company may from time to time be notified that it is infringing certain patent
or intellectual property rights of others. Combinations of technology acquired
through past or future acquisitions and the Company's technology will create
new products and technology that may give rise to claims of infringement.
While no actions are currently pending against the Company for infringement of
patent or other proprietary rights of third parties, there can be no assurance
that third parties will not initiate infringement actions against the Company
in the future. Any such action could result in substantial cost to and
diversion of resources of the Company. If the Company were found to infringe
upon the rights of others, no assurance can be given that licenses would be
obtainable on acceptable terms or at all, that significant damages for past
infringement would not be assessed or that further litigation relative to any
such licenses or usage would not occur. The failure to obtain necessary
licenses or other rights, or the advent of litigation arising out of any such
claims, could have a material adverse effect on the Company's operating
results.

Dependence on Key Management and Technical Personnel. The Company's success
depends to a significant degree upon the continued contributions of its key
management, marketing, technical and operational personnel, including members
of senior management and technical personnel of acquired companies. The
Company has agreements providing for the continued employment of its key
employees for a period of one or two years. Notwithstanding the agreements,
the employees may voluntarily terminate their employment with the Company at
any time. The loss of the services of one or more key employees, including key
employees of acquired companies, could have a material adverse effect on the
Company's operating results. The Company also believes its future success will
depend in large part upon its ability to attract and retain additional highly
skilled management, technical, marketing, product development and operational
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company will be successful in attracting and retaining such
personnel.

International Sales. In fiscal 1997, the Company derived approximately 4% of
its total revenues from international sales versus 14% in 1996. International
business is subject to certain risks including varying technical standards,
tariffs and trade barriers, political and economic instability, reduced
protection for intellectual property rights in certain countries, difficulties
in supporting foreign customers, difficulties in managing foreign
distributors, potentially adverse tax consequences, the burden of complying
with a wide variety of complex operations, customs, foreign laws, regulations
and treaties and the possibility of difficulties in collecting accounts
receivable.

Acquisition-Related Risks. Since its initial public offering the Company has
acquired AOMC and VRLI and other acquisitions may be contemplated from
time-to-time. The process of integrating the business operations of the
acquired companies into the Company's operations may result in unforeseen
operating difficulties and expenditures and may absorb significant management
attention that would otherwise be available for the ongoing development of the
Company's business. If the Company's management does not respond to these
challenges effectively, the Company's results of operations could be adversely
affected. Moreover, there can be no assurance that the anticipated benefits of
the acquisitions will be realized. The Company and the acquired companies
could experience difficulties or delays in integrating their respective
technologies or developing and introducing new products. Delays in, or the
non-completion of, the development of these new products, or lack of market
acceptance of such products, could have an adverse impact on the Company's
future results of operations and result in a failure to the realize
anticipated benefits of the acquisitions.

Potential Failure of Product Liability Limitations. The Company's license
agreements with customers typically contain provisions designed to limit their
exposure to potential product liability claims. However, it is possible that
such limitation of liability provisions may not be effective under the laws of
certain jurisdictions. Although the Company has not experienced any product
liability claims to date, the sale and support of products may entail the risk
of such claims, and there can be no assurance that the Company will not be
subject to such claims in the future. A successful product liability claim
brought against the Company could have a material adverse effect upon the
Company's business, operating results and financial condition.

Stock Price Volatility. The Company believes that a variety of factors could
cause the price of its Common Stock to fluctuate, perhaps substantially,
including quarter to quarter variations in operating results; announcements of


                                   Page 11
<PAGE>

developments related to its business; fluctuations in its order levels;
general conditions in the technology sector or the worldwide economy;
announcements of technological innovations , new products or product
enhancements by the Company or its competitors; key management changes;
changes in joint marketing and development programs; developments relating to
patents or other intellectual property rights or disputes; and developments in
the Company's relationships with its customers, distributors and suppliers. In
addition, in recent years the stock market in general, and the market for
shares of software and high technology stocks in particular, has experienced
extreme price fluctuations which have often been unrelated to the operating
performance of affected companies. Such fluctuations could adversely affect
the market price of the Company's Common Stock.

Possible Delisting of Securities; New Nasdaq Listing Requirements; Risk of Low
Priced Stocks. The Common Stock is listed for trading on the Nasdaq SmallCap
Market under the symbol ROMT. A listed company may be delisted if it fails to
maintain minimum levels of stockholders' equity, shares publicly held, number
of stockholders or aggregate market value, or if it violates other aspects of
its listing agreement. At June 30, 1997 the Company satisfied the minimum
level of stockholders' equity required to be listed ($1,000,000) and all other
aspects of its listing agreement.

The Nasdaq Stock Market announced new listing requirements for continued
listing on the Nasdaq SmallCap Market effective August 22, 1997. Companies
failing to satisfy the new continued listing requirements will have until
February 23, 1998 to meet the new requirements. The Company would not satisfy
the new requirements at June 30, 1997, but management of the Company will seek 
to be in compliance on or before February 23, 1998.

To comply with the new requirements, the Company may seek additional capital
to, among other things, increase its stockholders' equity to at least the new
minimum level required, ($2,000,000). There can be no assurance that the
Company will be able to raise such additional capital or, if it is able to
raise additional capital, it will be on terms satisfactory to the Company (See
Item 6 - Management's Discussion and Analysis of Results of Operations and
Financial Condition, Liquidity and Capital Resources contained in this report,
incorporated herein by reference, for additional information concerning the
Company's financial position). If the Company fails to satisfy the criteria
for the new requirements, its Common Stock may be delisted. Public trading, if
any, would thereafter be conducted in the over-the-counter market in the
so-called "pink sheets," or on the NASD's "Electronic Bulletin Board." If the
Common Stock were delisted, it may be more difficult to dispose of, or even to
obtain quotations as to the price of, the Common Stock and the price, if any,
offered for the Common Stock may be substantially reduced.

In addition, if the Common Stock is delisted from trading on the Nasdaq
SmallCap Market, and the trading price of the Common Stock is less than $5.00
per share, or the Company has less than $2 million in net tangible assets,
trading in the Common Stock would be subject to the requirements of Rule 15g-9
promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Under this rule, broker/dealers who recommend such securities
to persons other than established customers and accredited investors
(generally institutions with assets in excess of $5 million or individuals
with a net worth in excess of $1 million or an annual income exceeding
$200,000 or $300,000 jointly with their spouses) must make a special written
suitability determination for the purchaser and receive the purchaser's
written agreement to a transaction prior to sale. The requirements of Rule
15g-9, if applicable, may affect the ability of broker/dealers to sell the
Company's securities and may also affect the ability of purchasers to sell
their shares in the secondary market. The Securities Enforcement Remedies and
Penny Stock Reform Act of 1990 (the "Penny Stock Rule") also requires
additional disclosure in connection with any trades involving a stock defined
as penny stock (any non-Nasdaq equity security that has a market price or
exercise price of less than $5.00 per share and less than $2 million in net
tangible assets, subject to certain exceptions). Unless exempt, the rules
require the delivery, prior to any transaction involving a penny stock, of a
disclosure schedule prepared by the SEC explaining important concepts
involving the penny stock market, the nature of such market, terms used in
such market, the broker/dealer's duties to the customer, a toll-free telephone
number for inquiries about the broker/dealer's disciplinary history and the
customer's rights and remedies in case of fraud or abuse in the sale.
Disclosure must also be made about commissions payable to both the
broker/dealer and the registered representative, and current quotations for
the securities. Finally, monthly statements must be sent disclosing recent
price information for the penny stock held in the account and information on
the limited market in penny stocks.




                                   Page 12
<PAGE>


Item 2.           Properties

The Company leases 11,000 square feet of office, development and warehouse
space in Langhorne, PA. The Company closed its San Luis Obispo, CA facility on
September 19, 1997 and the space has been leased to a third party. The Company
has been released from its lease obligation pertaining to the San Luis Obispo
facility and the closure of the facility had no material financial impact on
the Company. The Company believes that its current facilities will be adequate
for the Company's anticipated needs through fiscal 1998. (See Note 7 on page
30 to Notes to Consolidated Financial Statements in Item 7 contained in this
report incorporated herein by reference for additional information concerning
properties leased by the Company). The Company anticipates that it may require
additional space as its business grows but anticipates no difficulty in
obtaining such space in the vicinity of its current facilities on terms
substantially similar to those of the Company's current lease.

Item 3.           Legal Proceedings

The Company terminated the Asset Acquisition Agreement (the "Agreement")
entered into with FileABC(TM) , L.P. ("FileABC") in October 1996, and will not
consummate the acquisition of certain assets of FileABC pursuant to the
Agreement. The completion of the transaction had been subject to certain
conditions, including the condition that FileABC continue to have a
distribution relationship with Franklin Covey Company ("Franklin Covey") for
the distribution of software products. Franklin Covey terminated its
distribution relationship with FileABC, which was among the reasons for the
Company's termination of the Agreement.

On July 8, 1997, Company filed suit against FileABC and certain of its
principals and agents in the United States Federal Court for the Eastern
District of Pennsylvania, alleging fraud, deceit and misrepresentation, breach
of the covenant of good faith and fair dealing, breach of contract and
conspiracy on the part of FileABC and certain of its principals and agents.
The Company is seeking to rescind the Agreement, to recover damages in the
amount of $175,000 plus interest and other expenses and a declaratory judgment
that the Agreement is void and unenforceable.

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

None.




                                   Page 13
<PAGE>


                                    PART II

Item 5.   Market for the Registrant's Common Equity and Related Stockholder 
          Matters

The Company's Common Stock is traded on the Nasdaq SmallCap Market System
("Nasdaq") under the symbol ROMT. The following are the high and low closing
prices from October 18, 1995 (the date of the Company's initial public
offering) through June 30, 1997, as reported by Nasdaq:

                                                            High          Low
                                                            ----          ---
      Fiscal 1996
      -----------
           October 18, 1995 (commenced trading)            $4.250       $3.750
           Second quarter                                  $5.250       $3.500
           Third quarter                                   $9.625       $3.000
           Fourth quarter                                  $5.375       $3.500
      Fiscal 1997
      -----------
           First quarter                                   $6.000       $3.625
           Second quarter                                  $5.875       $5.000
           Third quarter                                   $5.500       $3.625
           Fourth quarter                                  $5.000       $1.250

The closing price of the Company's Common Stock on June 30, 1997 was $1.4375.
On September 18, 1997, the approximate number of stockholders of record was
687 and the closing price of the Company's Common Stock was $1.375.

The Company has not paid any dividends on its Common Stock. The Company
currently intends to retain earnings, if any, for use in its business and does
not anticipate paying cash dividends in the foreseeable future.




                                   Page 14
<PAGE>


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

Basis of Presentation

The accompanying consolidated financial statements as of June 30, 1997 include
the accounts of RomTech, Inc., ("RomTech"), which successfully completed an
initial public offering on October 18, 1995 and a merger with Applied Optical
Media Corporation ("AOMC"), which merged with RomTech concurrent with the
completion of RomTech's public offering, and Virtual Reality Laboratories,
Inc. ("VRLI"), its wholly owned subsidiary, which was acquired on April 5,
1996 in a transaction accounted for using the pooling of interests method of
accounting. As further described in Note 2 to the consolidated financial
statements, the AOMC merger was accounted for as a reverse acquisition whereby
AOMC was deemed to be the acquiring entity for accounting purposes.
Accordingly, the consolidated statements of operations include the activities
of the following entities for the following periods:

         o July 1, 1995 to October 17, 1995 - AOMC and VRLI
         o October 18, 1995 to June 30, 1996 - RomTech, AOMC and VRLI 
         o July 1, 1996 to June 30, 1997 - RomTech, AOMC and VRLI

Results of Operations

The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto for the Company contained elsewhere
herein.

Year Ended June 30, 1997 Compared to the Year Ended June 30, 1996

Net Sales and Cost of Sales

         Revenues for the year ended June 30, 1997 were $4,383,000 compared to
$3,121,000 for the year ended June 30, 1996, representing an increase of
$1,262,000 or 40.4%. This increase resulted from a $1,368,000 increase in
revenues derived from the products within the "Galaxy Series".

         The cost of revenues for the year ended June 30, 1997 were $1,571,000
compared to $1,136,000 for the year ended June 30, 1996, representing an
increase of $435,000 or 38.3%. The reasons for this increase are attributable
to increased volume, as well as increases in product costs related to the
additional revenues of $585,000, freight expense of $33,000 and provision for
obsolescence costs of $27,000, which were partially offset by a reduction in
royalty expense of $247,000. The increase in gross profit margin from 63.6% to
64.2% was caused primarily by the reduction in royalty expense, which was
partially offset by an increase in freight costs.

Operating Expenses

     Product development expenses for the year ended June 30, 1997 were
$415,000 compared to $728,000 for the year ended June 30, 1996, a decrease of
$313,000 or 43.0%. This decrease was caused primarily by a $179,000 decrease
in salary for employees engaged in development activities and a $90,000
reimbursement for a development contract.

     Selling, general and administrative expenses for the year ended June 30,
1997 were $3,998,000 compared to $3,208,000 for the year ended June 30, 1996,
an increase of $790,000 or 24.6%. This increase was caused primarily by an
increase in direct mail marketing costs of $630,000 and amortization costs of
$122,000 related to software rights to clip art images.

     The Company closed its San Luis Obispo, CA facility on September 19, 1997
and the space has been leased to a third party. The Company has been released
from its lease obligation pertaining to the San Luis Obispo facility and the
closure of the facility had no material financial impact on the Company.

                                   Page 15
<PAGE>

     Non-recurring charges of $971,000 for the year ended June 30, 1996 were
comprised of $213,000 in costs relating to the closing of the AOMC facility
and $758,000 in merger related expenses associated with the acquisition of
VRLI. The AOMC facility was closed because the Company determined that it
possessed neither the product offerings nor the financial and human resources
to compete effectively for market share in the highly competitive market for
direct, educational and reference software, which were AOMC's core products
and market. The Company redirected its strategy to focus on software titles
and personal productivity application products in the game, personal/business
productivity, education/edutainment, reference and lifestyle markets for use
at home and in the office. The Company's current product line enables it to
serve customers who are seeking a broad range of high-quality, value priced
software. Any AOMC business functions or activities were consolidated in the
Langhorne, PA office.

     Net interest expense for the year ended June 30, 1997 was $48,000
compared to $74,000 for the year ended June 30, 1996, a decrease of $26,000 or
35.1%. The primary reason for this decrease was the reduction of long term
debt related to the conversion of $200,000 of debt to equity and $134,000 of
principal repayments made on existing notes payable during the year ended June
30, 1997.

     The weighted average common shares outstanding increased 1,125,965 for
the year ended June 30, 1997 as a result of the full year's effect from the
initial public offering. Also, during the year ended June 30, 1997, 243,887
warrants representing 239,571 shares and options representing 5,000 shares
were exercised and 7,000 shares of common stock were issued in connection with
the Company's private offering of Class Three Convertible Preferred Stock. In
addition, due to the $559,000 accretion of the beneficial conversion feature
of the Class Two and Class Three Preferred Stock, the net loss per common
share increased $0.09 for the year ended June 30, 1997.

     Subsequent to June 30, 1997, 731,000 shares of the Class Two Convertible
Preferred Stock have been converted into 522,173 shares of Common Stock and
all of the 1,250,000 shares of Class Three Convertible Preferred Stock have
been converted into 1,487,508 shares of Common Stock. The remaining 540,340
shares of the Class Two Convertible Preferred Stock will be converted into
385,957 shares of Common Stock at the conversion price of $1.40 upon notice of
conversion to the Company by the Class Two Convertible Preferred Stockholders
(See Note 10, Preferred Stock, in the Notes to the Consolidated Financial
Statements on page 31 of this report).

Liquidity and Capital Resources

The financial information presented reflects the Company's financial position
as of June 30, 1997.

     As of June 30, 1997, the Company's cash and working capital balances were
$445,474 and $1,099,982, respectively. During the year ended June 30, 1997,
the Company successfully completed the private placement of the Class Two
Convertible Preferred Stock resulting in approximately $1,115,000 in cash
proceeds and the private placement of the Class Three Convertible Preferred
Stock resulting in approximately $1,064,000 in net proceeds. Additionally,
Odyssey Capital Group L. P. ("Odyssey"), a shareholder of the Company,
purchased $200,000 of notes payable previously owed to Ballyshannon Partners
L. P., another shareholder of the Company, and exchanged $100,000 of the debt
for 100,000 shares of Class Two Convertible Preferred Stock, bringing the
Class Two Convertible Preferred Stock net proceeds up to $1,215,000, Odyssey
then exchanged the remaining $100,000 of the debt to pay the exercise price of
warrants to purchase 198,687 shares of Common Stock. After accounting for the
above transactions, total stockholders' equity at June 30, 1997 was $1,067,822
(See Note 10, Preferred Stock, in the Notes to the Consolidated Financial
Statements on page 31 of this report).

     As indicated in the accompanying financial statements, the Company's net
loss was $1,650,925 and $2,998,480 in fiscal 1997 and 1996, respectively. In
addition, cash used by operating activities totaled $2,556,976 and $2,046,297
in fiscal 1997 and 1996, respectively. The Company's ability to achieve
positive cash flow depends upon a variety of factors, including the timeliness
and success of developing and selling its products, the costs of developing,
producing and marketing such products and various other factors, some of which
may be beyond the Company's control. In the future, the Company's capital
requirements will be affected by each of these factors. Although, the Company
believes cash and working capital balances will be sufficient to fund the
Company's operations for the foreseeable future, the Company may seek to raise
additional capital. However, there can be no assurances that the Company will


                                   Page 16
<PAGE>

achieve a positive cash flow or that additional financing will be available if
and when required or, if available, will be on terms satisfactory to the
Company. At June 30, 1997 the Company satisfied the minimum level of
stockholders' equity required to be listed ($1,000,000) and all other aspects
of its listing agreement for the Nasdaq Smallcap Market. The Nasdaq Stock Market
announced new listing requirements for continued listing on the Nasdaq SmallCap 
Market effective August 22, 1997. Companies failing to satisfy the new continued
listing requirements will have until February 23, 1998 to meet the new 
requirements. The Company currently does not satisfy the new net tangible assets
requirement of $2,000,000. Although management of the Company will seek to be in
compliance with this requirement on or before February 23, 1998, there can be
no assurance that this will occur.

     To comply with the new requirements the Company may seek additional
capital to, among other things, increase its stockholders' equity to at least
the new minimum level required. There can be no assurance that the Company
will be able to raise such additional capital or if it is able to raise
additional capital it will be on terms satisfactory to the Company

Accounting for Stock-based Compensation

     The Company has adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which became
effective for the year ended June 30, 1997. The Company continues to apply
APB25 and related interpretations in accounting for its stock options to
employees and directors. See footnote 12 for pro forma disclosures.

New Accounting Pronouncements

     The Company will be required to adopt Statement of Financial Accounting
Standards No. 128, "Earnings Per Share", which will become effective in the
second quarter of fiscal 1998. Management believes that the adoption of this
statement will not have a material financial impact on the Company.

     The Company will be required to adopt Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income", which will become
effective for fiscal year 1999. The Company believes that the adoption of this
statement will not have a material financial impact.

     The Company will be required to adopt Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information", which will become effective for fiscal year 1999. The Company
believes that the adoption of this statement will not have a material
financial impact.





                                   Page 17
<PAGE>


Item 7.           Financial Statements

                                 RomTech, Inc.
                  Index to Consolidated Financial Statements



                                                                            Page
                                                                            ----
Independent Auditors' Report................................................. 19

Consolidated Balance Sheet June 30, 1997..................................... 20

Consolidated Statements of Operations for the years
ended June 30, 1997 and 1996................................................. 21

Consolidated Statements of Stockholders' Equity for the years
ended June 30, 1997 and 1996................................................. 22

Consolidated Statements of Cash Flows for the years
ended June 30, 1997 and 1996................................................. 23

Notes to Consolidated Financial Statements................................... 25




                                   Page 18
<PAGE>


                         Independent Auditors' Report


The Board of Directors and Stockholders
RomTech, Inc.:

We have audited the accompanying consolidated balance sheet of RomTech, Inc.
and subsidiary as of June 30, 1997, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years in the
two-year period ended June 30, 1997. 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 the significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of RomTech,
Inc. and subsidiary as of June 30, 1997 and the results of their operations
and their cash flows for each of the years in the two-year period ended June
30, 1997, in conformity with generally accepted accounting principles.



/s/ KPMG PEAT MARWICK LLP
-------------------------

Philadelphia, Pennsylvania
September 17, 1997




                                   Page 19
<PAGE>


                                 RomTech, Inc.
                          Consolidated Balance Sheet
                                 June 30, 1997

                                                                          1997
                                                                          ----
ASSETS
Current assets:
   Cash and cash equivalents                                        $   445,474
   Restricted cash                                                       24,788
   Accounts receivable, net of allowance for
    doubtful accounts of $69,209                                      1,033,472
   Inventory                                                            369,582
   Prepaid expenses                                                     225,517
                                                                    -----------
          Total current assets                                        2,098,833

Furniture and equipment, net                                            187,507
Intangibles and other assets                                            246,637
                                                                    -----------
          Total assets                                              $ 2,532,977
                                                                    ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Notes payable                                                    $    39,650
   Accounts payable                                                     637,442
   Accrued expenses                                                     293,055
   Capital lease obligations                                             28,704
                                                                    -----------
          Total current liabilities                                     998,851

Capital lease obligations net of current portion                         46,820
Notes payable-long term portion                                         269,484
Convertible subordinated debt                                           150,000
                                                                    -----------
          Total liabilities                                           1,465,155

Commitments and contingencies - Notes 7, 13, 17 and 18

Stockholders' equity:
  Preferred stock, no par value, 10,000,000 shares  authorized:
    Class One Convertible Preferred Stock, 1,000,000
      issued and outstanding                                          1,000,000
    Class Two Convertible Preferred Stock, 1,271,340
      issued and outstanding                                            941,340
    Class Three Convertible Preferred Stock, 1,250,000
      issued and outstanding                                            937,000
    Accretion of beneficial conversion feature on Preferred Stock       537,559

  Common stock, no par value (40,000,000 shares authorized;
    6,535,614 issued and outstanding)                                 4,368,736
   Additional paid in capital                                         1,148,550
   Accumulated deficit                                               (7,865,363)
                                                                    -----------
          Total stockholders' equity                                  1,067,822
                                                                    -----------
          Total liabilities and stockholders' equity                $ 2,532,977
                                                                    ===========


See accompanying notes to consolidated financial statements.




                                   Page 20
<PAGE>


                                 RomTech, Inc.
                     Consolidated Statements of Operations
                      Years ended June 30, 1997 and 1996

                                                         1997           1996
                                                         ----           ----

Net sales                                            $ 4,382,693    $ 3,120,651

Cost of sales                                          1,571,064      1,135,792
                                                     -----------    -----------

Gross profit                                           2,811,629      1,984,859

Operating expenses:
     Product development                                 414,973        728,391
     Selling, general and administrative               3,997,747      3,208,386
     Non-recurring facility closure expenses               - 0 -        212,782
     Non-recurring merger expenses                         - 0 -        757,804
                                                     -----------    -----------
        Total operating expenses                       4,412,720      4,907,363
                                                     -----------    -----------

Operating loss                                        (1,601,091)    (2,922,504)

Interest expense, net                                     48,104         73,706
Provision for income taxes                                 1,730          2,270
                                                     -----------    -----------

Net loss                                              (1,650,925)    (2,998,480)

Accretion of beneficial conversion feature
  on preferred stocks, including dividend
  payable in the form of common stock                    559,434          - 0 -
                                                     -----------    -----------

Net loss attributable to common stock                ($2,210,359)   ($2,998,480)

Net loss per common share                                ($ 0.35)        ($0.57)
                                                         =======         ======

Weighted average common shares outstanding             6,380,517      5,254,552
















See accompanying notes to consolidated financial statements.




                                   Page 21
<PAGE>



                                 RomTech, Inc.
                Consolidated Statements of Stockholders' Equity
                      Years ended June 30, 1997 and 1996


<TABLE>
<CAPTION>
                                                                                        Additional
                                         Preferred Stock            Common Stock          Paid-in    Accumulated     Stockholders'
                                         ---------------            ------------
                                        Shares      Amount       Shares      Amount       Capital       Deficit        Equity
                                        ------      ------       ------      ------       -------       -------        ------

<S>                                    <C>         <C>          <C>         <C>            <C>        <C>               <C>     
Balance as of June 30, 1995                                     1,286,517     $381,000     $161,131   ($2,656,524)   ($2,114,393)

Net loss                                                                                               (2,998,480)    (2,998,480)

Adjustment to reflect RomTech's
   outstanding shares as a    
   recapitalization of AOMC and the     
   shares issued in connection with
   the merger with AOMC accounted
   for as a reverse acquisition        
   (Note 2)                                                     3,175,664      (92,219)                                  (92,219)

Shares issued in connection with
   the initial public offering                                  1,550,000    3,623,796                                 3,623,796

Shares issued in exchange for debt
   and related forgiveness in
   connection with AOMC merger
   (Note 2)                            1,000,000   $1,000,000                               586,607                    1,586,607

Shares issued in connection with
   exercise of warrants                                           221,862      100,600                                   100,600

Shares issued in connection with
   VRLI merger related expenses                                    51,085      204,340                                   204,340
                                       ---------   ----------   ---------   ----------     --------   -----------       --------

Balance as of June 30, 1996            1,000,000   $1,000,000   6,285,128   $4,217,517     $747,738   ($5,655,004)      $310,251
                                       =========   ==========   =========   ==========     ========   ============      ========

Net loss                                                                                               (1,650,925)    (1,650,925)

Shares issued in connection with
   exercise of warrants and options                               244,571      109,344          656                      110,000

Shares issued in connection with
   Class Two Preferred, net of
   beneficial conversion feature       1,271,340      941,340                               330,000                    1,271,340

Shares issued in connection with
   Class Three Preferred, net of
   beneficial conversion feature       1,250,000      937,000                               313,000                    1,250,000

Effects from the beneficial
   conversion  feature of Class 
   Two Preferred                                      326,284                                            (326,284)         - 0 -

Effects from the beneficial
   conversion feature of Class
   Three Preferred                                    211,275                                            (211,275)         - 0 -
   
Costs incurred with Class Two and
   Class Three Preferred                                                                   (242,844)                    (242,844)

Stock dividend accrued
   on Class Three Preferred                                                     21,875                    (21,875)         - 0 -

Other equity transactions                                           5,915       20,000                                    20,000
                                       ---------   ----------   ---------   ----------     --------   -----------       --------
                                                                                                                  
Balance as of June 30, 1997            3,521,340   $3,415,899   6,535,614   $4,368,736   $1,148,550   ($7,865,363)    $1,067,822
                                       =========   ==========   =========   ==========   ==========   ============    ==========
</TABLE>

See accompanying notes to consolidated financial statements.




                                   Page 22
<PAGE>


                                 RomTech, Inc.
                     Consolidated Statements of Cash Flows
                      Years ended June 30, 1997 and 1996

<TABLE>
<CAPTION>
                                                                    1997              1996
                                                                    ----              ----
<S>                                                             <C>               <C>         
Cash flows from operating activities:
    Net loss                                                     ($1,650,925)      ($2,998,480)
    Adjustments to reconcile net loss to net cash
        from operating activities:
    Common stock issued as a finder fee in connection
          with the VRLI acquisition                                    - 0 -           204,340
    Depreciation and amortization                                    220,455           143,382
    Loss on disposal of equipment                                      4,683             - 0 -
    Interest expense incurred but not paid                             - 0 -            55,000
    Changes in items affecting operations, net of effect
             from acquired business:
             Restricted cash                                         (24,788)           34,627
             Accounts receivable                                    (608,174)          (27,469)
             Prepaid expenses                                       (184,107)           15,002
             Inventory                                              (164,361)          (85,214)
             Accounts payable                                        261,275           197,091
             Accrued expenses                                       (411,034)          415,424
                                                                  ----------        ----------
Net cash used in operating activities                             (2,556,976)       (2,046,297)

Cash flows from investing activities:
    Purchase of short term investments                                 - 0 -        (1,192,404)
    Sales and maturities of short term investments                   398,952           793,452
    Purchase of furniture and equipment                              (80,175)         (123,901)
    Purchase of software rights and other assets                    (294,656)          (89,930)
    Loan to related party                                              2,750            (4,750)
                                                                  ----------        ----------
Net cash provided by (used in) investing activities                   26,871          (617,533)

Cash flows from financing activities:
     Net proceeds of initial public offering of common stock           - 0 -         3,623,796
     Net proceeds from issuance of convertible preferred stock     2,178,496             - 0 -
     Net repayments of factored accounts receivable                    - 0 -          (279,411)
     Repayments of notes payable                                    (133,834)          (44,872)
     Proceeds from convertible subordinated debt                       - 0 -           300,000
     Proceeds from exercise of  warrants and options                  10,000           100,600
     Repayments of advances to officers                                - 0 -          (127,776)
     Repayments of lease obligations                                 (33,746)          (39,017)
                                                                  ----------        ----------

Net cash provided by financing activities                          2,020,916         3,533,320

Net increase (decrease) in cash and cash equivalents                (509,189)          869,490

Cash and cash equivalents:
   Beginning of period                                               954,663            85,173
                                                                  ----------        ----------
   End of period                                                  $  445,474        $  954,663
                                                                  ==========        ==========
</TABLE>



See accompanying notes to consolidated financial statements.




                                   Page 23
<PAGE>


                                 RomTech, Inc.
                     Consolidated Statements of Cash Flows
                      Years ended June 30, 1997 and 1996


<TABLE>
<CAPTION>
                                                                             1997            1996
                                                                             ----            ----
<S>                                                                          <C>           <C>     
Supplemental cash flow information:

Cash paid for interest                                                       $80,638       $129,897
                                                                             =======       ========


Noncash investing and financing activities:
        Settlement of long term debt and officer's notes payable through
        issuance of preferred stock, notes payable and debt
        forgiveness, net of $50,000 cash payment, (see Note 2).             $  - 0 -     $1,886,451
                                                                            ========     ==========

        Net liabilities assumed in reverse acquisition by issuance
         of common stock                                                     $ - 0 -       $ 92,219
                                                                             =======       ========

        Capital lease additions                                              $81,643        $ - 0 -
                                                                             =======        =======

        Conversion of debt for $100,000 of convertible preferred
          stock and $100,000 exercise of common stock warrants              $200,000        $ - 0 -
                                                                            ========        =======

        Conversion of debt for common stock                                  $20,000        $68,555
                                                                             =======        =======
</TABLE>




























See accompanying notes to consolidated financial statements.




                                   Page 24
<PAGE>


                                 RomTech, Inc.
                  Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements as of June 30, 1997 include
the accounts of RomTech, Inc., ("RomTech"), which successfully completed an
initial public offering on October 18, 1995 combined with Applied Optical
Media Corporation ("AOMC"), which merged with RomTech concurrent with the
completion of RomTech's public offering, and Virtual Reality Laboratories,
Inc. ("VRLI"), its wholly owned subsidiary, which was acquired on April 5,
1996 in a transaction accounted for using the pooling of interests method of
accounting. As further described in Note 2, the AOMC merger was accounted for
as a reverse acquisition whereby AOMC was deemed to be the acquiring entity
for accounting purposes. In addition, the fiscal 1995 financial statements
have been restated to reflect VRLI's operations on a pooled basis.
Accordingly, the consolidated statements of operations include the activities
of the following entities for the following periods:

         o July 1, 1995 to October 17, 1995 - AOMC and VRLI
         o October 18, 1995 to June 30, 1997 - RomTech, AOMC and VRLI

Description of Business

     RomTech, Inc. (the "Company") a Pennsylvania corporation incorporated in
July 1992, develops, publishes, markets and resells a diversified line of
personal computer software for consumer, educational and business
applications. The Company believes it operates in a single business segment.
The Company's product line enables it to serve customers who are seeking a
broad range of high-quality, value priced software. The Company sales are
primarily made through distributors, direct mail and direct sales at weekend
PC shows. The Company intends to continue to explore opportunities using the
Internet to market and distribute software but Internet sales currently
account for an insignificant portion of the Company's sales.

Consolidation

     The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, VRLI. All inter-company balances and
transactions have been eliminated.

Fair Value of Financial Instruments

     The recorded amounts of cash and short term investments, accounts
receivable, and accounts payable at June 30, 1997 approximate fair value in
accordance with Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Value of Financial Instruments" due to the relatively
short period of time between origination of the instruments and their expected
realization. The Company's debt is carried at cost, which approximates fair
value, as the debt bears interest at rates approximating current market rates
for similar instruments.

Cash and Cash Equivalents

     For purposes of the statement of cash flows, the Company considers all
highly liquid instruments purchased with an original maturity of three months
or less to be cash equivalents.

Inventory

     Inventory is valued at the lower of cost or market. Cost is determined by
the first-in, first-out method (FIFO).




                                   Page 25
<PAGE>


Furniture and Equipment

     Furniture and equipment are stated at cost. Depreciation is calculated on
the straight-line method over the estimated useful lives of the assets ranging
from three to five years.

     Leasehold improvements are amortized on the straight-line method over the
shorter of the lease term or estimated useful life of the assets. Maintenance
and repair costs are expensed as incurred.

Intangible Assets

     The Company has intangible assets resulting from the purchase of the
software rights to clip art images. Accumulated amortization at June 30, 1997
was $144,626. The Company amortizes these intangible assets over three years.

Revenue Recognition

     Product sales:

     Revenue from the sale of products is recognized when the product has been
shipped, the Company has the right to invoice the customer, collection of the
receivable is probable and there are no significant obligations remaining.

     While the Company has no other obligations to perform future services
subsequent to shipment, the Company provides telephone customer support as an
accommodation to purchasers of its products for a limited time and as a means
of fostering customer loyalty. Costs associated with this effort are
insignificant and, accordingly, are expensed as incurred.

     Allowance for product returns:

     The Company maintains a return policy that allows distributors and
retailers to return products according to negotiated terms relating to
overstocking or defective products. The Company records an allowance for
returns as a reduction of gross sales at the time of product shipment. The
allowance, which is included in accrued liabilities, is estimated based
primarily upon historic experience, analysis of distributor and retailer
inventories of the Company's products and analysis of market conditions. Gross
product revenues subject to returns were approximately $4,354,000 and
$2,790,000 for the years ended June 30, 1997 and 1996, respectively, and
returns during the same periods were $270,000 and $280,000, respectively.

     Software licenses and royalties:

     Software license revenue and royalties are recognized as revenue at the
time the Company has completed all significant performance obligations under
the terms of the license agreement and when any amounts advanced or received
are non-refundable. Revenues from licenses and royalties were approximately
$319,000 and $612,000 for the years ended June 30, 1997 and 1996,
respectively.

Software Development Costs

     Software development costs are expensed as incurred until technological
feasibility has been established. After technological feasibility has been
established, any additional costs are capitalized in accordance with Statement
of Financial Accounting Standards (SFAS) No. 86. To date, amounts qualifying
for capitalization, net of valuation allowances, have not been material.




                                   Page 26
<PAGE>


Advertising

     Advertising cost is charged to expense as incurred. Advertising expense
was approximately $981,000 and $624,000 for the years ended June 30, 1997 and
1996, respectively. The primary cause for the current year's increase was the
direct mail advertising costs of $630,000 incurred during the year ended June
30, 1997.

Income Taxes

     The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates in effect for
the year in which those temporary differences are expected to be recovered or
settled.

Computation of Net Loss Per Share

     For the year ended June 30, 1996, net loss per common share was computed
using the weighted average number of common shares outstanding during the
period for AOMC retroactively adjusted for the shares and warrants received in
connection with the reverse acquisition, reflected as a recapitialization of
the previously outstanding common stock of AOMC, and retroactively adjusted
for the acquisition of VRLI (see Note 2).

     For the year ended June 30, 1997, net loss per common share is computed
using the weighted average number of common shares outstanding and common
stock equivalents were excluded from the calculation since they were
anti-dilutive.

Accounting for Stock-based Compensation

     The Company has adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which became
effective for the year ended June 30, 1997. The Company continues to apply
APB25 and related interpretations in accounting for its stock options to
employees and directors. See footnote 12 for pro forma disclosures.

Management's Estimates

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

New Accounting Pronouncements

     The Company will be required to adopt Statement of Financial Accounting
Standards No. 128, "Earnings Per Share", which will become effective in the
second quarter of fiscal 1998. The Company believes that the adoption of this
statement will not have a material financial impact.

     The Company will be required to adopt Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income", which will become
effective for fiscal year 1999. The Company believes that the adoption of this
statement will not have a material financial impact.

     The Company will be required to adopt Statement of Financial Accounting
Standards No. 131 "Disclosures About Segments of an Enterprise and Related
Information", which will become effective for fiscal year 1999. The Company
believes that the adoption of this statement will not have a material
financial impact.





                                   Page 27
<PAGE>


2.  Mergers/Completion of Public Offering

Applied Optical Media Corporation ("AOMC")

     On October 18, 1995, the Company merged with AOMC, whereby the
stockholders of AOMC exchanged all their outstanding shares for 1,575,000
common shares of the Company and 425,000 warrants to purchase common shares at
$.50 per share. In addition, concurrently with the Merger, certain
stockholders of AOMC exchanged debt with a carrying value of $1,936,452 for
1,000,000 shares of convertible preferred stock, a $300,000, 8.75% note
payable, a $50,000 cash payment and forgiveness of $586,607 of debt. The
preferred stock has a face value of $1,000,000 and is convertible into common
stock of the Company beginning two years after October 18, 1995 at a price of
$3.30 per share. The Company has the right to redeem the preferred stock for
an aggregate redemption price of $1,000,000.

     As a result of the AOMC merger, the former stockholders of AOMC had a
majority of the voting rights of the combined enterprise on a fully diluted,
if converted basis. Therefore, for accounting purposes, AOMC was considered
the acquirer (reverse acquisition). The cost of acquiring the Company was
based on the fair market value of the Company's net assets which approximated
their recorded value.

     In connection with the reverse acquisition, the outstanding shares of the
Company and the shares of the Company issued to AOMC stockholders have been
reflected as a recapitalization of the previously outstanding AOMC common
stock.

     Prior to completion of the Merger, the Company's authorized capital was
increased to 40,000,000 shares of common stock, no par value, and 10,000,000
shares of preferred stock, no par value. Also, on October 18, 1995, the
Company consummated an initial public offering of 1,550,000 shares of common
stock at a price of $3.00 per share resulting in net proceeds of $4,070,500
before deducting offering costs of $446,704.

     In connection with the Company's initial public offering the Company's
Chief Executive Officer ("CEO") and a vice president each agreed to transfer
200,000 shares of the Company's common stock owned by them to PJM Trading
Company ("PJM") in connection with certain services provided to the Company by
PJM related to the Company's capital raising activity at the time of the
initial public offering. Such shares have been transferred as of June 30,
1997. For accounting purposes, the transfer of shares by these principal
shareholders is presumed to benefit the Company and should be recognized in
the financial statements of the Company. Therefore, the shares transferred
would result in a contribution of stock to the Company by the principal
shareholders and the issuance of shares to PJM for the same value. These
transactions have not been separately recognized in the Company's financial
statements since they had no net effect on the results of operations or
shareholders' equity.

Virtual Reality Laboratories, Inc. ("VRLI")

     On April 5, 1996, the Company acquired VRLI, a California corporation, in
a transaction structured as a merger of VRLI with a newly formed subsidiary of
the Company ("RomTech subsidiary"), with the RomTech subsidiary as the
surviving corporation. VRLI, which is located in San Luis Obispo, California,
publishes software for use on desktop computers. Its products include business
forms and imaging processing software targeted for the small-office,
home-office market, three-dimensional landscape rendering software and
astronomy software for special interest users and the education market. In
connection with the acquisition, the Company issued a total of 1,284,440
shares of its common stock, in exchange for all of the equity interests of
Virtual Reality, which included common stock, stock options, convertible
subordinated debt and a $100,000 promissory note to an officer and stockholder
of VRLI. In addition, the Company incurred acquisition-related expenses of
approximately $757,804, including $204,340 in the form of the Company's Common
Stock, related to investment banking, consulting, accounting and legal costs
which were charged to operations. This acquisition was accounted for using the
pooling-of-interests method, and accordingly the Company's historical
financial statements presented have been restated to include the accounts and
results of operations of VRLI.



                                   Page 28
<PAGE>

     The following supplemental unaudited pro forma information summarizes the
combined results of operations of the Company as if the merger with AOMC
occurred at the beginning of fiscal 1996.


                                                                1996
                                                                ----
     Net sales                                              $3,378,360
     Net loss                                              ($3,310,745)
     Net loss per share                                          ($.57)
     Weighted average common shares                          5,786,378

3. Inventory

     Inventory consists of the following:

     Raw materials                                           $  80,020
     Finished goods                                            289,562
                                                             ---------
                                                              $369,582
                                                             ========= 

4. Furniture and Equipment

     Furniture and equipment consists of the following:

     Equipment                                                $280,297
     Furniture                                                 155,021
     Leasehold improvements                                      3,915
                                                             ---------
                                                               439,233
     Accumulated depreciation                                 (251,726)
                                                             ---------
     Net book value                                           $187,507
                                                             ========= 

5. Accrued Expenses

     Accrued expenses consist of the following:

     Accrued royalties                                        $ 44,190
     Accrued payroll                                            66,829
     Accrued professional fees                                  71,000
     Accrued inventory receipts                                 34,035
     Other accrued expenses                                     77,001
                                                             ---------
                                                              $293,055
                                                             ========= 

6. Notes Payable

     Notes payable consist of the following:

     Note payable to bank, bearing interest at the prime rate
     plus 2.75% (11.25%). Matures on March 24, 2003, principal
     and interest of $6,035.37 payable monthly. The note is
     guaranteed by an officer of the Company and the Small
     Business Administration.                                          $309,134

     Less current portion                                                39,650
                                                                       --------

     Long term portion                                                 $269,484
                                                                       ========


                                   Page 29
<PAGE>

7. Lease Obligations

     The Company leases its operating facility under an operating lease
expiring in September 2002. Rent expense was $128,000 and $68,000 for the
years ended June 30, 1997 and 1996, respectively.

     The Company has financed the purchase of office equipment through capital
lease agreements. The obligations are collaterallized by the leased equipment,
which had a net book value of approximately $71,000 and $27,000 at June 30,
1997 and 1996, respectively.

     Future payments of leases are as follows:

                                              Operating    Capital
                                                Leases     Leases       Total
                                              ---------   --------    ---------
     Year ending June 30, 1998                $ 108,671   $ 37,910    $ 146,581
     Year ending June 30, 1999                   96,279     29,640      125,919
     Year ending June 30, 2000                   81,282     14,721       96,003
     Year ending June 30, 2001                   82,859      5,952       88,811
     Year ending June 30, 2002                  106,539        992      107,531
                                              ---------   --------    ---------
                                              $ 475,630     89,215    $ 564,845
                                              =========   --------    =========
     Less interest                                         (13,691)
                                                          -------- 
     Present value of future lease payments                 75,524
     Less current portion                                  (28,704)
                                                          -------- 
     Long term portion                                    $ 46,820
                                                          ========

8.  Convertible Subordinated Debt

     In connection with the merger of VRLI on April 5, 1996 (see Note 2,) the
Company assumed $150,000 of 10% convertible subordinated debt, maturing in
November 2000. The notes are convertible into 46,685 shares of common stock at
a price of $3.213 per share, (the conversion price established at the time of
the merger of the Company and VRLI, see Note 2), at anytime by the holder.
Interest is payable quarterly. The convertible debt is subordinated to the
note payable ($309,134 at June 30, 1997) guaranteed by the Small Business
Administration.

9.  Income Taxes

     No federal income tax expense or benefit was recorded for the periods
presented. However, any deferred tax asset created was offset by a valuation
allowance of equal amount in accordance with SFAS No. 109.

     As of June 30, 1997, the Company has approximately $6,700,000 of net
operating loss carryforwards ("NOL's") for tax purposes (expiring in years
2004 through 2012), which may be available to offset future federal taxable
income. The Company's NOL's may be subject to the provisions of IRC Section
382, as established by the Tax Reform Act of 1986, related to changes in stock
ownership. Presently no determination has been made to evaluate what effect
the application of these regulations may have on the utilization of the NOL's.
Should these regulations apply, the amount of the NOL's that can be utilized
to offset taxable income in future periods may be subject to an annual
limitation and it is possible that some portion of the NOL's may never be
utilized.

10.  Preferred Stock

Class One Convertible Preferred Stock

     The Company issued 1,000,000 shares of Class One Convertible Preferred
Stock (the "Class One Preferred") in connection with the merger of AOMC (see
Note 2). The Class One Preferred is convertible into common stock at a price
of $3.30 per share and has a redemption value of $1.00 per share. The Class
One Preferred can be redeemed by the Company after giving 90 days written
notice to the preferred stockholder, provided that, beginning two years from


                                   Page 30
<PAGE>

October 18, 1995, the preferred stockholder has the right to convert the Class
One Preferred into common stock during such 90 day period. The Class One
Preferred entitles the holder to a liquidation payment of $1,000,000 upon the
dissolution of the Company before any liquidation distributions are made with
respect to the common stock. The Class One Preferred does not provide for the
payment of any dividends thereon.

Class Two Convertible Preferred Stock

     On January 30, 1997, the Company completed a private placement to
accredited investors of 1,271,340 shares of Class Two Convertible Preferred
Stock (the "Class Two Preferred") and 355,975 Common Stock Warrants (the
"Warrants") for the purchase of 355,975 shares of the Company's Common Stock.
The offer and sale of the Class Two Preferred and the Warrants was exempt from
the registration requirements of the Securities Act of 1933, as amended (the
"Act"), pursuant to Section 4(2) of the Act and Rule 506 of Regulation D
promulgated thereunder. There was no public offering of the Class Two
Preferred or the Warrants, and all sales were made in private transactions
with accredited investors, as such term is defined in Rule 501 of Regulation
D. Each Warrant entitles the holder to purchase one share of Common Stock at
any time during the period beginning six months after the date of issuance of
the Warrant until five years after the date of issuance at an exercise price
equal to $6.25. The Class Two Preferred is convertible beginning six months
following the date of issuance into shares of Common Stock equal to the number
of shares of Class Two Preferred surrendered for conversion divided by $1.40.
Of the 1,271,340 shares of Class Two Preferred sold, 1,171,340 shares were
issued as of November 15, 1996, and therefore became convertible into Common
Stock on May 15, 1997. The remaining 100,000 shares of Class Two Preferred
Stock became convertible on July 30, 1997. (See also, the last paragraph of
Note 10).

     The Company incurred expenses of approximately $57,000 in connection with
the private placement of the Class Two Preferred and realized net proceeds of
approximately $1,215,000.

     The aforementioned sales of securities will result in significant
dilution to the current holders of Common Stock. In addition, due to specific
accounting guidance recently promulgated by the SEC, the Company's loss per
share will be negatively impacted since the Class Two Preferred and the Class
Three Preferred Stock (as hereinafter defined) contain beneficial conversion
features that will be accounted for in a manner similar to a preferred stock
dividend. The intrinsic value of the beneficial conversion feature of the
Class Two Preferred was $330,000. This amount will be amortized to accumulated
deficit over approximately six months, which represents the initial conversion
period. The amount amortized, which is analogous to a preferred stock
dividend, increases the net loss attributable to common stockholders. For the
year ended June 30, 1997, $326,000 was amortized to the accumulated deficit.

     The Company also issued 177,988 Warrants to purchase 177,988 shares of
the Company's Common Stock to the investment advisor ("Advisor Warrants")
engaged by the Company to assist in the private placement of the Class Two
Preferred. The terms and conditions of the Adviser Warrants are identical to
the Warrants described above, except that the Advisor Warrants are exercisable
at an exercise price of $6.00.

Class Three Convertible Preferred Stock

     On April 22, 1997, the Company completed a private placement to
accredited investors of 1,250,000 shares of Class Three Convertible Preferred
Stock (the "Class Three Preferred ") and 62,500 Common Stock Warrants (the
"Class Three Warrants") for the purchase of 62,500 shares of the Company's
Common Stock. Each Class Three Warrant entitles the holder to purchase one
share of Common Stock at an exercise price of $3.94 per share subject to the
condition that the Class Three Warrants will not be exercisable until the
closing bid price of the Company's Common Stock exceeds $5.66 per share after
October 9, 1997. The Class Three Warrants are exercisable at any time
beginning six months after the date of issuance until three years and six
months after the date of issuance. The offer and sale of the Class Three
Preferred and the Class Three Warrants was exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Act"), pursuant
to Section 4(2) of the Act and Rule 506 of Regulation D promulgated
thereunder. There was no public offering of the Class Three Preferred or the
Class Three Warrants, and all sales were made in private transactions with
accredited investors, as such term is defined in Rule 501 of Regulation D. The
conversion price per share (the "Conversion Price") for the Class Three


                                   Page 31
<PAGE>

Preferred Stock ranged from a high of 80% of the average closing bid price of
the Company's Common Stock (the "Average Quoted Price") for the five (5)
trading days immediately preceding the date of conversion to a low of 70% of
the Average Quoted Price for the five trading days immediately preceding the
date of conversion; provided that the Conversion Price will not exceed $5.95
or be less than $.66. All of the Class Three Preferred has been converted into
Common Stock

     The Company incurred expenses of approximately $186,000 in connection
with the private placement of the Class Three Preferred and realized net
proceeds of approximately $1,064,000.

     The aforementioned sales of securities will result in significant
dilution to the current holders of Common Stock. In addition, due to specific
accounting guidance recently promulgated by the SEC, the Company's loss per
share will be negatively impacted since the Class Three Preferred contains
beneficial conversion features that will be accounted for in a manner similar
to a preferred stock dividend. The estimated intrinsic value of the beneficial
conversion feature of the Class Three Preferred was $313,000. This amount will
be amortized to accumulated deficit over approximately six months, which
represents the initial conversion period. The amount amortized, which is
analogous to a preferred stock dividend, increases the net loss attributable
to common stockholders. For the year ended June 30, 1997, $211,000 was
amortized to the accumulated deficit.

     The Company paid to H.J. Meyers & Co., Inc. ("H.J. Meyers"), as placement
agent of the Class Three Preferred and the Class Three Warrants, commissions
and expenses in an amount equal to $80,000. Additionally, the Company paid a
finder's fee of $20,000 to VMH, Ltd. in connection with the sale of $250,000
of the Class Three Preferred. H.J. Meyers was also granted 7,000 shares of
Common Stock (the "Agent Shares") which the Company has registered for resale.

     On May 1, 1997, the Company filed a registration statement on Form S-3
registering for resale the Common Stock issuable upon conversion of the Class
Two Preferred, the Class Three Preferred, and the Common Stock issuable upon
exercise of the Warrants, the Adviser Warrants, and the Class Three Warrants.
This registration statement was declared effective on July 3, 1997.

     The adjustments that were recorded to reflect the effect of the private
placement of the Class Three Preferred in the Balance Sheet at June 30, 1997
reflect the $1,250,000 of Class Three Preferred issued net of offering costs
of $186,000 and the estimated value of the beneficial conversion feature of
$313,000. Also, there was a 7% dividend payable in the form of the Company's
Common Stock accrued on the Class Three Preferred, which totaled $21,875. This 
amount was charged to accumulated deficit and credited to Common Stock.

     Subsequent to June 30, 1997, 731,000 shares of the Class Two Preferred
have been converted into 522,173 shares of Common Stock and all of the
1,250,000 Class Three Preferred have been converted into 1,487,508 shares of
Common Stock. The remaining 540,340 shares of the Class Two Preferred may be
convertible into 385,957 shares of Common Stock at the conversion price of
$1.40 upon notice of conversion to the Company by the remaining Class Two
Preferred Stockholders.

11. Common Stock

     During 1995, the Company completed a 10,000-for-1 common stock split and
increased its authorized common stock to 2,000,000 shares. Subsequently, on
June 30, 1995, the Company amended its articles of incorporation to authorize
the issuance of 40,000,000 shares of common stock, without par value, and
10,000,000 shares of preferred stock, without par value, and effected a 1.5
for 1 stock split. All common shares in the accompanying financial statements
are presented on a post-split basis.




                                   Page 32
<PAGE>



12. Stock Options and Warrants

Stock Option Plans:

     On August 31, 1994 the Company adopted the 1994 Stock Option Plan (the
"1994 Plan") under which options to purchase an aggregate of 132,000 shares of
the Company's common stock were granted to officers, directors or employees at
an exercise price of $2.00 and with an expiration date of August 31, 1999.
None of the options granted under the 1994 Plan have been exercised. The 1994
Plan has been terminated and no additional options will be granted thereunder.

     During 1995, the Company adopted, amended and restated the 1995 Stock
Option Plan (the 1995 Plan). At the 1996 Annual Meeting, the stockholder's of
the Company approved an amendment to increase the number of shares available
for issuance under the 1995 Plan to a total of 950,000 shares. The 1995 Plan
is administered by the Board of Directors and provides for the grant of
incentive stock options and non-qualified stock options to employees and
eligible independent contractors; and non-qualified stock options to
non-employee directors at prices not less than the fair market value of a
share of common stock on the date of grant. The 1995 Plan also provides for
automatic grants of options to non-employee directors of the Company.
Non-employee directors will receive options for 10,000 shares of common stock
upon appointment or election to the board and, in addition, each director
receives options for 5,000 shares of common stock on January 1 of each year
that they are a director.

     The expiration of an option and the vesting period will be determined by
the Board of Directors at the time of the grant, but in no event will an
option be exercisable after 10 years from the date of grant or in the case of
non-employee directors after 5 years from the date of grant. In most cases,
upon termination of employment, vested options must be exercised by the
optionee within 30 days after the termination of the optionee's employment
with the Company.

     On April 28, 1995, the Company issued 30,000 non qualified options under
the 1995 Plan. These options have an exercise price of $2.00 per share and
expire on April 28, 2000.

     Information regarding the stock option plans is as follows:

                                                                    Weighted
                                                  Number of          Average
                                                   shares         Exercise Price
                                                  -------         --------------
     Balances, June 30, 1995                      162,000             $2.00
       Granted                                    276,793              4.04
       Canceled                                        --                --
       Exercised                                       --                --
                                                  -------             -----
     Balances, June 30, 1996                      438,793             $3.29
       Granted                                    580,000              3.54
       Canceled                                   283,821              4.30
       Exercised                                    5,000              2.00
                                                  -------             -----
     Balances, June 30, 1997                      729,972             $3.10
                                                  =======             =====

     At June 30, 1997, 551,222 options outstanding under the 1994 and 1995
Plans were vested and 347,028 options were available for issuance under these
plans. The following summarizes information about the Company's stock options
outstanding at June 30, 1997:

<TABLE>
<CAPTION>
                                        Options Outstanding                        Options Exercisable
                          ------------------------------------------------    ------------------------------

                                             Weighted Avg.     Weighted                          Weighted
      Range of                Number           Remaining         Avg.              Number          Avg.
      Exercises           Outstanding at    Contractual Life   Exercise        Exercisable at    Exercise
       Prices              June 30, 1997       (in years)        Price         June 30, 1997       Price
       ------              -------------       ----------        -----         -------------       -----
<S>                           <C>                 <C>            <C>              <C>              <C>  
    $1.83-$2.00               182,472             2.22           $1.98            182,472          $1.98
    $3.00-$3.50               547,500             4.53           $3.48            368,750          $3.47
                              -------                            -----            -------          -----
    $1.83-$3.50               729,972             3.95           $3.10            551,222          $2.98
                              =======                            =====            =======          =====
</TABLE>

                                   Page 33
<PAGE>

     In the year ended June 30, 1997, the Company adopted the disclosure
requirements of Financial Accounting Standard No. 123, " Accounting for
Stock-Based Compensation" (Statement No. 123). As allowed by Statement No.
123, the Company has chosen to continue to account for stock based
compensation using Accounting Principles Board No. 25, "Accounting for Stock
Issued to Employees", and related interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the grant date over the amount an employee
must pay to acquire the stock. Accordingly, no compensation cost has been
recognized. Had compensation cost for the Company's Plans been determined
under Statement No. 123, the Company's net loss and net loss per share would
have been increased to the pro forma amounts indicated below:

                                                     Years ended June 30,

                                                   1997             1996
                                                   ----             ----

     Net loss attributable 
      to Common Stock       As reported           ($2,210,359)     ($2,998,480)
                            Pro forma             ($2,619,463)     ($3,128,536)

     Net loss per share     As reported           ($0.35)          ($0.57)
                            Pro forma             ($0.41)          ($0.60)

         The per share weighted-average fair values of stock options granted
during the years ended June 30, 1997 and 1996 were $2.41 and $2.35,
respectively, on the date of grant using the Black-Scholes option-pricing
model with the following assumptions:

                                                     Years ended June 30,

                                                   1997              1996
                                                   ----              ----
     Dividend yield                                       0%                0%
     Volatility factor                                82.01%            86.27%
     Risk-free interest rate                   6.05% - 6.45%     5.32% - 6.52%
     Average expected option life                    5 Years           5 Years

The fair value of stock options included in the pro forma amounts for the
years ended June 30, 1997 and 1996 is not necessarily indicative of future
effects on net income/(loss) and net income/(loss) per share. The pro forma
net loss reflects only options granted in the years ended June 30, 1997 and
1996. Therefore, the full impact of calculating compensation cost for stock
options under Statement No. 123 is not reflected in the pro forma net loss
amounts presented above, because compensation cost is reflected over an
option's vesting period and compensation cost for options granted prior to
July 1, 1995 is not considered.

On May 22, 1997 the Company repriced the options outstanding under the 1995
Plan, that were in excess of the market price of the Company's common stock on
May 22, 1997, to an exercise price of $3.50 

Common Stock Warrants:

     In April of 1995, the Company received $100,000 in connection with the
sale of a warrant to acquire 220,662 shares of the Company's common stock at
any time on or before April 27, 2002 at an exercise price of $.45 per share.
The warrant holder was also granted certain registration rights for a
seven-year period, however, those rights did not extend to the Company's
initial public offering of common stock. In April 1995, the Company issued
15,000 warrants to a group of private investors. These warrants are
exercisable at any time on or before May 1, 2000 at an exercise price equal to
the greater of $3.00 per share or 120% of the offering price of the Company's
common stock pursuant to the first registration statement filed by the Company
pursuant to the Securities Act of 1933. No value was assigned to these
warrants. On October 18, 1995, in connection with the Company's initial public
offering of common stock, the underwriter was granted 155,000 warrants. These
warrants are exercisable at anytime on or before October 13, 2000 at an
exercise price of $3.60 per share. Registration rights were granted in
connection with the underwriter's warrants. In addition, 425,000 warrants were


                                   Page 34
<PAGE>

issued to the former owners of AOMC. These warrants are exercisable at any
time on or before October 16, 2002 at an exercise price of $.50 per share.
Information regarding the warrants is as follows:

                                                   Number of        Exercise
                                                    Warrants          Price
                                                    --------          -----
     Balances, June 30, 1995                        235,662       $0.45-$3.00
       Warrants granted                             580,000        0.50- 3.60
       Warrants canceled                                 --                --
       Warrants exercised                          (221,862)       0.45- 0.50
                                                    -------       -----------
     Balances, June 30, 1996                        593,800       $0.50-$3.60
                                                                  ===========
       Warrants granted                             605,974        5.50- 6.25
       Warrants canceled                                 --                --
       Warrants exercised                          (243,887)             0.50
                                                    -------       -----------
     Balances, June 30, 1997                        955,887       $0.50-$6.25
                                                    =======       ===========

13.  Commitments and Contingencies

     Under various licensing agreements, the Company is required to pay
royalties on the sales of certain products that incorporate licensed content.
Royalty expense under such agreements, which is recorded in cost of sales, was
approximately $73,000 and $320,000 for the twelve months ended June 30, 1997
and 1996, respectively.

14.  Non-recurring Facility Closure Expenses

     In June 1996, the Company closed the former AOMC facility. In connection
with the closure $212,782 was charged to operations for the year ended June
30, 1996. The total charged to operations related to severance. At June 30,
1996, $15,775 of the total charged to operations had been paid and the
remaining $197,007 amount was paid during the year ended June 30, 1997.

15.  Related Party Transactions

     During the years ended June 30, 1997 and 1996 the Company engaged in
certain related party transactions with a company owned and operated by an
individual who also performs the buyer function for the Company as a part time
employee. The Company recorded $896,000 in revenues and $332,000 in commission
expense with this related party during the year ended June 30, 1997. The
Company recorded $769,000 in revenues and $272,000 in commission expense with
this related party during the year ended June 30, 1996. At June 30, 1997 the
Company had a trade accounts receivable of approximately $20,000 and a note
receivable of $2,000 with this related party.

     Odyssey Capital Group L. P., a shareholder of the Company, purchased
$200,000 of notes payable previously owed to Ballyshannon Partners L. P.,
another shareholder of the Company, and exchanged $100,000 of the debt for
100,000 shares of Class Two Convertible Preferred Stock and then exchanged the
remaining $100,000 of the debt to pay the exercise price of warrants to
purchase 198,687 shares of Common Stock (See Note 10).

16.  Major Customers and Export Sales

     During the year ended June 30, 1997 the Company had two customers, which
accounted for approximately 35% and 20% of net revenues, respectively. The
Company presently has an exclusive distribution agreement with Slash
Corporation ("Slash"), (a division of GT Interactive Software Corp. "GTIS")
covering distribution of the Company's products to retailers in North America.
GTIS is currently the largest distributor of consumer software to mass
merchants in the United States. During the year ended June 30, 1997, Slash
accounted for approximately 35% of the Company's net sales. The Company
believes that for the year ending June 30, 1998 Slash could account for 70% or
more of the Company's net sales. The Company's agreement with Slash does not
specify minimum purchase requirements and could be terminated at any time by
Slash. During the year ended June 30, 1996 the Company had four customers
which accounted for approximately 25%, 9%, 7% and 5% of net revenues,


                                   Page 35
<PAGE>

respectively. The amount of export sales included in net revenues was
approximately $169,000 and $429,000 for the years ended June 30, 1997 and
1996, respectively.

17.  Liquidity

         As indicated in the accompanying financial statements, the Company's
net loss was $1,650,925 and $2,998,480 in fiscal 1997 and 1996, respectively.
In addition, cash used by operating activities totaled $2,556,976 and
$2,046,297 in fiscal 1997 and 1996, respectively. The Company's ability to
achieve positive cash flow depends upon a variety of factors, including the
timeliness and success of developing and selling its products, the costs of
developing, producing and marketing such products and various other factors,
some of which may be beyond the Company's control. In the future, the
Company's capital requirements will be affected by each of these factors.
Although, the Company believes cash and working capital balances will be
sufficient to fund the Company's operations for the foreseeable future, the
Company may seek to raise additional capital however, there can be no
assurances that the Company will achieve a positive cash flow or that
additional financing will be available if and when required or, if available,
will be on terms satisfactory to the Company. As of June 30, 1997 the
Company's cash and working capital balances were $445,474 and $1,099,982,
respectively. At June 30, 1997 the Company satisfied the minimum level of
stockholders' equity required to be listed ($1,000,000) and all other aspects
of its listing agreement. The Nasdaq Stock Market announced new listing
requirements for continued listing on the Nasdaq SmallCap Market effective
August 22, 1997. Companies failing to satisfy the new continued listing
requirements will have until February 23, 1998 to meet the new requirements.
The Company currently does not satisfy the new net tangible assets requirement
of $2,000,000. Although management of the Company will seek to be in
compliance with this requirement on or before February 23, 1998, there can be
no assurance that this will occur.

         To comply with the new requirements the Company may seek additional
capital to, among other things, increase its stockholders' equity to at least
the new minimum level required. There can be no assurance that the Company
will be able to raise such additional capital or if it is able to raise
additional capital it will be on terms satisfactory to the Company (see Item
6. Management's Discussion and Analysis of Results of Operations and Financial
Condition, Liquidity and Capital Resources contained in this report
incorporated herein by reference for additional information concerning the
Company's financial position).

18.  Terminated Acquisition

     The Company has terminated an Asset Acquisition Agreement (the
"Agreement") entered into with FileABC(TM) L.P. ("FileABC") in October 1996,
and will not consummate the acquisition of certain assets of FileABC pursuant
to the Agreement. The completion of the transaction had been subject to
certain conditions, including the condition that FileABC continue to have a
distribution relationship with Franklin Covey Company ("Franklin Covey") for
the distribution of software products. Franklin Covey terminated its
distribution relationship with FileABC, which was among the reasons for the
Company's termination of the Agreement.

     The Company had advanced FileABC $175,000 in connection with the terms of
the Agreement. This amount is recorded in prepaid assets as an advance
payment. Although management currently believes this amount is recoverable and
is actively pursuing recovery, there can be no assurance collection will
ultimately occur, in which case the advances would be written off.

     On July 8, 1997, the Company filed suit against FileABC in federal court,
alleging fraud, deceit and misrepresentation, breach of the covenant of good
faith and fair dealing, breach of contract and conspiracy on the part of
FileABC and certain of its principals and agents. The Company is seeking to
rescind the Agreement and, to recover damages, and a declaratory judgment that
the Agreement is void and unenforceable.




                                   Page 36
<PAGE>


19.      Fourth Quarter Adjustments

     In connection with its year end closing, the Company recorded certain
adjustments primarily related to direct mail marketing costs, the beneficial
conversion feature of convertible preferred stocks and a development contract,
which affected the previously reported quarterly financial results during
fiscal 1997. The following table presents a condensed summary of fiscal 1997
unaudited quarterly financial information as previously disclosed and restated:

<TABLE>
<CAPTION>
                           Three months ended      Three months ended        Three months ended        Three months ended
                                9/30/96                 12/31/96                  3/31/97                   6/30/97
                        -----------------------  -----------------------    ----------------------    ----------------------
                        Previously       As      Previously        As       Previously       As       Previously       As
                         reported     restated    reported      restated     reported     restated    disclosed*    restated
                         --------     --------    --------      --------     --------     --------     --------     --------
                                                                                                                  
<S>                     <C>          <C>          <C>          <C>            <C>          <C>        <C>          <C>       
Net sales               $1,071,017   $1,071,017   $1,283,466   $1,058,466     $746,235     $746,235   $1,396,975   $1,506,975
                                                                                                                  
Gross profit              $753,560     $753,560     $918,427    $ 693,427     $438,025     $438,025     $816,617     $926,617
                                                                                                                  
Operating expenses        $973,551   $1,147,625   $1,261,592   $1,327,426   $1,151,046   $1,051,077     $988,609     $886,592
                                                                                                                  
Net (loss) income        $(233,504)   $(407,578)   $(358,132)   $(648,966)   $(731,055)   $(631,086)   $(171,992)     $36,705
                                                                                                                  
Accretion of beneficial                                                                                           
conversion feature of                                                                                             
preferred stock                 --           --           --      $86,858     $141,429     $141,429     $331,147     $331,147
                                                                                                                  
Net loss attributable                                                                                             
to common stock          $(233,504)   $(407,578)   $(358,132)   $(735,824)   $(872,484)   $(772,515)   $(503,139)   $(294,442)
                                                                                                                  
Net loss per                                                                                              
common share                $(0.04)      $(0.06)      $(0.06)      $(0.12)      $(0.14)      $(0.12)      $(0.08)      $(0.05)
                                                                                                            
</TABLE>

* As disclosed in a press release dated August 26, 1997.


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

None.





                                   Page 37
<PAGE>


                                   PART III

Item 9.           Directors and Executive Officers of the Registrant

There is hereby incorporated herein by reference the information appearing
under the caption "Election of Directors", under the caption "Executive
Officers of the Company", and under the caption "Compliance with Securities
Laws" of the Registrant's definitive Proxy Statement for its 1997 Annual
Meeting to be filed with the Securities and Exchange Commission.

Item 10.          Executive Compensation

There is hereby incorporated herein by reference the information appearing
under the caption "Executive Compensation" and under the caption "Election of
Directors" of the Registrant's definitive Proxy Statement for its 1997 Annual
Meeting to be filed with the Securities and Exchange Commission.

Item 11.          Security Ownership of Certain Beneficial Owners and Management

There is hereby incorporated herein by reference the information appearing
under the caption "Voting Securities and Principal Holders Thereof" of the
Registrant's definitive Proxy Statement for its 1997 Annual Meeting to be
filed with the Securities and Exchange Commission.

Item 12.          Certain Relationships and Related Transactions

There is hereby incorporated by reference herein the information appearing
under the caption "Certain Transactions" of the Registrant's definitive Proxy
Statement for its 1997 Annual Meeting to be filed with the Securities and
Exchange Commission.




                                   Page 38
<PAGE>


Item 13.          Exhibits and Reports on Form 8-K

                  The following is a list of exhibits filed as part of this
                  annual report on Form 10-KSB. Where so indicated, exhibits
                  which were previously filed are incorporated by reference.

<TABLE>
<CAPTION>
  Exhibit No.                 Description of Exhibit                               Page Number
  -----------                 ----------------------                               -----------

<S>             <C>                                                               <C>

   (1)2.1         Form of Amended and Restated Agreement and Plan of Merger
                  between and among Applied Optical Media Corporation and the
                  Registrant ("AOMC Merger Agreement").

   (2)2.2         Agreement and Plan of Reorganization dated April 4, 1996 by
                  and among the Registrant, the Registrant's wholly-owned
                  subsidiary and Virtual Reality Laboratories, Inc.

   (2)2.3         Agreement and Plan of Merger dated April 4, 1996 by and
                  among the Registrant, the Registrant's wholly-owned
                  subsidiary and Virtual Reality Laboratories, Inc.

   (3)3.1         Amended and Restated Articles of Incorporation of the
                  Registrant

   (4)3.2         Amended and Restated By-Laws of the Registrant

   (4)4.1         Promissory Note in the amount of $350,000 from Virtual
                  Reality Laboratories, Inc. to Heller First Capital
                  Corporation dated March 25, 1996; Commercial Security
                  Agreement dated March 25, 1996 between Virtual Reality
                  Laboratories, Inc. and Heller First Capital Corporation; and
                  U.S. Small Business Administration Guaranty dated March 25,
                  1996.

  (3)10.1         Form of Redeemable Warrant for the Purchase of the
                  Registrant's Common Shares (Exhibit A to AOMC Merger
                  Agreement).

  (3)10.2         Form of Underwriter's Warrant Agreement.

  (3)10.3         Form of Certificate of Designation, Powers, Rights,
                  Preferences and Number of Shares of Class One Preferred
                  Stock (Exhibit B to AOMC Merger Agreement).

  (3)10.4         1994 Stock Option Plan.

     10.5         Amended and Restated 1995 Stock Option Plan.

  (3)10.6         Form of Employment Agreement by and between the Registrant
                  and John E. Bauer.

  (3)10.7         Form of Employment Agreement by and between the Registrant
                  and Joseph A. Falsetti.

  (4)10.8         Registration Rights Agreement dated April 4, 1996 by and
                  among the Registrant, the former stockholders of Virtual
                  Reality Laboratories, Inc. and the former holders of
                  convertible subordinated debt of Virtual Reality
                  Laboratories, Inc.
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
  Exhibit No.                 Description of Exhibit                               Page Number
  -----------                 ----------------------                               -----------

<S>               <C>                                                                 <C> 
  (5)10.9         Certificate of Designation, Preferences, Powers, Rights and
                  Number of Shares of Class Two Convertible Preferred Stock

  (5)10.10        Form of Purchase Agreement for the Class Two Convertible
                  Preferred Stock (the "Class Two Preferred") dated as of
                  November 15, 1996

  (5)10.11        Form of Warrant Agreement for the Warrants (the "Warrants")
                  issued to the holders of the Class Two Preferred dated as of
                  November 15, 1996

  (5)10.12        Form of Registration Rights Agreement for the Common Stock
                  underlying the Class Two Preferred and the Warrants dated as
                  of November 15, 1996

  (5)10.13        Form of Agreement amending certain terms of the Class Two
                  Preferred Certificate of Designation, Warrants and
                  Registration Rights Agreement dated as of November 15, 1996

  (6)10.14        Purchase Agreement dated January 30, 1997 between RomTech,
                  Inc. and Odyssey Capital Group, L.P.

  (6)10.15        Agreement dated January 30, 1997 between RomTech, Inc. and
                  Odyssey Capital Group, L.P.

  (6)10.16        Registration Rights Agreement dated January 30, 1997 between
                  RomTech, Inc. and Odyssey Capital Group, L.P.

  (7)10.17        Certificate of Designation, Preferences, Powers, Rights and
                  Number of Shares of Class Three Convertible Preferred Stock

  (7)10.18        Form of Securities Purchase Agreement for the Class Three
                  Convertible Preferred Stock (the "Class Three Preferred")

  (7)10.19        Form of Warrant Agreement for the Warrants (the "Class Three
                  Warrants") issued to the holders of the Class Three
                  Preferred

  (7)10.20        Form of Registration Rights Agreement for the Common Stock
                  underlying the Class Three Preferred and the Class Three
                  Warrants

  (8)10.21        Asset Acquisition Agreement between RomTech, Inc. and
                  FileABC, LP
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
  Exhibit No.                 Description of Exhibit                               Page Number
  -----------                 ----------------------                               -----------

<S>               <C>                                                                 <C>               
    10.23         Warrant Agreement dated January 30, 1997 by and between the
                  Registrant and PJM Trading Company, Inc.

    10.24         Distribution Agreement dated May 1, 1997 between the
                  Registrant and GT Interactive Software.

     11.1         Computation of Loss Per Share

     21.1         Subsidiaries.

     23.1         Consent of KPMG Peat Marwick LLP

 (9) 24.1         Power of Attorney

     27.1         Financial Data Schedule                                           

   (1)    Incorporated by reference herein from Amendment No. 3 of the
          Registrant's Form SB-2 as filed with the Securities and Exchange
          Commission on October 4, 1995.
   (2)    Incorporated by reference herein from the Registrant's Form 8-K as
          filed with the Securities and Exchange Commission on April 19, 1996.
   (3)    Incorporated by reference herein from the Registrant's Form SB-2 as
          filed with the Securities and Exchange Commission on July 28, 1995.
   (4)    Incorporated by reference herein from the Registrant's Form 10-QSB
          for the quarter ended March 31, 1996 as filed with the Securities
          and Exchange Commission on May 14, 1996.
   (5)    Incorporated by reference herein from the Registrant's Form 8-K as
          filed with the Securities and Exchange Commission on November 27,
          1996.
   (6)    Incorporated by reference herein from the Registrant's Form 8-K as
          filed with the Securities and Exchange Commission on February 4,
          1997.
   (7)    Incorporated by reference herein from the Registrant's Form 8-K as
          filed with the Securities and Exchange Commission on April 9, 1997.
   (8)    Incorporated by reference herein from the Registrant's Form 10-QSB
          as filed with the Securities and Exchange Commission on November 14,
          1996.
   (9)    See signature page.

</TABLE>


                                   Page 39
<PAGE>


(b) Reports on Form 8-K

On November 27, 1996, the Company filed a report on Form 8-K in regard to the
private placement of Class Two Convertible Preferred Stock (See Part I, Item
7, Notes to the financial statements, Note 10).

On February 4, 1997, the Company filed a report on Form 8-K in regard to the
private placement of Class Two Convertible Preferred Stock (See Part I, Item
7, Notes to the financial statements, Note 10).

On April 9, 1997, the Company filed a report on Form 8-K in regard to the
private placement of Class Three Convertible Preferred Stock (See Part I, Item
7, Notes to the financial statements, Note 10).

On September 19, 1997, the Company filed a report on Form 8-K in regard to the
termination of the Asset Acquisition Agreement entered into with FileABC(TM) ,
L.P. ("FileABC") in October 1996 and its filed suit against FileABC in federal
court, alleging fraud, deceit and misrepresentation, breach of the covenant of
good faith and fair dealing, breach of contract and conspiracy on the part of
FileABC and certain of its principals and agents (See Part I, Items 3).





                                   Page 40
<PAGE>


                                  SIGNATURES


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

                                                   RomTech, Inc.

By:  /s/ Joseph A. Falsetti
     --------------------------------------------------------
     Joseph A. Falsetti, Chairman and Chief Executive Officer

Date September 29, 1997
     --------------------------------------------------------

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

Date:  September 29, 1997       /s/  Joseph A. Falsetti
       -------------------      -----------------------
                                Joseph A. Falsetti
                                Chairman, Chief Executive Officer and Director

Date:  September 29, 1997       /s/  Gerald W. Klein
       -------------------      --------------------
                                Gerald W. Klein
                                Vice President, Chief Financial and Accounting
                                Officer and Director

         Each person in so signing also makes, constitutes and appoints Joseph
A. Falsetti, Chairman and Chief Executive Officer and Gerald W. Klein, Vice
President and Chief Financial Officer, and each of them severally, his true
and lawful attorney-in-fact, in his name, place and stead to execute and cause
to be filed with the Securities and Exchange Commission any or all amendments
to this report.


Date:  September 29, 1997       /s/  Lance H. Woeltjen
       -------------------      ----------------------
                                Lance H. Woeltjen
                                President of Virtual Reality Laboratories, Inc.
                                and Director

Date:  September 29, 1997       /s/  Thomas D. Parente
       ------------------       ----------------------
                                Thomas D. Parente
                                Director

Date:  September 29, 1997       /s/  John P. Kirwin, III
       ------------------       ------------------------
                                John P. Kirwin, III
                                Director



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