SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                   FORM 10-KSB

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

                           For the fiscal year ended:
                                  June 30, 1998
                             Commission File Number
                                    0-21151

                           PROFILE TECHNOLOGIES, INC.
                           --------------------------
                 (Name of small business issuer in its charter)

            DELAWARE                                            91-1418002
            --------                                            ----------
(State or other jurisdiction of                              (I.R.S. Employer
 incorporation or organization)                           Identification Number)

         1077 NORTHERN BLVD.
             ROSLYN, NY                                             11576
---------------------------------------                           --------
(Address of Principal Executive Offices)                         (Zip Code)

Issuer's telephone number: (516) 365-1909
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:

                          Common Stock $.001 Par Value
                          ----------------------------
                                 Title of Class

Check  whether  the issuer  (1) has filed all  reports  required  to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been subject to such filing requirements for the past 90 days.

                                 Yes  X    No

Check if there is no  disclosure of  delinquent  filers  pursuant to Item 405 of
Regulation  S-B is not  contained  in  this  form,  and no  disclosure  will  be
contained,  to the  best of  Registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. X

State issuer's revenues for the most recent fiscal year. $45,000.

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant was $45,621,900,  based on the closing bid and ask prices as reported
by the NASDAQ SmallCap market on September 9, 1998.

There were  4,273,846  shares of common stock $.001 par value  outstanding as of
September 9, 1998.

                      Documents incorporated by reference:
Definitive Proxy material for annual shareholder meeting to be held November 14,
1998 filed pursuant to Regulation 14A.

Transitional Small Business Format (check one): Yes    ;   No  X

<PAGE>


Item 1.  Description of Business.

Introduction

     The Company was originally  incorporated in Washington in 1988 but has been
a Delaware  corporation  since 1995.  Since its  inception  the Company has been
engaged in the business of  researching  and  developing  a high speed  scanning
process,  which is nondestructive  and noninvasive,  to remotely test buried and
above  ground  pipelines  for  corrosion  and coating  problems.  The  Company's
process,  called a dual pulse propagation analyzer ("PPA") is a patented process
of  analyzing  the  waveforms  of  electrical  impulses  in a way that  extracts
point-to-point pipeline integrity information.  This process involves sending an
electrical  pulse along the pipe being tested from each of two locations  toward
an intersecting location between the two locations. At least one of the modified
pulses is analyzed to determine  whether an anomaly  exists at the  intersecting
location.  This  process is designed to detect  external  corrosion  of pipeline
which occurs under pipe  insulation  without the need for taking the line out of
service,  physically  removing the coating,  and then  visually  inspecting  the
outside of the pipe for  corrosion.  The most common  forms of  corrosion  under
insulation  ("CUI") are localized  corrosion of carbon steel and chloride stress
corrosion cracking of stainless steel. Refineries,  chemical plants,  utilities,
natural gas transmission  companies and the petroleum  industry have millions of
miles of corrosion protected  pipeline.  Much of this piping is exposed to harsh
and  severe  environments.  As a result,  there is an  on-going  effort by these
industries  to  ensure  that the  quality  of the pipe  meets  standards  set by
regulatory  bodies and the  industry  to  protect  operating  personnel  and the
environment.  While the Company continues to develop and refine its PPA process,
the  technology has evolved to the point where it is now being used in the field
on a commercial  basis. In July, 1998, the Company began and completed its first
commercial contract on the North Slope of Alaska, testing approximately 100 road
and caribou crossings on British Petroleum  pipelines under a contract with ASCG
Inspection, Inc. The contract was completed ahead of schedule.

Corrosion Protection

     Virtually all pipeline  systems are required to have some type of corrosion
protection  applied  to extend the useful  life of the  pipeline  and to prevent
pipeline  failures due to corrosion.  The effect of such failures  ranges from a
few drops of a toxic  substance on the surface of the  pipeline to  catastrophic
explosions which result in extensive damage of property and loss of human life.

     Although  there  are  many  special  techniques  used to  protect  pipeline
systems,  two are most  common.  The first is to apply a coating to the pipeline
which  will  keep  the  pipeline  isolated  from  its  environment.  This  is  a
fundamentally  sound  approach,  but it is complicated by the fact that coatings
can become damaged during the installation  process.  Most coatings also degrade
over time so the effectiveness of protection is reduced.

                                        1

<PAGE>


     The second technique,  used to protect  predominantly  buried and submersed
pipelines, is designed to protect bare pipeline or pipeline which has damaged or
missing coating.  This technique is called Cathodic  Protection.  Simply stated,
the  technique  uses the flow of electric  current to polarize  the pipeline and
prevent corrosion. The polarization process attempts to maintain the pipeline at
some negative voltage with respect to an external  reference  voltage,  called a
"half-cell".  That  reference  level is called a  Pipe-to-Soil-Potential  and is
commonly  referred to as a "PSP".  The  polarization  process  basically uses an
electrochemical  process to prevent the pipe from corroding in the ground.  Many
years of experience  and extensive  experimentation  have  generated a PSP level
which is generally  considered to represent  "protected"  pipe. To determine the
effectiveness of the cathodic  protection system, it is necessary to measure the
PSP at sufficient  locations  along the segment of pipeline so that a protection
profile can be viewed.

     A combination of federal,  state, local and industry  jurisdictions combine
to  regulate  corrosion  protection.  For  example,   regulations  covering  the
operation of natural gas transmission systems promulgated by the U.S. Department
of Transportation's Office of Pipeline Safety has required steel pipelines to be
equipped with cathodic protection since the early 1970's. In addition,  the U.S.
Department  of Labor,  operating  through  the  Occupational  Safety  and Health
Administration  ("OSHA") has  jurisdiction  over numerous  plants and facilities
containing  corrosion protected pipeline that, if breached,  could cause serious
bodily  injury or death to on-site  workers.  Finally,  the  American  Petroleum
Institute  ("API") has promulgated a comprehensive  Piping Inspection Code which
requires that extensive corrosion testing be done by all members (which includes
the vast majority of the petroleum and petrochemical industries). As a result of
the  extensive  regulation  and testing  requirements  as described  above,  the
industry  is faced  with the  requirement  to engage in  extensive  testing  for
corrosion.

     In 1993, the API imposed even stricter test standards regarding the problem
of CUI. When pipeline is uninsulated and above ground, external corrosion can be
identified  visually.  The  petroleum  and other  related  industries,  however,
insulate  much of their piping to conserve  energy  and/or to prevent  injury to
personnel from high  temperature  levels on the pipelines.  As soon as piping is
insulated,  a very complex situation is created.  Corrosion can occur underneath
the insulation due to moisture or corrosive products that find their way through
broken  or  poorly  sealed  insulation.  This CUI is very  difficult  to  locate


                                        2

<PAGE>


economically. In the past, testing for this problem had been on a limited sample
basis and relied upon inspection processes that were very cumbersome and costly.
Two  prevalent  testing  methods  used to detect CUI are X-ray and eddy  current
methods,  which are methods of  detecting  defects in pipe by  analyzing  visual
image and decay. After physically  stripping away coating for visual inspection,
depth gauges, ultrasonics and X-ray could then be used to determine the severity
of CUI on questionable pipe.  However,  the stripping of insulation to determine
corrosion is a costly testing method for the industry because it often meant the
assembly of scaffolding  for testing  otherwise  inaccessible  above ground pipe
(particularly  in refineries  and  petrochemical  plants) or an actual dig-up on
below ground pipe. The Company's  technology enables it to test pipe segments in
a refinery  setting as long as one hundred feet to three hundred feet and to use
"cherry pickers" instead of costly  scaffolding.  CUI is also a very complicated
problem  to test for  because  it  cannot be easily  identified  by  statistical
sampling. If, for example, a segment of pipe has a small insulation part removed
every ten feet and is visually inspected using eddy current or x-ray techniques,
there is no  statistical  basis to assume  that the  external  condition  of the
piping  between the  removed  insulation  parts is good or bad.  The API testing
standard  adopted in 1993, in essence,  mandates  either  stripping  even larger
amounts of coating or using an alternate  system that will  identify CUI without
stripping  the  coating  on  suspected  (or  unsuspected)  pipe.  Because of the
enormous cost involved in using the stripping and visual  testing  process,  the
industry is  enthusiastically  searching for an alternate testing system that is
reliable and less costly.  The Company believes that its PPA process provides an
alternate  testing  system  that the  industry  is  looking  for.  However,  the
Company's  technology is just now being  commercially  accepted for such purpose
and there can be no assurance that such acceptance will continue to grow.

The Company's Dual Pulse Propagation Analyzer Process

     The PPA process  extracts  corrosion  related  information from segments of
both  accessible and  inaccessible  pipelines  underneath the entire  insulation
barrier by analyzing the intersection of two electrical current pulses traveling
in opposite directions along the pipeline. This corrosion related information is
extracted without the need for removing the insulation  protecting the pipeline.
The Company  established  by laboratory  and field  testing that the  electrical
response,  called  characteristic  transfer  function (CTF), of two intersecting
pulses traveling along the pipeline is uniquely  defined with location  specific
information  that  relates  to the  integrity  of the  pipeline  at the point of
intersection. Constructive interference occurs when the two current impulses run
into and interfere with each other at the point of  intersection  on a pipeline.
The  CTF is  determined,  not  only by the  nature  and  characteristics  of the
original pulses, but by the physical  characteristics of the pipeline segment in
its environment at the point of intersection.

                                        3

<PAGE>


     The PPA process was  developed to evaluate the  condition  and integrity of
pipelines.  Electro-magnetic pulses are applied at both ends of the pipe segment
being tested.  Under computer control, the timing of the pulses is controlled so
that the intersection point of the two pulses moves sequentially from one end of
the pipe to the other end. A unique CTF is obtained for each intersection  point
of the pipeline segment being tested on some predetermined interval; such as, in
one foot intervals.  When this data is  geophysically  displayed,  it provides a
visual  display of data  related to the  physical  condition of the pipe at each
point of intersection.  Additional  electromagnetic  inspection of the pipeline,
using  an  external  calibrator  developed  by the  Company,  provides  a second
alternative  application of the Company's technology to inspect the questionable
pipe locations found during the PPA process. This alternative application, which
the Company is refining its development of, is used as a verification of the PPA
process.  It is more time  consuming to use and it is doubtful  that it would be
the initial method selected for testing.  This alternative  application involves
the use of an antenna  assembly  to scan the pipe under  analysis in those areas
where suspected anomalies have been located using the PPA process. Thus far, the
Company has used this  alternative  application  as  confirmation  of  potential
anomalies.  The  Company is in the  process  of  evaluating  whether  there is a
sufficient interest in this second alternative  application to justify a second,
separate product for the Company.  Information can also be derived using the PPA
process to determine the condition of the coating and the  effectiveness  of the
existing  corrosion  protection system which is being used to protect each point
of  intersection.  Where there are  indications  of  problems,  closer  interval
inspection can be performed and/or one of the other location specific  processes
used in the industry may be utilized before the insulation is removed to inspect
the pipe condition.

     As simple as the  concept may  appear,  the PPA process is not  intuitively
obvious. The petroleum industry has spent large sums trying to solve the problem
of  finding  corrosion  under   insulation.   Correlating   pipeline   corrosion
information   using  the  Company's   technology   requires  a  combination   of
state-of-the-art instrumentation plus an understanding of the physical phenomena
that are being  measured.  Although the principles of the PPA process are simple
to explain,  management believes that the measurement and analysis of the effect
are pushing the leading edge of technology.

     The Company believes that the principal  advantage to using the PPA is that
it  provides  a method for the  operating  companies  to do a visual  equivalent
inspection on inaccessible pipe without the need to remove insulation.  Research
and development efforts will continue in the development of new applications for
the Company's  technology and to develop new products for the petroleum industry
and other industries.


                                        4

<PAGE>



Patents, Proprietary Technology and Other Intellectual Property

     The Company pursues a policy of generally  obtaining patent protection both
in the United States and abroad for patentable subject matter in its proprietary
technology.  As of June 30, 1998, the Company had five issued U.S. patents, four
issued foreign  patents,  seven U.S. patent  applications  pending,  six foreign
patent applications pending and three patent applications filed under the patent
cooperation  treaty which enables the Company to file additional  foreign patent
applications in the future.

     The Company's success depends in large part upon its ability to protect its
process and  technology  under United States and  international  patent laws and
other intellectual property laws. U.S. patents have a term of 17 years from date
of issuance or, for more recently filed patent  applications,  20 years from the
filing of such  applications,  and patents in most foreign countries have a term
of 20 years from the  proprietary  filing  date of the patent  application.  The
first U.S. patent was issued in 1990,  three patents were issued in 1993 and one
patent was issued in 1998.

     The Company  believes  that it owns and has the right to use or license all
proprietary  technology  necessary  to  license  and market  its  process  under
development.  The  Company is not aware of the  issuance  of any  patents or the
filing of any patent  applications  which relate to processes or products  which
utilize the Company's proprietary  technology in a manner which could be similar
to or competitive with the Company's  products or processes.  The Company has no
knowledge  that it is  infringing  on any existing  patent such that it would be
prevented  from  marketing or  licensing  products or services  currently  being
developed by the Company.

     The  Company  may  decide  for  business  reasons  to  retain a  patentable
invention  as a trade  secret.  In such  event or if  patent  protection  is not
available,  the Company must rely upon trade  secrets,  internal  knowledge  and
continuing  technological  innovation  to develop and maintain  its  competitive
position.  The Company  employees and  consultants  have access to the Company's
proprietary information and have signed confidentiality agreements.

Research and Development Spending

     During the two most  recent  fiscal  years ended June 30, 1998 and June 30,
1997,  the Company  spent  $316,876  and $272,240  respectively  on research and
development activities. In addition,  certain non-cash expenses were incurred in
connection with research and development activity. See "Management's  Discussion
and Analysis of Financial Condition and Results of Operations".


                                        5

<PAGE>


Development of Business

     Up through the year ended June 30, 1994, all revenues earned by the Company
were derived from research and development contracts with a large public utility
and a  large  independent  natural  gas  company.  These  contracts  focused  on
evaluating  below  ground pipe for  cathodic  protection  and  coating  defects.
However,  by late 1994,  the Company,  as a result of its  activities up to that
point in time, came to the realization  that its technology had the potential to
identify  the  location of actual  corrosion,  as opposed to simply  identifying
locations  which  might  have  insufficient  cathodic  protection  or  defective
coating, and therefore a likelihood of corrosion.  The Company believed that the
identification  of  actual  corrosion  was of  even  greater  importance  to the
petroleum,  petrochemical  and  utility  industries  because  these  industries'
resources  could  be  used  more  efficiently  in  correcting  actual  corrosion
locations.  Once  corrosion  locations have been  identified and corrected,  the
Company's technology could still be used to identify lack of cathodic protection
and coating defects as part of a preventive maintenance program.

     In early 1995,  the Company  spent three  months at the refinery of a large
multi-national  oil company,  researching  and  developing  test  procedures for
identifying  corrosion  of  above  ground  refinery  pipe as part of a shift  in
emphasis  away from  testing of  underground  pipe for cathodic  protection  and
coating  defects.  An important  factor in this shift in emphasis had to do with
verification.  Potential customers could more easily and less expensively verify
the accuracy and  dependability  of the Company's  technology in an above ground
environment  that doesn't involve time consuming and costly dig ups. The Company
believes  that once  potential  customers  have  satisfied  themselves  that the
technology is accurate and cost  effective,  they would be more likely to expand
the use of the technology to difficult to reach below ground  environments.  The
Company also believes that this shift in emphasis was a significant step forward
because major oil  companies  were willing to provide  detailed data  concerning
pipe  quality and  testing  standards.  Beginning  in 1995,  the  Company  began
conducting  research and  development  activities at the research  facilities of
another large  multinational oil company to develop the Company's  technology to
the point where it could identify corrosion locations.  As part of this process,
numerous  segments  of pipe in various  conditions  ranging  from  excellent  to
extremely  corroded were  assembled in various  configurations  and covered with
insulation.  The Company then used its  technology  to evaluate the various pipe
segments  without prior  knowledge of the condition of the pipe segments.  After
obtaining  data,  the Company  evaluated the results and then submitted a report
which  summarized  its findings.  In late July of 1996,  representatives  of the
Company  traveled  to the  Prudhoe  Bay area of  Alaska  and met with  operating
personnel from three large  multi-national  oil companies with operations in the
area to discuss the feasibility of conducting a field  demonstration and test of
the  Company's  technology  on  operating  pipelines  in that area.  The Company


                                        6

<PAGE>


subsequently  conducted  a field  demonstration  and  test on a 24 inch  line in
September of 1996 and then  submitted a report  summarizing  its  activities and
findings.  In August of 1997, the Company completed a second field demonstration
using refined  hardware and software  that the Company had  developed  since its
previous field  demonstration.  In July of 1998, the Company completed its first
commercial contract on the North Slope of Alaska, testing approximately 100 road
and caribou crossings on British Petroleum  pipelines under a contract with ASCG
Inspection, Inc. The contract was completed ahead of schedule.


Competition

     The Company  believes that the  nondestructive  testing  industry is highly
fragmented and comprised of numerous companies, many of whom are larger and have
greater financial resources than does the Company. However, the Company believes
that these competitors are offering  non-destructive  testing services that rely
on technologies  which are different from the technology offered by the Company.
These other  technologies,  including x-ray,  ultrasonic and eddy current,  have
been in  existence  for many years and have  gained wide  acceptance  within the
industry.  In addressing the  requirements of the large national  companies that
would be expected to have an interest  in the  Company's  services,  the Company
expects to compete on the basis of technical  performance,  delivery capability,
service quality and price.

     Substantially  all of the Company's  competitors have, and potential future
competitors could have, substantially greater technical,  financial,  marketing,
and other  resources  than the Company and have,  or could  have,  greater  name
recognition  and  market  acceptance  of their  products  and  technologies.  No
assurance  can be given that the  Company's  competitors  will not  develop  new
technologies or enhancements to existing services or introduce new services that
will offer superior price or performance features. In such case, the Company may
experience  significant price  competition,  which could have a material adverse
effect on gross margins.

Marketplace

     Nondestructive  corrosion  testing  services  are  required  across a broad
market.  Customers  are expected to be generally  the owners of, or  engineering
firms associated with, major  processing  facilities and pipeline  systems.  The
Company's  services are expected to be provided to the  refining,  petrochemical
and pipeline segments of the petroleum  industry and to the utilities  industry,
and demand for these  services is typically  driven by safety and  environmental
considerations.

                                        7
<PAGE>


     The  Company  will  seek to obtain  business  through  ongoing  contractual
relationships  and competitive and sole source bidding.  The Company's  officers
are presently responsible for sales and marketing and will continue to have such
responsibility in the foreseeable future.

     Most  refineries,  petrochemical  plants and other similar  facilities have
ongoing  maintenance  programs  which may require  one or more crews  performing
corrosion control testing on a continuous basis.  Typically,  these services are
provided by an outside contractor under a blanket service agreement, rather than
by the employees of the refineries and plants. The Company expects that if it is
successful in obtaining  contracts  with major oil refineries (of which there is
no assurance), such contracts will be of this type.

     The  Company  also will seek to perform  testing  services  for the utility
industry.  Utilities  have thousands of miles of  underground  gas  transmission
lines that are constantly being monitored and tested for corrosion.

Employees

     The Company presently has five employees.  In preparation for the hiring of
field crews, the Company  anticipates that it will have three to five additional
employees,  who will be in the areas of administration,  accounting,  marketing,
promotion and  clerical.  Field crews will,  in all  likelihood,  consist of two
field  technicians  per crew. The number of crews employed by the Company at any
given time will be dependent upon the Company's level of business  activity.  In
addition, the Company will continue to retain independent  consultants to render
advice with respect to technical and scientific matters.

Compliance With Environmental Laws

     Because of the nature of the Company's  business,  it does not believe that
the costs and effects of compliance with  environmental  laws,  whether federal,
state or local, would be significant or even material.

Item 2.  Description of Property

     The Company's executive offices are located at 1077 Northern Blvd., Roslyn,
NY 11576. The Company leases approximately 1,400 sq. feet of office space at the
address from a  non-affiliate.  The rental payment is twenty-two  thousand eight
hundred dollars per year ($1,900 per month).  The lease expires in approximately
one year and has a two year renewal option.

     The  Company's  research and  development  facility is located in Ferndale,
Washington.  The Company  leased  1,800 sq. feet of space under a one year lease
from a  non-affiliate  at a  monthly  rental  rate of  $1,400.  The  Company  is
currently leasing the facility on a month to month basis since the lease has now
expired and the Company is negotiating an extension of the lease.

                                        8

<PAGE>


     The Company does not own any real estate.

     The Company does not invest in, nor does the Company  intend in the future,
to invest in real estate or interests in real estate,  real estate  mortgages or
securities  of  or  interests  in  persons  primarily  engaged  in  real  estate
activities.

Item 3.  Legal Proceedings.

     The Company is not a party to any material pending legal proceedings nor is
any of its property subject to any such legal proceedings.

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

     No matters were  submitted to a vote of security  holders during the fourth
quarter of the  Company's  fiscal year ended June 30, 1998,  either  through the
solicitation of proxies or otherwise.


                                     PART II

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

     The Company's  common stock has been traded on the NASDAQ  SmallCap  market
since it began public  trading in February of 1997,  under the symbol PRTK.  The
following table sets forth the high and low bid prices for the Company's  common
stock, by quarter,  since the  commencement  of public  trading,  as reported by
Nasdaq.

           Quarter Ended          High Bid           Low Bid
           -------------          --------           -------

           March 31, 1997           $7.25             $5.75
           June 30, 1997           $10.75             $6.00
           September 30, 1997      $12.25             $6.25
           December 31, 1997       $12.25            $11.00

           March 31, 1998          $21.00            $10.00
           June 30, 1998           $19.50            $14.00

     The above prices are believed to be representative  interdealer quotations,
without  retail  markup,  markdown  or other  fees or  commissions,  and may not
represent actual transactions.

     At  September  9, 1998,  the bid price of the  Company's  common  stock was
$15.25  per share.  On such date the  Company  had 125  holders of record of the
Company's common stock and the Company  estimates that it has  approximately 450
beneficial shareholders.


                                        9

<PAGE>



     The Company has not paid any dividends on its common stock and the Board of
Directors presently intends to continue a policy of retaining earnings,  if any,
for use in the Company's  operations  and to finance  expansion of its business.
The declaration and payment of dividends in the future, of which there can be no
assurance,  will be  determined by the Board of Directors in light of conditions
then existing, including earnings, financial condition, capital requirements and
other factors.  There are no restrictions  that currently  materially  limit the
Company's ability to pay dividends or which the Company reasonably  believes are
likely to limit materially the future payment of dividends on common stock.

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

GENERAL
-------

     The Company is a development  stage  enterprise and has recently  completed
development of its pulse  propagation  analyzer  process and is further refining
the  technology  associated  therewith  to the point  where  initial  commercial
utilization  began in July,  1998.  The  Company  has not,  as of yet,  obtained
significant  revenues from its planned  primary source of revenues.  The goal of
the Company has been the establishment of commercial  viability  associated with
services  to  electronically  measure  corrosion  in  piping of all  kinds.  The
Company's  product  identifies  areas of  corrosion,  areas  that lack  cathodic
protection  and areas that may have  defective  coating on both below ground and
above  ground  pipes.  The pulse  propagation  analyzer  consists of a computer,
software to enhance collection and processing of data, a precision multi-channel
pulse generator and a signal analyzer.  During fiscal 1996, the Company began to
see rapid progress in the  development of its technology and its ability to meet
the expectations of potential customers.  By that time, the Company had begun to
accelerate  its  efforts  and expend more  resources  to develop its  technology
faster. Thus, expenses and purchases of equipment have been generally increasing
at a faster pace than in prior  periods.  This trend  accelerated  in the fiscal
year ended June 30, 1997, particularly after completion of the Company's initial
public stock offering in February of 1997. The Company believes that it attained
technological feasibility of its product with the completion of its research and
development  activity  in a  controlled  environment  in July of  1996.  A field
demonstration  of  the  Company's  service  capabilities   utilizing  its  pulse
propagation  analyzer process was performed for two  multinational oil companies
at Prudhoe  Bay,  Alaska in September  of 1996.  A further  demonstration  using
updated and more  sophisticated  hardware and software was  completed in Prudhoe
Bay, Alaska in August of 1997. This work led to an initial  commercial  contract
to test 100 road and caribou crossings, which began and was completed in July of
1998.

                                       10

<PAGE>


     In order for the Company to obtain significant revenues from the use of its
technology,  the Company must establish a sales and marketing  organization that
is effective  and obtains  customers  for its pulse  propagation  analyzer.  The
Company must also be able to supply and train work crews in  sufficient  numbers
to satisfy the  requirements of its customers.  From inception  through June 30,
1998,  the Company has incurred  losses of $3,145,684 and losses are expected to
continue at least  through the second  quarter of the year ending June 30, 1999;
no assurances can be given that losses will not be incurred thereafter.

     In the opinion of management, significant progress has been made to date in
developing its technologies,  gaining  credibility with its markets and building
its board of directors and investor base,  without  spending  inordinate sums to
achieve  these  goals.  As of June 30,  1998,  the  Company had been issued five
patents covering its unique  technology.  An additional seven provisional patent
applications have been filed, and the Company may file for additional patents in
the future.

RESULTS OF OPERATIONS
---------------------

Years Ended June 30, 1998 and June 30, 1997
-------------------------------------------

     The Company incurred a net loss of $712,827 in the year ended June 30, 1998
compared to a net loss of $1,035,003  in the year ended June 30, 1997.  Revenues
for the year ended June 30, 1998 were $45,000,  which  represented a decrease of
$5,000,  or 10% as  compared  to revenues of $50,000 for the year ended June 30,
1997.  Revenues  for the year ended  June 30,  1998 were  earned  from one major
multi-national oil company for  demonstrations of the Company's  technology both
in the field and in a controlled  setting at one of such oil company's  research
and development  facilities.  Interest income increased to $246,706 for the year
ended June 30, 1998 from $97,703 for the year ended June 30, 1997. This increase
is the result of the  Company's  investment  of the net  proceeds  of its public
stock  offering for a full fiscal year in short term interest  bearing  accounts
and interest bearing instruments.

     Total  expenses for the Company for the year ended June 30, 1998  decreased
slightly over the year ended June 30, 1997.  Total  expenses of $1,004,533  were
recorded  in the year  ended  June  30,  1998  compared  to  total  expenses  of
$1,182,706  for the year ended June 30,  1997.  This  represented  a decrease in
expenses of $178,173 or 15%. However, $559,154 of the total expenses incurred in
the year ended June 30, 1997 were  attributed  in large part to the  issuance of
common  stock  purchase  warrants  to outside  consultants.  Before  taking into
account this nonrecurring noncash expense,  expenses for the year ended June 30,
1997 were actually  $380,981  less than the expenses  incurred in the year ended
June 30, 1998. The increase in cash expenses for the year ended June 30, 1998 is


                                       11

<PAGE>


attributed in part to increased  expenditures  associated  with the research and
development  involving  the  Company's  technology.  General and  administrative
expenses  increased to $687,657  for the year ended June 30, 1998 from  $351,312
for the year ended June 30,  1997 and  reflects  the  payment  of  salaries  and
outside  consulting  fees  incurred  in  connection  with  the  Company's  field
demonstrations  as well as an increase in  personnel,  including the hiring of a
field  operations  supervisor.  Research and development  expenses  increased to
$316,876 for the year ended June 30, 1998 from  $272,240 for the year ended June
30, 1997, an increase of $44,636 or 16%.

     Management  believes  that both  revenues  and expenses of the Company will
increase  during the fiscal  year  ending  June 30, 1999 if it is able to secure
additional  contracts  with  customers,  of  which  there is no  assurance.  The
revenues  earned by the  Company  to date  principally  relate to  research  and
development activities that were sponsored by large multi-national oil companies
and large utilities.  These activities include field research and development at
such companies' facilities.

     These  activities  are likely to  continue  during the year ending June 30,
1999 and for the  foreseeable  future.  Management  is also  vigorously  working
towards obtaining  additional fee for service  contracts,  which are hoped to be
the major  source of the  Company's  revenues.  If  additional  fee for  service
contracts are obtained,  management  expects its  expenditures  associated  with
personnel and testing equipment will begin to rise. In addition,  as the Company
provides  additional  fee for service work,  additional  administrative  support
activities will increase together with related expenses.

LIQUIDITY AND CAPITAL RESOURCES

     Revenues  for the period  from July 1, 1988  (inception)  through  June 30,
1998,  were $527,189  while expenses were  $4,028,122,  resulting in a loss from
operations,   since  inception,  of  $3,500,933.  Net  cash  used  in  operating
activities  from inception  through June 30, 1998 was  $2,008,655.  For the year
ended June 30, 1998,  cash used in  operations  was  $637,321.  Thus,  while the
revenues   derived  from   research  and   development   activities   funded  by
multi-national  oil companies and major  utilities were  indicative of financial
support  for the  Company's  efforts to develop  its  technology,  they were not
sufficient to cover expenses.  Accordingly,  the Company historically maintained
adequate liquidity and cash reserves through the private placement of its common
stock. Such offerings, from inception through March of 1996, totaled $1,471,567.
No private placements have occurred since that date.

                                       12

<PAGE>

     In February 1997 the Company  completed an initial  public  offering of its
common stock which  involved the sale of 1,050,000  shares of common stock at an
offering  price  of $6.00  per  share.  The  Company  derived  net  proceeds  of
$5,171,687 (including the issuance of 50,000 shares of common stock at $6.00 per
share pursuant to a partial exercise of the underwriter's overallotment option).

     The Company has no material long term  commitments or material  commitments
for capital expenditures.

At June 30, 1998 Compared to June 30, 1997.

     At June 30, 1998,  the Company had cash and cash  equivalents of $4,167,951
as  compared  to the  June  30,  1997  cash  and  cash  equivalent  balances  of
$4,936,600.  The principal  reason for the decrease in cash and cash equivalents
was the expenditure of $637,321 used in operating activities.  At June 30, 1998,
the Company's  working  capital was $4,051,984.  As of June 30, 1997,  there was
working capital of $4,858,223.  The Company's principal assets at June 30, 1998,
apart from the cash and cash equivalents mentioned above, consisted of property,
equipment and capitalized patent costs. Property and equipment at June 30, 1998,
was $113,173,  up over the balance of property and equipment at June 30, 1997 of
$34,941.  Patents  had a balance  of  $204,037,  compared  to the June 30,  1997
balance  of  $189,037.  Total  assets  as of June 30,  1998 were  $4,548,336  as
compared to $5,236,726  at June 30, 1997 (a decrease of $688,390).  The decrease
in total assets was primarily due to the Company's  expenditure of funds used in
operating activities.

Year 2000 Compliance

     The Company is aware of the issues  associated with the programming code in
existing  computer systems as the year 2000 approaches.  The "Year 2000" problem
is  concerned  with  whether  computer  systems  will  properly  recognize  date
sensitive  information  when  the year  changes  to  2000.  Systems  that do not
properly  recognize such  information  could generate  erroneous data or cause a
system to fail.  The Year 2000  problem is  pervasive  and complex as  virtually
every company's  computer  operation will be affected in some way. The Company's
computer  programs  which  process  it's field data as well as  operational  and
financial  transactions,  were designed and developed  without  considering  the
impact of the  upcoming  change  in  century.  Nevertheless,  as a result of the
Company's analysis of it's computer programs and operations,  it has reached the
conclusion  that  "Year  2000"  problems  will not  seriously  impact  or have a
material  adverse  effect on the Company's  expenses,  business,  including data
gathering and interpretation, or it's operations.

                                       13

<PAGE>


     It is  possible,  however,  that  "Year  2000"  problems  incurred  by  the
customers  or suppliers  of the Company  could have a negative  impact on future
operations and financial  performance  of the Company,  although the Company has
not been able to  specifically  identify any such problems  among its suppliers.
The Company  believes that it will not be dependent upon any single supplier for
its  equipment  or  machinery  in  the  Year  2000,  and  therefore  has  made a
determination  not to contact its primary  suppliers  to  determine  if they are
developing plans to address processing transactions which may impact the Company
in the year 2000.  However,  there can be no assurance  that Year 2000  problems
will not occur with respect to the Company's computer systems.  Furthermore, the
Year 2000 problem may impact  other  entities  with which the Company  transacts
business and the Company  cannot  predict the effect of the Year 2000 problem on
such  entities or the resulting  effect on the Company.  The Company has not yet
developed  a  contingency  plan to operate  in the event that any  non-compliant
customer or supplier systems that materially impact the Company are not remedied
by January 1, 2000 and has not yet determined a time table for developing such a
plan. As a result, if preventative  and/or corrective  actions by the Company or
those  entities  with which the Company  does  business are not made in a timely
manner,  the Year  2000  issue  could  have a  material  adverse  effect  on the
Company's business, financial condition and results of operations.



                                       14

<PAGE>



Item 7.  Financial Statements.






                                       15

<PAGE>



                           PROFILE TECHNOLOGIES, INC.
                        (A Development Stage Enterprise)

                              Financial Statements

                                  June 30, 1998

                   (With Independent Auditors' Report Thereon)


<PAGE>


                           PROFILE TECHNOLOGIES, INC.


                                Table of Contents



                                                                          Page
                                                                          ----

Independent Auditors' Report                                               F-1

Balance Sheet                                                              F-2
                                                                             
Statements of Operations                                                   F-3
                                                                            
Statements of Cash Flows                                                   F-4
                                                                           
Statements of Stockholders' Equity                                         F-5
                                                                           
Notes to Financial Statements                                              F-7
                                                                           


<PAGE>



                          Independent Auditors' Report



The Board of Directors
Profile Technologies, Inc.:


We have audited the accompanying balance sheet of Profile Technologies,  Inc. (a
development stage enterprise) as of June 30, 1998, and the related statements of
operations,  stockholders'  equity,  and cash flows for each of the years in the
two-year  period  ended  June 30,  1998 and for the  period  from  July 1,  1988
(inception)   through  June  30,  1998.  These  financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Profile Technologies,  Inc. (a
development  stage  enterprise)  as of June 30,  1998,  and the  results  of its
operations and its cash flows for each of the years in the two-year period ended
June 30, 1998 and for the period July 1, 1988 (inception) through June 30, 1998,
in conformity with generally accepted accounting principles.








Seattle, Washington
August 18, 1998


                                       F-1

<PAGE>


                           PROFILE TECHNOLOGIES, INC.
                        (A Development Stage Enterprise)

                                  Balance Sheet

                                  June 30, 1998


                                     Assets

Current assets:
    Cash and cash equivalents                                       $ 4,167,951
    Prepaid expenses                                                     59,645
                                                                    -----------

                    Total current assets                              4,227,596

Property and equipment, net                                             113,173
Patents                                                                 204,037
Other assets                                                              3,530
                                                                    -----------

                    Total assets                                    $ 4,548,336
                                                                    ===========


                      Liabilities and Stockholders' Equity

Current liabilities:
    Accounts payable - stockholder                                  $    21,737
    Other accounts payable                                               19,553
    Other accrued liabilities                                           134,322
                                                                    -----------

                    Total current liabilities                           175,612
                                                                    -----------

Stockholders' equity:
    Common stock, $0.001 par value.  Authorized 10,000,000 shares;
       issued and outstanding 4,262,600 shares                            4,263
    Additional paid-in capital                                        7,514,145
    Deficit accumulated during the development stage                 (3,145,684)
                                                                    -----------

                    Total stockholders' equity                        4,372,724
                                                                    -----------

Commitments
                                                                    -----------

                    Total liabilities and stockholders' equity      $ 4,548,336
                                                                    ===========

See accompanying notes to financial statements.

                                       F-2

<PAGE>
<TABLE>
<CAPTION>

                                            PROFILE TECHNOLOGIES, INC.
                                         (A Development Stage Enterprise)

                                            Statements of Operations



                                                                  
                                                                   Period from
                                                                  July 1, 1988
                                                                   (inception)               Years ended June 30
                                                                     through           -------------------------------
                                                                  June 30, 1998            1997                1998
                                                                  -------------        -----------         -----------
<S>                                                                <C>                  <C>                 <C>   
Revenues - testing services and research and
    development fees                                               $   527,189              50,000              45,000
                                                                   -----------         -----------         -----------

Costs and expenses:
    Research and development                                         1,674,566             272,240             316,876
    General and administrative                                       1,494,402             351,312             687,657
    Excess of fair market  value over  exercise  price of
       extended  and assigned existing common stock
       purchase warrants                                               350,000              50,000                --
    Fair value of common stock purchase warrants granted
       to consultants                                                  509,154             509,154                --
                                                                   -----------         -----------         -----------

                    Total costs and expenses                         4,028,122           1,182,706           1,004,533
                                                                   -----------         -----------         -----------

                    Loss from operations                            (3,500,933)         (1,132,706)           (959,533)

Interest income                                                        355,149              97,703             246,706
Other income                                                               100                --                  --
                                                                   -----------         -----------         -----------

                    Net loss                                       $(3,145,684)         (1,035,003)           (712,827)
                                                                   ===========         ===========         ===========

Basic and diluted net loss per share                                                   $      0.29                0.17

Shares used to calculate basic and diluted net loss
    per share                                                                            3,587,532           4,262,600

See accompanying notes to financial statements 


                                                            F-3
</TABLE>

<PAGE>
<TABLE>
<CAPTION>

                                                  PROFILE TECHNOLOGIES, INC.
                                              (A Development Stage Enterprise)

                                                  Statements of Cash Flows


                                                                              
                                                                            Period from 
                                                                           July 1, 1988
                                                                            (inception)           Years ended June 30
                                                                              through        ----------------------------
                                                                           June 30, 1998         1997             1998
                                                                           -------------     -----------      -----------

Cash flows from operating activities:
<S>                                                                         <C>               <C>                <C>      
    Net loss                                                                $(3,145,684)      (1,035,003)        (712,827)
    Adjustments to reconcile net loss to net cash used in operating
       activities:
           Depreciation and amortization                                        155,438           20,822           38,096
           Services received in exchange for common stock                        10,000             --               --
           Excess of fair value over exercise price of extended and
              assigned existing common stock purchase warrants                  350,000           50,000             --
           Fair value of common stock purchase warrants granted to
              consultants                                                       509,154          509,154             --
           Changes in assets and liabilities:
              Contract work in progress                                            --            (20,000)          20,000
              Accounts receivable/payable - stockholder                          21,737          (12,154)          19,237
              Prepaid expenses                                                  (59,645)         (52,549)          (6,847)
              Other assets                                                       (3,530)          (3,350)            (180)
              Other accounts payable                                             19,553            1,379           13,634
              Accrued wages                                                        --             20,614          (20,614)
              Other accrued liabilities                                         134,322           69,443           12,180
                                                                            -----------      -----------      -----------

                    Net cash used in operating activities                    (2,008,655)        (451,644)        (637,321)
                                                                            -----------      -----------      -----------

Cash flows from investing activities:
    Patents                                                                    (184,037)         (70,676)         (15,000)
    Purchase of property and equipment                                         (264,510)         (21,320)        (116,328)
                                                                            -----------      -----------      -----------

                    Net cash used in investing activities                      (448,547)         (91,996)        (131,328)
                                                                            -----------      -----------      -----------

Cash flows from financing activities:
    Proceeds from issuance of common stock, net of issuance costs             6,643,254        5,267,551             --
    Repurchase of common stock                                                  (14,000)            --               --
    Organization costs                                                           (4,101)            --               --
                                                                            -----------      -----------      -----------

                    Net cash provided by financing activities                 6,625,153        5,267,551             --
                                                                            -----------      -----------      -----------

                    Increase (decrease) in cash and cash equivalents          4,167,951        4,723,911         (768,649)

Cash and cash equivalents at beginning of period                                   --            212,689        4,936,600
                                                                            -----------      -----------      -----------

                    Cash and cash equivalents at end of period              $ 4,167,951        4,936,600        4,167,951
                                                                            ===========      ===========      ===========

Supplemental disclosures of noncash financing and investing activities -
    patent costs in exchange for common stock                               $    20,000             --               --

See accompanying notes to financial statements.

                                                           F-4

</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                                    PROFILE TECHNOLOGIES, INC.
                                 (A Development Stage Enterprise)

                                Statements of Stockholders' Equity
                                                                                                                       
                                                                               Common stock                            
                                                                          ------------------------
                                                                            Shares        Amount                       
                                                                          ----------    ----------                     

<S>                                                                        <C>          <C>       
Sale at inception (July 1, 1988), $.0005 per share                         1,000,000    $      500
Sale of common stock in July, $.0005 per shares                              600,000           300
Sale of common stock in September, $.25 per share                            400,000         1,200
Net loss                                                                        --            --   
                                                                          ----------    ----------

Balance at June 30, 1989                                                   2,000,000         2,000

Sale of common stock in September, $.25 per share                             80,000            80
Net loss                                                                        --            --   
                                                                          ----------    ----------

Balances at June 30, 1990                                                  2,080,000         2,080

Sale of common stock in October, $.25 per share                              114,000           114
Issuance of common stock for services in November, $.25 per share             40,000            40
Net loss                                                                        --            --   
                                                                          ----------    ----------

Balances at June 30, 1991                                                  2,234,000         2,234

Sale of common stock in September, $.625 per share                           296,000           296
Sale of common stock in May, $1.50 per share                                 141,268           141
Net loss                                                                        --            --   
                                                                          ----------    ----------

Balances at June 30, 1992                                                  2,671,268         2,671

Sale of common stock in January, $1.50 per share                              51,000            51
Net loss                                                                        --            --   
                                                                          ----------    ----------

Balances at June 30, 1993                                                  2,722,268         2,722

Net loss                                                                        --            --   
                                                                          ----------    ----------

Balances at June 30, 1994                                                  2,722,268         2,722

Repurchases of common stock in October                                       (16,000)          (16)
Sale of common stock in December, $1.75 per share, net of issuance
    costs of $22,115                                                         268,332           269
Excess of fair value over exercise price of existing common stock
    purchase warrants extended in December                                      --            --   
Net loss                                                                        --            --   
                                                                          ----------    ----------

Balances at June 30, 1995                                                  2,974,600         2,975

Issuance of common stock for services in October, $1.00 per share             20,000            20
Sale of common stock in December-March, $2.00 per share, net of
    issuance costs of $34,600                                                218,000           218
Excess of fair value over exercise price of existing common stock
    purchase warrants extended in March                                         --            --   
Net loss                                                                        --            --   
                                                                          ----------    ----------

Balances at June 30, 1996                                                  3,212,600         3,213

Fair value of common stock purchase warrants granted to consultants             --            --   
Excess of fair market value over exercise price of existing common
    stock purchase warrants assigned by principal stockholder to others         --            --   
Sale of common stock in February-March, $6.00 per share, net of
    issuance costs of $1,238,313                                           1,050,000         1,050
Net loss                                                                        --            --   
                                                                          ----------    ----------

Balances at June 30, 1997                                                  4,262,600         4,263

Net loss                                                                        --            --   
                                                                          ----------    ----------

Balances at June 30, 1998                                                  4,262,600    $    4,263
                                                                          ==========    ==========
                                                F-5
<PAGE>
                                           PROFILE TECHNOLOGIES, INC.
                                        (A Development Stage Enterprise)

                                       Statements of Stockholders' Equity

                                                  (Continued)
                                                                                                    
                                                                                          Deficit               
                                                                                        accumulated    
                                                                          Additional    during the      Total
                                                                           paid-in      development  stockholders'     
                                                                           capital         stage        equity          
                                                                          ----------    ----------    ---------- 
Sale at inception (July 1, 1988), $.0005 per share                              --            --             500
Sale of common stock in July, $.0005 per shares                                 --            --             300
Sale of common stock in September, $.25 per share                             98,800          --         100,000
Net loss                                                                        --         (85,749)      (85,749)
                                                                          ----------    ----------    ----------

Balance at June 30, 1989                                                      98,800       (85,749)       15,051

Sale of common stock in September, $.25 per share                             19,920          --          20,000
Net loss                                                                        --         (13,683)      (13,683)
                                                                          ----------    ----------    ----------

Balances at June 30, 1990                                                    118,720       (99,432)       21,368

Sale of common stock in October, $.25 per share                               28,386          --          28,500
Issuance of common stock for services in November, $.25 per share              9,960          --          10,000
Net loss                                                                        --         (30,593)      (30,593)
                                                                          ----------    ----------    ----------

Balances at June 30, 1991                                                    157,066      (130,025)       29,275

Sale of common stock in September, $.625 per share                           184,704          --         185,000
Sale of common stock in May, $1.50 per share                                 211,761          --         211,902
Net loss                                                                        --        (267,186)     (267,186)
                                                                          ----------    ----------    ----------

Balances at June 30, 1992                                                    553,531      (397,211)      158,991

Sale of common stock in January, $1.50 per share                              76,449          --          76,500
Net loss                                                                        --        (132,905)     (132,905)
                                                                          ----------    ----------    ----------

Balances at June 30, 1993                                                    629,980      (530,116)      102,586

Net loss                                                                        --         (13,503)      (13,503)
                                                                          ----------    ----------    ----------

Balances at June 30, 1994                                                    629,980      (543,619)       89,083

Repurchases of common stock in October                                       (13,984)         --         (14,000)
Sale of common stock in December, $1.75 per share, net of issuance
    costs of $22,115                                                         447,196          --         447,465
Excess of fair value over exercise price of existing common stock
    purchase warrants extended in December                                   210,000          --         210,000
Net loss                                                                        --        (453,382)     (453,382)
                                                                          ----------    ----------    ----------

Balances at June 30, 1995                                                  1,273,192      (997,001)      279,166

Issuance of common stock for services in October, $1.00 per share             19,980          --          20,000
Sale of common stock in December-March, $2.00 per share, net of
    issuance costs of $34,600                                                401,182          --         401,400
Excess of fair value over exercise price of existing common stock
    purchase warrants extended in March                                       90,000          --          90,000
Net loss                                                                        --        (400,853)     (400,853)
                                                                          ----------    ----------    ----------

Balances at June 30, 1996                                                  1,784,354    (1,397,854)      389,713

Fair value of common stock purchase warrants granted to consultants          509,154          --         509,154
Excess of fair market value over exercise price of existing common
    stock purchase warrants assigned by principal stockholder to others       50,000          --          50,000
Sale of common stock in February-March, $6.00 per share, net of
    issuance costs of $1,238,313                                           5,170,637          --       5,171,687
Net loss                                                                        --      (1,035,003)   (1,035,003)
                                                                          ----------    ----------    ----------

Balances at June 30, 1997                                                  7,514,145    (2,432,857)    5,085,551

Net loss                                                                        --        (712,827)     (712,827)
                                                                          ----------    ----------    ----------

Balances at June 30, 1998                                                  7,514,145    (3,145,684)    4,372,724
                                                                          ==========    ==========    ==========
See accompanying notes to financial statements.

                                                       F-6
</TABLE>
<PAGE>


                           PROFILE TECHNOLOGIES, INC.
                        (A Development Stage Enterprise)

                          Notes to Financial Statements

                                  June 30, 1998



(1)  Nature  of  Development   Stage   Activities  and  Summary  of  Significant
     Accounting Policies


     (a)  Nature of Development Stage Activities

          Profile  Technologies,  Inc.  (Company),  formerly Pipeline  Profiles,
          Ltd., was incorporated in 1986 and commenced operations in fiscal year
          1989  (inception).  The Company is in the business of  developing  and
          commercializing    potential   processes   for   the   nondestructive,
          noninvasive  testing of both above ground and buried pipelines for the
          effectiveness  of  pipeline  cathodic  protecting  systems and coating
          integrity. The Company believes that the first commercial applications
          of this  process  will likely be in the  refining  and  petro-chemical
          segments of the  industry,  although the  utilities  industry has also
          expressed  interest in the Company's  process.  The  Company's  future
          revenues are currently  dependent upon the market's  acceptance of its
          sole developed  process.  In July 1998, the Company  commenced work on
          its initial commercial  contract for corrosion  inspection services of
          pipeline at  approximately  one hundred road and caribou  crossings in
          Alaska.  There can be no  assurance  that the Company  will be able to
          obtain additional  commercial  contracts in the future. As of June 30,
          1998, the Company is considered to be in the development  stage as the
          Company has not generated  significant  revenues from its research and
          development  efforts and related service contracts with respect to the
          above process, and operations have primarily been financed through the
          issuance of common stock.


     (b)  Contract Revenue Recognition

          Earned  revenue  from  research  and  development   service  contracts
          primarily  related to  testing of  industrial  pipeline  integrity  is
          recognized   on  the   percentage-of-completion   method  of  contract
          accounting.   Contract   revenues   earned  are  recorded   using  the
          percentage-of-contract  costs  incurred  to  date to  total  estimated
          contract costs.

          Anticipated  losses on  contracts  are  charged to earnings as soon as
          such  losses  can  be  estimated.  Changes  in  estimated  profits  on
          contracts  are  recognized  during  the  period in which the change in
          estimate is known.

          The Company  records claims for additional  compensation  on contracts
          upon revision of the contract to include the amount to be received for
          the  additional  work  performed.  Contract  costs  include all direct
          material and labor costs and those  indirect costs related to contract
          performance,  such as indirect labor, supplies, tools and repairs, and
          depreciation  costs.  Selling,  general and  administrative  costs are
          charged to expense as incurred.  Service contracts generally extend no
          more than six months.


     (c)  Research and Development

          Research and development costs are expensed when incurred.

                                       F-7
<PAGE>

                           PROFILE TECHNOLOGIES, INC.
                        (A Development Stage Enterprise)

                          Notes to Financial Statements

                                  June 30, 1998



     (d)  Property and Equipment

          Property and  equipment are stated at cost and are  depreciated  using
          the straight-line method over their estimated useful lives of three to
          seven years.


     (e)  Patents

          Patent  and  related  application  costs will be  amortized  using the
          straight-line method over the shorter of the patents' estimated useful
          lives  or their  legal  lives  (seventeen  years).  Amortization  will
          commence  once  the  Company  has  emerged  from   development   stage
          activities. The Company assesses the recoverability of this intangible
          asset by  determining  whether the balance  can be  recovered  through
          forecasted  future  operations.  The amount of impairment,  if any, is
          measured  based on  projected  future  results  using a discount  rate
          reflecting the Company's assumed average cost of funds.


     (f)  Income Taxes

          Deferred  income taxes are provided based on the estimated  future tax
          effects of temporary  differences between financial statement carrying
          amounts of existing assets and  liabilities  and their  respective tax
          bases.

          Deferred tax assets and  liabilities  are measured  using  enacted tax
          rates that are  expected  to apply to  taxable  income in the years in
          which those  temporary  differences  are  expected to be  recovered or
          settled. The effect on deferred tax assets and liabilities of a change
          in tax rates is  recognized  in operations in the period that includes
          the enactment date. A valuation allowance is recorded for deferred tax
          assets when it is more likely than not that such  deferred  tax assets
          will not be realized.


     (g)  Major Customers

          As the Company is still in the development stage, all of the Company's
          revenues were from two domestic customers for the years ended June 30,
          1997 and 1998.


     (h)  Cash Equivalents

          The Company considers all short-term  investments with a maturity date
          at purchase of three months or less to be cash equivalents.


                                       F-8

<PAGE>

                           PROFILE TECHNOLOGIES, INC.
                        (A Development Stage Enterprise)

                          Notes to Financial Statements

                                  June 30, 1998



     (i)  Net Loss Per Share

          The  Financial  Accounting  Standards  Board  (FASB)  recently  issued
          Statement of Financial  Accounting  Standards (SFAS) No. 128, Earnings
          Per  Share,  which  became  effective  for the  Company  in the second
          quarter  of  its  1998  fiscal   year.   SFAS  No.  128  requires  the
          presentation  of basic  earnings  per share,  and for  companies  with
          complex capital structures, diluted earnings per share. Basic earnings
          per share is  computed  using the  weighted  average  number of common
          shares  outstanding  during the period.  Diluted earnings per share is
          computed  using the  weighted  average  number of common and  dilutive
          common equivalent shares  outstanding  during the period.  The Company
          has  presented  basic and diluted net loss per share and has  restated
          previously  reported  amounts in compliance  with the  requirements of
          SFAS No.  128.  As the  Company  had a net loss in each of the periods
          presented, basic and diluted net loss per share is the same.

          On February 3, 1998,  the Securities  and Exchange  Commission  issued
          Staff  Accounting  Bulletin (SAB) No. 98 which  superseded SAB No. 83.
          SAB 83 required  that all common and common  equivalent  shares issued
          during the twelve months immediately preceding the initial filing of a
          registration  statement  for  the  Company's  IPO be  included  in the
          calculation of earnings per share as if they were  outstanding for all
          periods   presented,   including   loss  years  where  the  impact  is
          antidilutive. The Company has presented basic and diluted net loss per
          share  using  the  provisions  of SAB No. 98 and  antidilutive  common
          equivalent shares previously included pursuant to SAB No. 83 have been
          excluded in all periods presented.

          Excluded from the  computation  of diluted loss per share for 1997 are
          warrants to acquire  1,120,000  shares of common stock with a weighted
          average  exercise  price  of  $3.41  because  their  effect  would  be
          antidilutive.  Excluded from the computation of diluted loss per share
          for 1998 are warrants to acquire 1,140,000 shares of common stock with
          a weighted  average exercise price of $3.59 because their effect would
          be antidilutive.


     (j)  Use of Estimates

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


                                       F-9

<PAGE>

                           PROFILE TECHNOLOGIES, INC.
                        (A Development Stage Enterprise)

                          Notes to Financial Statements

                                  June 30, 1998




     (k)  Patents, Proprietary Technology and Other Intellectual Property

          The Company pursues a policy of generally  obtaining patent protection
          both in the United States and abroad for patentable  subject matter in
          its proprietary  technology.  The Company's success depends in a large
          part upon its ability to protect its  products  and  technology  under
          United  States and  international  patent laws and other  intellectual
          property  laws.  U.S.  patents  have a term of 17 years  from  date of
          issuance and patents in most foreign countries have a term of 20 years
          from the proprietary filing date of the patent application.

          The Company  believes that it owns and has the right to use or license
          all  proprietary  technology  necessary  to  license  and  market  its
          products under  development.  The Company is not aware of the issuance
          of any patents or the filing of any patent  applications  which relate
          to  processes  or products  which  utilize the  Company's  proprietary
          technology in a manner which could be similar to or  competitive  with
          the Company's products or processes. The Company has no knowledge that
          it is  infringing  on any  existing  patent  such  that  it  would  be
          prevented from marketing or licensing  products or services  currently
          being developed by the Company.


     (l)  Financial Instruments and Concentrations of Credit Risk

          Financial   instruments  which  potentially  subject  the  Company  to
          concentrations of credit risk include cash and cash  equivalents.  The
          fair  value  of  these   instruments   approximates   their  financial
          statements  carrying amount.  The Company  regularly  invests funds in
          excess of its immediate  needs in money market  accounts with Citibank
          (Accounts). Funds invested in these Accounts are uninsured and subject
          to  investment  risk.  Included  with cash and cash  equivalents  were
          amounts  held in the  Accounts  totaling  $2,606,000  and  $1,544,000,
          respectively,  at June 30, 1998.  Amounts  held in these  Accounts are
          insured  up  to   $100,000  by  the   Federal   Depository   Insurance
          Corporation.


     (m)  Product Development Costs and Software Developed for Internal Use

          Product  development  costs are  charged to  operations  as  incurred.
          Statement of Financial Accounting Standards No. 86, Accounting for the
          Costs of Computer Software to be Sold,  Leased or Otherwise  Marketed,
          requires   capitalization   of  certain  software   development  costs
          subsequent to the establishment of technological feasibility.

          Based on the  Company's  product  development  process,  technological
          feasibility is established  upon completion of a working model.  Costs
          incurred by the Company  between  completion  of the working model and
          the point at which the product is ready for general  release have been
          insignificant. All product development costs have been expensed.

          In March 1998, the AICPA issued  Statement of Position (SOP) No. 98-1,
          Accounting  for the Costs of Computer  Software  Developed or Obtained
          for Internal Use, which requires  capitalization  of certain  software
          development costs for software developed for internal use. The Company
          plans on  adopting  SOP No. 98-1  beginning  July 1, 1998 and does not
          anticipate a material impact upon adoption of this standard.


                                      F-10

<PAGE>

                           PROFILE TECHNOLOGIES, INC.
                        (A Development Stage Enterprise)

                          Notes to Financial Statements

                                  June 30, 1998



     (n)  Stock-Based Compensation

          The Company accounts for its stock-based  compensation  arrangement in
          accordance  with  provisions  of  Accounting  Principles  Board  (APB)
          Opinion No. 25, Accounting for Stock Issued to Employees,  and related
          interpretations. As such, compensation expense under fixed plans would
          be  recorded  on the  date of  grant  only if the  fair  value  of the
          underlying  stock at the date of grant  exceeded the  exercise  price.
          SFAS  No.  123,  Accounting  for  Stock-Based  Compensation,  requires
          entities that  continue to apply the  provisions of APB Opinion No. 25
          for  transactions  with  employees to provide pro forma net income and
          pro forma  earnings per share  disclosures  for employee  stock option
          grants made in 1995 and future years as if the fair-value-based method
          defined in SFAS No. 123 had been applied to these transactions.


(2)  Property and Equipment

     Property and equipment at June 30, 1998 consist of the following:

                    Trailer                         $ 11,670
                    Equipment                        252,840
                                                    --------

                                                     264,510
                    Less accumulated depreciation    151,337
                                                    --------

                                                    $113,173
                                                    ========


     Depreciation  expense totaled $151,337,  $20,822 and $38,096 for the period
     from July 1, 1988  (inception)  through  June 30,  1998 and the years ended
     June 30, 1997 and 1998, respectively.


(3)  Services Received in Exchange for Common Stock

     The Company values common stock issued in payment for services  provided to
     the Company  based either on  third-party  billings or the  estimated  fair
     value of the common stock issued.  During fiscal year 1991, two individuals
     (one a board member) each received 20,000 shares of common stock in payment
     for services provided to the Company. These services were valued at $10,000
     based on the estimated fair value of the common stock issued.

     In October 1995, the Company issued 20,000 shares of common stock for legal
     services  provided to the Company  valued at $20,000  based on  third-party
     billings.

                                      F-11
<PAGE>

                           PROFILE TECHNOLOGIES, INC.
                        (A Development Stage Enterprise)

                          Notes to Financial Statements

                                  June 30, 1998



(4)  Related Parties


     (a)  Accounts Payable - Stockholder

          At June 30, 1998,  the Company owed  $21,737 to a  stockholder  of the
          Company for business expenses.


     (b)  Consulting Services and Wages

          The Company's  policy is to pay wages and  consulting  fees to two key
          stockholders on a basis  consistent  with available cash flows.  Wages
          and consulting fees to these individuals, Gale Burnett, President, and
          Henry Gemino, Executive Vice-President, were approximately $1,121,000,
          209,000  and  $242,000  for the period  from July 1, 1988  (inception)
          through  June 30,  1998 and the years  ended  June 30,  1997 and 1998,
          respectively.

          Additional  consulting fees were paid to a stockholder of the Company,
          Dr. John Kuo, totaling  approximately  $267,000,  $80,000 and $118,000
          for the period from July 1, 1988 (inception) through June 30, 1998 and
          the years  ended June 30,  1997 and 1998,  respectively.  Included  in
          other  accrued  liabilities  are  amounts  owing  to  the  stockholder
          totaling $60,000 at June 30, 1998.


     (c)  Royalty Arrangement

          In July 1988, the primary  technology  rights used by the Company were
          contributed   by  Northwood   Enterprises   Inc.   (NEI),   a  company
          wholly-owned  by  certain  Company   stockholders.   In  exchange  for
          contributing the technology, the Company agreed to pay a royalty of 4%
          of  the  Company's  net  earnings  before  taxes  to  certain  Company
          stockholders.  When the Company becomes profitable,  royalties will be
          due quarterly. In March 1996, an additional 1% was given to a director
          of the Company in exchange for his expertise,  technological  know-how
          and proprietary information and trade secrets.


     (d)  Facilities

          Since 1991, two of the Company's  officers/stockholders  have provided
          the use of their homes for office facilities and research  development
          activity at no additional charge to the Company.


(5)  Income Taxes

     Federal  income  taxes  reported  by the  Company  differ  from the  amount
     computed by applying the  statutory  rate due primarily to  limitations  on
     utilizing net operating losses.

                                      F-12

<PAGE>

                           PROFILE TECHNOLOGIES, INC.
                        (A Development Stage Enterprise)

                          Notes to Financial Statements

                                  June 30, 1998



     The tax  effect of  temporary  differences  that  give rise to  significant
     portions of Federal  deferred tax assets are  comprised of the following at
     June 30, 1998:

         Deferred tax assets:
         Net operating loss carryforwards                    $  742,000
         Stock compensation                                     292,000
         Research and experimentation credit carryforwards       75,000
                                                             ----------

                       Gross deferred tax assets              1,109,000

         Less valuation allowance                             1,109,000
                                                             ----------

                       Net deferred tax assets               $     --
                                                             ==========

     The net  increase in the  valuation  allowance  for deferred tax assets was
     $436,145  and  $253,000  for the  years  ended  June  30,  1997  and  1998,
     respectively.  The increases  were primarily due to increases in the amount
     of net operating  loss  carryforwards  that could not be utilized and stock
     compensation.

     For  Federal  income tax  purposes,  the  Company  has net  operating  loss
     carryforwards  at June 30, 1998 available to offset future Federal  taxable
     income, if any, of approximately  $2,182,000 which begin to expire in 2003.
     In  addition,  the  Company has  research  and  experimentation  tax credit
     carryforwards of approximately $75,000 at June 30, 1998 which are available
     to offset income taxes and begin to expire in 2003.

     The utilization of the tax net operating loss  carryforwards may be limited
     due to  ownership  changes  that have  occurred  as a result of the sale of
     common stock.


(6)  Stockholders' Equity


     (a)  Stock Split

          In December 1995, the Company  authorized a 2-for-1 stock split of the
          Company's  common stock and a change in par value to $.001. All share,
          par value and per share  information has been adjusted for all periods
          presented to reflect the stock split and par value change.


     (b)  Stock Warrants and Stock-Based Compensation

          The Company has granted stock  warrants to compensate  key  employees,
          consultants and board members for past and future services.  The stock
          warrants  are  generally  exercisable  immediately  at the date of the
          grant. The Company extended the exercise period on certain warrants to
          October 2001 from October 1999 which resulted in compensation  expense
          in the amount of $210,000 in December 1994. The related  warrants were
          originally granted in November 1991 and September 1993.

                                      F-13
<PAGE>

                           PROFILE TECHNOLOGIES, INC.
                        (A Development Stage Enterprise)

                          Notes to Financial Statements

                                  June 30, 1998



          In March 1996, the Company  extended the exercise  period on all stock
          warrants to October  2004 which  resulted in  compensation  expense of
          $90,000.

          In November 1996, the Company  recorded noncash  compensation  expense
          totaling $559,154 related to warrant transactions.  The Company issued
          a warrant to purchase  285,000  shares of common stock to a consultant
          at an exercise  price of $3.50 per share and a warrant to its attorney
          to purchase  10,000  shares of common  stock at an  exercise  price of
          $7.20 per share. The Company also agreed to issue warrants to purchase
          25,000 shares of common stock with an exercise  price of $7.20 to each
          of its two of its nonemployee  directors.  In addition,  the Company's
          principal  shareholder  agreed to assign  warrants to purchase  50,000
          shares  of  common  stock at  $3.00  per  share  to  other  employees,
          directors and shareholders of the Company. In connection with the IPO,
          the Company issued  warrants to the  underwriter  to purchase  100,000
          shares of common stock at $8.40 per share.

          The following is a summary of warrants outstanding at June 30, 1998:

                                   Warrants oustanding
            -----------------------------------------------------------------
                                                 
                                               Weighted-average    Number of
                                   Number         remaining         warrants
             Exercise prices    outstanding    contractual life   exercisable
             ---------------    -----------    ----------------   -----------

               $  1.125            320,000           6.33           320,000
                  1.500             40,000           6.33            40,000
                  3.000            270,000           6.33           270,000
                  3.500            285,000           6.33           285,000
                  7.200            105,000           6.33           105,000
                  8.400            100,000           4.67           100,000
                 13.500             20,000           6.33            20,000
             ---------------    -----------    ---------------    -----------

                   3.59          1,140,000           6.18          1,140,000
             ===============    ===========    ===============    ===========


                                      F-14
<PAGE>


                           PROFILE TECHNOLOGIES, INC.
                        (A Development Stage Enterprise)

                          Notes to Financial Statements

                                  June 30, 1998



          The Company applies APB Opinion No. 25 and related  interpretations in
          accounting for warrant grants to employees.  Had compensation cost for
          the Company's warrant awards been determined  consistent with SFAS No.
          123, the Company's net loss would have been increased to the pro forma
          amounts indicated below:

                                           Years ended June 30
                                      ----------------------------
                                           1997           1998
                                      -------------   ------------
                Net loss:
                    As reported       $   1,035,003      712,827
                    Pro forma             1,171,003      800,827

                Net loss per share:
                    As reported       $      .29           .17
                    Pro forma                .33           .19

          The  weighted  average  fair value per share of the warrant  grants or
          extensions  made during the years ended June 30, 1997 and 1998,  where
          the fair value of the underlying stock equaled the exercise price, was
          approximately $1.27 and $0,  respectively,  and the number of warrants
          were 60,000 and 0, respectively.

          The  weighted  average  fair value per share of the warrant  grants or
          extensions  made during the years ended June 30, 1997 and 1998,  where
          the exercise  price was above the fair value of the  underlying  stock
          was $0 and $4.40, respectively,  and the number of warrants were 0 and
          20,000, respectively.

          The  weighted  average  fair value per share of the warrant  grants or
          extensions  made during the years ended June 30, 1997 and 1998,  where
          the exercise price was below the fair value of the  underlying  stock,
          was  approximately  $1.85  and  $0,  respectively  and the  number  of
          warrants were 335,000 and 0, respectively.

          The fair value of warrant grants is estimated using the  Black-Scholes
          option pricing model with the following  weighted average  assumptions
          used for grants in fiscal years 1997 and 1998:  expected volatility of
          50%,  risk-free interest rate of 6%, expected lives ranging from three
          to six years; and a 0% dividend yield.


(7)  Operating Leases

     The Company leases office facilities in Washington State and New York State
     under  operating lease  agreements that expire at various dates.  Aggregate
     minimum rental payments on operating leases as of June 30, 1998 are $17,100
     in fiscal year 1999.

     Total rent expense under the operating leases was $5,700 and $39,600 during
     the years ended June 30, 1997 and 1998, respectively.


                                      F-15
<PAGE>


Item  8.  Changes  In and  Disagreements  With  Accountants  on  Accounting  and
Financial Disclosure.

     None

                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.

     The  Company  will file  with the  Securities  and  Exchange  Commission  a
definitive  Proxy  Statement to be distributed in connection  with the Company's
Annual  Meeting of  Shareholders  to be held on November  14,  1998.  Such Proxy
Statement will be filed with the  Securities  and Exchange  Commission not later
than October 15, 1998. The  information  required by this Item 9 is incorporated
by reference from the Proxy Statement.

Item 10.  Executive Compensation.

     The information  required by this Item 10 is incorporated by reference from
the Proxy Statement.

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

     The information  required by this Item 11 is incorporated by reference from
the Proxy Statement.

Item 12.  Certain Relationships and Related Transactions.

     The information  required by this Item 12 is incorporated by reference from
the Proxy Statement.

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

     (a) Exhibits

          (3)
               (i) Articles of Incorporation(1)
               (ii) Bylaws(2)

          (10.1) Royalty Agreement(3)
          (10.2) Assignment of Patent Rights(4)
          (10.3) Consulting Agreement with Dr. John Kuo(5)
          (23.1) Consent of Independent Certified Public Accountants
          (27.1) Financial Data Schedule

     (b) No  reports on Form 8-K were filed  during the  quarter  ended June 30,
1998.


                                       16

<PAGE>



     (1) Incorporated by reference to Exhibit 3.1 to the Registration  Statement
on Form  SB-2 of  Profile  Technologies,  Inc.  filed  with the  Securities  and
Exchange Commission on May 10, 1996. (333- 4714-NY)

     (2) Incorporated by reference to Exhibit 3.3 to the Registration  Statement
on Form  SB-2 of  Profile  Technologies,  Inc.  filed  with the  Securities  and
Exchange Commission on May 10, 1996 (333- 4714-NY)

     (3) Incorporated by reference to Exhibit 10.1 to the Registration Statement
on Form  SB-2 of  Profile  Technologies,  Inc.  filed  with the  Securities  and
Exchange Commission on May 10, 1996. (333- 4714-NY)

     (4) Incorporated by reference to Exhibit 10.2 to the Registration Statement
on Form  SB-2 of  Profile  Technologies,  Inc.  filed  with the  Securities  and
Exchange Commission on July 31, 1996 (333- 4714-NY)

     (5) Incorporated by reference to Exhibit 10.3 to the Registration Statement
on Form  SB-2 of  Profile  Technologies,  Inc.  filed  with the  Securities  and
Exchange Commission on July 31, 1996. (333- 4714-NY)



                                       17

<PAGE>


                                   SIGNATURES

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


                                           PROFILE TECHNOLOGIES, INC.



                                           By: /s/ G.L. Scott
                                              ----------------------------------
                                              G.L. SCOTT
                                              Chief Executive Officer


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

      Signatures                      Title                      Date
      ----------                      -----                      ----


/s/ G.L. Scott                  Chairman, Principal          Sept. 18, 1998
----------------------          Executive Officer,
    G.L. SCOTT                  Director          
                                

/s/ Henry Gemino                Executive Vice-              Sept. 18, 1998
----------------------          President, Chief        
    HENRY GEMINO                Operating Officer,      
                                Chief Financial Officer,
                                Principal Accounting    
                                Officer, Director       


/s/ Gale D. Burnett             President, Director          Sept. 18, 1998
----------------------
    GALE D. BURNETT


/s/ Murphy Evans                Director                     Sept. 18, 1998
----------------------
    MURPHY EVANS


/s/ John Tsungfen Kuo           Director, Chief              Sept. 18, 1998
----------------------          Technical Consultant
    John Tsungfen Kuo                    


/s/ Allen G. Reeves             Director                     Sept. 18, 1998
----------------------
    ALLEN G. REEVES



                                       18