SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM 10-KSB

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

                    For the fiscal year ended December 31, 1997

                [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                         Commission file No. 0-14119-NY

                        POLYMER RESEARCH CORP. OF AMERICA
                 (Name of small business issued in its charter)

         NEW YORK                                             11-2023495
(State or other jurisdiction of                     (IRS Employer Identification
incorporation or organization)                                  Number)

    2186 Mill Avenue, Brooklyn, NY                               11234
(Address of principal executive offices)                      (Zip Code)

Issuers telephone number including area code: (718) 444-4300

Securities registered pursuant to Section 12(b) of the Act:
                                      NONE

Securities registered pursuant to Section 12(g) of the Act:

                 4,000,000 shares of $.01 par value Common Stock

Check whether the issuers: (1) filed all reports required to be filed by Section
13 or 15(d) of the  Exchange  Act of 1934 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  X      No
   ----       ----

Registrant's revenues for its most recent fiscal year - $5,448,272

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure  will be contained,  to
the best 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.  Yes  X   No
                      ----    ----

The  aggregate  market  value of  voting  stock  held by  non-affiliates  of the
Registrant at February 18, 1998 was  approximately  $2,415,285 based on the last
sale price of such stock.

As of February 18, 1998,  the  Registrant  had 1,488,711  shares of Common Stock
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      NONE

                                       -1-

<PAGE>



ITEM 1 - BUSINESS

Polymer  Research Corp. of America ("the  Company") was  incorporated  under the
laws of New York  State in 1963.  It is  principally  engaged  in  research  and
development  in polymer  chemistry,  on a contract  basis,  particularly  in the
application of chemical "grafting," i.e., techniques for modification of organic
and  inorganic  substances.  The Company also  manufactures  and sells  products
arising from research activities and textile printing inks.

During 1997,  research  revenues and products sales accounted for 77 percent and
23 percent of the Company's net revenues, respectively.

For a detailed breakdown of segments of the Company's revenues,  income, capital
expenditures  and  identifiable  assets,  see Note 14 of Notes to the  Financial
Statements.

RESEARCH AND DEVELOPMENT CONTRACT WORK

The  Company's  principal  business is that of  research  and  development  on a
contract basis for other companies in the field of polymer chemistry,  i.e., the
chemical creation and use of polymers.  "Polymers" are essentially  compounds of
high molecular weight, such as plastics and resins.

Polymers result from chemical reactions of compounds with low molecular weights,
called  "monomers," which react to form a polymer.  Generally,  a polymerization
reaction (i.e.,  the chemical  creation of a polymer) entails the application of
heat to a solution  containing the  appropriate  monomers,  in the presence of a
catalyst; the result of the reaction can include one or more kinds of polymers.

The Company owns several patented processes for chemical "grafting"  technology.
Chemical  "grafting"  refers to processes by which surfaces are bonded together,
or  a  coating  is  affixed  to  a  surface,   or  in  depth,   through  various
polymerization reactions.

Chemical  "grafting"  is done by treating a surface  with one or more  solutions
containing monomers,  polymers and/or other chemicals.  By using heat, catalysts
and/or other appropriate techniques,  small "whiskers" grow on the surface being
treated. These "whiskers" are generally polymers which include in their chemical
makeup  molecules that remain part of the surface being treated.  The "whiskers"
can  themselves  form a protective  coating on a surface or join the  "whiskers"
from another  surface thus bonding the two surfaces  together.  Alternately,  by
suitable  methods,  grafting can take place in depth  throughout the body of the
substrate, i.e. the product to be grafted.



                                       -2-

<PAGE>



By using  chemical  "grafting"  techniques,  the  Company  can form a  permanent
scratch and corrosion-resistant  protective coating on plastics, rubber, metals,
and other substances.  Based upon the Company's  research,  management  believes
that there are many other practical  applications of these  techniques that have
not yet been fully developed or discovered.

Research and development  contract work for specific application of its chemical
"grafting"   techniques   has  been  done  for   pharmaceutical   companies  and
manufacturers of industrial equipment,  tires, packaging material,  pipes, tubes
and plastic  films,  and other  enterprises.  The Company  continues to seek and
obtain such research and development contract work.

A majority of the Company's research and development work in chemical "grafting"
is done for customers in the private  sector.  The Company  markets its research
and  development  services by contacting  businesses  which might have a use for
chemical  "grafting."   Typically  the  Company  and  the  prospective  customer
determine the possible  application of chemical "grafting" in which the customer
has an  interest.  The  Company  then  submits  a  research  proposal  based  on
specifications  provided  by  the  prospective  customer.  If  the  proposal  is
accepted, or if an acceptable proposal is negotiated,  the Company enters into a
contract with the customer and commences the research that is required.

A majority of the Company's research and development contracts are for specified
periods of time. Most such contracts extend for a period of three to four months
and are  renewable.  The  remainder of the  Company's  research and  development
contract work is done either on a lump sum or month-to-month basis.

Research  revenue  earned  from  foreign  customers  outside  the United  States
aggregated  $840,000 for 1997,  representing  approximately  20% of total annual
research revenues.

Almost all of the research and development contracts provide that if the Company
successfully  develops a patentable  new process  while working on the contract,
the Company  will assign  patent  rights to the  customer who then will have the
right to use that process.  This right generally extends only for uses which the
Company was hired to do the research,  and in some instances,  is dependent upon
the customer making specified payments to the Company. The Company believes that
these  provisions  in its  contracts  are  necessary  and have not  unreasonably
inhibited the Company's research and development projects for other customers.

The  Company  employs 7 in-house  sales  persons  plus 2 persons in  training to
market its research and development  contracts,  primarily through bulk mailings
to targeted potential customers.

To date,  all of the  Company's  research  and  development  services  have been
related to contracts for customers.



                                       -3-

<PAGE>


PRODUCTION

The  Company  manufactures  formulations  resulting  from  research  work  as an
accommodation for the companies for whom the research work was done.

The Company also has,  since its  inception,  produced and sold color inks,  and
components  thereof.  These  products  are used by  textile  businesses  for the
printing of textiles.

The manufacture of textile inks is essentially a process of mechanically  mixing
solvents,  resins,  emulsions,  gums, oils and pigments to produce a colored ink
which can be printed  onto  cloth.  The  Company  owns and  operates  the mixing
machinery for this manufacturing  process and acquires the required  ingredients
from a variety of  sources.  The  Company  is not  dependent  upon a  particular
supplier for the  ingredients.  The Company's  textile inks are solvent-free and
non-polluting.

During 1997,  1996 and 1995,  no one customer of the Company  accounted for more
than 5% of its sales of formulation products or textile inks. The Company has no
long-term   contracts   with  its  customers  for  textile  inks  and  maintains
approximately  a one-month  supply of the  ingredients  for the textile  inks in
inventory.  The Company  fills 95% of all textile ink orders within two business
days after their receipt.

The Company's  sales of textile inks are dependent  upon the decision of textile
companies as to whether they will dye or print their fabrics. Such a decision is
primarily based on fashion trends,  with one-color  fabrics requiring dyeing and
multi-colored fabrics requiring printing.  However,  these trends have not had a
material  adverse  effect on the  Company's  revenues  because  the  Company has
maintained a reliable customer base in the United States.  The sales of printing
inks has not been a significant source of revenues or profits for the Company.

The Company employs 1 in-house salesperson to sell its textile inks. The Company
markets its textile  inks to the United  States and foreign  customers.  Foreign
customers account for less than 5% of the Company's textile ink sales.

EMPLOYEES AND EMPLOYEE RELATIONS

As of December 31, 1997, the Company had 52 full-time  employees.  The President
and the 18 other scientists in the Company's Research  Department are engaged in
research and  development.  The  Production  Department  has 4 employees who are
engaged in the production of items arising from research and textile inks. There
are 10 employees in the sales and marketing departments.  In addition, there are
15 clerical employees and 4 maintenance employees.

The Company's  technical staff sign nondisclosure  agreements whereby they agree
to keep the technical information and processes of the Company confidential.  In
those agreements,  such technical personnel also agree to unconditionally assign
to the Company all techniques and inventions developed by them in furtherance of
or related to Company projects.


                                       -4-

<PAGE>


None of the Company's employees are members of a labor union. There have been no
strikes or work  stoppages and the Company  believes its employee  relations are
satisfactory.

COMPETITION

The fields in which the Company does business are highly competitive.

In its contract research and development business, the Company competes with the
in-house  research and  development  staffs of its customers  and  scientists at
educational  institutions  and foundations who will do private grant research on
processes to produce materials with  characteristics of the types desired by the
Company's customers.  The Company also faces potential competition from research
and development  companies which are substantially  larger than the Company, and
various private laboratories, although the Company believes that it is presently
the only Company doing contract  research and  development  work in the field of
chemical  "grafting" for other companies.  The Company's  "grafting"  techniques
include the use of innocuous or mild non-alkaline and non-acidic  chemicals.  In
addition,  the  Company's  method  of  grafting,  by use of  chemicals,  is less
expensive than other methods such as gamma-ray grafting.

In its textile  ink  business,  the Company  faces  intense  competition  from a
variety  of  competitors,  many  of  whom  are  substantially  larger  and  have
significantly  greater resources,  reputations and marketing abilities than does
the Company, and the Company is not a significant factor in this business.

ENVIRONMENTAL CONSIDERATION

The Company  does not believe  that its  operations  are  adversely  affected by
existing  environmental  regulations.  The Company's  primary waste products are
non-toxic and  non-corrosive  such as wood, paper and cardboard and are disposed
of by a private  sanitation  company.  The small  amount of  chemicals  that the
Company disposes of are sealed in non-corrosive  containers and are removed from
the premises by a company that disposes of corrosive waste.

PATENTS

The Company's President and other employees of the Company have assigned a total
of 16 United  States  patents  to the  Company,  9 of which  have  expired.  The
assigned patents,  which cover the basic grafting  process,  were issued between
1968 and  1996.  Each  patent  is  effective  for 17 years  from the date of its
issuance.

Management  can give no  assurance  that any of the  patents  which the  Company
possesses  or  might  possess  in  the  future,   will  be  enforceable  or,  if
enforceable,  will  provide the Company or the holder  thereof with an advantage
over its competitors.


                                       -5-

<PAGE>


ITEM 2. PROPERTY

The Company's offices, research and development and manufacturing facilities are
located  in a 64,000  square  foot  three-story  building  at 2186 Mill  Avenue,
Brooklyn,  New York.  On June 4, 1990,  the Company  purchased  the building and
adjoining  property.  The Company had previously  leased this facility under the
terms of a long-term  operating  lease.  The purchase  price of the property was
$3,000,000  of  which  the  Company  paid  $500,000  and  granted  a  $2,500,000
seller-financed mortgage, which was renegotiated during 1996. Under the terms of
the renegotiated mortgage the Company made an $800,000 principal installment and
paid a $45,000 renegotiation fee. (See Note 6 of Notes to Financial Statements).

The Company  utilizes the space in the following  manner:  approximately  11,000
square  feet is devoted to office  space;  approximately  10,000  square feet is
devoted to  production  of items  resulting  from  research  and  textile  inks;
approximately   35,000  square  feet  is  devoted  to  research  and  laboratory
facilities and 8,000 square feet is devoted to warehousing inventory.

The Company  believes  that its facility is adequate  for its current  needs and
those of the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

The Company is a defendant in certain  lawsuits which arose in the normal course
of the  Company's  business.  In the opinion of  management  the  allowance  the
Company has provided is sufficient  to cover the potential  damages and expenses
that may be  incurred  in these  proceedings,  and they will not have a material
adverse effect on the Company.

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

During the fourth  quarter of 1997,  no matters were  submitted to a vote of the
Company's security holders.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
        SHAREHOLDER MATTERS

The Company's Common Stock has traded on the National  Association of Securities
Dealers  Automated   Quotation  System  ("NASDAQ")  small  capital  market.  The
following table sets forth the high and low bid prices for the periods indicated
where the Common Stock is traded under the symbol PROA. The indicated prices are
interdealer  prices without retail markups,  markdowns or commissions and do not
necessarily  represent  actual sales.  The limited  amount of sales within these
ranges should not be interpreted to indicate that an established  trading market
exists  for  the  shares  of  Common  Stock,  nor do  these  prices  necessarily
accurately  reflect the true value of such shares. The prices indicated have not
been adjusted for stock dividends and stock splits referred to below.


                                       -6-

<PAGE>


                                                              Bid Prices
                                                         ---------------------
    Quarter                                              LOW              HIGH
    -------                                              ---              ----
     1997
October - December                                      2-1/8             3
July - September                                        2                 2-5/16
April - June                                            2                 2-1/2
January - March                                         2-1/2             3-7/8

     1996
October - December                                      2                 2-5/8
July - September                                        2-5/16            3-1/4
April - June                                            3-5/8             5-1/4
January - March                                         3-5/8             4-3/4

DIVIDEND POLICY

The  Company  has  paid  no  cash  dividends  to  its  stockholders   since  its
incorporation and has no present intention to do so. The payment of dividends in
the future will be determined  by the Board of Directors  based on the Company's
earnings,  financial  condition,  capital  requirements and other factors at the
time.

On March 20, 1997 the Company  declared a 5% stock dividend to  shareholders  at
April 1, 1997,  paid April 8, 1997.  The  transaction  was valued based upon the
closing market price of the Company's stock on the day prior to the declaration.
(See Note 9 of Notes to Financial Statements).

On March 1, 1996 the Company  declared a 10% stock dividend to  shareholders  at
March 15, 1996,  paid March 29, 1996. The  transaction was valued based upon the
closing market price of the Company's stock on the day prior to declaration (See
Note 9 of Notes to Financial Statements).

On February 21, 1995 the Company  declared a 10% stock dividend to  shareholders
at March 6, 1995, paid March 20, 1995. The transaction was valued based upon the
closing market price of the Company's stock on the day prior to the declaration.
(See Note 9 of Notes to Financial Statements).

On June 6, 1995 the Company  declared a 5 for 4 stock split effected in the form
of a 25% stock  dividend,  to its  shareholders at June 19, 1995 and distributed
June 27, 1995. (See Note 10 of Notes to Financial Statements).

On July 20, 1995 the Company adopted a Shareholders Rights Plan. The Rights Plan
provides for the issuance of one stock  right,  entitling  the holder to buy one
share of  common  stock  at a price of $25  (subject  to  adjustment),  for each
outstanding  share  of the  Company's  common  stock.  The  rights  will  become
excersizable  only if an "acquiring  party" (as defined) acquires or announces a
tender offer to acquire 15% or more of the Company's  common  stock.  The rights
expire July 31, 2005 (See Note 11 of Notes to Financial Statements).


                                       -7-

<PAGE>


On March 2, 1998, the Company  declared a 5% stock dividend to  shareholders  at
March  23,  1998,  payable  April 2,  1998  (see  Note 17 of Notes to  Financial
Statements).

As of February 18, 1998 there were 1,488,711 shares outstanding, which were held
by  1,012  shareholders,  276  shareholders  of  record  and an  additional  736
unregistered shareholders.

ITEM 7.  MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Revenue Analysis
                                         Year Ended December 31,
                                         -----------------------
                                                             Percentage of
                              ($) In Thousands               Total Revenues
                          ------------------------      -----------------------
                           1997     1996     1995        1997     1996     1995
                          ------   ------   ------      ------   ------   ------
Research                  $4,214   $4,326   $4,608       77.3%    85.2%    89.0%
Production                 1,234      752      571       22.7     14.8     11.0
                          ------   ------   ------      -----    -----    -----
Total Revenues            $5,448   $5,078   $5,179      100.0%   100.0%   100.0%
                          ======   ======   ======      =====    =====    =====

1997 v. 1996

Total revenues increased $370,000 or 7% from $5,078,000 in 1996 to $5,448,000 in
1997.  Research  revenues  decreased  $112,000  or 3% while  production  revenue
increased $482,000 or 64% from 1996 to 1997.

The decrease in research was primarily  attributable  to continuing  turnover of
personnel in the marketing department.

The increase in production  sales was  primarily the result of increased  demand
resulting  from  research  findings for  customers in prior years and  increased
demand from the industry for polymer coatings.

The  rate of  inflation  has not had a  material  impact  upon  the  results  of
operations.


                                       -8-

<PAGE>


1996 v. 1995

Total revenues decreased $100,000 or 2% from $5,179,000 in 1995 to $5,079,000 in
1996.  Research  revenues  decreased  $281,000  or 6% while  production  revenue
increased $181,000 or 32.0% from 1995 to 1996.

The  decrease in  research  revenue was  primarily  attributable  to turnover of
personnel. During the latter part of 1995 and early 1996 several important sales
department people left the Company. Their replacements were unable to offset the
decrease in revenue generated by these former employees.

The increase in production  sales was  primarily the result of increased  demand
resulting  from  research  findings for  customers in prior years and  increased
demand from the building industry for polymer coatings.

The  rate of  inflation  has not had a  material  impact  upon  the  results  of
operations.

Cost of Revenues Analysis

                                         Year Ended December 31,
                                         -----------------------
                                                               Cost as a
                                                             Percentage of
                              ($) In Thousands               Total Revenues
                          ------------------------      -----------------------
                           1997     1996     1995        1997     1996     1995
                          ------   ------   ------      ------   ------   ------
Research                  $1,002   $1,017   $1,311      18.4%    20.0%     25.3%
Production                 1,018      623      505      18.7     12.3      12.8
                          ------   ------   ------      ----     ----      ----
Total cost of
 revenues                 $2,020   $1,640   $1,816      37.1%    32.3%     35.1%
                          ======   ======   ======      ====     ====      ====

The cost of research  revenues for 1995, set forth above,  have been adjusted to
exclude sales salaries,  which have been  reclassified  to selling,  general and
administrative expenses.

1997 v.1996

The cost of revenues as a percentage  of sales  increased  from 32.3% in 1996 to
37.1% in 1997.  The  increase  in cost of  revenues  is  primarily  caused by an
increase in the percentage of product  sales,  which have a higher cost of sales
than research revenue. Production sales as a percentage of total sales increased
to 22.7% in 1997 compared to 14.8% in 1996.

1996 v. 1995

The cost of revenues as a percentage  of sales  decreased  from 35.1% in 1995 to
32.3% in 1996. The primary cause is decreased labor costs.


                                       -9-

<PAGE>


Selling, General and Administrative Expenses Analysis

                                         Year Ended December 31,
                                         -----------------------
                                                             Expenses as a
                                                             Percentage of
                              ($) In Thousands               Total Revenues
                          ------------------------      -----------------------
                           1997     1996     1995        1997     1996     1995
                          ------   ------   ------      ------   ------   ------
Selling, General &
Administrative Expenses   $2,902   $2,898   $2,491       53.2%    57.1%    48.1%
                          ======   ======   ======       ====     ====     ====

Selling,  general and  administrative  expenses for 1995, set forth above,  have
been adjusted to include sales salaries,  which were previously charged to costs
of research revenues.

1997 v. 1996

Selling,  general and administrative  expenses increased $4,000 during 1997, but
decreased as a  percentage  of sales,  from 57.1% in 1996 to 53.2% in 1997.  The
Company's 7% sales increase in 1997 was supported by slightly  increased support
staff. In addition, legal proceeding expenses dropped from 1996 to 1997.

1996 v. 1995

Selling,  general  and  administrative  expenses,  as  a  percentage  of  sales,
increased to 57.1% in 1996,  as compared to 48.1%  during 1995.  The increase is
attributed  to  increased  support  salaries  and  related  expenses,  increased
insurance costs, and increased  travel expenses.  In addition,  legal proceeding
expenses increased in 1996 as compared to1995.

CAPITAL RESOURCES AND LIQUIDITY


Cash has increased  from $709,170 at December 31, 1996 to $1,367,008 at December
31, 1997. During 1997 many of the Company's Certificates of Deposits matured and
were  transferred  to interest  bearing  savings  accounts to avoid locking into
longer term cash  investments at low interest rates.  (See the statement of cash
flows for a more detailed analysis of opening versus closing cash).

Cash is generated and used by the Company  through its  operations.  Neither the
issuance of stock nor the acquisition of debt was in 1997, nor expected to be in
1998, significant sources of cash.

In an attempt to secure a better,  yet safe,  return on excess cash,  management
has elected to invest  certain  cash  amounts in  marketable  securities.  These
securities  include U.S.  Government  and New York State Mutual Bond Funds.  The
Company  closely  monitors  these   investments   which  are  subject  to  price
fluctuation (See Note 2 to Financial Statements).


                                      -10-

<PAGE>


There are no known  demands  for cash  related to capital  expenditures  seen as
imminent in the upcoming three years based on stable sales. Capital expenditures
anticipated in the next year are  anticipated  to approximate  those in the past
three years (see above).

The Company's  cash position at December 31, 1997 is deemed  sufficient to cover
any  unforeseen  sales  downturn  as it is equal to  approximately  6 months  of
selling, general and administrative expenses. Over both the long and short term,
liquidity will be the direct result of sales.

The ratio of current assets to current liabilities at December 31, 1997 was 2.95
to 1.0 as compared to 2.35 to 1.0 at December 31, 1996.

GENERAL DISCUSSION

Cash flow of the Company is a direct  result of net income and net cash provided
from  operating  activities.  Credit  extended  by the  Company  in the  form of
receivables and received in the form of payables has not had and will not have a
significant impact on cash flow.

Cash flow from  financing  and  investing  activities is not expected to have an
impact on cash flow in the next 1 to 2 years.  However, the Company is preparing
for the building mortgage balloon payment of $1,400,000 due on June 1, 2000 (see
Note 6 of Notes to the Financial Statements). The Company intends to provide for
this payment by accumulating cash prior to the payment due date.

No significant  changes to operating  expenses are anticipated within the next 1
to 3 years.

SEGMENT DISCUSSION

The Company is primarily in the business of research sales.  The sale of textile
inks and chemical products is an accommodation to research  customers and is not
seen as a  segment  that  could  stand  on its own as an  independent  business.
Availability of production of research  breakthroughs is an important  marketing
tool of the Company to its research customers.


                                      -11-

<PAGE>


ANALYTIC REVIEW OF QUARTERLY RESULTS

Gross profit for the fourth quarter decreased  substantially from the average of
the prior three  quarters.  Production  sales,  which yield a lower gross profit
than research, increased in the fourth quarter.

Selling,  general and  administrative  expenses  increased  significantly in the
fourth quarter  resulting from increased legal  proceedings  expenses and normal
year-end  expenses  including bonuses and holiday expenses as well as travel and
entertainment expenses in connection with increased year-end selling efforts.

                          3/31/97        6/30/97        9/30/97       12/31/97
                          -------        -------        -------       --------
Total revenue          $ 1,380,980    $ 1,450,000    $ 1,272,483    $ 1,344,809
Cost of revenue            492,783        492,366        405,998        629,176
Gross profit               888,197        957,634        866,485        715,633
SG&A expenses              660,357        746,822        657,340        837,955
Income (loss) from
 operations                227,840        210,812        209,145       (122,322)
Other expenses             (22,383)       (22,556)       (23,020)       (21,861)
Pre-tax income (loss)      205,457        188,246        186,125       (144,183)
Income tax expense
 (benefit)                  98,501         89,499         86,000        (44,934)
Net income (loss)          106,956         98,747        100,125        (99,249)






                                      -12-


<PAGE>


                             POLYMER RESEARCH CORP.
                                   OF AMERICA

                              FINANCIAL STATEMENTS

                           DECEMBER 31, 1997 AND 1996














<PAGE>


                        POLYMER RESEARCH CORP. OF AMERICA



                                    CONTENTS



                                                                 Page
                                                                 ----

Independent Auditors' Report                                      F-1

Financial Statements

Balance Sheets at December 31, 1997 and 1996                      F-2 - F-3

Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995                                  F-4

Statement of Changes in Stockholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995              F-5

Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995                                  F-6 - F-7

Notes to Financial Statements                                     F-8 - F-20

Financial Statement Schedules

For the Years Ended December 31, 1997, 1996 and 1995:

          Report of Independent Certified Public
          Accountants on Financial Statement Schedules            F-21

VIII      Valuation and Qualifying Accounts and Reserves          F-22

 X        Supplementary Income Statement Information              F-23

 XI       Property, Equipment and Accumulated Depreciation        F-24

          All other schedules have been omitted because the required information
          is  included  in the  financial  statements  or the notes  thereto  or
          because they are not required.


<PAGE>


[LOGO]CK  CASTELLANO, KORENBERG & CO.
--------------------------------------------------------------------------------
CERTIFIED PUBLIC ACCOUNTANTS                               1048 Old Country Road
                                                        Westbury, New York 11590
                                                                    516-338-6600
                                                               FAX: 516-338-6632


                          INDEPENDENT AUDITORS' REPORT


To The Stockholders and Board of Directors
Polymer Research Corp. of America
Brooklyn, New York


We have audited the  accompanying  balance  sheets of Polymer  Research Corp. of
America at December  31, 1997 and 1996,  and the related  statements  of income,
stockholders'  equity and cash flows for the years ended December 31, 1997, 1996
and 1995.  These financial  statements are the  responsibility  of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the  financial  position of Polymer  Research  Corp. of
America at December 31, 1997 and 1996 and the results of its  operations and its
cash flows for the years ended  December 31, 1997,  1996 and 1995, in conformity
with generally accepted accounting principles.



                                     /s/Castellano, Korenberg & Co. CPAs, P.C.
                                     -----------------------------------------
                                     CASTELLANO, KORENBERG & CO. CPAs, P.C.

Westbury, New York
February 18, 1998



                                       F-1

<PAGE>


                        POLYMER RESEARCH CORP. OF AMERICA
                                 BALANCE SHEETS
                           DECEMBER 31, 1997 AND 1996


                                     ASSETS

                                                          1997           1996
                                                          ----           ----
CURRENT ASSETS:
    Cash and cash equivalents                        $ 1,367,008    $   709,170
    Certificates of deposit                              155,308        554,338
    Investment securities available
     for sale                                            482,940        473,283
    Accounts receivable, less allowance for
     doubtful accounts of $-0- for 1997 and 1996         137,827         91,850
    Inventories                                           99,654         85,822
    Prepaid income taxes                                     -0-        167,000
    Prepaid expenses and other current assets             17,504         28,086
                                                     -----------    -----------

         Total Current Assets                          2,260,241      2,109,549
                                                     -----------    -----------

PROPERTY AND EQUIPMENT                                 2,863,416      2,939,514
                                                     -----------    -----------

OTHER ASSETS:
    Deferred financing costs, less accumulated
     amortization of $3,093 for 1997 and
     $2,728 for 1996                                      11,450         11,814
                                                     -----------    -----------









                                                     $ 5,135,107    $ 5,060,877
                                                     ===========    ===========



      See independent auditors' report and notes to financial statements.

                                       F-2

<PAGE>


                        POLYMER RESEARCH CORP. OF AMERICA
                                 BALANCE SHEETS
                           DECEMBER 31, 1997 AND 1996


                      LIABILITIES AND STOCKHOLDERS' EQUITY

                                                          1997           1996
                                                          ----           ----
CURRENT LIABILITIES:
    Current maturities of long-term debt             $    31,244    $    28,143
    Accounts payable                                      75,548         56,907
    Deferred revenue                                     252,450        393,300
    Income taxes payable                                  56,100            -0-
    Accrued expenses and other current
     liabilities                                         349,802        417,714
                                                     -----------    -----------

         Total Current Liabilities                       765,144        896,064
                                                     -----------    -----------

LONG-TERM LIABILITY:
    Long-term debt, less current maturities            1,451,770      1,483,080
                                                     -----------    -----------

STOCKHOLDERS' EQUITY:
    Common stock - $.01 par value; 4,000,000
     shares authorized; 1,580,548 and 1,489,657
     shares issued at December 31, 1997 and
     1996, respectively                                   15,805         14,896
    Capital in excess of par value                     2,850,332      2,632,037
    Retained earnings                                    111,029        103,654
    Unrealized holding losses                             (2,236)       (12,117)
                                                     -----------    -----------
                                                       2,974,930      2,738,470

    Less:  Treasury stock, at cost -
           91,837 shares in 1997 and 1996                 56,737         56,737
                                                     -----------    -----------

         Total Stockholders' Equity                    2,918,193      2,681,733
                                                     -----------    -----------


                                                     $ 5,135,107    $ 5,060,877
                                                     ===========    ===========



      See independent auditors' report and notes to financial statements.

                                       F-3

<PAGE>

                        POLYMER RESEARCH CORP. OF AMERICA
                              STATEMENTS OF INCOME
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995


<TABLE>
<CAPTION>
                                             1997           1996            1995
                                         -----------    -----------     -----------
<S>                                      <C>            <C>             <C>
NET REVENUES:
         Research                        $ 4,214,293    $ 4,326,424     $ 4,607,889
         Production                        1,233,979        752,145         571,256
                                         -----------    -----------     -----------
                                           5,448,272      5,078,569       5,179,145
                                         -----------    -----------     -----------
COST OF REVENUES:
         Research                          1,001,818      1,017,460       1,310,643
         Production                        1,018,505        623,320         504,621
                                         -----------    -----------     -----------
                                           2,020,323      1,640,780       1,815,264
                                         -----------    -----------     -----------

GROSS PROFIT                               3,427,949      3,437,789       3,363,881

SELLING, GENERAL AND ADMINISTRATIVE
 EXPENSES                                  2,902,474      2,897,775       2,491,150
                                         -----------    -----------     -----------

INCOME FROM OPERATIONS                       525,475        540,014         872,731
                                         -----------    -----------     -----------

OTHER INCOME (EXPENSE):
         Interest income                      65,886         58,965          55,358
         Interest expense                   (157,320)      (227,683)       (227,195)
         Net rental income (expense)             -0-          2,850           5,000
         Realized gain (loss) on
          investment in marketable
          securities                           1,604         (1,621)          9,890
         Mortgage modification expense           -0-        (45,000)            -0-
                                         -----------    -----------     -----------

                  Total Other Expense        (89,830)      (212,489)       (156,947)
                                         -----------    -----------     -----------

INCOME BEFORE PROVISION FOR INCOME
 TAXES                                       435,645        327,525         715,784

PROVISION FOR INCOME TAXES                   229,066        157,697         358,841
                                         -----------    -----------     -----------

NET INCOME                               $   206,579    $   169,828     $   356,943
                                         ===========    ===========     ===========

EARNINGS PER SHARE                       $       .14    $       .12*    $       .24**
                                         ===========    ===========     ===========

WEIGHTED AVERAGE NUMBER OF SHARES
 OUTSTANDING                               1,487,371      1,472,303*      1,471,634**
                                         ===========    ===========     ===========
</TABLE>


*    Restated for 1997 5% stock dividend

**   Restated for 1997 5% stock dividend and 1996 10% stock dividend


      See independent auditors' report and notes to financial statements.

                                       F-4

<PAGE>


                        POLYMER RESEARCH CORP. OF AMERICA
                  STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995


<TABLE>
<CAPTION>
                                           Common Stock, $.01 Par
                                              Value Authorized;
                                              4,000,000 Shares       Capital                   Unrealized   Treasury Stock - At Cost
                                          -----------------------   in Excess     Retained       Holding    ------------------------
                                            Shares       Amount       of Par      Earnings       Losses        Shares     Amount
                                          ----------   ----------   ----------   ----------    ----------    ---------- ----------
<S>                                          <C>       <C>          <C>          <C>           <C>               <C>    <C>
Balance, December 31, 1994                   984,897   $    9,849   $1,797,214   $  416,753    $  (27,198)       60,719 $  (56,737)
Stock Dividend                                98,490          985      294,485     (295,470)          -0-         6,072        -0-
Stock Split                                  270,847        2,708          -0-       (2,708)          -0-        16,697        -0-
Unrealized Gain on Investment
 Securities Available for Sale                   -0-          -0-          -0-          -0-        25,228           -0-        -0-
Net Income                                       -0-          -0-          -0-      356,943           -0-           -0-        -0-
                                          ----------   ----------   ----------   ----------    ----------    ---------- ----------
Balance, December 31, 1995                 1,354,234       13,542    2,091,699      475,518        (1,970)       83,488    (56,737)
Stock Dividend                               135,423        1,354      540,338     (541,692)          -0-         8,349        -0-
Unrealized Loss on Investment
 Securities Available for Sale                   -0-          -0-          -0-          -0-       (10,147)          -0-        -0-

Net Income                                       -0-          -0-          -0-      169,828           -0-           -0-        -0-
                                          ----------   ----------   ----------   ----------    ----------    ---------- ----------
Balance, December 31, 1996                 1,489,657       14,896    2,632,037      103,654       (12,117)       91,837    (56,737)
                                          ----------   ----------   ----------   ----------    ----------    ---------- ----------

Stock Bonus Issued                            20,000          200       19,800          -0-           -0-           -0-        -0-

Stock Dividend                                70,891          709      198,495     (199,204)          -0-           -0-        -0-

Unrealized Gain on Investment
 Securities Available for Sale                   -0-          -0-          -0-          -0-         9,881           -0-        -0-

Net Income                                       -0-          -0-          -0-      206,579           -0-           -0-        -0-
                                          ----------   ----------   ----------   ----------    ----------    ---------- ----------
Balance, December 31, 1997                 1,580,548   $   15,805   $2,850,332   $  111,029    $   (2,236)       91,837 $  (56,737)
                                          ==========   ==========   ==========   ==========    ==========    ========== ==========
</TABLE>

      See independent auditors' report and notes to financial statements.

                                       F-5

<PAGE>


                        POLYMER RESEARCH CORP. OF AMERICA
                            STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995


<TABLE>
<CAPTION>
                                                                                  1997                 1996                 1995
                                                                              -----------          -----------          -----------
<S>                                                                           <C>                  <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Cash received from customers                                                 $ 5,255,070          $ 5,266,656          $ 5,260,240
 Interest received                                                                 65,886               58,965               55,358
 Rent received                                                                        -0-                2,850                5,000
                                                                              -----------          -----------          -----------
     Cash Provided By Operating Activities                                      5,320,956            5,328,471            5,320,598
                                                                              -----------          -----------          -----------

 Cash paid for merchandise                                                     (1,961,416)          (1,572,608)          (1,752,829)
 Cash paid to suppliers and employees                                          (2,899,200)          (2,732,151)          (2,384,450)
 Interest paid                                                                   (157,320)            (227,683)            (227,195)
 Income taxes paid                                                                 (5,966)            (358,097)            (348,553)
 Mortgage modification fee paid                                                       -0-              (45,000)                 -0-
                                                                              -----------          -----------          -----------
     Cash Disbursed For Operating Activities                                   (5,023,902)          (4,935,539)          (4,713,027)
                                                                              -----------          -----------          -----------

              NET CASH PROVIDED BY
              OPERATING ACTIVITIES                                                297,054              392,932              607,571
                                                                              -----------          -----------          -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
 Proceeds from maturity of certificates of deposit                                399,030              142,611              136,086
 Proceeds from sale of marketable securities                                      551,452              378,619              807,290
                                                                              -----------          -----------          -----------
     Cash Provided By Investing Activities                                        950,482              521,230              943,376
                                                                              -----------          -----------          -----------

 Purchase of certificates of deposits                                                 -0-             (554,338)            (142,611)
 Purchase of marketable securities                                               (549,624)            (275,189)            (773,517)
 Purchase of property and equipment                                               (11,865)             (18,221)             (41,445)
                                                                              -----------          -----------          -----------
     Cash Disbursed For Investing Activities                                     (561,489)            (847,748)            (957,573)
                                                                              -----------          -----------          -----------

              NET CASH PROVIDED BY (USED IN)
              INVESTING ACTIVITIES                                                388,993             (326,518)             (14,197)
                                                                              -----------          -----------          -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
 Principal payments on long-term borrowings                                       (28,209)            (831,278)             (32,460)
                                                                              -----------          -----------          -----------

              NET CASH USED IN FINANCING
              ACTIVITIES                                                          (28,209)            (831,278)             (32,460)
                                                                              -----------          -----------          -----------

              NET INCREASE (DECREASE) IN CASH                                     657,838             (764,864)             560,914

              CASH, BEGINNING OF YEAR                                             709,170            1,474,034              913,120
                                                                              -----------          -----------          -----------

              CASH, END OF YEAR                                               $ 1,367,008          $   709,170          $ 1,474,034
                                                                              ===========          ===========          ===========
</TABLE>


       See independent auditors' report and notes to financial statements.

                                      F-6

<PAGE>


                        POLYMER RESEARCH CORP. OF AMERICA
                            STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995


<TABLE>
<CAPTION>
                                                                                  1997                 1996                 1995
                                                                              -----------          -----------          -----------
<S>                                                                           <C>                  <C>                  <C>

RECONCILIATION OF NET INCOME TO NET CASH
 PROVIDED BY OPERATING ACTIVITIES:

NET INCOME                                                                    $   206,579          $   169,828          $   356,943
                                                                              -----------          -----------          -----------

ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:

   Bonus paid through issuance of stock                                            20,000                  -0-                  -0-
   Depreciation and amortization                                                   88,327               93,658              103,824
   Bad debt expense                                                                 6,375                2,342               6,255
   Realized (gain) loss on investment
    in marketable securities                                                       (1,604)               1,621               (9,890)

Changes in assets (increase) decrease:
   Accounts receivable                                                            (52,352)             (34,376)              (6,026)
   Inventories                                                                    (13,832)             (13,109)              (1,043)
   Prepaid income taxes                                                           167,000             (167,000)                 -0-
   Prepaid expenses and other current assets                                       10,582              (15,491)              41,699
   Other assets                                                                       -0-                  -0-                8,199

Changes in liabilities increase (decrease):
   Accounts payable                                                                18,641               43,765               (8,111)
   Deferred revenue                                                              (140,850)             222,463               85,837
   Income taxes payable                                                            56,100              (33,400)              10,275
   Accrued expenses and other current liabilities                                 (67,912)             122,631               19,609
                                                                              -----------          -----------          -----------

             Total Adjustments                                                     90,475              223,104              250,628
                                                                              -----------          -----------          -----------

                  NET CASH PROVIDED BY
                  OPERATING ACTIVITIES                                        $   297,054          $   392,932          $   607,571
                                                                              ===========          ===========          ===========

SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

         Stock dividend paid                                                  $   199,204          $   541,692          $   295,470
                                                                              ===========          ===========          ===========

         Stock split paid                                                     $       -0-          $       -0-          $     2,708
                                                                              ===========          ===========          ===========

         Unrealized gain (loss) on investment securities                      $     9,881          $   (10,147)         $    25,228
                                                                              ===========          ===========          ===========

         Stock bonus paid                                                     $    20,000          $       -0-          $       -0-
                                                                              ===========          ===========          ===========
</TABLE>


      See independent auditors' report and notes to financial statements.

                                       F-7

<PAGE>


                        POLYMER RESEARCH CORP. OF AMERICA
                          NOTES TO FINANCIAL STATEMENTS

Note 1 -        Summary of Significant Accounting Policies

                Business Activity

                Polymer   Research   Corp.   of  America   ("the   Company")  is
                predominately  engaged in the  research and  development  of the
                applications   of  chemical   grafting  for  both  domestic  and
                international  companies.  The Company  also  produces and sells
                products  arising from research  activities and textile printing
                inks.  Revenue  for  research  and  production  is derived  from
                various   manufacturers   throughout   the  United   States  and
                worldwide.

                Credit Risk

                Financial  instruments that  potentially  subject the Company to
                credit risk include investments in United States Treasury bills,
                notes and other  certificates of deposit,  government  agencies'
                securities  and U.S.  Government  and New York State mutual bond
                funds.  Future  changes  in  economic  conditions  may  make the
                investments less valuable.

                In addition,  financial instruments that potentially subject the
                Company  to  credit  risk  also  include  accounts   receivable.
                Accounts  receivable   resulting  from  product  sales  are  not
                collateralized.

                The Company  maintains  deposits with financial  institutions in
                excess of amounts insured by the FDIC.

                Pervasiveness of Estimates

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

                Revenue Recognition

                Revenue from research  contracts is recognized upon satisfaction
                of  the  following  two  criteria:  first,  client  approval  of
                performance  of  specific  stage  of the  contract  and  second,
                collection  of the  resulting  revenue is assured.  Revenue from
                production is recognized when the product is shipped for sale to
                customers.


                                       F-8

<PAGE>


                        POLYMER RESEARCH CORP. OF AMERICA
                          NOTES TO FINANCIAL STATEMENTS


Note 1 -        Summary of Significant Accounting Policies (cont'd)

                Cash Equivalents

                The Company considers securities with maturities of three months
                or less, when purchased, to be cash equivalents.

                Investment Securities

                The  Company   determines  the  appropriate   classification  of
                securities  at the  time of  purchase.  If the  Company  has the
                intent  and  the  ability  at  the  time  of  purchase  to  hold
                securities  until  maturity  or on a long-term  basis,  they are
                classified  as  investment  securities  and carried at amortized
                historical cost. Securities to be held for indefinite periods of
                time and not  intended  to be held to maturity or on a long-term
                basis are  classified  as available for sale and carried at fair
                value.  Securities  held for indefinite  periods of time include
                securities that  management  intends to use as part of its asset
                and  liability  management  strategy  and  that  may be  sold in
                response to changes in interest rates, resultant prepayment risk
                and  other  factors  related  to  interest  rate  and  resultant
                prepayment risk changes.

                Realized gains and losses on  dispositions  are based on the net
                proceeds and the  adjusted  book value of the  securities  sold,
                using the specific  identification method.  Unrealized gains and
                losses on investment  securities available for sale are based on
                the  difference  between  book  value  and  fair  value  of each
                security.  These  gains and  losses are  credited  or charged to
                stockholders'  equity,  whereas  realized  gains and losses flow
                through the Company's yearly operations.

                Inventories

                Inventories,  which consists of raw materials and finished goods
                is valued at the lower of cost or market,  with cost  determined
                using the first-in,  first-out method and with market defined as
                the lower of replacement cost or realizable value.

                Property and Equipment

                Property and equipment is stated at cost. The costs of additions
                and betterments are capitalized and expenditures for repairs and
                maintenance are expensed in the period  incurred.  When items of
                property and  equipment  are sold or retired,  the related costs
                and accumulated  depreciation  are removed from the accounts and
                any gain or loss is included in income.


                                       F-9

<PAGE>


                        POLYMER RESEARCH CORP. OF AMERICA
                          NOTES TO FINANCIAL STATEMENTS

Note 1 -        Summary of Significant Accounting Policies (cont'd)

                Property and Equipment (cont'd).

                The Company  capitalizes leased equipment where the terms of the
                lease result in the transfer to the Company of substantially all
                of the benefits and risks of ownership of the equipment.

                Depreciation  and  amortization  of property  and  equipment  is
                provided   utilizing  both  the  straight-line  and  accelerated
                methods over the estimated useful lives of the respective assets
                as follows:

                Building and building improvements                     40 years
                Land improvements                                      20 years
                Transportation equipment                           3 to 5 years
                Machinery and equipment                                 5 years
                Furniture and fixtures                            5 to 10 years
                Office equipment                                        5 years

                Deferred Financing Costs

                Costs  incurred in obtaining  the  mortgage  used to finance the
                purchase of its  building  have been  capitalized  and are being
                amortized over the term of the related obligation  utilizing the
                straight-line method.

                Deferred Revenue

                The Company records as deferred revenue  payments  received from
                research  contracts  prior  to the  culmination  of the  revenue
                process.

                Income Taxes

                The Company accounts for its income taxes utilizing Statement of
                Financial  Accounting Standards ("SFAS") No. 109 "Accounting for
                Income  Taxes"  which  requires  that  the  Company  follow  the
                liability  method of accounting for income taxes.  The liability
                method  provides  that deferred tax assets and  liabilities  are
                recorded based on the difference between the tax bases of assets
                and  liabilities  and  their  carrying   amounts  for  financial
                reporting purposes, referred to as "temporary differences."


                                      F-10

<PAGE>


                        POLYMER RESEARCH CORP. OF AMERICA
                          NOTES TO FINANCIAL STATEMENTS


Note 1 -        Summary of Significant Accounting Policies (cont'd).

                Profit Sharing Plan

                The Company maintains a qualified noncontributory profit sharing
                plan. The plan provides all eligible  employees with a source of
                retirement income, as well as assistance in other  circumstances
                such as death or  disability.  Eligible  employees must meet two
                requirements  to become  participants;  attainment of age 21 and
                completion  of one year of service  with the  Company.  Employer
                contributions  are  determined  by an annual  resolution  of the
                Board of  Directors.  A percentage  of the  benefits  vest after
                three years of qualifying service.

                Earnings Per Share

                Earnings per share is computed  based upon the weighted  average
                number of common shares outstanding during each year.

                Reclassifications

                Certain   accounts   relating  to  the  prior  years  have  been
                reclassified  to conform  to the  current  year's  presentation.
                These  reclassifications  have no effect on previously  reported
                income.

Note 2 -        Investment Securities

                At  December  31,  1997  and  1996,  the  investment  securities
                portfolio is comprised of securities classified as available for
                sale,  in  conjunction  with FASB 115,  resulting in  investment
                securities available for sale being carried at market value.

                The  amortized  cost and fair  values of  investment  securities
                available for sale at December 31, 1997 are:

<TABLE>
<CAPTION>
                                                                     Gross           Gross
                                                     Amortized    Unrealized       Unrealized          Fair
                                                        Cost         Gains           Losses            Value
                                                     ---------    ----------       ----------        ---------
                <S>                                  <C>          <C>              <C>               <C>
                U.S. Treasury securities             $  90,181    $    2,053       $      -0-        $  92,234
                Obligations of other U.S.
                 government agencies                   254,177        12,601          (20,948)         245,830
                Other  securities                      149,999           -0-           (5,123)         144,876
                                                     ---------    ----------       ----------        ---------
                                                     $ 494,357    $   14,654       $  (26,071)       $ 482,940
                                                     =========    ==========       ==========        =========
</TABLE>

                                      F-11

<PAGE>


                        POLYMER RESEARCH CORP. OF AMERICA
                          NOTES TO FINANCIAL STATEMENTS

Note 2 -        Investment Securities (cont'd).

                The  amortized  cost and fair  values of  investment  securities
                available for sale at December 31, 1996 are:

<TABLE>
<CAPTION>
                                                                     Gross           Gross
                                                     Amortized    Unrealized       Unrealized          Fair
                                                        Cost         Gains           Losses            Value
                                                     ---------    ----------       ----------        ---------
                <S>                                  <C>          <C>              <C>               <C>
                U.S. Treasury securities             $ 148,367    $      -0-       $   (2,332)       $ 146,035
                Obligations of other U.S.
                 government agencies                   194,572           -0-           (9,407)         185,165
                Other  securities                      149,999           -0-           (7,916)         142,083
                                                     ---------    ----------       ----------        ---------
                                                     $ 492,938    $      -0-       $  (19,655)       $ 473,283
                                                     =========    ==========       ==========        =========
</TABLE>

                The  amortized  cost and fair  values of  investment  securities
                available  for sale  December 31, 1997 by expected  maturity are
                shown below.  Expected  maturities will differ from  contractual
                maturities  because  borrowers  may  have  the  right to call or
                prepay obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>
                                                                                                       Securities Available
                                                                                                             For Sale
                                                                                             --------------------------------------
                                                                                             Amortized                       Fair
                                                                                                Cost                         Value
                                                                                             ---------                     --------
               <S>                                                                            <C>                          <C>
                Due in one year or less                                                           $-0-                         $-0-
                Due after one year but less
                 than five years                                                                43,037                       43,142
                Due after five years but
                 less than ten years                                                            47,144                       49,092
                Due after ten years                                                                -0-                          -0-
                                                                                                90,181                       92,234
                Mortgage-backed securities                                                     254,177                      245,830
                Other securities                                                               149,999                      144,876
                                                                                              --------                     --------
                                                                                              $494,357                     $482,940
                                                                                              ========                     ========
</TABLE>

                Proceeds  from sales and  maturities  of  investment  securities
                available  for  sale  during  1997 and 1996  were  $551,452  and
                $378,619,  respectively.  Included  in  shareholders'  equity at
                December  31, 1997 and 1996 is $2,236 and $12,117  respectively,
                of net unrealized losses on investment  securities available for
                sale.


                                      F-12

<PAGE>


                        POLYMER RESEARCH CORP. OF AMERICA
                          NOTES TO FINANCIAL STATEMENTS

Note 3 -        Inventories

                Inventories at December 31, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                                                                                1997                         1996
                                                                                              --------                     --------
                <S>                                                                           <C>                          <C>
                Raw materials                                                                 $ 85,556                     $ 73,515
                Finished goods                                                                  14,098                       12,307
                                                                                              --------                     --------

                                                                                              $ 99,654                     $ 85,822
                                                                                              ========                     ========
</TABLE>

Note 4 -        Property and Equipment

                Property and equipment is summarized as follows:

<TABLE>
<CAPTION>
                                                                                                1997                         1996
                                                                                              --------                     --------
                <S>                                                                         <C>                          <C>
                Land                                                                        $  450,000                   $  450,000
                Land improvements                                                               80,211                       80,211
                Building                                                                     2,550,000                    2,550,000
                Building improvements                                                          289,505                      289,505
                Transportation equipment                                                        12,967                       12,967
                Machinery and equipment                                                        206,917                      200,259
                Furniture and fixtures                                                          99,018                       98,213
                Office equipment                                                                65,066                       60,664
                                                                                              --------                     --------
                                                                                             3,753,684                    3,741,819
                Less:  Accumulated depreciation
                           and amortization                                                    890,268                      802,305
                                                                                            ----------                   ----------
                                                                                            $2,863,416                   $2,939,514
                                                                                            ==========                   ==========
</TABLE>

                Depreciation  and  amortization  expense related to property and
                equipment  amounted to $87,963,  $93,295  and  $103,460  for the
                years ended December 31, 1997, 1996 and 1995 respectively.

Note 5 -        Deferred Revenue

                At December 31, 1997 and 1996 the Company had received  research
                contract  payments  not  yet  earned  aggregating  $252,450  and
                $393,300, respectively.


                                      F-13

<PAGE>


                        POLYMER RESEARCH CORP. OF AMERICA
                          NOTES TO FINANCIAL STATEMENTS

Note 6 -        Mortgage Payable

                On  August  20,  1996  the  Company  renegotiated  the  existing
                mortgage on its building.  The terms of the  agreement  required
                the Company to make an $800,000 principal  installment and pay a
                re-negotiation  fee of  $45,000.  The  remaining  balance of the
                mortgage  is being paid  pursuant to a 25-year  amortization  in
                monthly installments of $15,457 including principal and interest
                at the rate of 10.50% per annum.  The  entire  unpaid  principal
                balance  at the  end of the  mortgage  term,  anticipated  to be
                $1,398,330, is due in a balloon payment on June 1, 2000.

                The mortgage is secured by a lien on the building. The principal
                balances  payable on the  mortgage  amounted to  $1,483,014  and
                $1,511,223  of  which  $31,244  and  $28,143  represent  current
                maturities  of the  mortgage  at  December  31,  1997  and  1996
                respectively.

                Aggregate  maturities  of  the  mortgage  note  payable  are  as
                follows:

                Years Ending December 31:
                      1998                                           $    31,244
                      1999                                                34,688
                      2000                                             1,417,082
                                                                     -----------
                                                                     $ 1,483,014
                                                                     ===========

Note 7 -        Contingencies

                At December  31,  1997,  the  Company is a defendant  in various
                lawsuits  which arose in the  ordinary  course of  business.  At
                December  31,  1997,  the  Company  has  provided  a reserve  of
                $100,000,  included in current  liabilities,  as a provision for
                legal expenses and potential  unfavorable  rulings in certain of
                these  cases.  It is  management's  opinion  that  the  ultimate
                liability, if any, which might result from the remainder of such
                actions  would  not  have a  material  effect  on the  Company's
                financial position.



                                      F-14

<PAGE>


                        POLYMER RESEARCH CORP. OF AMERICA
                          NOTES TO FINANCIAL STATEMENTS

Note 8 -        Commitments

                On July 26, 1994 the Company entered into retirement  agreements
                with 2 key executives. The agreements set a compensation rate of
                60% of the  average  5  preceding  years'  annual  compensation,
                payable for the remainder of the  executive's  life. The Company
                is  also   responsible  to  maintain  the   executives   medical
                insurance.

                On March 1, 1993 the Company  extended its  employment  contract
                with its President  which expires on May 16, 1998.  The contract
                provides  for a current  minimum  annual  salary of $170,000 for
                1997 and annual increases of $10,000 throughout its duration.

                In  addition,   the  Company   leases   vehicles  under  various
                noncancellable operating leases requiring future minimum rentals
                as follows:

                Years Ending December 31:
                        1998                                            $ 29,748
                        1999                                              21,921
                        2000                                               6,205
                                                                        --------
                                                                        $ 57,874
                                                                        ========

                Vehicle lease expense  charged to operations for the years ended
                December  31, 1997 and 1996  amounted  to $11,191  and  $26,903,
                respectively.

Note 9 -        Stock Dividends

                On March 20,  1997 the Company  declared a 5% stock  dividend to
                stockholders of record at April 1, 1997, paid April 8, 1997. The
                transaction  was valued  based upon the closing  market price of
                the Company's  stock on April 7, 1997 which was $2.81 per share.
                Retained  earnings  was charged for  $199,204 as a result of the
                issuance of 70,891 shares.

                On March 1, 1996 the  Company  declared a 10% stock  dividend to
                stockholders  of record at March 15, 1996,  paid March 29, 1996.
                The  transaction  was valued based upon the closing market price
                of the  Company's  stock on March 15,  1996  which was $4.00 per
                share. Retained earnings was charged for $541,692 as a result of
                the issuance of 135,423 shares.

                                      F-15

<PAGE>


                        POLYMER RESEARCH CORP. OF AMERICA
                          NOTES TO FINANCIAL STATEMENTS

Note 9 -        Stock Dividends (cont'd).

                On February 21, 1995 the Company  declared a 10% stock  dividend
                to stockholders of record at March 6, 1995, paid March 20, 1995.
                The  transaction  was valued based upon the closing market price
                of the  Company's  stock on March 19, 1995,  which was $3.00 per
                share. Retained earnings was charged for $295,470 as a result of
                the issuance of 98,490 shares.

                Per share data were  retroactively  restated  for the effects of
                the 1997, 1996 and 1995 stock dividends.

Note 10-        Stock Split

                On June 6,  1995  the  Company  declared  a 5 for 4 stock  split
                effected in the form of a 25% stock dividend, to stockholders of
                record at June 19, 1995,  distributed June 27, 1995. As a result
                of this transaction,  an additional  270,847 shares were issued.
                The Company did not distribute  fractional shares from the stock
                split.  The  Company's  par  value  of $.01 per  share  remained
                unchanged.  Per share data was  retroactively  restated  for the
                effects of the stock split.

Note 11-        Shareholders Rights Plan

                On July 20,  1995,  the Company  adopted a  Shareholders  Rights
                Plan.  The  Company  adopted  the plan to  protect  shareholders
                against unsolicited  attempts to acquire control of the Company.
                The rights  were  issued to  shareholders  of record on July 31,
                1995 and will expire on July 31, 2005.  The Rights Plan provides
                for the issuance of one stock right for each  outstanding  share
                of  the  Company's   common   stock.   The  rights  will  become
                exercisable  only if an  "acquiring  party"  (as  defined in the
                rights plan) acquires 15% or more of the Company's  common stock
                or  announces a tender  offer that would  result in ownership of
                15% or more of the Company's common stock.

                Each  right will  entitle  the holder to buy one share of common
                stock at an exercise price of $25, subject to adjustment.

                Upon the  occurrence  of certain  events,  holders of the rights
                will be  entitled  to  purchase  either the  Company's  stock or
                shares in an  "Acquiring  Entity" at 50% of those shares  market
                value.

                The Company will  generally be entitled to redeem all rights for
                $.01 per right at any time prior to the tenth day  following the
                acquisition  of 15% or more of the  Company's  common stock by a
                person or group.

                                      F-16

<PAGE>


                        POLYMER RESEARCH CORP. OF AMERICA
                          NOTES TO FINANCIAL STATEMENTS

Note 12 -       Stock Bonus

                On April 1,  1997,  prior to the 1997 5% stock  dividend  record
                date,  the Company paid an Executive  Vice  President a bonus by
                issuing to him 20,000  restricted shares of the Company's stock.
                The shares have not been registered  under the Securities Act of
                1933 and sales of the shares are  subject  to  restrictions  and
                limitations. The Company valued the shares at $20,000.

Note 13 -       Provision For Income Taxes

                The provision for income taxes is summarized as follows:

<TABLE>
<CAPTION>
                                                                  1997           1996              1995
                                                               ---------      ---------         ---------
                <S>                                            <C>           <C>                <C>
                Federal                                        $ 135,754     $   92,054         $ 207,140
                State and local                                   93,312         65,643           151,701
                                                               ---------      ---------         ---------
                Provision for income taxes                     $ 229,066      $ 157,697         $ 358,841
                                                               =========      =========         =========
</TABLE>

                The  reconciliation  between  the maximum  effective  income tax
                rates  with  federal  statutory  tax  rates  for the year  ended
                December 31, 1997 and the rates  reflected  in the  accompanying
                financial statements is as follows:

                Income taxes at U.S. statutory rates                  $ 148,119
                (Decrease) increase in federal income
                 tax expense resulting from:
                Federal tax arising from non-deductible
                 financial statement expenses                            15,727
                Benefit from utilization of lower federal
                 tax brackets                                              (982)
                Benefit from deduction for state
                 and local taxes                                        (27,110)
                State and local taxes                                    93,312
                                                                      ---------

                Provision for Income Taxes                            $ 229,066
                                                                      =========







                                      F-17

<PAGE>


                        POLYMER RESEARCH CORP. OF AMERICA
                          NOTES TO FINANCIAL STATEMENTS

Note 14 -       Industry Segments

                The Company's  operations are classified  into the following two
                industry segments:

                Research  -      Providing  laboratory research  services in the
                                 area of polymer chemistry.

                Production -     Manufacture  and sale of  products arising from
                                 research  activities  and  the sale of  textile
                                 printing inks and accessories.

                Information  on industry  segments for the years ended  December
                31, 1997, 1996 and 1995 are as follows:

<TABLE>
<CAPTION>
                                                                         1997                  1996                1995
                                                                      ----------            ----------          ----------
<S>                                                                   <C>                   <C>                 <C>
NET REVENUES:
         Research                                                     $4,214,293            $4,326,424          $4,607,889
         Production                                                    1,233,979               752,145             571,256
                                                                      ----------            ----------          ----------

                  Total Net Revenues                                  $5,448,272            $5,078,569          $5,179,145
                                                                      ==========            ==========          ==========

GROSS PROFIT:
         Research                                                     $3,212,475            $3,308,964          $3,297,246
Production                                                               215,474               128,825              66,635
                                                                      ----------            ----------          ----------
                  Total Gross Profit                                   3,427,949             3,437,789           3,363,881

SELLING, GENERAL AND ADMINISTRATIVE
 EXPENSES                                                              2,756,224             2,680,505           2,450,509
                                                                      ----------            ----------          ----------

INCOME FROM OPERATIONS                                                $  671,725            $  757,284          $  913,372
                                                                      ==========            ==========          ==========

CAPITAL EXPENDITURES:
         Research                                                     $      -0-            $    3,603          $   12,189
         Production                                                          -0-                 2,881               9,747
         Corporate                                                        11,864                 5,766              19,509
                                                                      ----------            ----------          ----------
                  Total                                               $   11,864            $   12,250          $   41,445
                                                                      ==========            ==========          ==========
DEPRECIATION AND AMORTIZATION:
         Research                                                     $   36,505            $   27,545          $   30,309
         Production                                                       17,593                22,028              24,239
         Corporate                                                        33,865                44,085              49,276
                                                                      ----------            ----------          ----------
                  Total                                               $   87,963            $   93,658          $  103,824
                                                                      ==========            ==========          ==========
</TABLE>

                                      F-18

<PAGE>


                        POLYMER RESEARCH CORP. OF AMERICA
                          NOTES TO FINANCIAL STATEMENTS

Note 14 -       Industry Segments (cont'd).

<TABLE>
<CAPTION>
                                                                         1997                  1996                1995
                                                                      ----------            ----------          ----------
<S>                                                                   <C>                   <C>                 <C>
IDENTIFIABLE ASSETS:
Research                                                              $1,262,411            $  886,238          $  885,752
Production                                                               718,512               831,529             818,175
Corporate                                                              3,154,184             3,343,110           3,673,088
                                                                      ----------            ----------          ----------
         Total                                                        $5,135,107            $5,060,877          $5,377,015
                                                                      ==========            ==========          ==========
</TABLE>

                Net income from  operations  represents net sales less operating
                expenses for each segment and corporate  expenses  which are not
                directly  attributable  to any  segment.  A ratable  portion  of
                corporate  expenses  have been  charged  to  rental  operations.
                Segment   identifiable   assets  include  accounts   receivable,
                inventories  and property and  equipment for use in, or directly
                attributable to, the individual segments. Corporate identifiable
                assets  include  cash,  property and  equipment and other assets
                which are not directly attributable to any individual segment.

                There was no individual  customer from which the Company derived
                10% or more of its revenues during the periods presented.

Note 15 -       Accrued Expenses and Other Current Liabilities

                Accrued expenses and other current liabilities are summarized as
                follows:

<TABLE>
<CAPTION>
                                                                                                1997                         1996
                                                                                              --------                     --------
                <S>                                                                           <C>                          <C>
                Accrued profit sharing                                                        $100,000                     $100,000
                Accrued provision for legal
                 proceedings                                                                   100,000                      150,000
                Accrued vacation                                                                26,042                       25,584
                Accrued professional fees                                                       30,000                       30,000
                Accrued officers' bonuses                                                       37,899                          -0-
                Other items (none in excess
                 of 5% of total current
                 liabilities)                                                                   55,861                      112,130
                                                                                              --------                     --------
                                                                                              $349,802                     $417,714
                                                                                              ========                     ========
</TABLE>

Note 16 -       Profit Sharing Plan

                Profit  sharing  expense  under  the  Company's  noncontributory
                profit  sharing plan charged to operations  amounted to $100,000
                for the years ended December 31, 1997, 1996 and 1995.


                                      F-19

<PAGE>


                        POLYMER RESEARCH CORP. OF AMERICA
                          NOTES TO FINANCIAL STATEMENTS

Note 17 -       Subsequent Event

                On March 2, 1998,  the Company  declared a 5% stock  dividend to
                shareholders at March 23, 1998, payable April 2, 1998.







                                      F-20

<PAGE>


[LOGO]CK  CASTELLANO, KORENBERG & CO.
--------------------------------------------------------------------------------
CERTIFIED PUBLIC ACCOUNTANTS                               1048 Old Country Road
                                                        Westbury, New York 11590
                                                                    516-338-6600
                                                               FAX: 516-338-6632


To The Stockholders
Polymer Research Corp. of America
Brooklyn, New York


Our report on our audits of the basic financial  statements of Polymer  Research
Corp. of America for 1997, 1996 and 1995, appears on page F-1. Those audits were
made for the  purpose of forming  an opinion on the basic  financial  statements
taken as a whole.  The accompanying  supplementary  information is presented for
the  purpose of  additional  analysis  and is not a  required  part of the basic
financial  statements.  Such  information  has been  subjected  to the  auditing
procedures  applied in the audit of the basic  financial  statements and, in our
opinion,  is fairly  stated in all  material  respects  in relation to the basic
financial statements taken as a whole.





                                      /s/Castellano, Korenberg & Co., CPAs, P.C.
                                      ------------------------------------------
                                      CASTELLANO, KORENBERG & CO., CPAs, P.C.



Westbury, New York
February 18, 1998





                                      F-21


<PAGE>


                        POLYMER RESEARCH CORP. OF AMERICA
         SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES


<TABLE>
<CAPTION>

Column A                            Column B                   Column C                   Column D         Column E
--------                           ----------        ---------------------------         ----------        ----------
                                                              Additions
                                                     ---------------------------
                                   Balance at        Charged to         Charged
                                    Beginning        Costs and          to Other                           Balance at
                                     Of Year          Expenses          Accounts         Deductions        End of Year
                                   ----------        ----------        ----------        ----------        ----------
<S>                                <C>               <C>               <C>               <C>               <C>
Allowance for Doubtful Accounts:
--------------------------------
Year ended December 31, 1997       $      -0-        $    6,375        $      -0-        $    6,375        $      -0-
                                   ----------        ----------        ----------        ----------        ----------
Year ended December 31, 1996       $    4,000        $    2,342        $      -0-        $    6,342        $      -0-
                                   ----------        ----------        ----------        ----------        ----------
Year ended December 31, 1995       $      -0-        $    6,375        $      -0-        $    2,255        $    4,000
                                   ----------        ----------        ----------        ----------        ----------

Reserve for Sales Credits:
--------------------------
Year ended December 31, 1997       $      -0-        $   -0-           $      -0-        $      -0-        $      -0-
                                   ----------        ----------        ----------        ----------        ----------
Year ended December 31, 1996       $      -0-        $   -0-           $      -0-        $      -0-        $      -0-
                                   ----------        ----------        ----------        ----------        ----------
Year ended December 31, 1995       $      -0-        $   -0-           $      -0-        $      -0-        $      -0-
                                   ----------        ----------        ----------        ----------        ----------
</TABLE>











                                      F-22


<PAGE>



                        POLYMER RESEARCH CORP. OF AMERICA
                        SCHEDULE X - SUPPLEMENTARY INCOME
                              STATEMENT INFORMATION


                                           Charged To Costs and Expenses
                                           -----------------------------
                                                   December 31,
                                                   ------------
                                        1997          1996              1995
                                     ---------     ---------         --------

1. MAINTENANCE AND REPAIR            $    *        $  56,208         $   *
                                     ---------     ---------         --------

2. DEPRECIATION                      $  87,963     $  93,295         $103,460
                                     ---------     ---------         --------

3. TAXES, OTHER THAN PAYROLL
    AND INCOME TAXES                      *              *               *

4. ROYALTIES                              *              *               *

5. ADVERTISING COSTS                      *              *               *

Note: * Less than 1% of revenue.











                                      F-23


<PAGE>


                        POLYMER RESEARCH CORP. OF AMERICA
         SCHEDULE XI - PROPERTY, EQUIPMENT AND ACCUMULATED DEPRECIATION
                          YEAR ENDED DECEMBER 31, 1997


<TABLE>
<CAPTION>

                           Initial Cost to Company            Gross Amount At Which
                           -----------------------         Carried At Close of Period
                                                            -------------------------------                            Life On Which
                                                                                                                       Depreciation
                                                                                                                         In Latest
                                     Land                Land                                                             Income
Date                             Building and            Building and                          Accumulated     Date       Statement
Description       Encumbrances   Improvements  Equipment Improvements  Equipment      Total    Depreciation  Acquired    is Computed
-----------       ------------   ------------  --------- ------------  ---------   ----------  ------------ --------    -----------
<S>                <C>           <C>          <C>          <C>         <C>         <C>         <C>          <C>            <C>
Land, Building
 and Improvements  $1,483,014    $3,369,716   $      -0-   $3,369,716  $      -0-  $3,369,716  $  534,851   June 4, 1990  20-40Years

Equipment                 -0-           -0-      383,968          -0-    383,968      383,968     355,416    Various      3-10 Years
                   ----------    ----------   ----------   ----------  ----------  ----------  ------------
                   $1,483,014    $3,369,716   $  383,968   $3,369,716  $  383,968  $3,753,684  $    890,267
                   ==========    ==========   ==========   ==========  ==========  ==========  ============
</TABLE>















                                      F-24


<PAGE>



ITEM 9.  DISAGREEMENTS ON FINANCIAL AND ACCOUNTING DISCLOSURES

                                                        None

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive  officers of the Company as of December 31, 1997 are
as follows:

NAME               AGE             POSITION

Carl Horowitz       74             President and Director

Irene Horowitz      74             Senior Vice President and Director

John M. Ryan        42             Director, Executive Vice
                                   President, Corporate Research

Alice J. Horowitz   38             Director

Boris Jody          78             Director

Anna Dichter        84             Secretary, Treasurer

George V. Sawey     69             Vice President, Chemicals

Terry J. Wolfgang   36             Director

Dr. Mohan Sanduja,  62             Vice President, R & D
                                   Director

Clare Chamow        63             Vice President, Office Management

Betty Friedman      66             Vice President, Personnel

Carl  Horowitz  founded the Company and has devoted his full time and efforts to
the affairs of the Company, as its President and as a Director,  since 1963. Mr.
Horowitz received a B.S. in Chemical  Engineering at Columbia  University in New
York in  1950,  and a  Master  of  Science  degree  in  Polymer  Chemistry  from
Polytechnic  Institute of Brooklyn in 1961. Mr. Horowitz is the husband of Irene
Horowitz and the father of Alice J. Horowitz and Terry J. Wolfgang.





                                      -13-

<PAGE>


Irene  Horowitz has been a Director  and a Senior Vice  President of the Company
since 1980.  Mrs.  Horowitz  devotes her full time and efforts to the affairs of
the  Company,  and her primary  responsibility  as Senior Vice  President  is to
oversee  the  operations  of the  Company.  Mrs.  Horowitz  is the  wife of Carl
Horowitz and the sister of Anna Dichter and the mother of Alice J.  Horowitz and
Terry J. Wolfgang.

John M.  Ryan has been a  Director  since  September,  1984.  Mr.  Ryan has been
employed by the Company  since 1981 as a technical  director of Special  Product
Development  and has been the  Executive  Vice  President of Corporate  Research
since 1985.

Alice J. Horowitz was a Senior Vice  President.  In 1987, she became a Director.
During 1995 Ms.  Horowitz  relocated  outside of New York.  Ms.  Horowitz is the
daughter of Carl and Irene Horowitz.

Boris Jody was elected a Director of the Company in 1984.  Mr. Jody is currently
retired.  Mr. Jody previously was with Standard Motor Products,  Inc.,  where he
had been Vice President of Corporate Affairs.

Anna  Dichter  joined  the  Company  in 1968  as  Controller.  She  was  elected
Secretary/Treasurer  of the Company in 1977. Mrs. Dichter,  who devotes her full
time and efforts to the affairs of the Company,  is in charge of maintaining the
Company's books on a day-to-day basis. She is the sister of Irene Horowitz.

George V. Sawey has been  employed  full time by the  Company  since 1972 and is
Vice  President  in charge  of  chemical  products.  He is  responsible  for the
manufacture of textile inks and chemical products resulting from research.

Terry J.  Wolfgang has been a Director of the Company  since 1989.  She has been
engaged in the  private  practice of law in New York City.  Ms.  Wolfgang is the
daughter of Carl and Irene  Horowitz.  Ms.  Wolfgang and law firms with whom she
has been associated occasionally have performed legal services for the Company.

Dr.  Mohan  Sanduja,  PHD joined the  Company in 1979 as  Assistant  Director of
Research. In 1982, he became a Director of Research and Development. In 1987, he
became a Director of the Company and Vice President of Research and Development.

Clare Chamow joined the Company in 1982. She became a Vice President in March of
1996 and is  responsible  for office  management.  She is a graduate of Brooklyn
College with a B.A. Degree in Education.

Betty Friedman  joined the Company in 1976. She became a Vice President in March
of 1996 and is in charge of personnel and purchasing for production.



                                      -14-

<PAGE>


ITEM 11. EXECUTIVE COMPENSATION

The  following  table sets forth the  compensation  paid  during the years ended
December 31, 1997, 1996 and 1995 to the chief executive  officer and those three
executive  officers of the Company who earned in excess of $100,000 for the year
ended December 31, 1997.

<TABLE>
<CAPTION>
                                                        SUMMARY COMPENSATION TABLE

                                                                                     LONG TERM COMPENSATION
                                                                                     ----------------------
                                          ANNUAL COMPENSATION                   AWARDS                     PAYOUTS
                                  -------------------------------------------------------------------------------------------------
   (a)                (b)           (c)              (d)              (e)         (f)          (g)           (h)             (i)
NAME                                                                 OTHER     RESTRICTED
AND                                                                  ANNUAL      STOCK                       LTIP         ALL OTHER
PRINCIPAL                                                            COMPEN-     AWARDS      OPTIONAL       PAYOUTS       COMPEN-
POSITION              YEAR        SALARY ($)        BONUS($)         SATION($)     ($)       SAR'S(#)          ($)        SATION($)
                                                                      (1)
-----------------------------------------------------------------------------------------------------------------------------------
<S>                   <C>         <C>               <C>              <C>        <C>            <C>             <C>        <C>
CARL HOROWITZ         1997        $160,000          $25,000          $13,236      $-0-         $-0-            $-0-       $12,985
CEO, PRESIDENT        1996         150,000           25,000           10,836       -0-          -0-             -0-         7,460
                      1995         135,915           25,000           27,616       -0-          -0-             -0-         8,084

IRENE HOROWITZ        1997         158,349           10,000              -0-       -0-          -0-             -0-        12,985
SENIOR VICE           1996         153,923           10,000              -0-       -0-          -0-             -0-         7,650
PRESIDENT             1995         152,525           10,000              -0-       -0-          -0-             -0-         7,940

JOHN M. RYAN          1997         248,014             -0-               -0-     20,000         -0-             -0-         3,359
EXECUTIVE VICE        1996         241,167           20,000              -0-       -0-          -0-             -0-         3,524
PRESIDENT             1995         218,227            7,738              -0-       -0-          -0-             -0-         3,374

MOHAN SANDUJA         1997         117,780            1,624              -0-       -0-          -0-             -0-         9,905
VICE PRESIDENT        1996         114,080            1,500              -0-       -0-          -0-             -0-        10,592
RESEARCH AND          1995         102,930            2,000              -0-       -0-          -0-             -0-         9,493
DEVELOPMENT
</TABLE>

(1)  Represents  premiums  on  officer's  life  insurance  policy  in which  Mr.
     Horowitz has the right to designate the beneficiary.

During the years ended 1997, 1996 and 1995, the financial statements reflected a
charge for profit sharing contributions of $100,000.


                                      -15-

<PAGE>


STOCK OPTIONS

No executive officer owns any stock options.

EMPLOYMENT AGREEMENTS

On March 1, 1993, the Company and Carl Horowitz agreed to extend Mr.  Horowitz's
employment  agreement through May 16, 1998. Mr.  Horowitz's  maximum base salary
under the new  agreement is $160,000  for 1997 with annual  increases of $10,000
thereafter.

On July  26,  1994 the  Company  entered  into  retirement  agreements  with the
Company's President and Senior Vice President. The agreements set a compensation
rate of 60% of the average 5 preceding year's annual  compensation,  payable for
the remainder of the  individuals'  life. In addition the Company is to maintain
the individuals' medical benefits.

Directors  who are not  employees of the Company  receive a fee of $500 for each
regular meeting of the Board of Directors that they attend.

Effective  January 1, 1990,  the  Company  adopted a  qualified  noncontributory
profit sharing plan.  Eligible  employees must meet two  requirements  to become
participants;  attainment  of age 21 and  completion of one year of service with
the Company.  Employer  contributions,  if any, are  determined  at the Board of
Directors'  discretion.  A percentage  of the benefits vest after three years of
qualifying service.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT

The  following  table sets forth certain  information,  as of February 18, 1998,
with respect to each person known to the Company to be the  beneficial  owner of
more than 5% of the Company's Common Stock,  each executive officer named on the
Summary Compensation table, and by all officers and directors as a group:

                                                   AMOUNT
                    NAME AND ADDRESS OF         BENEFICIALLY     PERCENTAGE
TITLE OF CLASS       BENEFICIAL OWNER               OWNED         OF CLASS
--------------       ----------------           ------------     ----------
Common stock         Carl Horowitz                361,206          24.2%
$.01 par value       2719 Whitman Drive
                     Brooklyn, NY  11234


                                      -16-

<PAGE>


                                                   AMOUNT
                    NAME AND ADDRESS OF         BENEFICIALLY     PERCENTAGE
TITLE OF CLASS       BENEFICIAL OWNER               OWNED         OF CLASS
--------------       ----------------           ------------     ----------
                     Irene Horowitz                32,507           2.2%
                     2719 Whitman Drive
                     Brooklyn, NY  11234

                     John M. Ryan                  36,637           1.1%
                     3035 Lonni Lane
                     Merrick, N.Y.  11566

                     Alice J. Horowitz             46,585           3.1%
                     3046 West Tonopah Drive
                     Phoenix, Arizona  85027

                     Boris Jody                       -0-           0.0%
                     4301 N. Ocean Blvd.
                     Boca Raton, Fl.

                     Anna Dichter                     770           0.0%
                     1757 E. 54th Street
                     Brooklyn, N.Y.

                     George Sawey                      74           0.0%
                     59 Squaw Brook Road
                     N. Haldon, N.J.

                     Terry J. Wolfgang             13,970           0.9%
                     440 West End Avenue
                     New York, N.Y.  10750

                     Dr. Mohan Sanduja                -0-           0.0%
                     144-90 91st Avenue
                     Flushing, N.Y.

                     Clare Chamow                     -0-           0.0%
                     5613 Fillmore Avenue
                     Brooklyn, N.Y. 11234

                     Betty Friedman                   -0-           0.0%
                     7219 Avenue N
                     Brooklyn, N.Y. 11234

                     All executive officers and
                     Directors as a group (11
                     in number)                   471,749           31.7%


                                      -17-

<PAGE>


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

                                      NONE

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS
         ON FORM 8-K

         1. Financial Statements.  See  Item 8  above  for  a list of  financial
                                   statements  included as  part of this  Annual
                                   Report on Form 10-K.

         3. Exhibits

                      (3)    Registrant's   Certificate  of  Incorporation,   as
                             amended,  and By-Laws, as amended  (incorporated by
                             reference  as  previously  filed  with  the  United
                             States   Securities  and  Exchange   Commission  on
                             January  7,  1986 on  Form  10).  Amendment  to the
                             Certificate of  Incorporation  dated July 23, 1988,
                             (incorporated by reference as previously filed with
                             the United States Security and Exchange  Commission
                             in March 1991 with Form 10K)

                     (10)    Material Contracts

                     (.1)    Employment Contract of Carl Horowitz, the Company's
                             President,  dated  March 1, 1993  (incorporated  by
                             reference as  previously  filed with  United States
                             Security  and  Exchange  Commission in  March, 1994
                             Form 10K).

                     (.2)    Mortgage  agreement  between the  Company  and Tama
                             Realty Co.,  dated  June 4, 1990  (incorporated  by
                             reference  as  previously  filed  with  the  United
                             States  Security and  Exchange  Commission in March
                             1991 with Form 10K).

                    (.2A)    Mortgage modification agreement between the Company
                             and  Tama  Realty  Co.,   dated  August  26,  1996.
                             (Incorporated by reference as previously filed with
                             the United States Security and Exchange  Commission
                             in March, 1997 with Form 10k).





                                      -18-

<PAGE>



                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                   POLYMER RESEARCH CORP. OF AMERICA

                                   /s/CARL HOROWITZ
                                   ----------------------------------
                                   CARL HOROWITZ, President and
                                   Chief Executive Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities and on the dates indicated.

/s/CARL HOROWITZ                                       March 30, 1998
--------------------------      Director               ----------------
Carl Horowitz                                          Date

/s/IRENE HOROWITZ                                      March 30, 1998
--------------------------      Director               ----------------
Irene Horowitz                                         Date

/s/JOHN M. RYAN                                        March 30, 1998
--------------------------      Director               ----------------
John M. Ryan                                           Date

/s/ALICE J. HOROWITZ                                   March 30, 1998
--------------------------      Director               ----------------
Alice J. Horowitz                                      Date

/s/BORIS JODY                                          March 30, 1998
--------------------------      Director               ----------------
Boris Jody                                             Date

/s/DR. MOHAN SANDUJA, PhD                              March 30, 1998
--------------------------      Director               ----------------
Dr. Mohan Sanduja, PhD                                 Date

/s/TERRY WOLFGANG                                      March 30, 1998
--------------------------      Director               ----------------
Terry Wolfgang                                         Date