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                    U.S. SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                               ----------------
 
                                  FORM 10-KSB
 
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                                    OF 1934
                  For The Fiscal Year Ended December 31, 1998
 
                        Commission File Number 1-12230
 
                               ----------------
 
                    ADVANCED DEPOSITION TECHNOLOGIES, INC.
          (Name of Small Business Issuer as specified in Its charter)
 
                               ----------------
 
              Delaware                                 04-2865714
   (State or other jurisdiction of         (I.R.S.Employer Identification No.)
           incorporation)
 
                      580 MYLES STANDISH INDUSTRIAL PARK
                         TAUNTON, MASSACHUSETTS 02780
                   (Address of principal executive offices)
 
                   Issuer's Telephone Number: (508) 823-0707
 
Securities Registered Under Section 12(b) Of The Exchange Act:
 
<TABLE>
<CAPTION>
                                                    Name of Each Exchange on
       Title of Each Class                               which Registered
       -------------------                          -------------------------
       <C>                                          <S>
       Common Stock                                   Boston Stock Exchange
</TABLE>
 
Securities Registered Under To Section 12(g) Of The Exchange Act: None
 
  Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [_]  NO [X]
 
  Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB.
 
  The Registrant had revenue of approximately $23,501,000 in its most recent
fiscal year.
 
  The aggregate market value of the Common Stock held by non-affiliates of the
registrant, (without admitting that any person whose shares are not included
in determining such value is an affiliate) based upon the average closing bid
and asked prices of the Common Stock on March 29, 1999 was approximately
$6,296,082.
 
  The number of shares outstanding of the Registrant's Common Stock as of
March 29, 1999 was 4,278,919.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
  The Registrant hereby incorporates by reference into Part III of this report
portions of its proxy statement for the 1999 annual meeting of stockholders,
which the Registrant intends to file within 120 days of the Registrant's
fiscal year ended December 31, 1998.
 
  Transitional Small Business Disclosure Format: Yes [_] No [X]
 
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Item 1. Description of Business
 
Overview
 
  Advanced Deposition Technologies, Inc. (the "Company") develops,
manufactures, markets and sells standard and proprietary metallized capacitors
and a variety of other metallized films for energy management applications.
The Company's primary markets are the electronic capacitor market and the
microwave food packaging market. The Company produces metallized films by
applying an ultra-thin layer or layers of vaporized metal onto different types
of polymer films. The Company has the capability to print these metals at high
resolutions through its proprietary Pattern Metallized Printing ("PMP")
process for its patented and patent pending products. These thin films are
then incorporated into a wide variety of end-use applications such as
capacitors for florescent lighting, motors, power factor correction systems
and microwave food packaging for pizza, popcorn, pastries, and other foods.
The Company has also developed and manufactured, on a limited basis for
evaluation purposes, other patented or patent pending products that use the
Company's PMP technology, such as authentication holograms, electronic article
surveillance tags, electrostatic discharge materials, retroreflective films,
and solar protective films.
 
  The Company began operations in 1985 as a Massachusetts corporation
supplying metallized film to the electronic capacitor industry. In 1989, the
Company developed and introduced metallized films in patterns for use in
microwave food packaging applications. In July 1993, the Company was
reincorporated as a Delaware corporation. Since 1993, the Company has actively
pursued the development of new products for food and other industries based on
its PMP process. In 1994, the Company introduced a microwave browning and
crisping bag (the "ACCU-CRISP(R) Bag") made with a patented fuse susceptor
metallized film, which was sold through retail channels. In the first quarter
of 1999, the Company introduced a new and improved microwave bag under the
tradename, "Micro Heat N' Serve" and expects to market this to retail channels
going forward. The improvements relate to a reconfigured bag and an entirely
new pattern of metal to optimize the heating.
 
  In December 1997, the Company acquired (the "ABSA Acquisition") 65% of
Alexander Boxall, S.A. ("ABSA"), a corporation located in Madrid, Spain. ABSA
was renamed DNA-AD TECH S.A. ("DNA") and is a manufacturer of electronic
capacitors with 1998 revenues of approximately $15,300,000. DNA has been a
significant customer of the Company since 1995. In addition, on October 1,
1998, the Company, through DNA, acquired 80% of the outstanding common stock
of Kidamai, SDN of Kuala Lumpur, Malaysia ("Kidamai"), for approximately
$370,000 in the form of the cancellation of amounts due DNA for product sales.
In January 1998, the Company reached an agreement (the "Kidamai Agreement") to
purchase a majority of the capital stock of Kidamai SDN ("Kidamai") located in
Kuala Lumpur, Malaysia. Kidamai is a capacitor assembler and distributor with
1998 sales of approximately $665,000. During 1998 the name of Kidamai was
change to DNA-AD TECH (Asia) Sdn Bhd ("DNA-Asia"). As a result of the DNA
Acquisition and the purchase of DNA-Asia, the Company expects that its sales
to the electronic capacitor industry will account for a significant part of
its future business. The Company also expects that sales of products that
utilize the Company's proprietary manufacturing technologies and/or its owned
or licensed patents will account for a substantial portion of its anticipated
future growth in revenues.
 
  Over the past year the Company has applied for new high energy density
("HED") film patents and has been notified that the claims have been allowed
by the United States Patent and Trademark Office. These new films use the
Company's proprietary PMP process to reduce the weight and size of standard
capacitor designs as well as to increase their reliability. The Company is
currently testing these new HED films for Underwriter's Laboratory (UL)
approvals and is working with customers for the same purpose.
 
  The Company's executive offices are located at 580 Myles Standish Industrial
Park, Taunton, Massachusetts, 02780. Its telephone number is (508) 823-0707.
 
                                       2
<PAGE>
 
Markets and Products
 
  Since the Company's inception, the majority of the Company's sales have been
to the electronic and alternating current ("AC") capacitor market. In 1989,
the Company decided to find new product areas and focused on establishing
itself as a technology and market leader for providing film used in the
microwave food packaging market. In connection with this effort, the Company
developed the ACCU-CRISP(R) Bag in 1994, a consumer product that had been sold
primarily over cable television channels. As a result of the DNA Acquisition
in December 1997, however, the Company now also produces and sells electronic
capacitors and related products for the lighting and electronic equipment
industries. The Company believes that it benefits from additional technical
support from DNA that enables the Company to more quickly develop new film
technology by shortening the testing and acceptance cycle of new products. The
Company also believes that the DNA Acquisition has resulted and will continue
to result in favorable economies of scale. See "Products and Processes Under
Development."
 
 Electronic Capacitors
 
  Electronic capacitors store and transmit energy in electronic and electric
devices present in a wide variety of items such as computers, appliances,
light ballasts, automotive engines, air conditioners and audio equipment.
Metallized films are the strategic raw material for electronic capacitor
function in these products. The Company currently supplies such metallized
film to many of the major, technically advanced manufacturers of capacitors
and is one of four primary suppliers of metallized film for these applications
in the United States. Beginning in 1995, using the Company's PMP process, the
Company began introducing new products to the capacitor market for high
energy, self-protected capacitors, also known as segmented electrode
materials. In 1997, the Company filed a U.S. patent application for patterned
"HED" films and capacitors. These new materials were invented to enable
metallized film capacitors to be produced smaller, lighter, safer and more
cost effectively. Through ABSA, the Company manufactures a wide range of
electronic capacitors and capacitor products used primarily for lighting and
motor applications and exports to over 50 countries. See "Products and
Processes Under Development."
 
 Microwave Food Packaging
 
  Microwave food packaging can be active or passive. Active packaging produces
heat by interaction with microwaves generated from a microwave oven, thereby
increasing the cooking temperature for purposes of browning and crisping.
Passive packaging does not produce heat, but instead reflects the microwave
energy away from selected areas. The Company produces metallized film for use
in active microwave food packaging in two of the currently available formats:
flexible and rigid paperboard. Flexible packaging is typically wrapped around
food to conduct heat to the whole exterior of the food product within the
package. Rigid paperboard is typically placed within a package to conduct heat
to a particular portion of the food.
 
  In 1994, the Company developed and patented a fuse susceptor film based on
PMP technology, which it markets under the name Safety Susceptor(TM). Safety
Susceptor(TM) metallized film is designed to be used in active, flexible and
rigid microwave food packaging to heat food more evenly, crisp the outside of
food, and reduce the occurrence of cold spots. It is also designed to reduce
the occurrence of package charring and the possibility of burning if a package
is overheated due to human error when setting cooking time or otherwise. The
Company incorporates Safety Susceptor(TM) film in its ACCU-CRISP(R) Bags. In
1996, the Company assigned its rights to 3 patents related to Safety
Susceptor(TM) and other microwave food packaging products to Fort James
Corporation ("Fort James"), formerly known as James River Corporation, in
exchange for a cash payment of $1,200,000 and a licensing arrangement,
pursuant to which the Company became a licensee of products to 27 patents,
including the patent for the Safety Susceptor(TM). Under this arrangement, the
Company retained an exclusive, royalty-free license for sales of certain
consumer products, such as ACCU-CRISP(R) Bags. Fort James also agreed to
purchase certain quantities of microwave packaging film from the Company for a
five-year period, subject to certain quality control and other conditions. The
Company has developed other proprietary and patented metallized films for
microwave food packaging based on PMP technology that it currently sells for
new product applications. See "Marketing and Distribution."
 
                                       3
<PAGE>
 
  The Company also sells standard metallized film for microwave packaging
applications. Standard metallized susceptor film is produced with a continuous
layer of thin metal deposited onto polymer film and is used in microwave
popcorn bags as well as other microwave packaging products to brown and crisp
the exterior of food. Except with respect to the Company's consumer products,
the Company generally sells metallized film packed in rolls to converters who
incorporate the film into final food packages.
 
  In 1994, the Company introduced ACCU-CRISP(R) Bags, the Company's first
consumer product, which has been sold on the QVC and Home Shopping Network
cable television channels, as well as through various infomercials. In 1996,
the Company signed an exclusive sales and marketing agreement with a
manufacturers' representative, The Media Group, Inc. (the "Media Group") for
the retail distribution of ACCU-CRISP(R) Bags that is subject to certain
volume purchase requirements. The ACCU-CRISP(R) Bag and the BROWN & CRISP(R)
microwave cooking bag, which were distributed by the Media Group Inc., are
made using Safety Susceptor(TM) film. In 1998, the Company terminated its
exclusive distribution arrangement for its ACCU-CRISP(R) Bags with Media
Group. The Company may in the future enter into other exclusive arrangements
for the supply of its products, including its ACCU-CRISP(R) Bags, to specific
markets within defined territories. The Company has re-engineered the product
to improved performances, adopted a new tradename, "Micro Heat N' Serve" and
is exploring new channels of sales and distribution.
 
 Non-Microwave Food Packaging
 
  Metallized film also acts as an effective barrier to oxygen, water and
ultraviolet light, and is used to package non-microwavable food as a means to
maintain freshness in products such as snack foods, coffee, and juice. The
Company has also developed and manufactured, on a limited basis for evaluation
purposes, other products using the Company's PMP technology, such as
authentication holograms, electronic article surveillance tags, electrostatic
discharge materials, retroreflective films, and solar protective films using
the Company's proprietary metalization process. See "Products and Processes
Under Development."
 
Marketing and Distribution
 
  The Company markets and sells metallized capacitor film primarily through
direct factory contacts with its major customers. The Company's capacitor and
capacitor products are sold through direct contacts and distributors. The
Company markets and sells its microwave film products using inside sales staff
and through manufacturer's representatives, technical presentations,
advertising and participation in industry trade shows and conferences.
 
  Three customers accounted for approximately 37%, 12% and 9% of the Company's
total product sales in the year ended December 31, 1997. There were no
customers accounting for 10% or over in 1998.
 
Products and Processes Under Development
 
  The Company's research and development activities are focused on the
development of new proprietary processes and patented products and on
enhancements to its production equipment. Company-funded research and
development expenditures totaled approximately $356,000 and $324,000, or 1.5%
and 2.6% of total revenues, during 1998 and 1997, respectively.
 
  The Company continues to improve its PMP process. The Company has enhanced
its proprietary metalization process to enable high-resolution deposition (up
to 130 dots per inch) of metals onto polymer film. This enhanced metalization
process has resulted in the manufacture of new products such as authentication
holograms, which the Company has sold on a limited basis for evaluation
purposes.
 
  Authenticity holograms are used to detect counterfeiting of licenses,
passports, and other important identification documents. Holograms are also
used to reduce copyright and product piracy. The Company has two patents
pending related to proposed products with a high resolution pattern of vapor
deposited metal to create
 
                                       4
<PAGE>
 
holographic images. The Company believes that these products can improve the
security feature of certain holograms at lower costs of production. The
Company's sales of such authenticity holograms were immaterial during 1998.
 
  In 1996, the Company developed a high energy density ("HED") metallized film
using the Company's PMP process that is designed to double the capacity of
electronic capacitors without a proportional increase in size or cost. In
January 1997, the Company filed a patent application for this film under the
name "High Energy Density Films and Capacitors Thereof" and received a notice
of allowance in January 1998. These films are being tested at the Company's
facility and with its customers. The Company intends to obtain Underwriter's
Laboratory (UL) approvals by the end of 1999. The Company has also been
informed by the United States Patent office that its HED patents should be
issued prior to August, 1999.
 
Technology and Manufacturing Process
 
  The Company's corporate headquarters and one of its three manufacturing
facilities is located in Taunton, Massachusetts. The Company's other
manufacturing facilities are located in Madrid, Spain and Kuala Lumpur,
Malaysia.
 
  At its 30,000 square foot, film metallizing facility in Taunton, the Company
currently operates three vacuum metallizers, the primary pieces of production
equipment used in its manufacturing process, to metallize film used in all of
its film products and film products under development. The Company has
enhanced all of its vacuum metallizers with proprietary improvements to enable
them to deposit vaporized metal onto plastic film in single or multiple
coatings and in patterns. Variations in metal thickness and patterns will
influence and modify different energy spectrums. In 1997, the Company
announced that it had entered into a purchase agreement to increase its
production capacity with new equipment. The Company believes that this new
equipment and modifications to current production processes will substantially
improve capacity beginning in the third quarter of 1999.
 
  Within a vacuum metallizer, rolls of plastic film are fed through a vacuum
chamber where a metal vapor, usually aluminum or zinc, is deposited onto the
film. After cooling, the film is cut to customer specifications using
automated slitters, and then packaged and shipped to customers in the form of
boxed rolls of film. With respect to the Company's ACCU-CRISP(R) and "Micro
Heat N' Serve" bags, the Company subcontracts printing and laminating
functions to unaffiliated third parties, who complete the manufacture of the
bags using the Company's metallized film.
 
  The production of capacitors involves taking metallized rolls and winding
them into small, individual cylinders frequently called "sections". These
sections are then end-sprayed, leads are attached and placed in a protective
case. The final capacitors are sold in over fifty countries and for a variety
of applications such as lighting, motors, power regulation and energy
distribution.
 
  The Company relies on management's know-how to engineer its machine
enhancements and protects this information by restricting access to its
production facilities and by requiring all employees to sign confidentiality
agreements. The Company believes that its patents, in addition to the
proprietary enhancements to its vacuum metallizers described above, give the
Company a competitive advantage in the marketplace. See "Patents and
Proprietary Technology."
 
  At its 70,000 square foot, capacitor manufacturing facility in Madrid, the
Company operates many types of winding and assembly equipment, the primary
pieces of equipment in the manufacture of electronic capacitors. Much of the
equipment in the Madrid facility has been engineered to maximize production
efficiency, and the Company is currently nearly half way through its two year-
long program to double its capacity. The manufacture of capacitors
incorporates two primary operations: the winding of metallized film into the
required capacitor size and the subsequent encapsulation of the windings into
various containers. The Company has implemented automated computer processes
and quality control checks throughout its production processes. See "Markets
and Products".
 
                                       5
<PAGE>
 
  In addition, the Company assembles capacitor windings into finished
capacitors at its capacitor manufacturing facility in Kuala Lumpur. Performing
these functions in Malaysia substantially reduces labor costs and duty charges
when compared to the Company's Madrid operation.
 
Sources of Supply
 
  There are multiple suppliers of base polymer films for the manufacture of
metallized film, of metallized film for the production of electronic
capacitors, and of other raw materials used in the Company's manufacturing
processes. The Company seeks to maintain inventories and close working
relationships with its suppliers to ensure timely and reliable delivery. Major
suppliers include Dupont and Hoechst Trespaphan of America. Supplies of base
polymer film, metallized film and other raw materials used by the Company are
currently available in sufficient quantities and acceptable prices.
 
Patents and Proprietary Technology
 
  The Company has been granted 13 patents and has 5 United States and 7
foreign patent applications pending in the U.S. Patent and Trademark Office.
One of the Company's patents relating to vapor deposition patterned method
expired on August 28, 1998. Of the active patents, the expiration dates range
from January, 2011 through April, 2016. Most of the Company's patents and
patent applications pertain to (i) vaporized metals deposited onto substrates
(ii) microwave products, such as the Company's ACCU-CRISP(R) Bags, and (iii)
security holograms. The Company also has 1 patent disclosure for which patent
applications are in process. In addition, the Company has several pending
patent applications in Europe and Japan. The Company's patent and trade secret
rights are of material importance to the Company and its future prospects. The
Company is also a licensee of an additional 26 patents from its relationship
with Fort James Corporation. To date, no legal action has been initiated
against the Company for infringement of patents. The Company also relies on
trade secrets that it seeks to protect, in part, through confidentiality
agreements with employees, consultants and other parties.
 
Insurance
 
  The Company maintains coverage for the customary risks inherent in the
operation of a manufacturing facility, the supply of home-use products, and
business in general.
 
Competition
 
  The electronic capacitor film market is highly competitive in respect to
quality, delivery time and price. The Company believes that it competes
effectively with respect to each of these factors. Many of the Company's
competitors in the metallized film industry have substantially greater
financial, marketing, technical and other resources than the Company. In
addition, the Company's primary competitors in the capacitor film market
produce their own polymer film. The Company's primary competitors are
Steinerfilm, Inc., Bolmet, Inc., a subsidiary of Bollore of France, and Toray
Plastics, Inc.
 
  In the capacitor products market, there are numerous world-wide suppliers
and customers. The electronic capacitor products market is also highly
competitive in respect to quality, delivery time and price. The Company
believes it competes effectively with respect to each of these factors.
 
  The microwave food packaging industry is competitive and subject to changes
in the types of food products requiring packaging, food preparation, and
methods of preparing and cooking food. The Company's success will depend, in
part, on its ability to provide high quality, cost-effective metallized film
for food packaging, establish continuing relationships with food packaging
companies and packaging distributors and respond to the changing needs of the
marketplace in order to compete successfully in this industry. The Company
competes with numerous local, regional and national providers of food
packaging and food packaging supplies. Competition in this industry is based
upon the quality of metallized film, technological improvement, service and
price. The Company believes it competes effectively with respect to each of
these factors.
 
                                       6
<PAGE>
 
Employees
 
  As of March 1, 1999, the Company had 242 full-time employees, of which 34
are located at the Corporate/Manufacturing facility in Taunton, Massachusetts,
171 are located at the DNA facility in Madrid and 37 are located in Malaysia.
Of the total employees, six are executive officers, two of which also perform
research and development and marketing functions. A total of 65 employees were
involved with selling, manufacturing support and administration and the
remaining were involved with direct manufacturing. None of the Company's
employees at its Taunton facility are represented by a labor union. The
employees at the DNA facility in Madrid are represented by a nine-member work
council, obligatory in Spain, who are mostly members of the Spanish trade
union, "Comisiones Oberas." DNA's labor relations are governed by the
Collective Bargaining Agreement on metal activities currently in force in the
Madrid region, which sets forth suggested annual salary increases in
accordance with increases in the consumer price index. None of the Company's
employees at its Kuala Lumpur, Malaysia facility are represented by a labor
union. Management believes that relationships with its employees at all three
facilities are satisfactory.
 
Acquisitions
 
  In December 1997, the Company purchased 65% of the capital stock of DNA. The
Company purchased 50% of the capital stock of DNA from Pedro Nunez-Barranco
Guembe and the remaining 15% from Alexander Peter Boxall. The remaining 35% of
DNA stock is owned by Mr. Boxall. As part of the purchase price for his
shares, Mr. Nunez-Barrance Guembe received a $990,000 note from the Company
that is payable in December 1999. If the Company fails to pay Mr. Nunez-
Barranco Guembe in 1999, Mr. Nunez-Barranco Guembe has the option to receive
(i) his 50% interest in DNA, provided he returns $2,800,000 in cash to the
Company, less (ii) liquidated damages of $340,000 (see MD&A under "Subsequent
Events"). Upon the closing of the DNA Acquisition, Mr. Boxall became a
director of the Company and Managing Director of DNA. For further pertinent
information see section "Subsequent Events". Company sales to DNA amounted to
approximately $602,000 for fiscal year 1997.
 
  Effective October 1, 1998, the Company, through DNA, acquired 80% of the
outstanding common stock of Kidamai, for approximately $370,000 in the form of
the cancellation of amounts due DNA for product sales.
 
Item 2. Description of Property.
 
  The Company maintains its principal executive offices and its metalizing
operations in an approximate 30,000 square foot leased facility in Taunton,
Massachusetts. The Company pays rent and real estate taxes, which combined
currently amount to approximately $22,000 per month, (excluding utilities).
The lease expires on March 31, 2004. The Company's capacitor manufacturing
operations are maintained in an approximate 70,000 square foot leased facility
in Madrid, Spain. The Company pays rent, on one part, to a related party of
approximately $14,000 per month plus utilities and taxes pursuant to a lease
that expires on December 31, 2006 and on another part to a non-affiliate of
approximately $4,000 per month pursuant to a lease which expires on June 30,
2001. The Company's Malaysia capacitor-manufacturing operations are maintained
in an approximate 7,500 square foot leased facility in Kuala Lumpur. The
Company pays rent of approximately $8,300 per month plus utilities and taxes
pursuant to a lease that expires in October 2000. The Company believes that
its facilities are adequate for its current needs.
 
Item 3. Legal Proceedings.
 
  The Company is not a party to any material legal proceedings.
 
Item 4. Submission of Matters to a Vote of Security Holders.
 
  No matters were submitted to a vote of the Company's security holders,
through the solicitation of proxies or otherwise, during the fourth quarter of
the fiscal year covered by this report.
 
 
                                       7
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                                    PART II
 
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
 
 Market Information
 
  The Company's Common Stock has been traded on the over-the-counter market
through the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") since September 10, 1993. The Company's Common Stock is also
traded on the Boston Stock Exchange.
 
  The following table sets forth the range of high and low bid prices for the
Common Stock as reported by NASDAQ since January 1, 1997. These prices reflect
inter-dealer prices, without retail mark-up, markdown or commission, and may
not represent actual transactions.
 
<TABLE>
<CAPTION>
                                                                  High     Low
                                                                 ------- -------
   <S>                                                           <C>     <C>
   1997
     First Quarter.............................................. $ 6.125 $3.5625
     Second Quarter............................................. $5.0625 $  3.25
     Third Quarter.............................................. $ 4.625 $  3.00
     Fourth Quarter............................................. $  4.75 $3.5625
   1998
     First Quarter.............................................. $ 4.313 $  3.00
     Second Quarter............................................. $  3.75 $  1.75
     Third Quarter.............................................. $ 2.875 $  1.03
     Fourth Quarter............................................. $  2.00 $  1.00
</TABLE>
 
 Stockholders
 
  As of March 29, 1999, there were approximately 99 shareholders of "record"
of the Common Stock. As of December 23, 1998 there were 1,986 "beneficial"
shareholders.
 
 Dividends
 
  The Company has never paid cash dividends on its Common Stock. The Company
currently expects to retain all future earnings, if any, for use in its
business and does not anticipate paying any cash dividends in the foreseeable
future. In addition, the Company's financing arrangement with its principal
lender prohibit the payment of cash dividends by the Company.
 
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
 
General
 
  The Company recorded a Net Loss for 1998 of $2,695,000 as compared to a Net
Loss for 1997 of $365,000. Several factors contributed to the financial
results for 1998. Consolidated Sales of $23,501,000 were 92% better than 1997.
The full year impact of acquiring DNA and DNA (Asia) were key to record sales
growth. Despite cost reduction and productivity improvement efforts in the
last half of 1998 at the Taunton facility, operational and debt service costs
more than offset the profit contribution from foreign subsidiaries.
 
  Additionally, the fourth quarter included charges relating to an asset
write-down, reversal of sales and increases to reserves. Accounts Receivable
reserves were increased for doubtful accounts and inventory reserves were
increased for slow moving and obsolete goods. The most significant write-down
was for the impairment of a license with Fort James. (See "Markets and
Products") The original valuation of this license of $1,340,000
 
                                       8
<PAGE>
 
was based on an independent appraised value (using the royalty savings method)
for use of this asset for "home use" products. Initial market success of the
BROWN & CRISP bags in 1997, with sales of $4,366,000, was followed by a large
decline in sales for 1998 to $13,000. Additionally, the distribution agreement
related to the product was terminated in 1998. Although the Company has re-
engineered the product, adopted a new tradename, "Micro Heat N' Serve", and
has formulated a new business plan, the uncertainty of future sales relating
to this asset prompted recording an impairment loss equal to the carrying
value of the license of $1,075,000. An additional charge of $180,000 was
incurred related to ACCU-CRISP bag inventory that was fully reserved. A
technology sale of $300,000 in the third quarter was reversed in the fourth
quarter. The agreement became null and void due to the sudden death of its
President and founder and subsequent dissolution of the company. Total Company
interest expense for 1998 was $810,000, with $488,000 attributed to U.S.
operations and $322,000 to Spain.
 
  Organizational restructuring is planned for the second quarter of 1999. In
April, 1999, Mr. Alexander Boxall was appointed President of the Company. In
this capacity, Mr. Boxall will be responsible for finance and operations.
Management plans include: better identification of marginal business and
seeking out higher margin business, improving forecast and budgeting
processes, and identifying further cost reduction opportunities. A program is
also planned to institute a common financial reporting system for all
reporting entities. This will improve information timing and controls between
the Taunton, Madrid and Kuala Lumpur operations.
 
Results of Operations
 
 Years Ended December 31, 1998 and 1997
 
  Total Revenue. Total revenue increased by 91.8% during 1998 to $23,501,000
compared to $12,250,000 in 1997. Product sales during 1998 were approximately
$23,100,000 compared to $11,750,000 in 1997, a 96.7% increase. Total revenue
in 1998 included $356,000 related to licensing technology and $45,000 for
vendor volume revenues. The DNA Acquisition contributed $15,300,000 in 1998
revenue as compared to Fiscal 1997 of $376,000. DNA revenue in 1998 was for a
full-year compared to 12 days in 1997. Sales of ACCU-CRISP(R) bags decreased
from $4,366,000 in 1997 to $13,000 in 1998 explained in Item 6 above.
 
  Cost of Revenues. Cost of revenues increased to $15,714,000 in 1998 (68.1%
of product sales) from $10,102,000 (86% of product sales) in 1997. The
increase in cost of revenues was due primarily to the full-year effect of the
DNA acquisition. Cost of revenues as a percentage of product sales declined in
1998 due primarily to the consolidation of the profitable foreign subsidiary
businesses.
 
  Gross Profit. Gross profit increased to $7,787,000 (33.1% of total revenue)
in 1998 from $2,148,000 (17.5% of total revenue) in 1997. Full-year sales from
our capacitor facility in Madrid at margins approximating 45% were partially
offset by the decline in revenue and strong margins associated with the sales
of the ACCU- CRISP(R) bags in 1997 and continued low margins in its metallized
film operations. Gross profit was also unfavorably impacted by a write-down of
slow moving and obsolete inventory approximating $375,000.
 
  Selling, General and Administrative. Selling, general and administrative
expenses increased to $7,855,000 (34.0% of total revenue) in 1998 from
$1,782,000 (15.2% of product sales) in 1997 due, in most part, to the full-
year impact of DNA expenses in 1998.
 
  Research and Development. Direct research and development expenses increased
to $356,000 (1.5% of product sales) in 1998 from $324,000 (2.8% of product
sales) in 1997. The Company directed its research and development efforts at
expanding its technical capacity to produce higher resolution metallized
patterns at higher volumes for electronic, security, holographics,
retroreflective and microwave materials.
 
  Amortization of Intangible Assets. Amortization of intangible assets
increased to $338,000 in 1998 from $154,000 in 1997 due primarily to goodwill
amortization associated with the DNA Acquisition in December, 1997.
 
 
                                       9
<PAGE>
 
  Loss from Impairment of Long Lived Assets. A one-time charge against
earnings of $1,108,000, included the impairment of the Fort James license of
$1,075,000. (See "General" above).
 
  Operating Income (Loss). The Company generated an operating loss of
($1,870,000) in 1998 compared to an operating loss of ($112,000) in 1997.
Recapping the above, 1998 results were negatively impacted by the write-down
of the James River license ($1,075,000) and write-down of inventory of
($375,000).
 
  Interest Income (Expense). There was no interest income in 1998 compared to
$91,000 in 1997 and $61,000 in 1996. Interest expense totaled $810,000 in 1998
compared to $274,000 in 1997 due to higher average loan balances. U.S.
operations incurred interest expense of $488,000 and DNA incurred interest
expense of $322,000.
 
  Other Income (Expense). Other income was $352,000 during 1998 compared to
$63,000 in expense for 1997. In 1998, Other income generated at the DNA
operation included subsidies of $58,000 from the Spanish government
(authorized by the European Union) for creation of stable employment in
depressed areas and investment, $104,000 relating to insurance claim proceeds
from DNA-AD TECH (Asia) for a product liability claim and rebate on VAT taxes
of $114,000.
 
  Income Taxes. Income taxes increased to $98,000 in 1998 from $4,000 in 1997.
Income taxes in 1998 were attributable to income generated by the operations
of DNA.
 
  Minority Interest. Minority interest increased to $269,000 in 1998 due to
the minority interest in DNA's net income resulting from a full-year of
operations.
 
  Net Income (Loss). The Company generated a net loss of $ 2,695,000 in 1998
compared to a net loss of $365,000 in 1997 as a result of the factors set
forth above.
 
Liquidity and Capital Resources
 
  The Company had working capital of $505,000 at December 31, 1998 compared to
working capital of $1,705,000 at December 31, 1997. If we consider the recent
agreement with Alexander Boxall (See: "Subsequent Events"), the $990,000 due
to Mr. Guembe on or before December 19, 1999 can potentially be deferred until
January, 2001. Notwithstanding, the Company agreed to use its best efforts,
consistent with prudent cash management practices and plans for growth to pay
all amounts due and owing to Mr. Guembe on or before December 19, 1999 as
originally agreed. However, if this debt were reclassified to long term,
working capital ending 1998 would approximate $1,495,000.
 
  Cash provided by operating activities for the year ended December 31, 1998
was $97,000 compared to cash provided by operating activities of $177,000
during 1997. Net loss of $2,695,000 was partially offset by non-cash
depreciation/amortization of $1,396,000 and asset impairment of $1,108,000.
 
  During the year ended December 31, 1998, the Company invested approximately
$900,000 in equipment at its Taunton facility, $640,000 of which were deposits
on a new capacitor metallizer. At present, the Company has purchase
commitments totaling $975,000 for a new high-speed metallizer scheduled for
delivery in the third quarter of 1999. The Company expects to finance through
the M&E Loan agreed to on September 24, 1998 as detailed below. Fixed asset
additions at the Madrid facility in 1998 of $1,200,000 were the result of
investing in production equipment in the principle areas of production
winding, end spraying and assembly and facility configuration to optimize
production flow. A significant portion of this investment will result in
future cost improvements, increased capacity and productivity and more
consistent quality. Capital expenditures during 1999 will be closely reviewed
by management before any major commitments are made.
 
  In December 1997, the Company acquired 65% of the capital stock of DNA from
two shareholders of ABSA. The DNA Acquisition was financed with $1,800,000 in
cash; a $1,000,000 bridge loan (the "Bridge
 
                                      10
<PAGE>
 
Loan"); a $990,000 note payable and 280,000 shares of the Company's Common
Stock. The DNA Acquisition was accounted for under the purchase method. The
Bridge Loan is from the Company's principal lender and bears interest at the
bank's prime lending rate plus 1.25% per annum and matures, with all unpaid
interest, on July 8, 2001. The note payable to the former shareholder bears
interest at 5.39% per annum and is due, with all unpaid interest, on December
19, 1999. If the Company fails to pay this note, Mr. Pedro Nunez Guembe has
the option to receive his 50% interest in DNA provided he returns the
$2,800,000 in cash he received from the Company, or liquidated damages of
$340,000.
 
  On July 24, 1998, the Company and its principal lender entered into an
amended Credit Agreement (the "Amended Credit Agreement") that restructured
the terms of the Company's existing line-of-credit facility and two term loan
facilities and waived certain defaults thereunder. The Amended Credit
Agreement provides for a line-of-credit facility of up to $2,000,000, based on
percentages of its eligible accounts receivable, raw materials and finished
goods inventories (the "Line of Credit"), as well as term loans in the
aggregate principal amount of $3,750,000 (the "Term Loans"). Each of these
facilities matures on July 8, 2001.
 
  The Company uses the Line of Credit for working capital. Borrowings under
the Line of Credit bear interest at a rate per annum equal to the bank's prime
lending rate plus 1%. The Company had an outstanding balance of approximately
$1,136,000 of the Line of Credit as of December 31, 1998. As of December 31,
1998 the Company had approximately $408,000 available on its line of credit.
The Term Loans are to be repaid in 29 monthly payments of $62,500, commencing
January 1999 with a balloon payment of $1,875,000 in July 2001. Interest is
payable monthly at the bank's prime rate plus 1.25%. The new Term Loans
allowed the Company to repay a $1,000,000 bridge note incurred in connection
with the DNA Acquisition and move approximately $1,165,000 of its previous
revolving line of credit balance into a term note structure.
 
  On September 24, 1998, the Company closed on a line of credit with its
principal lender for the purchase of machinery and equipment (the "M&E Loan").
The M&E Loan allows the Company to borrow up to $2,000,000 for the purchase of
machinery and equipment. Interest is payable monthly at the bank's prime rate
plus 1.25%. The M&E Loan is to be repaid over 60 equal monthly installments
commencing on October 1999. The Company had an outstanding balance of
approximately $480,000 on the M&E Loan as of December 31, 1998.
 
  The Amended Credit Agreement and the M&E Loan require the Company to
maintain certain financial ratios and tangible net worth levels, among others.
The Company is not in compliance with the Amended Credit Agreement and M&E
Loan covenants. The bank has agreed to waive the events of default relating to
these covenants until January 1, 2000.
 
  Management believes that the Company's cash and cash equivalents together
with its credit facilities expected cash flows from operations will provide
sufficient funds to meet the Company's current and future cash requirements
and allow the Company to continue its marketing and development efforts. There
can be no assurance that cash flows will improve in an amount sufficient to
allow the Company to fund its current obligations and operating expense.
 
Subsequent Events
 
  On March 23, 1999, the Company entered into an agreement to purchase an
additional 16% of the equity of DNA-ADTECH of Madrid, Spain (the "Purchase
Agreement"), bringing the Company's total equity ownership to 81%. The
purchase price was based upon a similar valuation used in December 1997 when
the Company purchased 65% of ABSA. The Company will pay for this additional
16% equity position by issuing 598,198 shares of Common Stock. This
transaction is subject to the approval of the Company's stockholders and will
be submitted for approval at the Company's annual meeting.
 
  On March 23, 1999, the Company entered into an agreement with Mr. Boxall to
guarantee the debt of the Company to Mr. Guembe, in exchange for the right to
convert whatever amount Mr. Boxall pays to Mr. Guembe, into shares of the
Common Stock. If the Company determines that it will be unable to repay the
$990,000 due
 
                                      11
<PAGE>
 
on or before December 19, 1999, the Company shall give written notice of such
determination to Mr. Boxall and Mr. Boxall agreed to pay to Mr. Guembe any
remaining amount outstanding with any accumulated outstanding interest. If Mr.
Boxall is required to make any payment to Mr. Guembe, the debt shall bear
interest at the thirty day London Interbank Offered Rate, plus 2%, compounded
monthly, based on such rate as of the last day of such month and shall be due
and payable on March 1, 2001. If on January 1, 2001, there exists any
outstanding balance of the debt due Mr. Boxall, Mr. Boxall shall have the
right at any time after January 1, 2001 through March 1, 2001, to convert all
or part of the outstanding balance of such debt into shares of common stock at
a purchase price per share equal to the fair market value of the Common Stock
on the conversion date, but in no event less than $3.50 per share. The
guarantee agreement with Mr. Boxall is subject to the closing of the Purchase
Agreement.
 
  In February 1999, the Company established a joint venture with Trykko Pack
of Denmark and currently owns 82% equity position in a newly formed company
called MICROTECH A/S of Denmark. MICROTECH A/S will be managed by Steen
Pedersen, managing director of Trykko Pack. MICROTECH A/S has one employee and
a salesman located in England. The purpose of the company will be to: (1)
manage a technology licensing program for Europe of the Company's patented
Safety Susceptor product, (2) educate the European market on the Company's
microwave film products, (3) work with our licensees in Europe and (4)
establish Safety Susceptor as a European standard.
 
Recent Accounting Pronouncements
 
  In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 requires companies to recognize all derivative contracts
as either assets or liabilities in the balance sheet and to measure them at
fair value. If certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the timing of gain
or loss recognition on the hedging derivative with the recognition of (i) the
changes in the fair value of the hedged assets or liability or (ii) the
earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income
in the period of change. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999.
 
  Historically, the Company has not entered into derivative contracts either
to hedge existing risks or for speculative purposes. Accordingly, the Company
does not expect adoption of the new standard to affect its financial
statements.
 
Seasonal Revenues
 
  Historically, the Company experienced lower sales of metallized film to the
electronic capacitor market during the third quarter, particularly in July.
Based on market research conducted by the Company, it believes that demand for
the Company's other products, including microwave food packaging and
electronic capacitor products, do not experience similarly timed seasonal
variations and will, in the future, offset third quarter lower seasonal sales
to the capacitor market.
 
Inflation
 
  In 1998, there was no inflation for raw materials and unit selling prices.
 
Impact of the Year 2000 Issue
 
  The Year 2000 Issue refers to potential problems with computer systems or
any equipment with computer chips or software that use dates where the date
has been stored as just two digits (e.g. 98 for 1998). On January 1, 2000, any
clock or date recording mechanism incorporating date sensitive software that
uses only two digits to represent the year may recognize a date using 00 as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or
engage in similar business activities.
 
                                      12
<PAGE>
 
  The Company has addressed the Year 2000 Issue by conducting a review of its
information technology and non-information technology systems to determine the
extent of any Year 2000 problems. As a result of that review, the Company has
determined that its information technology systems as installed, including its
primary operating, manufacturing, procurement and accounting systems,
correctly define the Year 2000. The Company has also determined that several
non-information technology systems do not correctly define the Year 2000. Both
determinations have been independently verified by outside consultants who
have employed standard testing devices.
 
  The Company is currently investigating insurance coverage in connection with
potential problems as a result of the Year 2000 Issue.
 
  The Company has projected the cost to rectify the existing non-compliant
systems to be approximately $25,000, representing approximately 10% of the
Company's Information Technology budget for 1999. The Company anticipates that
these systems will be Year 2000 compliant by July 1999. No other Information
Technology projects have been deferred as a result of the Year 2000 project.
At this time, the Company cannot accurately assess the risks associated with
the non-compliance of its non-information technology systems. While it is
understood by the Company that such non- compliance could have a material
effect on the Company's business, results of operations or financial
condition, at this time management has not determined the entire potential
level of risk.
 
  In addition, the Company has developed a strategic plan to estimate the
potential risks related to third parties with whom it has relationships. The
third parties include suppliers and customers. Within the next several months
the Company will distribute inquiry letters to its major suppliers and
customers, which will be followed by subsequent internal evaluations of the
responses received. Upon learning that certain third parties are not Year 2000
compliant, the Company may be required to replace any suppliers who are not
able to correct their systems before the Year 2000. Management does not
currently have a plan for dealing with its customers whose systems are not
Year 2000 compliant.
 
  While the Company cannot predict what impact the Year 2000 problem may have
on third parties, it does not currently believe that it will incur material
costs in resolving potential Year 2000 problems with its customers and
suppliers.
 
  Until the Company's plan has been completed, the Company cannot accurately
assess the potential risks associated with non-compliance of its external
third parties. While it is understood by the Company that the potential effect
could have a material adverse effect on the Company's business, results of
operations or financial condition, at this time management has not determined
the entire potential level of risk.
 
  At the present time, the Company has not developed a contingency plan. The
Company will continue to monitor the need for a contingency plan based on the
results of its Year 2000 compliance strategic plan.
 
Business Factors
 
  This report may contain certain forward-looking statements that are subject
to certain risks and uncertainties. These statements include statements
regarding (i) the expected effects of the Company's products and products in
development; (ii) the Company's ability to realize economies of scale and to
expand its sales and its production capacity; (iii) the possibility and the
expected effect of acquisitions; (iv) the Company's Year 2000 readiness; and
(v) the Company's liquidity. Such statements are based on management's current
expectations and are subject to a number of factors and uncertainties that
could cause actual results to differ materially from those described in the
forward-looking statements. The Company cautions investors that there can be
no assurance that actual results or business conditions will not differ
materially from those projected or suggested in such forward-looking
statements as a result of various factors, including, but not limited to, the
following: uncertainties regarding the performance advantages of the Company's
products and products in development, market responses to pricing actions,
continued competitive factors and pricing pressures, the timely acceptance
 
                                      13
<PAGE>
 
of new products, inventory risk due to shifts in market demand, the
development of competing or superior technologies or products from other
manufacturers, many of which have substantially greater financial, technical
and other resources than the Company, dependence on key personnel, the
variation in the Company's operating results, technological change, the
Company's ability to develop and protect proprietary products and
technologies, the availability of additional capital on acceptable terms, if
at all, to fund expansion, and general economic conditions. For further
information, refer to the more specific risks and uncertainties discussed
throughout this report.
 
Item 7. Financial Statements and Supplementary Data
 
  See Item 13 below and the index therein for a listing of the financial
statements and supplementary data as filed as part of this report.
 
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
 
  None
 
                                   PART III
 
  Items 9 through 12 are incorporated herein by reference to the Company's
definitive proxy statement to be filed with the Securities and Exchange
Commission not later than 120 days after the close of the Company's fiscal
year ended December 31, 1998.
 
Item 13. Exhibits and Reports on Form 8-K
 
  (a) (1) Financial Statements. The consolidated financial statements required
to be filed in Item 8 herewith are as follows:
 
<TABLE>
<CAPTION>
                                                                      Page
                                                                   -----------
      <S>                                                          <C>
      Report of Independent Certified Public Accountants BDO
       Seidman, LLP...............................................     F-2
      Consolidated Balance Sheets as of December 31, 1998 and
       1997....................................................... F-3 to F-4
      Consolidated Statements of Operations for the years ended
       December 31, 1998 and 1997.................................     F-5
      Consolidated Statements of Stockholders' Equity for the
       Years Ended December 31, 1998 and 1997.....................     F-6
      Consolidated Statements of Cash Flows for the years ended
       December 31, 1998 and 1997.................................     F-7
      Notes to Consolidated Financial Statements.................. F-8 to F-34
</TABLE>
 
  (a) (2) The following exhibits are filed herewith:
 
<TABLE>
<CAPTION>
      Exhibit
      Number  Title
      ------- -----
      <C>     <S>
      21      Subsidiaries of the Company
      23      Consent of BDO Seidman, LLP
      27      Financial Data Schedule
</TABLE>
 
  (a) (3) The following exhibits are incorporated herein by reference:
 
                                      14
<PAGE>
 
    (i) The following exhibits were filed as Exhibits 10.3 and 10.4 to the
  Company's Form 10-QSB for the quarter ended September 30, 1998 (Commission
  file number 1-12230), and are incorporated herein by reference:
 
<TABLE>
<CAPTION>
      Exhibit
      Number  Title
      ------- -----
      <C>     <S>
      10nn    Modification No.2 to Revolving Credit and Term Loan Agreement,
              dated June 18, 1998, between the Company and National Bank of
              Canada
      10oo    Modification No.3 to Revolving Credit and Term Loan Agreement,
              dated September 23, 1998, between the Company and National Bank
              of Canada
 
    (ii) The following exhibit was filed as Exhibit 10.1 to the Company's
  Form 10-QSB for the quarter ended March 31, 1998 (Commission file number 1-
  12230), and is incorporated herein by reference:
 
<CAPTION>
      Exhibit
      Number  Title
      ------- -----
      <C>     <S>
      10mm    Lease between MARAP, S.A. and Alexander Boxall, S.A. dated
              December 15, 1996
 
    (iii) The following exhibits were filed as Exhibits 3b and 10ll to the
  Company's Form 10-KSB for the year ended December 31, 1997 (Commission file
  number 1-12230), and is incorporated herein by reference:
 
<CAPTION>
      Exhibit
      Number  Title
      ------- -----
      <C>     <S>
      3b      Amended and Restated Bylaws
      10ll    Modification No. 1 to Revolving Credit and term Loan Agreement,
              dated as of December 18, 1997, between the Company and National
              Bank of Canada
 
    (iv) The following exhibit was filed as Appendix C of the Company's
  Schedule 14(A) for the meeting held on May 22, 1997 (Commission file number
  1-12230), and is incorporated herein by reference:
 
<CAPTION>
      Exhibit
      Number  Title
      ------- -----
      <C>     <S>
      *10ii   1993 Stock Option Plan.
 
    (v) The following exhibits were filed on Exhibits 2.1 and 2.2 of the
  Company's Form 8-K filed with the Securities and Exchange Commission on
  January 5, 1998 (Commission file number 1-12230) and are incorporated
  herein by reference:
 
<CAPTION>
      Exhibit
      Number  Title
      ------- -----
      <C>     <S>
      10jj    Share Purchase Agreement, dated December 19, 1997, between the
              Company and Pedro Nunez-Barranco Guembe.
      10kk    Share Purchase Agreement, dated December 19, 1997, between the
              Company and Alexander Peter Boxall.
</TABLE>
 
    (vi) The following exhibit was filed as part of the Company's S-3
  Registration Statement (Commission file number 33-98400) declared effective
  by the Securities and Exchange Commission on May 13, 1996, and is
  incorporated herein by reference:
 
<TABLE>
<CAPTION>
      Exhibit
      Number  Title
      ------- -----
      <C>     <S>
      4a      Form of Warrant Agreement between the Company and American
              Securities Transfer, Incorporated with description of Warrant
              Certificate included.
</TABLE>
 
 
                                      15
<PAGE>
 
    (vii) The following exhibits, were filed with the Company's 10-KSB for
  the year ended December 31, 1994 (Commission file number 1-12230), and are
  herein incorporated by reference:
 
<TABLE>
<CAPTION>
      Exhibit
      Number  Title
      ------- -----
      <C>     <S>
      *10gg   1994 Formula Stock Option Plan.
       10hh   Security Agreement with Eastern Bank dated April 3, 1995.
</TABLE>
 
    (viii) The following exhibits were filed as part of the Company's SB-2
  Registration Statement (Commission file number 33-66324-B) declared
  effective by the Securities and Exchange Commission on September 10, 1993,
  and are incorporated by reference herein:
 
<TABLE>
<CAPTION>
      Exhibit
      Number  Title
      ------- -----
      <C>     <S>
        3a    Certificate of Incorporation.
        3c    Certificate of Agreement of Merger between Advanced Dielectric
              Technologies, Inc., a Massachusetts corporation ("Advanced
              Dielectric") and the Company, dated July 15, 1993.
        4a    Included in Exhibits 3a and 3b.
        4c    Form of Representative's Warrant Agreement with the Form of
              Warrant attached thereto.
        4d    Form of Warrant Agreement between the Company and American
              Securities Transfer, Incorporated (includes Specimen Warrant
              Certificate)
      *10q    Form of Employment Agreement between the Company and
              Glenn J. Walters.
      *10r    Form of Consulting Agreement between the Company and
              Gordon E. Walters.
       10s    Form of Employee Secrecy, Invention and Non-Competition Agreement
              between Advanced Dielectric Technologies, Inc. and certain
              employees.
      *10u    Collaboration Agreement between Advanced Dielectric Technologies,
              Inc. and Officine Galileo, S.p.A. ("Galileo"), dated December 19,
              1986 and amended May 31, 1988.
       10u    Collaboration Agreement between Advanced Dielectric Technologies,
              Inc. and Galileo, dated August 3, 1992.
       10v    Transfer of Technology Agreement between Advanced Dielectric and
              Centro Tecnologie Del Vuoto, dated June 18, 1993.
       10w    Securities Purchase Agreement between Advanced Dielectric,
              Glenn J. Walters, Printpack Enterprises, Inc. ("Printpack") and
              Gordon E. Walters, dated September 1992.
       10x    New Metallizer Agreement between Advanced Dielectric and
              Printpack, dated September 1992.
       10y    Purchase and Tolling Agreement between Advanced Dielectric and
              Printpack dated September 1992.
       10z    Lease between Advanced Dielectric and Condyne Realty Inc., f/k/a/
              CD-Tech Realty Trust, dated September 4, 1985 and modified June
              28, 1991.
       28a    Form of Agreement between the Representative and the Company's
              officers, directors and Stockholders with respect to the
              transferability of shares.
       28b    Form of Financial Advisory and Consulting Agreement between the
              Company and the Representative.
</TABLE>
 
  * These reports relate to a management control or compensatory plan or
arrangement.
 
    (b) Reports on Form 8-K.
 
  The Company did not file any Current Reports on Form 8-K during the three
months ended December 31, 1998.
 
                                      16
<PAGE>
 
                                  SIGNATURES
 
  In accordance with section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
 
                                       Advanced Deposition Technologies, Inc.
 
                                                 /s/ Glenn J. Walters
                                       By_____________________________________
                                                  Glenn J. Walters
                                        Chief Executive Officer and Treasurer
 
Date: April 15, 1999
 
  In accordance with the exchange act, this report has been signed below by
the following persons, on behalf of the registrant and in the capacities and
on the dates indicated.
 
<TABLE>
<CAPTION>
                    Name                               Title                 Date
                    ----                               -----                 ----
 <C>                                         <S>                        <C>
            /s/ Glenn J. Walters             Chairman of the Board,     April 15, 1999
  __________________________________________ Chief Executive Officer,
               Glenn J. Walters              and Treasurer
                                             (principal executive
                                             officer)
            /s/ Joseph P. Keller             Controller (principal      April 15, 1999
  __________________________________________ financial and accounting
               Joseph P. Keller              officer)
           /s/ Alexander P. Boxall           Director, President        April 15, 1999
  __________________________________________
             Alexander P. Boxall
           /s/ Charles R. Buffler            Director                   April 15, 1999
  __________________________________________
              Charles R. Buffler
             /s/ John J. Moroney             Director                   April 15, 1999
  __________________________________________
               John J. Moroney
             /s/ Robert M. Pozzo             Director                   April 15, 1999
  __________________________________________
               Robert M. Pozzo
</TABLE>
 
                                      17
<PAGE>
 
                     ADVANCED DEPOSITION TECHNOLOGIES, INC.
                                 AND SUBSIDIARY
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<S>                                                                  <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS..................         F-2
CONSOLIDATED FINANCIAL STATEMENTS:
  Balance sheets....................................................  F-3 to F-4
  Statements of operations..........................................         F-5
  Statements of stockholders' equity................................         F-6
  Statements of cash flows..........................................         F-7
  Notes to financial statements..................................... F-8 to F-22
</TABLE>
 
                                      F-1
<PAGE>
 
              REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
 
To the Stockholders and Board of Directors of
Advanced Deposition Technologies, Inc.
 
  We have audited the accompanying consolidated balance sheets of Advanced
Deposition Technologies, Inc. and subsidiary as of December 31, 1998 and 1997
and the related consolidated statements of operations, stockholders' equity
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
from material misstatement. An audit includes examining on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
  In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Advanced
Deposition Technologies, Inc. and subsidiary at December 31, 1998 and 1997,
and the results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.
 
                                     /s/ BDO SEIDMAN, LLP
 
Boston, Massachusetts
March 5, 1999
 
                                      F-2
<PAGE>
 
                     ADVANCED DEPOSITION TECHNOLOGIES, INC.
                                 AND SUBSIDIARY
 
                    CONSOLIDATED BALANCE SHEETS (NOTE 2(b))
 
<TABLE>
<CAPTION>
                                                                December 31,
                                                              -----------------
                                                                1998     1997
                                                              -------- --------
                                                               (In Thousands)
<S>                                                           <C>      <C>
ASSETS (Note 4)
CURRENT ASSETS:
  Cash and cash equivalents (Note 2(c))...................... $    411 $    919
  Investment in marketable securities (Notes 2(e) and 11)....       43      155
  Accounts receivable, net of allowances for doubtful
   accounts of $460,000 in 1998 and $135,000 in 1997 (Note
   9)........................................................    5,868    7,084
  Inventories (Note 2(f))....................................    4,252    3,347
  Prepaid expenses and other.................................      274       69
                                                              -------- --------
    Total current assets.....................................   10,848   11,574
                                                              -------- --------
PROPERTY AND EQUIPMENT, at cost (Notes 2(g), 4 and 5):
  Machinery and equipment....................................   12,683    8,286
  Furniture and fixtures.....................................      645      738
  Leasehold improvements.....................................      453      392
  Vehicles...................................................      189       51
  Software...................................................      165       99
  Equipment deposits.........................................      640      --
                                                              -------- --------
                                                                14,775    9,566
  Less--accumulated depreciation and amortization............    7,099    3,235
                                                              -------- --------
    Net property and equipment...............................    7,676    6,331
                                                              -------- --------
OTHER ASSETS, net of accumulated amortization (Notes 2(h), 3
 and 9)......................................................    5,426    6,038
                                                              -------- --------
    Total assets............................................. $ 23,950 $ 23,943
                                                              ======== ========
</TABLE>
 
 
 
          See accompanying notes to consolidated financial statements.
 
                                      F-3
<PAGE>
 
                     ADVANCED DEPOSITION TECHNOLOGIES, INC.
                                 AND SUBSIDIARY
 
              CONSOLIDATED BALANCE SHEETS (NOTE 2(b)) ( Continued)
 
<TABLE>
<CAPTION>
                                                               December 31,
                                                              ----------------
                                                               1998     1997
                                                              -------  -------
                                                              (In Thousands)
<S>                                                           <C>      <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Bridge financing (Note 4).................................. $   --   $ 1,000
  Due to financial institutions (Note 4).....................   3,589    3,709
  Accounts payable...........................................   4,347    4,092
  Accrued expenses...........................................     643      543
  Current maturities of long-term obligations (Note 4).......   1,764      525
                                                              -------  -------
    Total current liabilities................................  10,343    9,869
LONG-TERM OBLIGATIONS:
  Revolving line of credit (Note 4)..........................   1,136      974
  Long-term obligations, net of current maturities (Note 4)..   4,010    2,324
                                                              -------  -------
    Total liabilities........................................  15,489   13,167
                                                              -------  -------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY                    1,078      795
                                                              -------  -------
COMMITMENTS (Notes 5 and 6)
STOCKHOLDERS' EQUITY (Notes 7 and 14):
  Preferred stock, $.01 par value, authorized 1,000,000
   shares, issued and
   outstanding--none.........................................     --       --
  Common stock, $.01 par value, authorized 10,000,000 shares,
   issued 4,286,560 and 4,280,560, outstanding 4,253,950 and
   4,262,950 in 1998 and 1997, respectively..................      43       43
  Common stock purchase warrants.............................     --     1,594
  Additional paid-in capital.................................  11,177    9,581
  Accumulated deficit........................................  (3,848)  (1,153)
  Accumulated other comprehensive income (loss)..............      95      (19)
                                                              -------  -------
                                                                7,467   10,046
  Less treasury stock, 32,610 and 17,610 shares, at cost in
   1998 and 1997, respectively...............................     (84)     (65)
                                                              -------  -------
    Total stockholders' equity...............................   7,383    9,981
                                                              -------  -------
    Total liabilities and stockholders' equity............... $23,950  $23,943
                                                              =======  =======
</TABLE>
 
 
          See accompanying notes to consolidated financial statements.
 
                                      F-4
<PAGE>
 
             ADVANCED DEPOSITION TECHNOLOGIES, INC. AND SUBSIDIARY
 
               CONSOLIDATED STATEMENTS OF OPERATIONS (NOTE 2(b))
 
<TABLE>
<CAPTION>
                                                   Years ended December 31,
                                                  ----------------------------
                                                      1998           1997
                                                  -------------  -------------
                                                     (In Thousands Except
                                                   Share and Per Share Data)
<S>                                               <C>            <C>
REVENUES (Notes 2(k), 9 and 11):
  Product sales.................................. $      23,070  $     11,750
  Royalties, license and other...................           431           500
                                                  -------------  ------------
    Total revenues...............................        23,501        12,250
COST OF REVENUES.................................        15,714        10,102
                                                  -------------  ------------
  Gross profit...................................         7,787         2,148
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
 (Note 2(d)).....................................         7,855         1,782
RESEARCH AND DEVELOPMENT EXPENSES (Note 2(l))....           356           324
AMORTIZATION EXPENSE.............................           338           154
LOSS FROM IMPAIRMENT OF LONG-LIVED ASSETS (Note
 6)..............................................         1,108            --
                                                  -------------  ------------
    Operating loss...............................        (1,870)         (112)
                                                  -------------  ------------
OTHER INCOME (EXPENSE):
  Interest income................................           --             91
  Interest expense...............................          (810)         (274)
  Other income (expense), net....................           352           (63)
                                                  -------------  ------------
    Total other expense, net.....................          (458)         (246)
                                                  -------------  ------------
    Loss before income taxes and minority
     interest....................................        (2,328)         (358)
INCOME TAXES (Notes 2(i) and 8)..................            98             4
                                                  -------------  ------------
    Loss before minority interest................        (2,426)         (362)
MINORITY INTEREST IN NET INCOME OF SUBSIDIARY....           269             3
                                                  -------------  ------------
NET LOSS......................................... $      (2,695) $       (365)
                                                  =============  ============
NET LOSS PER COMMON SHARE (Note (2m)):
  Basic and diluted.............................. $       (0.63) $      (0.09)
                                                  =============  ============
</TABLE>
 
 
          See accompanying notes to consolidated financial statements.
 
                                      F-5
<PAGE>
 
                     ADVANCED DEPOSITION TECHNOLOGIES, INC.
                                 AND SUBSIDIARY
 
     CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES 2(b), 7 AND 14)
 
<TABLE>
<CAPTION>
                             Common Stock
                          --------------------
                                                Common                                    Accumulated
                                                Stock   Additional                           Other         Total
                          Number of    $.01    Purchase  Paid-in   Accumulated Treasury  Comprehensive Stockholders'
                           Shares    Par Value Warrants  Capital     Deficit    Stock    Income (loss)    Equity
                          ---------  --------- -------- ---------- ----------- --------  ------------- -------------
                                                   (In Thousands Except Number of Shares)
<S>                       <C>        <C>       <C>      <C>        <C>         <C>       <C>           <C>
BALANCE, December 31,
 1996...................  3,919,300     $42     $1,691   $ 9,289     $  (788)  $(1,127)      $--          $9,107
 Issuance of treasury
  stock in connection
  with purchase of
  business..............    280,000     --         --        --          --      1,030        --           1,030
 Expiration of IPO
  warrants..............        --      --         (35)       35         --        --         --             --
 Exercise of common
  stock purchase
  warrants..............     36,676       1        (43)      226         --        --         --             184
 Exercise of stock
  options...............     16,974     --         --         31         --        --         --              31
 Awards under 1997 stock
  award plan............     10,000     --         --        --          --         32        --              32
 Purchase of treasury
  stock warrants........        --      --         (19)      --          --        --         --             (19)
 Comprehensive loss:
 Net loss...............        --      --         --        --         (365)      --         --            (365)
 Other comprehensive
  loss..................        --      --         --        --          --        --         (19)           (19)
                          ---------     ---     ------   -------     -------   -------       ----         ------
  Total comprehensive
   loss.................        --      --         --        --          --        --         --            (384)
                          ---------     ---     ------   -------     -------   -------       ----         ------
BALANCE, December 31,
 1997...................  4,262,950      43      1,594     9,581      (1,153)      (65)       (19)         9,981
 Purchase of treasury
  stock warrants........        --      --          (9)      --          --        --         --              (9)
 Expiration of
  warrants..............        --      --      (1,585)    1,585         --        --         --              --
 Purchase of treasury
  stock.................    (15,000)    --         --        --          --        (19)       --             (19)
 Exercise of stock
  options...............      6,000     --         --         11         --        --         --              11
 Comprehensive income
  (loss):
 Net loss...............        --      --         --        --       (2,695)      --         --          (2,695)
 Other comprehensive
  income................        --      --         --        --          --        --         114            114
                          ---------     ---     ------   -------     -------   -------       ----         ------
  Total comprehensive
   loss.................        --      --         --        --          --        --         --          (2,581)
                          ---------     ---     ------   -------     -------   -------       ----         ------
BALANCE, December 31,
 1998...................  4,253,950     $43     $  --    $11,177     $(3,848)  $   (84)      $ 95         $7,383
                          =========     ===     ======   =======     =======   =======       ====         ======
</TABLE>
 
 
          See accompanying notes to consolidated financial statements.
 
                                      F-6
<PAGE>
 
                     ADVANCED DEPOSITION TECHNOLOGIES, INC.
                                 AND SUBSIDIARY
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (NOTES 2(b) AND 12)
 
<TABLE>
<CAPTION>
                                                 Years ended December 31,
                                                    --------------------------
                                                        1998          1997
                                                    ------------  ------------
                                                         (In Thousands)
<S>                                                 <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss.........................................      $(2,695)      $  (365)
  Adjustments to reconcile net loss to net cash
   provided by operating activities:
    Compensation expense relating to the issuance
     of common stock...............................          --             32
    Depreciation and amortization..................        1,396           700
    Provision for asset impairment.................        1,108           --
    Minority interest..............................          269             3
    Loss on sale of investments....................           14           --
    Changes in assets and liabilities, net of
     effects from purchase of ABSA:
      Accounts receivable..........................        1,183          (598)
      Inventories..................................         (735)          239
      Prepaid expenses and other...................         (197)           55
      Accounts payable.............................         (548)          510
      Accrued expenses.............................          302          (399)
                                                    ------------  ------------
        Net cash provided by operating activities..           97           177
                                                    ------------  ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment..............       (2,169)         (624)
  Decrease in investment in marketable securities..          --          1,085
  Proceeds from sale of investments................           82           --
  (Increase) decrease in other assets..............         (223)           37
  Purchase of ABSA, net of cash acquired...........          --         (3,187)
                                                    ------------  ------------
        Net cash used for investing activities.....       (2,310)       (2,689)
                                                    ------------  ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net borrowings (repayments) from bridge
   financing.......................................       (1,000)        1,000
  Net repayments from financial institutions.......         (120)         (177)
  Net proceeds under revolving line of credit......          162           794
  Borrowings of long-term obligations..............        2,651           456
  Proceeds from exercise of common stock purchase
   warrants, net of expenses.......................          --            184
  Proceeds from exercise of common stock options...           11            31
  Purchase of treasury stock.......................          (19)          --
  Purchase of treasury stock warrants..............           (9)          (19)
                                                    ------------  ------------
        Net cash provided by financing activities..        1,676         2,269
                                                    ------------  ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
 EQUIVALENTS.......................................           29            (8)
                                                    ------------  ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS..........         (508)         (251)
CASH AND CASH EQUIVALENTS, beginning of year.......          919         1,170
                                                    ------------  ------------
CASH AND CASH EQUIVALENTS, end of year.............       $  411        $  919
                                                    ============  ============
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                      F-7
<PAGE>
 
                    ADVANCED DEPOSITION TECHNOLOGIES, INC.
                                AND SUBSIDIARY
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. Operations
 
  Advanced Deposition Technologies, Inc. (the "Company") is engaged in the
business of manufacturing proprietary metallized films primarily for the
electronics and microwave food packaging industries.
 
  In December 1997, the Company acquired 65% of the common stock of Alexander
Boxall, S.A. ("ABSA"), a foreign corporation (see Note 3). ABSA is a
manufacturer of electronic capacitors used for lighting and motor
applications.
 
2. Significant Accounting Policies
 
  The accompanying consolidated financial statements reflect the application
of certain significant accounting policies, including those described below.
 
 (a) Estimates and Assumptions
 
  The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosures 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.
 
 (b) Principles of Consolidation
 
  The accompanying consolidated financial statements include the accounts of
the Company and its majority owned subsidiary Alexander Boxall, S.A. The
results of operations of ABSA are included for the period from December 19,
1997 (date of acquisition) to December 31, 1998. All significant intercompany
balances and transactions have been eliminated in consolidation.
 
 (c) Cash and Cash Equivalents
 
  The Company considers all investments purchased with original maturities of
less than three months to be cash equivalents. There were no cash equivalents
at December 31, 1998 and 1997.
 
 (d) Advertising Expenses
 
  Advertising expenses are charged to operations as incurred. Advertising
expense for years ended December 31, 1998 and 1997 was approximately $81,000
and $91,000, respectively.
 
 (e) Investment in Marketable Securities
 
  The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", which requires that debt and marketable equity securities
be classified as trading, available-for-sale or held-to-maturity. Available-
for-sale securities are reported in the balance sheet at fair value with
unrealized gains or losses included as a component of comprehensive income.
Realized gains and losses are recognized in the results of operations.
 
  As of December 31, 1998 and 1997, investments in marketable securities,
which are classified as available-for-sale and recorded at fair value which
approximate cost, consisted entirely of equity instruments.
 
 
                                      F-8
<PAGE>
 
                    ADVANCED DEPOSITION TECHNOLOGIES, INC.
                                AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 (f) Inventories
 
  Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                 1998    1997
                                                                ------- -------
   <S>                                                          <C>     <C>
   Raw materials............................................... $ 2,760 $ 1,812
   Work in process.............................................     303     731
   Finished goods..............................................   1,905   1,182
                                                                ------- -------
                                                                  4,968   3,725
   Less: reserve for obsolescence..............................     716     378
                                                                ------- -------
   Net......................................................... $ 4,252 $ 3,347
                                                                ======= =======
</TABLE>
 
  Work in process and finished goods include materials, labor and
manufacturing overhead.
 
 (g) Property and Equipment
 
  Property and equipment are stated at cost. The Company provides for
depreciation and amortization by charges to operations over the estimated
useful lives of property and equipment using the straight-line and units-of-
production methods as follows:
 
<TABLE>
<CAPTION>
                                                                   Estimated
   Classification                                                Useful Lives
   --------------                                               ---------------
   <S>                                                          <C>
   Machinery and equipment.....................................   10-15 years
   Furniture and fixtures......................................     5 years
   Leasehold improvements......................................  Terms of lease
   Vehicles....................................................    4-5 years
   Software....................................................    3-5 years
</TABLE>
 
 (h) Other Assets
 
  During 1996, the Company acquired several licenses which allow the Company
to manufacture and market products under certain patents which are being
amortized over 14 years (see Note 6). As described in Note 6, certain licenses
were written off in fiscal 1998. The Company capitalizes the costs of
obtaining patents and trademarks and is amortizing such costs over a five-year
period.
 
  Other assets consist of (in thousands):
 
<TABLE>
<CAPTION>
   Other assets                                                    1998   1997
   ------------                                                   ------ ------
   <S>                                                            <C>    <C>
   Goodwill (Note 3)............................................. $3,899 $3,415
   Licenses and patents..........................................  1,426  2,548
   Due from related party (Note 10)..............................    242    245
   Other.........................................................    463    128
                                                                  ------ ------
                                                                   6,030  6,336
   Less: accumulated amortization................................    604    298
                                                                  ------ ------
   Net........................................................... $5,426 $6,038
                                                                  ====== ======
</TABLE>
 
                                      F-9
<PAGE>
 
                    ADVANCED DEPOSITION TECHNOLOGIES, INC.
                                AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  Goodwill results from the excess of cost over fair value of net assets
acquired and is being amortized on a straight-line basis over 25 years. The
Company evaluates the recoverability and remaining life of its goodwill in
accordance with SFAS No. 121.
 
 (i) Income Taxes
 
  The Company provides for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Under the liability method specified by SFAS
No. 109, a deferred tax asset or liability is determined based on the
difference between the financial statement and tax basis of assets and
liabilities, as measured by the enacted rates assumed to be in effect when
these differences reverse.
 
 (j) Postretirement Benefits
 
  The Company does not have any obligations for postretirement benefits under
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than
Pensions", as it does not currently offer such benefits.
 
 (k) Revenue Recognition
 
  The Company recognizes revenues on its product sales upon shipment and on
royalties and license fees as earned.
 
 (l) Research and Development Expenses
 
  The Company charges research and development expenses to operations as
incurred.
 
 (m) Net Income (Loss) Per Common Share
 
  The Company follows Statement of Financial Accounting Standards ("SFAS") No.
128, Earnings per Share, issued by the Financial Accounting Standards Board,
which requires the Company to present its basic earnings per share and diluted
earnings per share, and certain other earnings per share disclosures for each
year presented. Basic earnings per share is computed by dividing income
available to common shareholders by the weighted average number of common
shares outstanding. The computation of diluted earnings per share is similar
to the computation of basic earnings per share except that the denominator is
increased to include the number of additional common shares that would have
been outstanding if the dilutive potential common shares had been issued. In
addition, the numerator is adjusted for any changes in income or loss that
would result from the assumed conversions of those potential shares.
 
  The weighted average number of common shares outstanding is summarized as
follows:
 
<TABLE>
<CAPTION>
                                                                 December 31
                                                             -------------------
                                                               1998      1997
                                                             --------- ---------
   <S>                                                       <C>       <C>
   Denominator for basic and diluted
    loss per share:
     Weighted average common shares outstanding............. 4,267,213 3,964,491
                                                             ========= =========
</TABLE>
 
  In 1998 and 1997, the Company had common stock options and warrants
outstanding, none of which were included in the diluted earnings per share
calculation since their effect would have been antidilutive.
 
                                     F-10
<PAGE>
 
                    ADVANCED DEPOSITION TECHNOLOGIES, INC.
                                AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
 (n) Financial Instruments
 
  The estimated fair value of the Company's financial instruments, which
include marketable securities, accounts receivable, accounts payable and notes
payable approximates their carrying value.
 
 (o) Foreign Currency Translation
 
  Assets and liabilities of the Company's foreign subsidiary are translated at
the rates of exchange at the balance sheet date, and related revenues and
expenses are translated at average exchange rates in effect during the period.
Resulting translation adjustments are excluded from net income and recorded as
a component of comprehensive income.
 
 (p) Long-Lived Assets
 
  The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of". SFAS 121 establishes accounting
standards for the impairment of long-lived assets and certain identifiable
intangibles to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of.
 
  The Company reviews the carrying values of its long-lived, identifiable
intangible assets and goodwill for possible impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may
not be recoverable. Any long-lived assets held for disposal are reported at
the lower of their carrying amounts or fair value less cost to sell. In fiscal
year 1998, the Company recorded an impairment loss related to certain licenses
as changes in circumstances indicated an impairment had occurred (see Note 6).
 
 (q) Comprehensive Income
 
  The Company adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income, ("SFAS No. 130") which establishes standards
for reporting and display of comprehensive income, its components, and
accumulated balances. Comprehensive income is defined to include all changes
in equity except those resulting from investments by owners and distributions
to owners. Among other disclosures, SFAS No. 130 stipulates that all items
that are required to be recognized under current accounting standards as
components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements (see Note
14).
 
 (r) Industry Segments
 
  The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("SFAS
No. 131"), which supercedes SFAS No. 14, "Financial Reporting for Segments of
a Business Enterprise". SFAS No. 131 establishes standards for the way that
public enterprises report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It
also establishes standards for disclosures regarding products and services,
geographic areas, and major customers. SFAS No. 131 defines operating segments
as components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance (see Note 13).
 
 (s) New Accounting Standard Not Yet Adopted
 
  In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 requires companies to recognize all
 
                                     F-11
<PAGE>
 
                    ADVANCED DEPOSITION TECHNOLOGIES, INC.
                                AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
derivative contracts as either assets or liabilities in the balance sheet and
to measure them at fair value. If certain conditions are met, a derivative may
be specifically designated as a hedge, the objective of which is to match the
timing of gain or loss recognition on the hedging derivative with the
recognition of (i) the changes in the fair value of the hedged assets or
liability or (ii) the earnings effect of the hedged forecasted transaction.
For a derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. SFAS No. 133 is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999.
 
  Historically, the Company has not entered into derivative contracts either
to hedge existing risks or for speculative purposes. Accordingly, the Company
does not expect adoption of the new standard to affect its financial
statements.
 
 (t) Reclassifications
 
  Certain balances in the 1997 financial statements have been reclassified to
conform to the 1998 presentation.
 
3. Acquisition
 
  Effective December 19, 1997, the Company acquired 65% of the outstanding
common stock of Alexander Boxall, S.A. ("ABSA"), a producer of lighting and
motor run capacitors for approximately $2,998,000 in cash, a secured
promissory note of $990,000 and 280,000 shares of the Company's stock with a
fair value of $1,030,400.
 
  The acquisition was recorded using the purchase method of accounting,
whereby the net assets acquired were recorded at their estimated fair values
and the excess of cost over the fair value of the net assets acquired of
approximately $3,528,000 was allocated to goodwill and is being amortized over
25 years.
 
  The consolidated statements of operations and cash flows for the years-ended
December 31, 1998 and 1997 include the results of operations and cash flows
for ABSA from December 19, 1997 through December 31, 1998.
 
  The unaudited pro forma combined results of operations of the Company and
ABSA for the year ended December 31, 1997, assuming that the acquisition had
occurred at January 1, 1997 and after giving effect to certain pro forma
adjustments are as follows (in thousands except per share data):
 
<TABLE>
<CAPTION>
                                                                      (Proforma)
   Years ended December 31,                                              1997
   ------------------------                                           ----------
   <S>                                                                <C>
   Revenue...........................................................  $25,422
   Net income........................................................  $   181
   Net income per share:
     Basic...........................................................  $  0.04
     Diluted.........................................................  $  0.04
</TABLE>
 
  On October 1, 1998, ABSA acquired 80% of the capital stock of Kidamai SDN
("Kidamai"), a capacitor assembler and distributor located in Kuala Lumpur,
Malaysia, for the cancellation of accounts receivable from product sales of
approximately $370,000. The acquisition was recorded using the purchase method
of accounting where the cost of the acquisition over the fair value of the net
assets acquired of approximately $370,000 was allocated to goodwill and is
being amortized over 10 years.
 
  The operations of Kidamai were not material and accordingly, proforma
information was not provided.
 
                                     F-12
<PAGE>
 
                    ADVANCED DEPOSITION TECHNOLOGIES, INC.
                                AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
4. Financing Arrangements
 
 (a) Revolving Line of Credit and Term Notes
 
  In June 1998, the Company amended their financing agreement with a bank (the
"Financing Agreement") dated July 8, 1996 which included a line of credit (the
"Line of Credit") and a term note (the "Term Note").
 
  The amended Financing Agreement extended the due date of the Line of Credit
and Term Note from July 8, 1999 to July 8, 2001, decreased the amount
available under the Line of Credit from $3,000,000 to $2,000,000, readvanced
the Term Note A principal from $2,600,000 to $2,750,000 and converted the
$1,000,000 bridge loan to Term Note B due July 8, 2001.
 
  The Line of Credit and the Term Notes are secured by all of the Company's
assets, mature on July 8, 2001, and are subject to a prepayment fee of 3% of
the then outstanding balance if prepaid by July 8, 1999 or 2% if prepaid
before July 8, 2000 or 1% thereafter.
 
  The Line of Credit allows the Company to borrow up to the lesser of
$2,000,000 or the borrowing base as defined in the Financing Agreement and
bears interest at a rate of 1.0% above the lender's prime lending rate (8.75%
at December 31, 1998). The Company is required to make monthly interest only
payments with the principal due on July 8, 2001. As of December 31, 1998 and
1997, borrowings under the Line of Credit were approximately $1,136,000 and
$974,000, respectively. The maximum amount of short-term borrowings under the
line of credit was approximately $1,668,000 and $973,000 for fiscal 1998 and
1997, respectively.
 
  The Company was readvanced the Term Note A in a new principal amount of
$2,750,000 under the amended Financing Agreement which bears interest at a
rate of 1.25% above the lender's prime lending rate (9.0% at December 31,
1998). The Term Note A is payable interest only until January 1, 1999 and then
in thirty monthly principal payments, with each of the first twenty-nine such
payments to be in the amount of $45,833 plus interest with the final principal
payment of $1,420,834 due on July 8, 2001. As of December 31, 1998 and 1997,
the balance due on the Term Note A was $2,750,000 and $1,845,000,
respectively. The current portion of Term Note A was $550,000 and $520,000 at
December 31, 1998 and 1997, respectively.
 
 (b) Term Note B
 
  In June 1998, the Company converted the bridge note of $1,000,000 borrowed
from a bank to a term note ("Term Note B"). The loan was used to fund the
acquisition of ABSA, using ABSA's stock as collateral. The Term Note B is
payable interest only until January 1, 1999 and then in twenty-nine monthly
installments of $16,667 plus interest with one final principal payment of
$516,667 due on July 8, 2001. The Term Note B bears interest at the bank's
prime rate plus 1.25% (9.0% at December 31, 1998) and is due July 8, 2001. As
of December 31, 1998 and 1997, the outstanding balance was $1,000,000 for both
the Term Note B and the Bridge Note, respectively.
 
 (c) M&E Loan
 
  In September 1998, the Company amended the Financing Agreement to obtain up
to $2,000,000 (the "M&E Loan") for the purchase of new equipment. The
principal amount of the M&E Loan cannot exceed 80% of the invoice price of the
new equipment and bears interest at a rate of 1.25% above the lenders prime
lending rate (9.0% at December 31, 1998). The principal amount outstanding on
the M&E Loan as of January 31, 1999 will be payable in sixty monthly
installments commencing October 1, 1999 and paid in full by October 1, 2004.
As of December 31, 1998 the balance outstanding was $480,000.
 
                                     F-13
<PAGE>
 
                    ADVANCED DEPOSITION TECHNOLOGIES, INC.
                                AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  The Financing Arrangement includes certain financial covenants which must be
maintained by the Company. Such financial covenants include a minimum tangible
net worth, a maximum debt to equity ratio, a debt service coverage ratio and a
minimum level of working capital. As of December 31, 1998, the Company was in
default of certain financial covenants. The Company has received written
notification from the lender which waives the event of default through January
1, 2000.
 
 (d) Note Payable
 
  In connection with its acquisition of ABSA, the Company entered into a note
agreement with a former shareholder of ABSA in the principal amount of
$990,000 with interest at 5.39%. The principal and interest are due on
December 19, 1999. If payment is not made within terms, the Company will
incur, at the option of the holder, a penalty of $340,000 or the return of
shares of ABSA equivalent to a 50% ownership providing the former shareholder
returns the $2,800,000 cash paid by the Company to acquire ABSA. The note has
been guaranteed by a director and shareholder of the Company and 35%
shareholder of ABSA (see Note 15).
 
 (e) Due to Financial Institutions
 
  ABSA receives cash in advance at a discount on specific accounts receivable
balances. The customers have agreements with the bank to make payments
directly to the bank. ABSA is indebted to the bank until the agreements are
paid in full. As of December 31, 1998 and 1997, the balance outstanding
related to these agreements was $2,446,000 and $3,142,000 respectively.
 
  The Company has other short term loans from financial institutions with
interest rates ranging from 4.6% to 5.5% with a total outstanding balance of
$1,143,000 and $567,000 as of December 31, 1998 and 1997, respectively.
 
 (f) Capital Leases
 
  The Company has also leased certain equipment under capital leases. As of
December 31, 1998 and 1997, the Company's outstanding obligations under the
leases were approximately $540,000 and $5,500, respectively. Included in
property and equipment is leased equipment having a net book value at December
31, 1998 and 1997 of approximately $520,000 and $15,000, respectively.
 
  As of December 31, 1998, the aggregate annual payments on long-term
obligations are as follows (in thousands):
 
<TABLE>
<CAPTION>
   Fiscal year                                                           Amount
   -----------                                                           ------
   <S>                                                                   <C>
   1999................................................................. $1,764
   2000.................................................................  1,400
   2001.................................................................  2,346
   2002.................................................................     96
   2003.................................................................     96
   Thereafter...........................................................     72
                                                                         ------
                                                                          5,774
   Less: current maturities.............................................  1,764
                                                                         ------
   Long-term liabilities................................................ $4,010
                                                                         ======
</TABLE>
 
                                     F-14
<PAGE>
 
                    ADVANCED DEPOSITION TECHNOLOGIES, INC.
                                AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
5. Commitments
 
 (a) Operating Leases
 
  The Company leases its facilities, vehicles and other equipment under
operating leases that expire through March 2004. The Company has an option to
purchase the land and facility at fair market value should the lessor offer
the facility for sale. ABSA's manufacturing operations in Spain are maintained
in a leased facility which is owned by the 35% shareholder of ABSA with the
lease expiring on December 31, 2006. Future minimum lease payments as of
December 31, 1998 are approximately as follows (in thousands):
 
<TABLE>
<CAPTION>
   Fiscal year                                                          Amount
   -----------                                                        ----------
   <S>                                                                <C>
   1999.............................................................. $  516,000
   2000..............................................................    492,000
   2001..............................................................    408,000
   2002..............................................................    408,000
   2003..............................................................    408,000
   Thereafter........................................................    732,000
                                                                      ----------
     Total........................................................... $2,964,000
                                                                      ==========
</TABLE>
 
  Rent expense included in the accompanying consolidated statements of
operations is approximately $438,000 and $346,000 for 1998 and 1997,
respectively.
 
 (b) Purchase Commitments
 
  The Company has a purchase commitment of approximately $1,595,000 for
capital equipment which is scheduled for delivery in the third quarter of
1999. In September 1998, the Company obtained a machinery and equipment loan
(see Note 4(c)) to finance the purchase. As of December 31, 1998, the Company
made payments related to this purchase commitment for machinery and equipment
of $640,000.
 
6. Agreement with Fort James Corporation
 
  During 1996, the Company was notified by Fort James Corporation ("Fort
James") formerly known as James River Corporation that the Company's Fuse
Susceptor Patents, used in the development of microwave food packaging
products, were potentially infringing upon Fort James's Seiferth Patents. So
as to avoid potential patent infringement litigation, the Company entered into
a Patent Assignment, Licensing and Supply Agreement (the "Fort James
Agreement") with Fort James during 1996. Under the Fort James Agreement, the
Company assigned its rights under certain patents related to microwave
products (the "Assigned Patents") to Fort James. In return, Fort James (1)
paid $1,200,000 in cash to the Company, (2) granted to the Company licenses to
utilize 27 patents, and (3) entered into a supply agreement whereby Fort James
agreed to purchase specified minimum quantities of metalized film from the
Company, subject to certain quality standards and other conditions, for a
period of five years.
 
  Pursuant to the patent assignment, Fort James will remit to the Company a
portion of the royalties it collects from licensees who produce products
covered under the assigned Patents. The Company pays a royalty for its sales
of products covered under patents included in the Fort James Agreement, except
for products covered under the Assigned Patents. Royalty expense for the years
ended December 31, 1998 and 1997 were $7,000 and $12,000, respectively. The
Fort James Agreement also grants to the Company the exclusive right to sell
home use products covered under the Assigned Patents.
 
                                     F-15
<PAGE>
 
                    ADVANCED DEPOSITION TECHNOLOGIES, INC.
                                AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  The Company relied on an independent appraiser of intellectual properties to
determine the financial value of all licenses granted under the Fort James
Agreement. The licenses were valued at $1,550,000 and were being amortized
over 14 years, the remaining life of the underlying patents.
 
  During the fourth quarter of fiscal 1998, the Company recorded an impairment
loss of approximately $1,075,000 included in operations related to the
writedown of the licenses for the sale of home use products, primarily
microwave cooking bags. Due to the termination of the distribution agreement
effective in the fourth quarter, a large decline in sales from approximately
$4,366,000 in 1997 to $13,000 in 1998, and no new distribution agreement
resulting in the inability to project future revenue, the Company recorded an
impairment loss to reduce the carrying value of the licenses related to home
use products to $0 at December 31, 1998. The Company also recorded a fourth
quarter charge of approximately $180,000 related to the write-off of the
microwave cooking bag inventory.
 
7. Stock Options and Warrants
 
  The Company has a stock option plan (the "Plan") under which employees,
including Directors who are employees, may be granted options to purchase
shares of the Company's common stock at not less than fair market value on the
date of the grant, as determined by the Board of Directors. The Plan also
allows for the issuance of nonqualified stock options to employees and
nonemployees at prices that are less than fair market value. Options granted
under the Plan are exercisable for up to a 10-year period from the date of
grant. The Company has 800,000 shares reserved for issuance under the Plan.
 
   The Company accounts for its stock-based compensation plans using the
intrinsic value method. Accordingly, no compensation cost has been recognized.
Had compensation cost for the Company's stock options been determined based on
the fair value method, using an option pricing model, in accordance with SFAS
No. 123, the Company's net loss and loss per share would have been increased
to the pro forma amounts indicated below:
 
<TABLE>
<CAPTION>
                                                               1998     1997
                                                             --------  -------
   <S>                                                       <C>       <C>
   Net loss (in thousands)
     As reported............................................ $ (2,695) $  (365)
     Pro forma.............................................. $ (2,822) $  (622)
   Net loss per common share:
    As reported:
     Basic and diluted...................................... $  (0.63) $ (0.09)
    Pro forma:
     Basic and diluted...................................... $  (0.66) $ (0.16)
</TABLE>
 
  The Company's weighted-average assumptions used in the pricing model and
resulting fair values were as follows:
 
<TABLE>
<CAPTION>
                                                          1998         1997
                                                       -----------  -----------
   <S>                                                 <C>          <C>
   Risk free rate.....................................  5.56%-6.66% 5.44%--6.66%
   Expected dividend yield............................     --           --
   Expected option life (in years)....................     10            7
   Expected stock price volatility....................    46.5%        46.5%
   Grant date fair value.............................. $2.09-$2.83  $2.25-$2.83
</TABLE>
 
                                     F-16
<PAGE>
 
                    ADVANCED DEPOSITION TECHNOLOGIES, INC.
                                AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  Stock options activity of the Company, including activity under the Plan,
for the years ended December 31, 1998 and 1997, are as follows:
 
<TABLE>
<CAPTION>
                                                                       Weighted
                                                                        Average
                                                  Number    Exercise   Exercise
                                                    of        Price      Price
                                                  Shares    Per Share  Per Share
                                                  -------  ----------- ---------
<S>                                               <C>      <C>         <C>
Outstanding at December 31, 1996................. 252,548  $0.27-$5.44   $2.35
  Granted........................................ 217,500    2.88-5.06    4.03
  Exercised...................................... (16,974)   0.27-2.75    1.82
                                                  -------  -----------   -----
Outstanding at December 31, 1997................. 453,074    0.27-5.44    3.15
  Granted........................................  52,000   2.81-3.38     3.36
  Exercised......................................  (6,000)        2.00    2.00
                                                  -------  -----------   -----
Outstanding at December 31, 1998................. 499,074  $0.27-$5.44   $3.19
                                                  =======  ===========   =====
</TABLE>
 
<TABLE>
<CAPTION>
                                                  Exercise   Weighted
                                                   Number   Price Range Average
Options Exercisable At Year-End                   of Shares  Per Share   Price
-------------------------------                   --------- ----------- -------
<S>                                               <C>       <C>         <C>
1997.............................................  292,074  $0.27-$5.44 $  2.77
1998.............................................  362,074  $0.27-$5.44 $  2.96
 
  As of December 31, 1998 and 1997, the Company had 300,926 and 346,926
shares, respectively, available for future grants of options under the Plan.
 
  All options, granted under the Plan during 1998 and 1997, were granted with
exercise prices equal to the fair market value of the Company's common stock
at the date of grant.
 
  The following table summarizes information about stock options outstanding
at December 31, 1998:
 
                                                     $0.27        $2.38   $4.00
                                                        to           to      to
Range of Exercise Prices:                            $2.00        $3.69   $5.44
Outstanding options:
  Number outstanding at December 31, 1998........  166,974      189,600 142,500
  Weighted average remaining contractual life
   (years).......................................      5.2          8.1     8.0
  Weighted average exercise price................  $  1.98      $  3.40 $  4.33
Exercisable options:
  Number outstanding at December 31, 1998........  154,974      149,600  57,500
  Weighted average remaining contractual life
   (years).......................................      5.1          7.8     7.5
  Weighted average exercise price................  $  1.98      $  3.40 $  4.33
</TABLE>
 
  As of January 1, 1996, the Company had 1,150,000 redeemable common stock
purchase warrants (The "IPO Warrants") outstanding. Two IPO Warrants entitled
the holder to purchase one share of common stock at $5.00 per share. In May
1996, the Company commenced a special exercise period during which each IPO
Warrant entitled the holder to purchase one share of common stock and to
receive one additional warrant (The "Class B Warrants") at no additional cost.
The Company received approximately $4,738,000 in net proceeds during the
special exercise period which ended in July 1996. Each Class B Warrant
entitles the holder to purchase
 
                                     F-17
<PAGE>
 
                    ADVANCED DEPOSITION TECHNOLOGIES, INC.
                                AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
one share of common stock at $5.00 per share and were to expire on May 12,
1998. The Company extended the expiration date of the Class B warrants to July
31, 1998. No B warrants were exercised during the extended period and all
1,044,425 warrants expired. As of December 31, 1997 the Company had 1,004,425
Class B Warrants outstanding. During 1998 and 1997, the Company purchased
70,000 and 40,000, Class B warrants, respectively. As of December 31, 1996 the
Company had 132,084 IPO Warrants outstanding exercisable at $5.00 per share.
During 1997, 73,352 IPO warrants were converted and the remaining 58,732
expired.
 
8. Income Taxes
 
  Domestic and foreign income (loss) before income taxes and minority interest
in net income of the consolidated subsidiary are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                  Years ended
                                                                 December 31,
                                                                 --------------
                                                                  1998    1997
                                                                 -------  -----
   <S>                                                           <C>      <C>
   Domestic..................................................... $(3,160) $(370)
   Foreign......................................................     832     12
                                                                 -------  -----
                                                                 $(2,328) $(358)
                                                                 =======  =====
</TABLE>
 
  The approximate tax effect of each type of temporary difference and
carryforward which gives rise to the Company's deferred tax (liability) asset
as of December 31, 1998 and 1997 is as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                  Deferred
                                                                (Liability)
                                                                   Asset
                                                               ---------------
                                                                1998    1997
                                                               ------  -------
<S>                                                            <C>     <C>
Depreciation and amortization................................. $ (946) $(1,377)
Net operating loss and tax credit carryforwards...............  2,046    1,320
Inventory and other reserves..................................    441      178
Other.........................................................     11      167
Valuation reserve............................................. (1,552)    (288)
                                                               ------  -------
Net........................................................... $   --      $
                                                               ======  =======
</TABLE>
 
  At December 31, 1998, the Company had Federal and state income tax loss
carryforwards of approximately $4,800,000 and $2,791,000, respectively. The
Company also has tax credit carryforwards of approximately $97,000, expiring
at various dates through 2011. The Tax Reform Act of 1986 contains provisions
that limit the net operating loss carryforwards available to be used in any
given year in the event of certain changes in ownership.
 
  The difference between income taxes provided at the Company's effective tax
rate and the Federal statutory rate was due to the effect of foreign taxes of
approximately $98,000 and $4,000 for the years 1998 and 1997, respectively.
 
9. Related Party Transactions
 
  Included in 1998 sales is approximately $3,579,000 in sales to five
companies owned by a director and shareholder of the Company and 35%
shareholder of ABSA. At December 31, 1998 the accounts receivable balances to
these companies totaled approximately $841,000.
 
 
                                     F-18
<PAGE>
 
                    ADVANCED DEPOSITION TECHNOLOGIES, INC.
                                AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
  Included in rent expense is rent for a leased facility owned by a director
and shareholder of the Company and 35% shareholder of ABSA of approximately
$168,000 and $14,000 for fiscal years 1998 and 1997, respectively.
 
  Included in other assets are amounts due from a director and shareholder of
the Company and 35% shareholder of ABSA of approximately $242,000 and $245,000
for the years ended December 31, 1998 and 1997, respectively.
 
  The Company obtains consulting services from a shareholder and former
director of the Company. Fees for services paid to this shareholder and former
director were approximately $20,000 and $10,000 for the years 1998 and 1997,
respectively.
 
10. Technology License Agreement with a Related Party
 
  The Company has licensed the design specifications and operational
technology of certain machinery to a stockholder for the purpose of
manufacturing and selling the machinery to authorized purchasers, as defined.
The agreement has automatic one-year renewal periods until terminated by
either party. There were no revenues recognized under this agreement in 1998
and 1997.
 
11. Concentration of Credit Risk
 
Statement of Financial Accounting Standards No. 105, "Disclosure of
Information About Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk," requires disclosure
of any significant off-balance-sheet and credit risk concentrations. Although
collateral is not required, the Company periodically reviews its accounts and
provides estimated reserves for potential credit losses.
 
 (a) Significant Customers
 
  Product sales to significant customers for the years ended December 31, 1998
and 1997 were as follows:
 
<TABLE>
<CAPTION>
                                                              Percentage of
                                                              Product Sales
                                                              ---------------
   Customer                                                    1998     1997
   --------                                                   ------   ------
   <S>                                                        <C>      <C>
   A.........................................................      0%      37%
   B.........................................................      9       12
</TABLE>
 
 (b) Export Sales
 
  Export sales as a percentage of revenues were made to the following
geographic regions in 1998 and 1997, respectively:
 
<TABLE>
<CAPTION>
   Region                                                             1998  1997
   ------                                                             ----  ----
   <S>                                                                <C>   <C>
   Europe............................................................  54%   14%
   South America.....................................................   6     3
   Far East..........................................................   3     4
   Middle East.......................................................   3   --
   Other.............................................................   2     3
</TABLE>
 
                                     F-19
<PAGE>
 
                    ADVANCED DEPOSITION TECHNOLOGIES, INC.
                                AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
12. Supplemental Disclosure of Cash Flow Information
 
  Cash paid during the year for (in thousands):
 
<TABLE>
<CAPTION>
                                                                  1998  1997
                                                                  ---- -------
   <S>                                                            <C>  <C>
   Interest...................................................... $734 $   255
   Income taxes.................................................. $ 98 $   --
 
  The accompanying consolidated financial statements include the following
noncash investing and financing activities (in thousands):
 
<CAPTION>
                                                                  1998  1997
                                                                  ---- -------
   <S>                                                            <C>  <C>
   Treasury stock issued in connection with the purchase of
    ABSA......................................................... $--  $ 1,030
   Treasury stock issued under stock award plan.................. $--  $    32
   Cancellation of accounts receivable in connection with the
    acquisition of Kidamai SDN................................... $370 $   --
   Net unrealized loss on marketable securities.................. $ 16 $   --
</TABLE>
 
13. Industry and Geographic Segments
 
  The Company operations are classified into two business segments: food
packaging applications and electronic capacitor applications.
 
  The following table shows sales, operating income (loss) and other financial
information by industry segment. The corporate column includes corporate
related items not allocated to industry segments (in thousands):
 
<TABLE>
<CAPTION>
                                   Food     Capacitor
                                 Packaging Applications Corporate Consolidated
                                 --------- ------------ --------- ------------
<S>                              <C>       <C>          <C>       <C>
December 31, 1998
Sales...........................  $ 4,917    $18,584     $  --      $23,501
                                  -------    -------     ------     -------
Operating income (loss).........  $(2,289)   $   723     $ (304)    $(1,870)
                                  =======    =======     ======     =======
Capital Expenditures............  $   100    $ 1,315     $  754     $ 2,169
Depreciation and Amortization...      314        778        304       1,396
Identifiable assets at December
 31, 1998.......................  $ 4,486    $16,552     $2,912     $23,950
                                  =======    =======     ======     =======
December 31, 1997
Sales...........................  $ 7,180    $ 5,070     $  --      $12,250
                                  -------    -------     ------     -------
Operating income (loss).........  $   331    $  (185)    $ (258)    $  (112)
                                  =======    =======     ======     =======
Capital Expenditures............  $   100    $   524     $  --      $   624
Depreciation and Amortization...      250        450        --          700
Identifiable assets at December
 31, 1997.......................  $ 3,340    $19,460     $1,143     $23,943
                                  =======    =======     ======     =======
</TABLE>
 
                                     F-20
<PAGE>
 
                    ADVANCED DEPOSITION TECHNOLOGIES, INC.
                                AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  The Company operated in the United States for all of 1998 and 1997, in Spain
since December 19, 1997 and in Malaysia since October 1, 1998. The following
table presents information by country based on where the revenues and expenses
were generated and where the asset was located:
 
<TABLE>
<CAPTION>
                                        United
                                        States    Spain  Malaysia Consolidated
                                        -------  ------- -------- ------------
<S>                                     <C>      <C>     <C>      <C>
December 31, 1998
Sales.................................. $ 8,242  $15,074  $  185    $23,501
                                        -------  -------  ------    -------
Operating income (loss)................ $(3,305) $ 1,460  $  (25)   $(1,870)
                                        =======  =======  ======    =======
Capital Expenditures................... $   928  $ 1,241  $  --     $ 2,169
Depreciation and Amortization..........   1,038      352       6      1,396
Identifiable assets at December 31,
 1998.................................. $11,749  $11,112  $1,089    $23,950
                                        =======  =======  ======    =======
December 31, 1997
Sales.................................. $11,874  $   376  $  --     $12,250
                                        -------  -------  ------    -------
Operating income (loss)................ $  (144) $    32  $  --     $  (112)
                                        =======  =======  ======    =======
Capital Expenditures................... $   533  $    91  $  --     $   624
Depreciation and Amortization..........     645       55     --         700
Identifiable assets at December 31,
 1997.................................. $14,745  $ 9,198  $  --     $23,943
                                        =======  =======  ======    =======
</TABLE>
 
14. Comprehensive Income
 
  Effective January 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). Upon adoption of this pronouncement foreign currency
adjustments of $(19,000) at December 31, 1997 were reclassified to accumulated
other comprehensive loss in the accompanying consolidated balance sheets.
 
  The components of other comprehensive income (loss) are as follows:
 
<TABLE>
<CAPTION>
                                                   Years ended December 31,
                                                   --------------------------
                                                       1998          1997
                                                   ------------  ------------
<S>                                                <C>           <C>
Foreign currency translation adjustments.......... $    130,000  $    (19,000)
Unrealized losses on investments in marketable
 securities.......................................      (16,000)          --
                                                   ------------  ------------
                                                   $    114,000  $    (19,000)
                                                   ============  ============
 
  The components of accumulated other comprehensive income (loss) are as
follows:
 
<CAPTION>
                                                         December 31,
                                                   --------------------------
                                                       1998          1997
                                                   ------------  ------------
<S>                                                <C>           <C>
Foreign currency translation adjustments.......... $    111,000  $    (19,000)
Unrealized losses on investments in marketable
 securities.......................................      (16,000)          --
                                                   ------------  ------------
                                                   $     95,000  $    (19,000)
                                                   ============  ============
</TABLE>
 
                                     F-21
<PAGE>
 
                    ADVANCED DEPOSITION TECHNOLOGIES, INC.
                                AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
15. Subsequent Events
 
  In March 1999, the Company reached a purchase Agreement, subject to
stockholder approval at the Company's annual meeting, to acquire an additional
16% of the outstanding common stock of ABSA for 598,198 shares of the
Company's common stock with the final purchase price to be determined when the
Agreement is approved The acquisition will increase the Company's ownership of
ABSA to 81%.
 
  In March 1999, the Company entered into a repayment agreement where the 35%
shareholder of ABSA and shareholder and director of the Company will repay the
total amount outstanding on the $990,000 note related to the ABSA acquisition
due December 19, 1999 on behalf of the Company. Any amount paid by the
shareholder will bear interest at the LIBOR rate plus 2% and become due on or
before March 1, 2001. If the Company has not paid by January 1, 2001, the
shareholder may elect to convert all or part of the outstanding balance into
shares of the Company's common stock at a conversion price per share equal to
the fair market value of the common stock on the conversion date, subject to a
minimum $3.50 per share conversion price. This agreement is subject to the
closing of the Purchase Agreement.
 
                                     F-22