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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549



                                   FORM 10-KSB

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

                    FOR THE FISCAL YEAR ENDED MARCH 31, 1998
                         COMMISSION FILE NUMBER 0-15520

                         INDUSTRIAL IMAGING CORPORATION
           (NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)

            DELAWARE                                             05-0396504
  (STATE OR OTHER JURISDICTION                                (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION)                            IDENTIFICATION NO.)

                 847 ROGERS STREET, LOWELL, MASSACHUSETTS 01852
               (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

                                 (978) 937-5400
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

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

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

                                 TITLE OF CLASS
                          COMMON STOCK, $.01 PAR VALUE

    Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the issuer
was required to file such reports), and (2) has been subject to such filing
requirements for the past 60 days.

                                 Yes /X/   No / /

    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not 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.

    The issuer's revenue for the fiscal year ending March 31, 1998 was
$2,305,209.

    The aggregate market value of the voting stock held by non-affiliates of the
Issuer, based upon the average of the bid and ask prices of the Common Stock as
reported by the OTC Bulletin Board on July 13, 1998 was approximately $2,230,747
for the Common Stock, based on 3,244,723 shares held by non-affiliates.  As of
July 13, 1998, 10,890,201 shares of Common Stock, $.01 par value per share, were
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE: The definitive Proxy Statement for the
Annual Meeting of Stockholders for the fiscal year ended March 31, 1998, to be
filed pursuant to regulation 14A, is incorporated by reference in part III of
this Form.
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                                     PART I

ITEM 1.    DESCRIPTION OF BUSINESS

    This report contains forward-looking statements regarding anticipated
increases in revenues, marketing of products and proposed products and other
matters. These statements, in addition to statements made in conjunction with
the words "anticipate", "expect", "believe", "seek", "estimate", and similar
expressions are forward-looking statements that involve a number of risks and
uncertainties. The following is a list of factors, among others, that would
cause actual results to differ materially from forward-looking statements:
business conditions and changes in certain market segments and in the general
economy, competition, market acceptance of the Company's products and proposed
products, and other risks and uncertainties indicated from time to time in the
Company's filings with the Securities and Exchange Commission.

GENERAL

    Industrial Imaging Corporation designs, manufactures and markets automated
optical, vision and industrial imaging systems for inspection and identification
of defects in printed circuit boards ("PCBs") and distributes Laser Plotters and
Helios(TM) Film for creation of PCB artwork and photo tools. Members of the
Company's management were pioneers in the field of automated optical inspection
of PCBs. These individuals developed the product line while working at Itek
Corporation ("Itek"), now a part of Hughes Corporation, through close
cooperation between Itek and Digital Equipment Corporation ("DEC"). The
prototype and initial production models developed by Itek and DEC were later
completed and marketed by AOI Systems, Inc., which sold its assets and product
base to the Company's subsidiary, Triple I Corporation ("Triple I").

    Virtually all electronic equipment uses PCBs, which contain conductors that
interconnect electronic components. As such, PCBs are essential parts to
consumer electronic and automotive products, telecommunications and computer
components, industrial and medical equipment and military and aerospace
applications. However, PCBs are susceptible to conductor defects, such as
electrical shorts, open circuits and insufficient or excessive conductor widths,
which interfere with the interconnections between electronic components attached
to the finished boards. Moreover, the trend is towards the placement of more
complex miniaturized components in greater surface density and having decreased
conducting line widths. To avoid and cure defects, PCB manufacturers have sought
the use of automated optical inspection and remote sensing to satisfy industry
demands for the precise quality of finished PCBs and assemblies. The Company has
already developed an installed base of customers in the United States, Europe
and Asia, which include some of the largest PCB manufacturers in Sweden, France,
Germany and Japan.

    Since 1994, the Company has accomplished a number of major strategic goals,
including the following:


*.................INTRODUCTION OF A NEW GENERATION OF INSPECTION SYSTEMS. In May
                  1996, the Company commenced production of its new AOI-2500
                  Series of modular advanced automated inspection systems.
                  Management believes that this new generation of products
                  accurately detects defects in PCB production at speeds greater
                  than conventional optical inspection systems with a detection
                  capability that permits inspection of fine lines and difficult
                  geometric patterns. Management believes that the unique
                  modular design of the AOI-2500 Series offers customers optimum
                  flexibility and ease of upgrading their systems. Because the
                  mechanical portions of each model in the series are identical,
                  a customer can purchase the lowest priced model and upgrade at
                  an appropriate time based on its needs and inspection
                  requirements.

*.................IMPRIMUS INVESTORS LLC EQUITY INVESTMENT. In November 1997,
                  Imprimus Investors LLC ("Imprimus"), and the Company executed
                  a Securities Purchase Agreement whereby Imprimus invested $3
                  million into the Company in exchange for three million shares
                  of Common Stock at $1.00 per share. In accordance with the
                  agreement, the Company also issued warrants to purchase up to
                  one million shares of Common Stock at $2.00 per share through
                  November 12, 2002, and issued warrants to purchase up to one
                  million shares of Common Stock at $1.00 per share through
                  November 12, 2002. (SEE "CERTAIN RELATIONSHIPS AND RELATED
                  TRANSACTIONS").

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*.................POLAROID LICENSE AND EQUITY INVESTMENT. In November 1994, the
                  Company entered into the Polaroid Agreement. The Polaroid
                  Agreement gives both companies royalty free access to each
                  others' patents, technology and know-how for use in their
                  respective fields of business. In addition, the Polaroid
                  Agreement seeks to promote the development, marketing and
                  sales of a photo plotter system in the field of PCB
                  manufacturing consisting of equipment designed by the Company
                  and other Polaroid partners using Polaroid's new Helios(TM)
                  Film. As part of the Polaroid Agreement, the Company has been
                  granted the right to market Polaroid's Helios(TM) Film and
                  laser plotters within the PCB industry, provided the Company
                  meets certain ongoing sales and performance milestones. The
                  Company is aggressively seeking sales opportunities for the
                  Helios(TM) Film and the laser plotters that utilize the
                  Helios(TM) Film. The Company estimates the current annual
                  market for inspection systems for the PCB manufacturing
                  industry alone to be in the range of $100 to $150 million.
                  This market consists of approximately 2,500 PCB manufacturers
                  domestically and internationally. The Company and Polaroid are
                  currently negotiating to resolve a dispute regarding contract
                  milestones and exclusivity. (See "Polaroid Agreement" and
                  "LEGAL PROCEEDINGS").

*.................AWARD OF ARPA CONTRACT. In August 1994, the Company received a
                  grant of up to $462,000 from the United States Department of
                  Energy Advanced Research Project Agency ("ARPA"), as part of
                  ARPA's technology reinvestment project (the "ARPA Contract").
                  The Company is obligated to share in the costs of the project
                  for approximately an additional $462,000. Through March 31,
                  1998, the Company had incurred $462,000 in project expenses
                  and had received $462,000 in matching funds from ARPA. Under
                  the terms of the ARPA Contract, the Company is developing new
                  automated optical inspection techniques to enable inspection
                  systems to measure the position and movement speed of the
                  product being inspected. The results of this project and the
                  development of the new automated optical inspection system, if
                  successful, may significantly improve the performance of
                  inspection systems for PCBs and other manufactured components.

    The Company's strategy is to continue to enhance its existing systems and
products, to develop new systems for further automation of the PCB field and to
develop its existing technologies and capabilities for additional applications.
The Company believes it has leveraged its management expertise and technology to
expand industrial imaging technologies into a number of electronics markets
where high quality industrial inspection and reproduction capabilities are
required. The Company markets its products under the name AOI International.

HISTORY

    The Company's asset and product base was acquired in 1992 from AOI Systems,
Inc. by the Company's subsidiary, Triple I. Certain members of the Company's
management were pioneers in the automated optical inspection field. These
individuals developed the Company's product line while working at Itek, which is
now part of Hughes Corporation. The product line was developed through close
cooperation between Itek and DEC. DEC was a knowledgeable user who funded part
of the development and acted as an advisor, customer and beta site for the
prototype and initial production models, which were later marketed by AOI
Systems.

    In February 1997, the Company acquired Triple I, a privately held Delaware
corporation, in a transaction whereby the shareholders of Triple I exchanged
100% of the outstanding Triple I Common Stock, $.01 par value, for approximately
90% ownership of the Company (the "Exchange"). As part of the Exchange, all
Triple I outstanding warrants and options were transferred to the Company.

    Prior to the Exchange, the Company was a publicly held Rhode Island
corporation known as Orbis, Inc. Orbis initially designed and manufactured
software for use by health maintenance organizations, but had not had revenues
from operations since 1992. Orbis's Common Stock, $.01 par value per share, was
listed on NASDAQ after its initial public offering in 1987, but was delisted in
October 1992 when operating revenues diminished. Since that date, the stock has
been quoted on the OTC Bulletin Board, where limited trading of the shares has
occurred. Immediately prior to the Triple I Transaction, Orbis reincorporated
under the laws of Delaware, completed an 18:1 reverse split of its Common Stock
and changed its name to Industrial Imaging Corporation. Unless otherwise
indicated, all per share data relating to the number of shares of Common Stock
outstanding has been adjusted to give effect to such reverse stock split.

THE PCB INDUSTRY

    PCBs are the basic interconnecting platforms for the electronic components
that comprise most electronic equipment. PCBs contain 

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the electronic circuitry required to interconnect those components which, when
operating together, perform a specified function. An assembly of one or more
interconnected PCBs working together form an essential part of most electronic
products. The design of conductor patterns is developed with the help of a
Computer-Aided Design ("CAD") package, and later optimized for manufacturing at
the PCB manufacturing plant by using a Computer-Aided Manufacturing ("CAM")
system.

    PCBs are manufactured through a series of complex steps. Generally, a board
is made of one or more layers of fiberglass (or other material with insulating
qualities) laminated with a conducting material. Holes are then drilled into the
board in a specific pattern and the inner part of each hole is plated with
conducting metal. The board or layer is then coated with a thin layer of
light-sensitive material ("photoresist"). A transparent film containing the
desired circuitry pattern corresponding to the drilled pattern on the board
("production phototool"), which has been either copied from an artwork master or
produced directly by a photoplotter connected to a CAD/CAM data base, is then
laid on the photoresist. The board or layer is then exposed to light, which
transfers the conductor pattern from the production phototool to the
photoresist. Subsequent development of the photoresist and a chemical etching
process leave the desired conductor pattern printed on the board after excess
conducting material is removed. PCBs may be single-sided or double-sided, and
more complex PCBs may be multilayered.

    PCBs are susceptible to conductor defects, such as electrical shorts, open
circuits and insufficient or off-measure conductor widths, which may impair or
interfere with the electrical interconnections between electronic components
mounted on the finished boards. The trend towards more complex and compact
electronic products that utilize large-scale integrated circuits requires the
production of high-density PCBs with finer conductor lines, reduced spacing
between those lines and multiple layers. For such complex multilayer boards,
production yield drops dramatically as the number of likely defects increases,
unless in-process inspection is used. Inspection is required throughout PCB
production to identify such defects, which are then repaired, if possible, or
discarded. Early detection of these defects increases the possibility of
successful repair and reduces the number and cost of unusable boards.

PRODUCTS

    The Company's current products are automated vision systems sold to the PCB
manufacturing industry. The Company's products were developed by the current
Company management team while employed by Itek (now a part of Hughes
Corporation) in the 1980's through close collaboration with DEC. The Company's
systems are quality control and yield enhancement tools used for automated
optical inspection of PCBs to determine the presence of flaws such as conductor
breaks, short circuits, missing features and conductor width violations at
various stages of the PCB manufacturing process. In addition, the Company's
systems can generate statistical reports of defects in real-time to assist in
the control of the PCB manufacturing process, which can result in substantially
improved yields. These improved yields, in conjunction with the advantages in
quality control offered by the Company's systems, provide a major economic
incentive for companies in the PCB industry to purchase and use the Company's
products. The Company estimates that the market size of the PCB industry
approached $30 billion in 1997.

    The Company presently offers "in-line" systems capable of inspecting almost
any product at speeds ranging from three square feet per minute to over sixty
square feet per minute, with current prices that range from $185,000 for the
Company's AOI-190A model to approximately $600,000 for some of the models from
the Company's new AOI-2500 Series.

    PCB AUTOMATED OPTICAL INSPECTION SYSTEMS

    Each of the Company's AOI systems consists of an optomechanical/scanning and
a processing unit. The optomechanical unit includes a moving platform that
carries the PCB or artwork being inspected, and a scanning unit which acquires
an image of the board, digitizes it and transmits it to the electronic
processing unit. The electronic unit processes and enhances the image to allow
efficient analysis and interpretation of the acquired images. The proprietary
structure of the electronic logic unit enables real time parallel processing, a
requirement for performing each defect detection at very high speeds.

    The Company's AOI systems incorporate both the "design rule check" and
"reference comparison" methods of inspection. The design rule check method
involves inspecting the circuitry of PCBs pursuant to a pre-programmed algorithm
and detecting defects by applying prescribed rules to find flaws in the pattern
of the circuitry. The reference comparison method involves an intelligent
comparison of the subject PCB to a perfect "golden" board or to circuit pattern
representations stored in a CAD or CAM database.

    The Company's systems can easily be integrated into the production processes
of most PCB manufacturing facilities and can be employed at several stages
during PCB manufacturing to inspect the artwork design master, the production
photo tools, the photoresist 

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before the etching, the etched inner layers before lamination and the outer
layers before attachment of electronic components. The systems are designed for
operational simplicity and require no special skills or experience to operate.
The design of each system permits easy maintenance and service. As a result, the
Company believes that the use of its AOI systems significantly reduces the
overall production costs of PCBs.

    AOI-190 SERIES

    The AOI-190 Series is the Company's basic optical inspection system. This
system provides manufacturers of PCBs with a means to inspect PCB products for
quality and analyze the information to achieve higher yields at an economical
price. The AOI-190 inspection system provides a number of special features that
clearly distinguish it from its competitors, including but not limited to the
following:

    -   The in-line conveyorized transport provides automated operation when
        linked to commercially available handling equipment. Communication is
        maintained between the host computer and the multi-functional
        evaluation/repair station (described below). Part identification is
        achieved through a bar code labeling device so that critical information
        moves throughout the system with reduced possibility of error, and
        tracking of parts and information throughout the manufacturing facility
        can be automated;

    -   The linking of the AOI-190 inspector to the evaluation/repair station
        enables the customer to set-up or repair products while inspection is
        being conducted on the inspector with no interruptions or waiting
        periods. This feature significantly enhances throughput. In addition,
        management believes the AOI-190 is the only system on the market in
        which throughput can be increased and features added by software and
        hardware upgrades that are not expensive, and which do not require major
        design changes, such as those offered by the competition. This is due to
        the open architecture and modularity inherent in the Company's AOI-190;
        and

    -   AOI-190 can be interfaced to most-available CAM systems to permit direct
        "downloading" of set-up data.

    The Company presently manufactures and markets three models of the AOI-190
that currently range in price from $150,000 to $230,000, although various
options can reduce or increase the cost of a specific system.

    AOI-2500 SERIES

    The AOI-2500 Series is a new generation of automatic optical inspectors
designed to maximize productivity in demanding PCB operations. Prototypes were
field tested in 1995, and full production of the series began in May 1996. The
series includes four models, the AOI-1900, the AOI-1900L, the AOI-2500, and the
AOI-3200 depending on the width of the PCB's being inspected. Each model has the
option of a standard or a high speed version. These models currently range in
price from $320,000 to $600,000.

    As with the AOI-190, the AOI-2500 has a mechanical transport which enables
it to be placed in-line in the manufacturing process. The Company's systems
continue to be the only ones with this capability. The AOI-2500 Series
inspectors have the same overall functionality as the AOI-190 Series inspectors,
but with a significantly enhanced level of both performance and modularity. In
particular:

    -   The AOI-2500 systems have an improved illumination system and higher
        resolution cameras, which permit it to inspect product with smaller
        features than can be inspected with the AOI-190, and it can find much
        smaller defects.

    -   The AOI-2500 systems have a wider range of speeds than the AOI-190, with
        much higher speeds available for inspecting the more standard PCB
        designs.

    -   The AOI-2500 systems have enhanced image processing electronics and more
        general purpose processing power, which enable it to detect a wider
        range of defects.

    Due to the modularity of the design and the fact that the mechanical
portions of the machines in this series are identical, the customer can choose
the lowest price model that can meet its requirements without risking
obsolescence as either the width of their product changes, or the factory
throughput increases. This is a further extension of the Company's philosophy of
obsolescence-proof machines through the ability to continuously upgrade.

    AOI ER 35-36 EVALUATION AND REPAIR (E/R STATION)

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    The AOI E/R Station enables the user to view, classify and repair defects as
well as create inspection set-up files without interrupting ongoing inspection
at the inspection station. Ergonomically designed, the user may position the E/R
Station's display monitors for optimum viewing comfort and easily access the
defective PCB for repair. Convenient bar code labeling facilitates defect
evaluation and eliminates inspection data confusion. Automated camera
positioning precisely displays a magnified, crisp image of artwork and PCBs and
of each reported defect on a high-resolution color monitor, significantly
reducing operator fatigue.

    A computer generated reticle offers very precise measurement of defects.
Defects requiring repair or additional evaluation may be marked or optionally
photographed with a Polaroid freeze-frame camera for further review. Video
recording of complete inspection data is also available. The inspection station
defect report for the PCB under evaluation is simultaneously displayed on a
separate screen. This report includes defect number, location and type of
defect. To maximize throughput, defects are automatically sorted by user defined
levels of severity. Additionally, defects may be further classified for yield
analysis and process control using the included SPC software package, which can
produce numerous reports. The Company's Evaluation/Repair Station and series of
inspection stations combine to provide a complete automated optical inspection
system for real-time process control and yield improvement.

    ARTWORK/PHOTOTOOL IMAGING SYSTEMS

    In PCB manufacturing, the design of the conductor patterns are developed
with the help of a CAD software package, and later optimized for manufacturing
at the PCB manufacturing plant by using a CAM system. The CAM system then drives
a laser plotter that first generates the pattern on silver halide film. This
silver halide film often becomes the photo tool (mask) to expose the photoresist
that defines the conductor pattern on the PCB surface.

    The image manipulation that is done in the CAM system ensures that the final
design meets all of the design rule criteria and makes optimum use of the base
material. The digital image generated in the CAM system contains all of the
information which is required both for generating the artwork and also for
establishing the criteria for inspection of the artwork and completed PCB
product. Because of this, it is customary now to treat the optical inspector,
the CAM and the laser plotter as an integrated "front-end" system.

POLAROID AGREEMENT

    On November 28, 1994, the Company and Polaroid entered into the Polaroid
Agreement. Under the Polaroid Agreement, Polaroid and the Company are granted
royalty free access to each others' patents, technology and know-how for use in
their respective fields of business for a period of eight (8) years. The Company
is also granted the exclusive right to market and sell Helios(TM) Film to the
PCB market. To maintain this exclusive right, the Company is required to achieve
certain performance milestones, which include sales requirements for the
Helios(TM) Film and for the sale of laser plotters. On January 7, 1997, the
Company and Polaroid agreed that Polaroid would not act with respect to the
quarterly performance milestones under the Polaroid Agreement until May 31,
1997, the date by which the annual performance milestones had to have been met.
No such performance milestones apply to Triple I's agreement with Polaroid
granting it access to Polaroid's other technology. The consequence of failing to
achieve the annual performance milestones by May 31, 1997 would be that the
Company's exclusive right to sell and market the Helios(TM) Film to the PCB
market could, at Polaroid's option, be converted to a nonexclusive right. The
Company and Polaroid are involved in a dispute relating to whether the Company
did in fact meet its milestones under the Polaroid Agreement. The Company is
currently negotiating to resolve the dispute and believes the ultimate
resolution of this dispute, which may include the Company's agreement to convert
its rights to distribute Helios film from exclusive to non-exclusive, will not
have a material adverse effect on the results of operations.(SEE "LEGAL
PROCEEDINGS").

    The strategic partnership between the Company and Polaroid provides the
Company with significant complementary technological, marketing and product
advantages, including, but not limited to, the following:

    -   Polaroid's Helios(TM) Film technology has been market tested and is
        presently in production; and

    -   Polaroid's recording technology and devices have been developed through
        research and cooperation by Polaroid and other partners (and may be
        enhanced by the Company through state-of-the-art advanced optical
        technology being developed by the Company under ARPA sponsorship).

    These advantages, combined with the strengths and features of the Company's
AOI systems, enable the Company to provide its customers with the system and the
Helios(TM) Film necessary for production of defect free artwork and photo tools.

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    POLAROID's HELIOS(TM) FILM AND PLOTTERS

    Polaroid has developed the Helios(TM) Film, a dry process film with many
superior performance characteristics compared to the imaging films currently
being used in the manufacture of PCBs. The Polaroid product is expected to be
less prone to deterioration with use than silver halide and diazo. This permits
repeated use of the Helios(TM) Film as both master and phototool, eliminating
the current practice that often requires both tools. This should also eliminate
most defects introduced by the relatively poor quality of diazo. The Helios(TM)
Film also shows promise for imaging PCB designs with very small features,
performance difficult to achieve with present technology.

    As the Helios(TM) Film is a dry process product, potential customers will
benefit from elimination of chemicals and their effluent, a major concern in an
industry that is closely scrutinized by environmental agencies. The dry process
film also eliminates the need for "dark room" facilities for creating the photo
tools. The film is marketed under private label. The Company also distributes
laser plotters under a private label. The plotter for recording on Helios Film
was developed in cooperation between Polaroid and Heidelberg (Linotype) for the
graphic arts industry, and later modified by the Company for use in the PCB
industry. Both products were introduced in the quarter ending December 31, 1996.
Certain improvements are now being developed to increase durability of the film
coating for PCB applications and will be tested in the near future.

PRODUCTS UNDER DEVELOPMENT

    The Company intends to further develop and enhance its own proprietary
technology to better serve the industrial imaging and inspection markets and
exploit the synergies between its own technologies in the field of image
acquisition, processing and reconstruction and the technologies of Polaroid. The
Company currently has an engineering and product development staff, and a group
of customer support engineers, who assist the Company's customers in integrating
the Company's products into the customer's work environment. This engineering
work provides the Company an opportunity to keep abreast of new market
opportunities for the Company's technologies. During the fiscal years ended
March 31, 1998 and March 31, 1997, the Company's expenditures on research and
development amounted to $344,068 and $440,207, respectively, (net of cost
reimbursements from the ARPA Contract).

    The Company's management believes that the major technological innovations
that the Company has access to, through its previous work and its strategic
partnership with Polaroid, should permit the Company to make major improvements
in its PCB product line as well as create opportunities for expansion into other
market areas, such as optical velocity tracking, optical Z dimension (three
dimensional) gauging and advanced imaging devices. The Company believes it will
be able to increase the features of its present models and simplify its software
while expanding its product line to cover the largest range of performance in
the industry. Although no assurance can be given, the Company also intends to
expand into other inspection and industrial imaging markets, such as flat-panel
displays and other products requiring precise high-resolution optical
measurements to monitor quality control within the manufacturing process.

    The Company's success in developing and selling new and enhanced products
depends upon a variety of factors, including accurate prediction of future
customer requirements, introduction of new products on schedule, cost-effective
manufacturing, product performance in the field, and raising additional funds.
The Company's new product decisions and development commitments must anticipate
the equipment needed to satisfy the requirements for inspection processes one or
more years in advance of sales. Any failure to accurately predict customer
requirements and to develop new generations of products to meet those
requirements would have a substantial material adverse effect on the Company's
business, financial condition and results of operations. New product transitions
could adversely affect sales of existing systems, and product introductions
could contribute to quarterly fluctuations in operating results as orders for
new products commence and orders for existing products or enhancements of
existing products fluctuate. The costs to the Company of complying with
environmental laws are minimal and have not had a material effect on the results
of operations.

CUSTOMERS

    The Company's customers include manufacturers of PCBs, both domestically and
internationally. The Company sells to a limited number of customers as the
Company's market is dominated by a few major companies. For the year ended March
31, 1998 ("Fiscal 1998"), the Company had sales to three customers that
accounted for 40%, 17% and 11% of revenues. For the year ended March 31, 1997
("Fiscal 1997"), the Company had sales to four customers that accounted for 28%,
25%, 15% and 12% of revenues. 
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The failure to replace these sales with sales to other customers in succeeding
periods would have a material adverse effect on the Company's business,
financial condition and results of operations. The Company expects that sales to
relatively few customers will continue to account for a high percentage of the
Company's revenues in any accounting period in the foreseeable future and,
therefore, quarterly and annual results could vary greatly. A reduction in
orders from any such customer or the cancellation of any significant order could
have a material adverse effect on the Company's business, financial condition
and results of operations. None of the Company's customers have entered into a
long-term agreement requiring it to purchase the Company's products.

    During Fiscal 1998 and Fiscal 1997, the Company's foreign revenues accounted
for 66%and 80%, respectively, of the Company's revenues. These sales were made
primarily in Europe. The high percentage of foreign revenues was due to the
existence of an established network of distributors in Europe and Asia, along
with a market representative in Europe for the Company's products, and the
limited resources available to the Company to market its products in the United
States. Although the Company generally requires advance deposits or letters of
credit from customers, the Company sometimes extends credit to its foreign
customers and collection may be more difficult in the event of a default. To
help expand into the United States market, the Company hired a new Vice
President of Marketing in January 1997.

    Management expects that revenues from foreign customers will continue to
account for a significant portion of future revenues. The Company has been and
will continue to be subject to risks associated with foreign customers in
general, including political instability, embargoes, shipping delays, custom
duties, import and export quotas and other trade restrictions, all of which
could have a material adverse effect on the Company's operations, or could have
a significant adverse impact on the Company's ability to deliver products on a
competitive and timely basis. Recent events in the Asian markets, specifically
the recent devaluation of some Asian currencies, the current banking crises, and
a general economic downturn, could have an adverse effect on the Company's
ability to effectively market its products in these markets. Although the
Company generally sells products to large, well-funded corporations or requests
letters of credit from less creditworthy customers, the Company could experience
difficulties in obtaining or enforcing judgments with respect to receivables
outside the United States. The Company's foreign sales have been and are
expected to be made in U.S. dollars. A strengthening in the dollar relative to
the currencies of those countries where the Company does business would increase
the prices of its products as stated in those currencies, and may adversely
affect the Company's sales in those countries. To the extent the Company lowers
its prices to reflect a change in exchange rates, the profitability of the
Company's business in those markets may be adversely affected. In the past,
there have been significant fluctuations in the exchange rates between the
dollar and the currencies in those countries in which the Company does business.

SALES AND MARKETING STRATEGY

    The Company's strategy is to emphasize the broad range of competitive
performance and cost advantages of its products and the ability to upgrade
systems because of their modular designs. The newly developed "L" models, will
be the AOI-1900L, is expected to be marketed to the customers that to date have
not purchased any vendor's system, and to those accounts replacing outdated
medium performance equipment. The AOI-2500 Series product is expected to be
promoted to larger PCB manufacturers that require high productivity and higher
technology requirements. Key elements of the Company's marketing strategy
include:

    -   emphasizing product performance advantages such as in-line conveyorized
        material handling, ease-of-use, high throughput, high reliability,
        flexible, affordable service policies and upgrade paths and a more
        cost-effective solution;

    -   expanding the Company's direct sales force in the United States,
        particularly on the west coast; and

    -   increasing international sales through additional support of the
        Company's existing representative and distributor network, including
        joint seminars, sales calls and product showings and the addition of
        distributors in other parts of the world.

    The Company currently employs two full-time, in-house, employees dedicated
to sales and marketing. In addition, the Company relies upon the efforts of
eight distributors and/or sales representatives located in Europe and Asia. The
Company promotes its products through institutional advertising, distribution of
product literature and promotional videotapes throughout the industries its
products service, and exhibits and product presentations at industry and trade
shows, such as Productronica, The Institute for Interconnecting and Packaging
Electronic Circuits (IPC) and the Japan Printed Circuit Association (JPCA).

    Pending the outcome of current negotiations, the Company intends to
introduce new products that are developed from its strategic alliance with
Polaroid both domestically and in Japan through beta site testing (installed at
a customer's site) and field trials. Subsequently, 

                                       8
<PAGE>   9
it intends to launch an advertising campaign designed to inform potential
customers of the economic and performance benefits offered by these products,
emphasizing both Polaroid's corporate image for creative technology and the
Company's reputation for a high level of service and quality assurance. These
products are expected to then be marketed throughout the United States, Europe
and Asia through the Company's sales and marketing staff and its international
network of agents and distributors.

    The Company also plans to utilize the benefits of the Polaroid Agreement to
address the customer's preference to purchase an integrated "front-end" system,
which includes an AOI system, a CAM and a laser plotter. Customers prefer to buy
these components from one supplier to ensure the compatibility of interfaces and
the efficiency of the most sophisticated aspect in PCB manufacturing. Through
the Polaroid Agreement, the Company gains access to critical advanced technology
for its base business, inspection systems, as well as a license to sell
Polaroid's proprietary Helios(TM) Film in the PCB artwork and phototool markets.
Using these benefits, the Company is working to increase volume sales per
customer and to establish new OEM agreements and strategic alliances with
suppliers of CAM and automation equipment.

    COMPETITION

    The optical inspection systems industry is intensely competitive. The
Company competes with many companies in the United States and Europe, several of
which have substantially greater financial, technical, sales and managerial
resources than the Company and may be able to adapt more quickly to new or
emerging technologies and changes in customer requirements or to devote greater
resources to the promotion and sale of their products than the Company. The
Company believes that in the future the principal competitive factors will be
product functionality and performance (e.g., speed, ease of use, accuracy and
reliability), the development of improved products through research and
development, customer support services, customer relations and price. No
assurance can be given that the Company will compete successfully with existing
or potential future competitors.

    The Company believes that its products enjoy significant technical
advantages over those of its competition for the following reasons:

    -   RELIABILITY AND LIMITED DOWN-TIME. The Company believes that its
        products enjoy significantly higher reliability and less down-time than
        those of its competition. These benefits can be attributed to the more
        advanced in-line design of the Company's products, which employ few
        moving parts, and are therefore less prone to equipment failures, and
        the availability of direct diagnostic links, via modem, whereby the
        Company's in-house service technicians can diagnose and troubleshoot the
        Company's products in the field directly from the Company's facilities.

    -   VERSATILE PRODUCTS THAT CAN BE EASILY UPGRADED. The Company's products
        are designed to be significantly less prone to obsolescence than those
        of its competition. Unlike those of the Company's competition, the
        Company's products are designed to be more highly dependent upon
        software with a very modular hardware design that may be easily upgraded
        to add more features.

    -   INCREASED ACCURACY AND HIGHER THROUGHPUT. The Company believes that its
        products, as a result of its unique in-line system with multiple
        stationary cameras, achieve a higher throughput at most levels of
        resolution, resulting in enhanced productivity and overall performance.

    -   COMPLETE INTEGRATION OF DESIGN, INSPECTION AND REPAIR SYSTEMS. The
        Company's products together allow for the integrated implementation of a
        complete automated inspection system for real-time process control and
        yield improvement through inspection, evaluation and repair. When
        combined with the laser plotters and advanced Helios(TM) Film, the
        Company's product line has the added advantage of offering a complete
        integrated solution to the "front needs" of PCB manufacturers.

    The Company believes that the quality of its products, its ability to
quickly and adequately respond to the needs of its customers, its early
recognition of trends in the development of AOI related products, and its
increasing product and brand name recognition are important competitive factors
in achieving market penetration for its products. In addition, the Company
believes that it will be able to distinguish itself from its competition as a
result of the Company's broad selection of inspection products, proprietary
technology and access to other advanced technology and products by virtue of the
Company's relationship with Polaroid as well as funded development through ARPA
and similar programs.

BACKLOG

                                       9
<PAGE>   10
    The Company's backlog for products and services was approximately $1.8
million at March 31, 1998 (of which $200,000 represented plotters), compared to
approximately $1.5 at March 31, 1997. The Company defines backlog to include
only those systems, accessories, upgrades and service agreements with respect to
which firm purchase orders have been received. Cancellations of product purchase
orders are sometimes subject to penalties, depending upon the time of
cancellation. Although a significant indicator of business levels, backlog is
not necessarily representative of future sales. The Company believes its backlog
at March 31, 1998, except for the plotters which depend on the outcome of the
Polaroid negotiations, will be recognized in revenue in the next six to twelve
months.

MANUFACTURING

    The Company's manufacturing work force consists of a small group of
individuals who are each trained to cover several areas of production. Emphasis
is on performing final assembly, test and integration while maintaining critical
skills in each aspect of production: machining, PCB assembly and rework, cable
fabrication, electric-mechanical subassembly, optical alignment and electrical
test. The Company believes that production lead time, product quality and
customer response are key elements to its success.

    The Company's systems have a number of highly complex components. Although
the Company manufactures some of the subassemblies used in its systems, most are
purchased from unaffiliated subcontractors, typically to the Company's
specifications. None of the Company's suppliers are obligated to provide the
Company with any specific quantity of components or subassemblies over any
specific period. Certain of the components and subassemblies included in the
Company's products are obtained from a limited group of suppliers. In addition,
because the Company believes that subsystem vendors have increased their
manufacturing expertise, the Company expects to continue to obtain virtually all
of its components and subassemblies from third parties in order to devote its
resources toward systems design, software development and systems integration,
its primary areas of competence.

    From March 1996 through December 1996, the Company utilized an agreement
("Purchasing Agreement") with Centennial Technologies, Inc. ("Centennial"),
under which Centennial would purchase raw materials and certain components on
its own account and sell them to the Company at the same price. During this
time, the Company was able to obtain adequate and timely delivery of critical
subassemblies and components through the Purchasing Agreement, although it
experienced occasional delays. The Company did not make any purchases through
Centennial after December 31, 1996, which significantly limited the Company's
ability to purchase such materials. It experienced more significant delays after
December 1996 because of payment terms that required cash in advance or cash on
delivery. The Company was never a customer of Centennial products nor was
Centennial ever a customer of the Company. (SEE "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS")

    In November 1997, the Company received a major equity investment from
Imprimus and is using some of these funds to purchase materials to restabilize
its supply of raw materials. In addition, the Company has negotiated with its
major suppliers to reestablish credit terms for the purchase of materials,
components and subassemblies. No assurance can be given that the Company will be
successful in its negotiations or that it will obtain favorable financing terms,
if at all. Further, because the manufacture of these components and
subassemblies is very complex and requires long lead times, and although
alternative sources are available, such sources may not be readily available. As
a result, no assurance can be given that delays or shortages caused by suppliers
will not occur in the future. Any disruption of the Company's supply of critical
components and subassemblies could prevent the Company from meeting its
manufacturing schedules, which could damage relationships with customers and
would have a material adverse effect on the Company's business, financial
condition and results of operations.

    Due to recent increases in demand, the average time between order and
shipment of the Company's systems has increased over the last fiscal year. The
Company's ability to increase its manufacturing capacity in response to an
increase in demand is limited given the complexity of the manufacturing process,
the lengthy lead times necessary to obtain critical components and the need for
highly skilled personnel. The failure of the Company to keep pace with customer
demand would lead to further extensions of delivery times, which could deter
customers from placing additional orders, and could adversely affect product
quality. There can be no assurance that the Company will be successful in
increasing or be able to fund increasing its manufacturing capacity.

    Rapid growth of the Company's business, of which no assurance can be given,
may significantly strain the Company's management, operational and technical
resources. If the Company is successful in obtaining rapid market penetration of
its products, the Company will be required to deliver increasing volumes of
highly complex products and components to its customers on a timely basis at a
reasonable cost to the Company. No assurance can be given that the Company's
efforts to expand its manufacturing and quality assurance activities 

                                       10
<PAGE>   11
will be successful or that the Company will be able to satisfy increased
commercial scale production on a timely and cost-effective basis. In addition to
the levels of support currently provided, including the ability to modify its
technology and products to meet end-user requirements, the Company will also be
required to continue to improve its operational, management and financial
systems and controls. Failure to effectively manage such growth could have a
material adverse effect on the business of the Company.

GOVERNMENTAL REGULATIONS AND INDUSTRY STANDARDS

    The Company's products and worldwide operations are subject to numerous
governmental regulations designed to protect the health and safety of operators
of manufacturing equipment. In particular, the European Union ("EU") has
recently issued regulations relating to electromagnetic fields, electrical power
and human exposure to laser radiation. The Company believes that its products
currently comply with all applicable material governmental health and safety
regulations, including those of the EU, and with any voluntary industry
standards currently in effect.

PATENTS AND PROPRIETARY INFORMATION

    The Company holds five United States patents, expiring between August 2003
and October 2005. The Company also holds two patents issued in Israel and
England, expiring in June 2004.

    The Company's products require technical know-how to engineer and
manufacture and are based, in part, upon proprietary technology. To the extent
proprietary technology is involved, the Company relies on patents, copyrighted
software and trade secrets that it seeks to protect, in part, through
confidentiality agreements. There can be no assurance that such agreements will
not be breached, that the Company will have adequate remedies for any breach, or
that the Company's trade secrets will not otherwise become known to, or
independently developed by, existing or potential competitors of the Company.
The Company may be involved from time to time in litigation to determine the
enforceability, scope and validity of its rights. In addition, no assurance can
be given that the Company's products will not infringe any patents of others.
Litigation could result in substantial cost to the Company and diversion of
effort by the Company's management and technical personnel.

EMPLOYEES

    As of March 31, 1998, the Company had 34 full-time employees and two
part-time employees along with seven independent contractors, of which ten were
in sales, marketing and service, eight were in engineering and product
development, seven were in administration and finance, and 18 were in
manufacturing.

    None of the Company's employees are represented by a labor union. The
Company considers its relationships with its employees to be satisfactory. The
Company's financial performance will depend significantly upon the continued
contributions of its officers and key management, technical, sales and support
personnel, many of whom would be difficult to replace. In addition, the Company
believes that certain of its former employees currently provide services or
technical support to the Company's customers or competitors. Due to the level of
technical and marketing expertise necessary to support its existing and new
customers, the Company must attract highly qualified and well-trained personnel.
There can be only a limited number of persons with the requisite skills to serve
in these positions and it may become increasingly difficult for the Company to
hire such personnel. No assurance can be given that the Company will be
successful in attracting or retaining qualified personnel.

ITEM 2.    DESCRIPTION OF PROPERTIES

    The Company maintains its corporate headquarters, executive offices and
principal research, developing, engineering and manufacturing facilities in
approximately 14,000 square feet in Lowell, Massachusetts pursuant to a renewed
lease as of December 1, 1995, which expires on November 30, 1998. The Company's
manufacturing operations in this facility occupy 6,000 square feet of space. The
Company estimates that the current space is sufficient for shipment of up to
three systems per month. The minimum annual rental for these premises is
approximately $119,000. The Company is responsible for payment of real estate
taxes, which are approximately $13,000 per year, and maintenance. The Company
believes that these facilities are adequate to meet its current needs. If
additional space is required, the Company believes that adequate facilities are
available at competitive prices.

ITEM 3.    LEGAL PROCEEDINGS

                                       11
<PAGE>   12
    The Company is currently involved in litigation with Polaroid. On August 5,
1997 (after the May 31, 1997 end of the contract year), Polaroid filed a
complaint in Middlesex County (Massachusetts) Superior Court, in which Polaroid
sought to declare the Company in default of its milestone obligations and to
convert the arrangement to a non-exclusive relationship. The Company disputed
this action and, when Polaroid refused to negotiate, a Superior Court judge
entered a temporary restraining order prohibiting Polaroid from converting the
agreement to a non-exclusive relationship. Polaroid subsequently sought to have
the order overturned and the judge again found in favor of the Company,
extending the temporary restraining order. This order was subsequently converted
to a preliminary injunction. Polaroid has brought counterclaims, alleging breach
of conflict and breach of the duty of good faith and fair dealing. The Company
disputed those counterclaims and served a Motion to Dismiss causing Polaroid to
amend its counterclaims. The Company has answered the amended counterclaims.
Currently, the Company is in negotiations with Polaroid to resolve the dispute.
The outcome cannot be predicted, although the Company believes the ultimate
resolution of this dispute will not have a material adverse effect on the
Company's results of operations and the Company believes that any adverse
determination would not cause the Company to incur an obligation to pay
significant funds to Polaroid. The Company is not involved in any other
litigation of a material nature.

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

    The Company did not submit any matters during the fourth quarter of the
fiscal year covered by this report to a vote of security holders 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 is traded on the OTC Bulletin Board. Until
January 1997, the Company's Common Stock traded under the symbol ORBS. As part
of its acquisition of Triple I Corporation, the Company completed an 18:1
reverse stock split and changed its trading symbol to INIM.

    As of June 23, 1998, the Company had 255 holders of record of its Common
Stock. Management believes that there are approximately 500 beneficial owners of
the Company's Common Stock.

    For the fiscal quarters reported below, the following table sets forth the
range of high and low bid quotations for the Common Stock for the relevant
periods as reported by the OTC Bulletin Board. Such quotations represent
inter-dealer quotations without adjustment for retail markups, markdowns or
commissions and may not represent actual transactions. The quotations have been
adjusted to reflect the 18:1 reverse stock split. The quotations represent
interdealer quotations, do not include retail mark-ups or commissions and do not
necessarily represent actual transactions.


<TABLE>
<CAPTION>
                                                   HIGH BID     LOW BID
                                                   --------     -------
COMMON STOCK

Fiscal Year 1997

<S>                                                <C>         <C>   
    First Quarter..............................    $2 13/16     $2 13/16
    Second Quarter                                 $2 13/16     $2 13/16
    Third Quarter                                  $2 13/16     $2 1/4
    Fourth Quarter.............................    $4 1/4       $2 3/4

Fiscal Year 1998

    First Quarter..............................    $3 1/4       $1 1/8
    Second Quarter                                 $1 3/8       $1 1/8
    Third Quarter..............................    $1 1/8       $   7/8
    Fourth Quarter ............................    $1           $   7/8
</TABLE>


                                       12
<PAGE>   13
DIVIDENDS

    The Company has not paid any cash dividends on its Common Stock since
inception and does not anticipate the payment of cash dividends on its Common
Stock in the foreseeable future. It is expected that any earnings which may be
generated from operations will be used to finance the growth of the Company.

ITEM 6.    MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

GENERAL

    Industrial Imaging Corporation designs, manufactures and markets automated
optical, vision and industrial imaging systems for inspection and identification
of defects in PCBs and laser plotters for creation of PCB artwork and photo
tools. Members of the Company's management were pioneers in the field of
automated optical inspection of PCBs. These individuals developed the Company's
product line while working at Itek, now a part of Hughes Corporation, through
close cooperation between Itek and DEC. The prototype and initial production
models developed by Itek and DEC were later completed and marketed by AOI
Systems, Inc., a predecessor to the Company's subsidiary, Triple I.

    The Company acquired Triple I as part of the Exchange, whereby the
shareholders of Triple I received 90% ownership of the Company in exchange for
100% of Triple I's outstanding Common Stock (the "Exchange"). The Exchange was
effective on February 1, 1997. Prior to the Exchange, Orbis had not had revenues
from operations since 1992, and therefore, the impact of Orbis on the financial
statements of Industrial Imaging Corporation is immaterial. The information
provided below represents the financial information of Triple I for the year
ended March 31, 1997 and includes Orbis for the period from the effective date
of the Exchange of February 1, 1997 through March 31, 1997, and for the entire
year ended March 31, 1998. Prior to the Exchange, Triple I had a September 30
year end. As part of the Exchange, Triple I adopted a March 31 year end,
evidenced by the six-month period from September 30, 1995 to March 31, 1996,
which includes financial information for Triple I only. Financial information
for the year ended September 30, 1995, includes only Triple I.

    The following discussion and analysis should be read in conjunction with the
Financial Statements of the Company (including the Notes thereto) commencing on
page F-1 of this report.

RESULTS OF OPERATIONS

YEAR ENDED MARCH 31, 1998 ("FISCAL 1998") COMPARED TO THE YEAR ENDED MARCH 31,
1997 ("FISCAL 1997")

    Revenues for Fiscal 1998 were $2,305,209, as compared to $1,823,576 for
Fiscal 1997, an increase of $481,633. Product revenues were $1,896,524 in Fiscal
1998, as compared to $1,525,625 for Fiscal 1997. This increase was due primarily
to an increase in the number of units sold, in particular, the sale of photo
plotters in Fiscal 1998, as compared to no photo plotter sales in fiscal 1997.
Service revenues were $408,685 in Fiscal 1998, as compared to $297,951 in Fiscal
1997. This increase was due mostly to increased levels of services performed.
The Company's planned expansion may also significantly strain the Company's
management, manufacturing, financial and other resources. There can be no
assurance that the Company's systems, procedures, controls and existing space
will be adequate to support the Company's operations. Failure to manage the
Company's growth properly could have a material adverse effect on the Company's
future financial condition, revenues and operating results.

    Cost of revenues for Fiscal 1998 was $2,638,176, as compared to $1,609,987
for Fiscal 1997, an increase of $1,028,189, resulting from an increase in sales
volume. Gross loss was $(332,967) in Fiscal 1998, as compared to gross profit of
$213,589 in Fiscal 1997, due to increased materials costs, as well as an
increase in manufacturing personnel and overhead costs as a result of expanding
production to meet the anticipated increase in demand for the Company's
products, an increase in warranty expense and a charge of $143,000 to write down
inventory to net realizable value.

    Operating expenses are less sensitive to volume changes at this level of
sales than cost of sales. Operating expenses for Fiscal 1998 were $1,933,916, as
compared to $1,839,334 in Fiscal 1997, an increase of $94,582. Research and
development expenses were $344,068 in Fiscal 1998, as compared to $440,207 in
Fiscal 1997, a decrease of $96,139, which was primarily due to finalizing the
contract with the Department of Energy relating to a contract with the Company
to research optics, and recording of approximately $140,000 of cost
reimbursements as an offset to and decrease of research and development expense
in Fiscal 1998, and an increase in costs relating to increasing the engineering
staff. Sales and marketing expenses were $545,097 in Fiscal 1998, as compared to
$361,392 in Fiscal 1997, an increase of $183,705, due to increased commissions
paid to outside sales representatives, the Company's attendance in more trade
shows, 

                                       13
<PAGE>   14
advertising in trade journals, updating collateral materials, and increased
travel costs for sales and marketing. General and administrative expenses were
$1,044,751 in Fiscal 1998, as compared to $857,948 in Fiscal 1997, an increase
of $186,803, primarily due to increased legal, accounting , printing, and filing
costs relating to public company reporting, increased travel costs and a
compensation charge of $125,000 relating to warrants exercised at a discount. In
Fiscal 1997, the Company recorded $179,787 of merger expenses relating to the
costs of the Exchange with Orbis (See Note R of the financial statements).

    Interest expenses were $171,841 in Fiscal 1998, as compared to $89,257 in
Fiscal 1997, due to a significant increased use of factoring as well as
recording of a full year of interest expense on promissory notes issued in
February 1997 through the bridge financing. Other income (expense) was $5,170 in
Fiscal 1998 and $(179,552) in Fiscal 1997. Other expenses in Fiscal 1997 were
comprised of $171,297, which represented the expense recorded for the market
value of shares granted in conjunction with the 1997 bridge financing.

    The net loss increased to $2,433,554 in Fiscal 1998, as compared to
$1,894,554 in Fiscal 1997. This increase was primarily due to the aforementioned
increase in sales and cost of sales, a decrease in gross margin, an increase in
operating expenses, as well as an increase in other expenses explained above.

    Due to the uncertainty of realizing the tax benefits of net loss
carryforwards, no provision for income tax benefit was made for either Fiscal
1998 or Fiscal 1997.






                                       14
<PAGE>   15

LIQUIDITY AND CAPITAL RESOURCES

    The Company has incurred operating losses since inception that have
continued through March 31, 1998. In addition, the financial statements of the
Company for Fiscal 1998 were prepared on the assumption that the Company will
continue as a going concern and do not include any adjustments that would result
if the Company would cease as a going concern. The report of the independent
accountants contain an explanatory paragraph as to the Company's ability to
continue as a going concern. Among the factors cited by the auditors as raising
substantial doubt as to the Company's ability to continue as a going concern is
that the Company has suffered recurring losses from operations, and has an
accumulated deficit of $10,399,723 as of March 31, 1998. The auditors note that
the Company's capital requirements may change depending upon numerous factors,
including the demand for the Company's product. Management believes that the
investment by Imprimus of $3 million in November 1997, along with anticipated
future financings, will provide the additional capital funding that the Company
needs to aggressively pursue market penetration. In view of the Company's
current financial condition, the Company plans to continue to aggressively
manage its working capital and expenses while pursuing product sales
opportunities as well as strategic or other business relationships. In addition,
the Company is currently seeking bank financing as well as additional equity
investments. In the event the Company is unable to raise additional capital, it
may be required to take additional steps which could include a merger or sale of
the Company, or seeking protection under bankruptcy laws. (See Note B to the
Financial Statements)

    The Company's operations to date have been funded by equity investments,
borrowing from banks, investors and stockholders, factoring of accounts
receivable, and to a limited extent, cash flow from operations. In addition, the
Company raised $3 million of new equity in November, 1997. At March 31, 1998,
the Company had cash of $671,195, and working capital of $464,085. During 1998
and 1997, cash used in operating activities was $2,474,234 and $1,376,031.
Capital expenditures were $39,050 and $23,603 1998 and 1997.
 The Company has no outstanding material commitments for capital expenditures.
During 1998, the Company received $3,086,749 from sales of Common Stock and
warrant exercises. The Company raised $2,734,590 (net of issuance costs of
$265,410) of private equity from Imprimus Investors. In addition, an investor
exercised a warrant and purchased 100,014 shares of Common Stock for $100,014.
Warrantholders exercised warrants and purchased 1,187,406 shares Common Stock at
prices from $.25 to $.60 per share. Cash was received for $252,145, and a note
receivable was issued from an officer of the Company in the amount of $125,000,
and a noteholder canceled a promissory note due to the Company as payment.
During 1997, the Company raised (i) $816,496 from private equity sales to
affiliates and partially from the 1996 Private Placement and (ii) $635,230 (net)
from the issuance of debt. The net increases in cash for Fiscal 1997 and 1998
were $52,092, and $609,092.

    The Company derives most of its annual revenues from a relatively small
number of sales of products, systems and upgrades, with product prices ranging
from $185,000 to $600,000 per system. As a result, accounts receivable are
expected to fluctuate based on the number of systems sold in each period and the
timing of the individual sales within each period. Moreover, any delay in the
recognition of revenue for single products or a delay in shipment to customers,
systems or upgrades would have a material adverse effect on the Company's
results of operations for a given accounting period. In addition, some of the
Company's net sales have been realized near the end of a quarter. Accordingly, a
delay in a customer's acceptance or in a shipment scheduled to occur near the
end of a particular quarter could materially adversely affect the Company's
results of operations for that quarter. The accounts receivable balance
decreased from $493,778 at March 31, 1997, to $214,450 at March 31, 1998 due to
a sale in late 1997, for which the balance was collected in Fiscal 1998.

    Fluctuations in inventory will be caused by changes in production levels,
timing of materials inflows, amount of sales and the timing of shipments to
customers. Inventory was $1,995,194 and $1,877,979 as of March 31, 1998 and
March 31, 1997, respectively. The increase in inventory of $117,215, or 6%, was
primarily caused by a $550,319 increase in finished goods to facilitate meeting
actual and anticipated orders, partially offset by a decrease in raw materials
of $203,147.

                                       15
<PAGE>   16
    When the Company acquired the assets and product base of AOI Systems, Inc.,
the Company became responsible for $130,000 of indebtedness to certain creditors
of AOI Systems, Inc. This indebtedness incurs interest at 8.0% per annum and
became due and payable on January 30, 1995. The Company renegotiated the note in
July 1994 to require interest only payments at a rate of 8.0%, due monthly. In
1998, The Company renegotiated the note, which was in default, to a new note
with a 57 month amortization with payments increasing during each year. Unpaid
interest was added to the new principal which amounts to $163,750. In addition,
the Company issued warrants to purchase 40,937 shares of the Common Stock at
$4.00 per share.

    In December 1992, the Company received $50,000 from a stockholder in return
for a subordinated promissory note bearing an interest rate of 8.4% per annum,
due on December 31, 1996. The note provides that the Company is in default if
the amount due is not received within 90 days of the maturity date. Upon an
event of default, the noteholder may, upon written notice to the Company,
declare the note immediately due and payable. As of January 29, 1998, the note
has not been repaid. The Company has not received any demand notices and plans
to continue paying the quarterly interest payments as they become due. (SEE
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS")

    From August 1993 through June 1995, various stockholders of the Company,
including Dr. Harry Hsuan Yeh, Mr. Joseph Teves, the Massachusetts Technology
Development Corporation (the "MTDC") and the Massachusetts Community Development
Finance Corporation (the "CDFC"), loaned the Company an aggregate of
approximately $1,200,000 to help fund operations. These loans were made pursuant
to various promissory notes with various due dates through August 22, 1999.
These notes provide for interest at per annum rates ranging from 8.4% to 10%. In
February 1996, these noteholders agreed to convert the principal and interest
due on the notes into 1,270,637 shares of the Common Stock, on the basis of one
share of Common Stock for every one dollar of debt converted. Dr. Yeh and Mr.
Teves did not convert all of their outstanding debt and each received a
promissory note for $100,000 bearing an interest rates of 10% and 8.4% per
annum, respectively, for the amounts due to them from the Company. The maturity
date for the notes to Dr. Yeh and Mr. Teves was October 23, 1996. The notes
provide that the Company is in default if the amount due is not paid within 90
days of the maturity date. Upon an event of default, the noteholder may, upon
written notice to the Company, declare the note immediately due and payable. The
Company has not received any demand notices from the noteholders. Dr. Yeh also
forgave a $100,000 loan to the Company in return for a warrant to purchase
150,000 shares of Common Stock, exercisable until February 6, 1999 at $1.00 per
share which was recorded as paid in capital on the balance sheet.

    In November 1995, the Company completed a 1995 Bridge Financing ("1995
Bridge Financing") as part of the 1996 Private Placement, whereby certain
affiliates loaned $255,000 to the Company in return for $255,000 in subordinated
promissory notes bearing an interest rate of 10% per annum, due May 24, 1996,
and warrants to purchase 250,000 shares of Common Stock, exercisable until
November 1998, at an exercise price of $1.00 per share. The following affiliates
participated in the 1995 Bridge Financing: Dr. Juan J. Amodei, Dr. Joseph
Bordogna, Mr. Joseph Teves, Polaroid and Centennial. To date, $150,000 has been
repaid towards the outstanding balance. The notes provide that the Company is in
default if the amount due is not paid within 90 days of the maturity date. Upon
an event of default, the noteholder may, upon written notice to the Company,
declare the note immediately due and payable. The Company has not received any
demand notices from the noteholders.

    In February 1996, the Company commenced the 1996 Private Placement, which
involved the sale of the Company's Common Stock for $1.00 per share. When the
1996 Private Placement was completed in April 1996, the Company had sold 880,000
shares of Common Stock and received net proceeds of $797,036, which included a
purchase of 250,000 shares by Centennial.

    In March 1996, the Company entered into the Purchasing Agreement, whereby
Centennial would purchase raw materials and certain components on its own
account and sell them to the Company at the same price. Payment for such
purchases were due upon the receipt of final payment from customers for the
products containing such materials purchased through Centennial. Originally,
Centennial agreed to allow the Company to purchase up to a total of $750,000
worth of materials at any one time, which could be increased to $1,500,000. The
Company paid a one-time non-refundable fee of $200,000 for this credit facility.
The outstanding balance on this facility on December 31, 1996 was approximately
$1,300,000. In May, 1997, the amount due to Centennial was satisfied through a
cash payment of approximately $132,000 and a conversion of the remaining amount
into 600,000 shares of the Company's Common Stock. The Company did not make any
purchases through Centennial after December 31, 1996, which significantly
limited the Company's ability to purchase such materials. The Company was never
a customer of Centennial nor was Centennial ever a customer of the Company. As
described below, the Company has received a major equity investment from
Imprimus Investors and will use some of these funds to purchase materials. In
addition, the Company has negotiated with most of its major suppliers to
reestablish credit terms for the purchase of materials, components and
subassemblies. (SEE "BUSINESS" AND "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS")

                                       16
<PAGE>   17
    In June 1996, MTDC purchased 200,000 shares of Common Stock at a price of
$1.00 per share. In May 1996, Centennial loaned $200,000 to the Company in the
form of a convertible note bearing an interest rate of 10% per annum, which
automatically converted to 200,000 shares of Common Stock upon the purchase of
stock by MTDC. Upon MTDC's purchase in June 1996, Centennial converted the note
to shares of Common Stock on the same terms as the MTDC stock purchase and later
purchased another 250,000 shares of Common Stock at $1.00 per share.

    In August 1996, Centennial loaned the Company $100,000 in return for a
three-month promissory note for the amount borrowed, bearing a per annum
interest rate equal to the prime rate plus 4%, and warrants to purchase 100,000
shares of Common Stock, exercisable for a period of five years from the date of
issuance, at an exercise price of $1.00 per share. The warrants were exercised
for the Company's Common Stock in January 1997 and the proceeds were used to pay
the outstanding balance of the $100,000 promissory note.

    In November 1996, Centennial loaned Triple I $130,000 in return for a
three-month promissory note for the amount borrowed, bearing an interest rate
equal to the prime rate plus 4%, and warrants to purchase 130,000 shares of
Common Stock exercisable for a period of five years from the date of issuance,
at an exercise price of $1.00 per share. The warrants were exercised to purchase
the Company's Common Stock in January 1997 and the proceeds were used to pay the
outstanding balance of the $130,000 promissory note.

    In December 1996, Dr. Harry Hsuan Yeh loaned $150,000 to Triple I, in return
for a twelve-month promissory note. On January 15, 1997, this note was converted
to a two year subordinated promissory note, bearing an interest rate of 10% per
annum, which was issued to Dr. Yeh along with 44,100 shares of Common Stock. On
January 22, 1997, Dr. Yeh loaned another $50,000 to the Company in exchange for
a subordinated promissory note and 14,700 shares of Common Stock. Both
subordinated promissory notes contain the same terms as the Bridge Notes
(defined below) and payment is accelerated in the event the Company raises a
certain amount of equity financing.

    In February 1997, the Company commenced the 1997 Bridge Financing and sold
five units ("Units"), each Unit consisting of a $50,000 subordinated promissory
note bearing an annual interest rate of 10% ("Bridge Notes") and 10,714 shares
of Common Stock. Aggregate gross proceeds to the Company were $250,000 as of
February 14, 1997. The Bridge Notes are payable two years after the date of the
Bridge Notes and payment is accelerated in the event the Company raises a
certain amount of equity financing.

    In November 1997, Imprimus executed a Securities Purchase Agreement to
invest $3 million in the Company by purchasing three million shares of the
Common Stock at $1.00 per share. In accordance with the agreement, the Company
also issued warrants to purchase one million shares of Common Stock at $1.00 per
share through November 12, 2002, and issued warrants to purchase one million
shares of Common Stock at $2.00 per share through November 12, 2002. The
investor was granted demand registration rights starting six months from the
closing date for both the Common shares purchased and the warrants granted. In
addition, the investor holds a seat on the board of directors. The agreement
contains certain covenants which restrict future activities of the Company
including, but not limited to, mergers or acquisitions, borrowings, issuance of
securities, payment of dividends, granting a security interest in Company
assets, and the purchase or sale of assets. The investment was funded and
closing and issuance costs (including commissions) amounted to $265,410.

    In November, 1997, the Company offered a 50% discount of the exercise price
to all warrantholders of Common Stock for a specified period of time, which has
expired. Warrantholders exercised warrants to purchase 1,187,406 shares of
Common Stock at prices from $.25 per share to $.60 per share. The Company
received $252,145 in cash, received a promissory note from an officer of the
Company for $125,000, interest and principal is payable in four years, and
accrues interest at an rate of 8.5% per annum. The stock purchased is pledged as
collateral against the note. In addition, a director of the Company cancelled a
promissory note due from the Company for $100,000 in exchange for the exercise
of warrants at a total exercise price of $98,480. The balance of the note
payable plus accrued interest were paid to the noteholder in cash. The impact of
these transactions resulted in the Company taking a charge of $125,000 in Fiscal
1998.

    The Company is currently seeking new debt capital with a number of potential
sources. To fund operations in the future, the Company will rely on proceeds
from the Imprimus equity investment, cash flow from anticipated sales and new
capital. The Company's management believes that the funds provided by the equity
investment, cash flow from anticipated future product sales, and anticipated
debt capital will be sufficient to fund continuing operations through the end of
fiscal 1998. There can be no assurance that the Company can attract additional
capital at favorable rates, if at all.

INFLATION

To date, inflation has not had a material effect on the Company's business.

                                       17
<PAGE>   18
YEAR 2000 ISSUE DISCLOSURE

       The Company is evaluating the potential impact of the situation referred
to as the "Year 2000 Issue." The Year 2000 Issue concerns the inability of
computer software programs to properly recognize and process date sensitive
information relating to the Year 2000. It is not anticipated that the Company
will incur any negative significant impact as a result of this potential
problem. Certain of the Company's systems are currently Year 2000 compliant.
Other of the Company's applications , which utilize a two-digit century field,
are expected to require little additional effort to be Year 2000 compliant.

NEW ACCOUNTING STANDARDS NOT YET ADOPTED

    In June 1997, the Financial Accounting Standard Boards (the "FASB") issued
two new pronouncements. Results of operations and financial position will be
unaffected by the implementation of these new standards..

    Statement of Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income" establishes standards for reporting and display of comprehensive income,
its components and accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from investments by owners
and distribution to owners. Among other disclosures, SFAS No. 130 requires that
all items that are required to be recognized under current accounting standards
as components of comprehensive income to be reported in a financial statement
that is displayed with the same prominence as other financial statements.

    SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information", which supercedes SFAS No. 14, "Financial Reporting for Segments of
a Business Enterprise," establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic area and major customers. SFAS No. 131 defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.

    Both of these standards are effective for financial statements for periods
beginning after December 15, 1997, and require comparative information for
earlier years to be restated. Management does not expect implementation of
these standards to materially affect future financial statements and
disclosures.


ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    See Item 14 below and the Index therein for a listing of the financial
statements and supplementary data filed as part of this report.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

    Effective June 15, 1998, the Company retained as its new independent
accountants, BDO Seidman, LLP, replacing its prior independent accountants,
Coopers & Lybrand, LLP (now PriceWaterhouseCoopers L.L.P.)("Coopers & Lybrand").
Coopers & Lybrand's report on the financial statements for the two most recent
fiscal years contained a modification as to a going concern uncertainty.  No
action on the decision to change accountants has been taken by the Board of
Directors of the Company.
     
    During the last two fiscal years and the subsequent interim period
preceeding such replacement, there were no disagreements between the Company
and Coopers & Lybrand on any matters of accounting principles or practices,
financial statement disclosures, or auditing scope or procedures, which
disagreement, if not resolved to the satisfaction of Coopers & Lybrand, would
have caused it to make a reference to the subject matter of the disagreement in
connection with its reports.

    None of the "Reportable Events" described in Item 304(a)(1)(v) occurred
with respect to the Company within the last two fiscal years and the subsequent
interim period to the date of the change in accountants.



                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16A OF THE EXCHANGE ACT.

      The Company intends to file a definitive Proxy Statement within 120 days
of the completion of the Company's fiscal year ended March 31, 1998. The
information required by this item is incorporated by reference from the Proxy
Statement.

ITEM 10 EXECUTIVE COMPENSATION

                                       18
<PAGE>   19
      The information required by this Item is incorporated by reference from
the Proxy Statement.

ITEM 11      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 12      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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


                                       PART IV

ITEM 13a.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

    (i)The following exhibits are filed herewith:

    
    27                    Financial Data Schedule      

    (ii)The following exhibits were filed on the Company's Form 10-K for the
year ended March 31, 1997 as filed with the Commission and are herein
incorporated by reference.

          EXHIBIT
        NO. TITLE
   (a)      EXHIBITS

    1          --         Not applicable.

    2          --         Agreement of Merger, dated December 9, 1996.

    3a         --         Certificate of Incorporation.

    3b         --         Bylaws, as amended.

    4          --         Sections of Bylaws and Certificate of Incorporation
                          defining the rights of security-holders (contained in
                          Exhibits 3a and 3b).

    5          --         Not applicable.

    6          --         Not applicable.

    7          --         Not applicable.

    8          --         Not applicable.

    9          --         Not applicable.

  **10a        --         License and Collaboration Agreement dated November
                          1992 between the Company and Polaroid Corporation,
                          with amendments.

    10b        --         Purchase agreement dated March 31, 1996 between the
                          Company and Centennial Technologies, Inc., and the
                          termination thereof.

    10c        --         1996 Stock Option Plan.

    10d        --         Employment Agreement with Juan J. Amodei, Ph.D.

    10e        --         Lease Agreement between the Company and John Hancock
                          Mutual Life Insurance Company, dated October 31, 1995,
                          as amended.

    10f        --         Form of the Shareholder Exchange Agreement by and
                          between Orbis, Inc., Triple I Corporation, and the
                          Shareholders of Triple I Corporation.

    10g        --         Form of Subscription Agreement between the Company and
                          investors in the 1997 Bridge Financing.

    10h        --         Form of Subscription Agreement between the Company and
                          Dr. Harry Hsuan Yeh.

    10i        --         Form of Subscription Agreement between the Company and
                          investors in the 1996 Private Placement.

    10j        --         Securities Purchase Agreement between the Company and
                          Imprimus Investors LLC, dated November 12, 1997

    10k                   Form of Class A and Class B Warrants issued by the
                          Company to Imprimus Investors LLC

    10l                   Registration Rights Agreement between the Company and
                          Imprimus Investors LLC, dated November 12, 1997

    11         --         Not applicable.

    12         --         Not applicable.

    13         --         Not applicable.

    14         --         Not applicable.

    15         --         Not applicable.

    16         --         Not applicable.

    18         --         Not applicable.

    21         --         Subsidiaries of the Company

    23         --         Not applicable.

    24         --         Not applicable.




                                       19
<PAGE>   20

    25         --         Not applicable.

    26         --         Not applicable.

    27         --         Financial Data Schedule


ITEM 13b EXHIBITS AND REPORTS ON FORM 8-K

      Form 8-K filed February 15, 1998 reporting resignation of Coopers &
Lybrand L.L.P.

      Form 8-K filed June 29, 1998 reporting appointment of BDO Seidman, L.L.P.



** Certain information is withheld and being filed separately with the
Commission pursuant to a request for confidential treatment.



                                       20

<PAGE>   21
                                   SIGNATURES

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

                             INDUSTRIAL IMAGING CORPORATION

    Date: July 17, 1998      By:  /s/ Juan J. Amodei 
                                  -------------------------------------------
                                      Juan J. Amodei, Ph.D.
                                      President and Chief Executive Officer

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



<TABLE>
<CAPTION>
        NAME                                       CAPACITY                                       DATE
        ----                                       --------                                       ----
<S>                         <C>                                                                <C> 
/s/ Juan J. Amodei
----------------------      President, Chief Executive Officer, and Chairman of the Board of   July 17, 1998
Juan J. Amodei, Ph.D.       Directors (Principal Executive Officer)

/s/ Bryan M. Gleason
----------------------      Chief Financial Officer, Vice President and Treasurer              July 17, 1998
Bryan M. Gleason            (Principal Financial and Principal Accounting Officer)            
                                                                                              
/s/ Joseph Bordogna
----------------------      Director                                                           July 17, 1998
Joseph Bordogna, Ph.D.                                                                        
                                                                                              
/s/ Joseph A. Teves
----------------------      Director                                                           June 17, 1998
Joseph A. Teves                                                                               
                                                                                              
/s/ Charles G. Broming
----------------------      Director                                                           July 17, 1998
Charles G. Broming                                                                             
                                                                                              
/s/ Shaiy Pilpel                                                                                              
----------------------      Director                                                           July 17, 1998
Shaiy Pilpel                                                                                
</TABLE>



                                       21
<PAGE>   22
               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To The Board of Directors and Shareholders of
     Industrial Imaging Corporation and subsidiary:

         We have audited the accompanying consolidated balance sheet of
Industrial Imaging Corporation and subsidiary as of March 31, 1998 and the
related consolidated statements of operations, shareholders' equity (deficit)
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

         We conducted our audit 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 audit provides a reasonable basis for our opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Industrial
Imaging Corporation and subsidiary at March 31, 1998, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.

         The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note B to the
financial statements, the Company has suffered recurring losses from operations
and has been unable to pay certain debt obligations as they become due.  This
situation raises substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are described in Note B.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.


                                                       BDO Seidman, LLP

Boston, Massachusetts
June 24, 1998


                                       F-1
<PAGE>   23
REPORT OF INDEPENDENT ACCOUNTANTS


To The Board of Directors and Shareholders of
     Industrial Imaging Corporation:

         We have audited the accompanying balance sheet of Industrial Imaging
Corporation as of and March 31, 1997 and the related statement of operations and
shareholders' equity (deficit) and cash flows for the year ended March 31, 1997.
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 Industrial Imaging
Corporation at March 31, 1997, and the results of its operations and its cash
flows for the year ended March 31, 1997, in conformity with generally accepted
accounting principles.

         The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note B to the
financial statements, the Company has suffered recurring losses from operations
and has a net working capital deficiency and stockholders' deficit that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are described in Note B. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.



                                             Coopers & Lybrand LLP


Boston, Massachusetts
January 16, 1998


                                       F-2
<PAGE>   24
                         INDUSTRIAL IMAGING CORPORATION
                                 BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                                 March 31,        March 31,
                                                                                                   1998             1997
                                                                                               ------------     ------------
<S>                                                                                            <C>              <C>         
                                     ASSETS
Current assets:
    Cash ...................................................................................   $    671,195     $     62,103
    Accounts receivable, net of allowance for doubtful accounts of $31,000 (Notes C and
      D) ...................................................................................        214,450          493,778
    Inventories (Notes C and E) ............................................................      1,995,194        1,877,979
    Prepaid expenses .......................................................................         75,282           53,398
                                                                                               ------------     ------------
      Total current assets .................................................................      2,956,121        2,487,258
Property and equipment, net (Notes C and F) ................................................         59,150           34,256
Patents, net (Notes C and G) ...............................................................             --           61,979
Other assets ...............................................................................          7,600           10,786
                                                                                               ------------     ------------
      Total assets .........................................................................   $  3,022,871     $  2,594,279
                                                                                               ============     ============

                 LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
    Notes payable (Notes J and K) ..........................................................   $    715,334     $    480,404
    Accounts payable .......................................................................        599,785        2,497,890
    Deferred revenue (Notes C and H) .......................................................        342,705          242,938
    Accrued expenses (Note I) ..............................................................        834,212          957,953
                                                                                               ------------     ------------
      Total current liabilities ............................................................      2,492,036        4,179,185
Notes payable - long-term portion (Notes J and K) ..........................................        152,217          450,000
                                                                                               ------------     ------------
      Total liabilities ....................................................................      2,644,253        4,629,185
Commitments and contingencies (Notes H and N)
Shareholders' equity (deficit) (Notes J, K, L, and O):
    Common stock, par value $.01 per share, authorized 20,000,000 shares,
      10,890,201 shares and 5,867,498 shares issued and outstanding at March 31,
      1998, and March 31, 1997, respectively ...............................................        108,902           58,675
    Series A Preferred Stock, par value $.01 per share, authorized 1,000,000 shares, 0
      shares issued and outstanding at March 31, 1998 and 1997                                           --               --
    Series B Preferred Stock, par value $.01 per share, authorized 300,000 shares, 0 shares
      issued and outstanding at March 31, 1998 and 1997                                                  --               --
    Additional paid-in capital .............................................................     10,794,439        5,872,588
    Accumulated deficit ....................................................................    (10,399,723)      (7,966,169)
                                                                                               ------------     ------------
                                                                                                    503,618       (2,034,906)
     Note receivable (Note L) ..............................................................       (125,000)              --
                                                                                               ------------     ------------
Total shareholders' equity (deficit) .......................................................        378,618       (2,034,906)
                                                                                               ------------     ------------
        Total liabilities and shareholders' equity (deficit)................................   $  3,022,871     $  2,594,279
                                                                                               ============     ============
</TABLE>


    The accompanying notes are an integral part of the financial statements.


                                       F-3
<PAGE>   25

                         INDUSTRIAL IMAGING CORPORATION

                            STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                         YEAR            YEAR
                                                        ENDED           ENDED
                                                   MARCH 31, 1998  MARCH 31, 1997
                                                   --------------  --------------
<S>                                                <C>             <C>        
Revenues (Notes C and P):
    Product ....................................    $ 1,896,524     $ 1,525,625
    Service ....................................        408,685         297,951
                                                    -----------     -----------
                                                      2,305,209       1,823,576
                                                    -----------     -----------
Cost of revenues:
    Product ....................................      2,239,678       1,341,919
    Service ....................................        398,498         268,068
                                                    -----------     -----------
                                                      2,638,176       1,609,987
                                                    -----------     -----------
Gross profit (loss) ............................       (332,967)        213,589
                                                    -----------     -----------

Operating expenses:
    Research and development (Notes C and H) ...        344,068         440,207
    Sales and marketing ........................        545,097         361,392
    General and administrative (Note H) ........      1,044,751         857,948
    Merger expenses (Note R) ...................             --         179,787
                                                    -----------     -----------
        Total operating expenses ...............      1,933,916       1,839,334
                                                    -----------     -----------
Loss from operations ...........................     (2,266,883)     (1,625,745)

Other expense:
    Interest expense (Notes D and J) ...........       (171,841)        (89,257)
    Other, net (Note Q) ........................          5,170        (179,552)
                                                    -----------     -----------
        Other expense, net .....................       (166,671)       (268,809)
        Loss before income taxes ...............     (2,433,554)     (1,894,554)
Provision for income taxes (Notes C and M) .....             --              --
                                                    -----------     -----------

Net loss .......................................    $(2,433,554)    $(1,894,554)
                                                    ===========     ===========



Net loss per common share -- Basic 
  and Diluted (Note K) .........................    $      (.30)    $      (.42)
                                                    ===========     ===========


Weighted average common shares outstanding .....      8,090,583       4,486,562
                                                    ===========     ===========
</TABLE>

    The accompanying notes are an integral part of the financial statements.


                                       F-4
<PAGE>   26
                         INDUSTRIAL IMAGING CORPORATION

                            STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                   YEAR              YEAR
                                                                  ENDED             ENDED
                                                              MARCH 31, 1998    MARCH 31, 1997
                                                              --------------    --------------
<S>                                                           <C>               <C>         
Cash flows from operating activities:
    Net loss ............................................      $(2,433,554)      $(1,894,554)
    Adjustments to reconcile net loss to net cash used in
      operating activities:
        Depreciation ....................................           14,156            22,217
        Compensation relating to stock options and      
          warrants.......................................          125,000            26,400
        Shares issued in conjunction with bridge loan ...               --           171,297
        Amortization ....................................           61,979           106,250
        Changes in assets and liabilities:
        Accounts receivable .............................          279,328          (401,192)
        Inventories .....................................         (117,215)       (1,195,093)
        Prepaid expenses ................................          (21,884)          (31,322)
        Other assets ....................................            3,186                --
        Accounts payable ................................         (361,256)        2,216,796
        Deferred revenue ................................           99,767          (424,449)
        Accrued expenses ................................         (123,741)           27,619
                                                               -----------       -----------
        Net cash used in operating activities ...........       (2,474,234)       (1,376,031)
                                                               -----------       -----------
Cash flows from investing activities:
    Capital expenditures ................................          (39,050)          (23,603)
                                                               -----------       -----------
    Net cash used in investing activities ...............          (39,050)          (23,603)
                                                               -----------       -----------
Cash flows from financing activities:
    Proceeds from issuance of nonconvertible debt .......          110,521           719,000
    Principal payments on nonconvertible debt ...........          (74,894)         (283,770)
    Proceeds from issuance of convertible debt ..........               --           200,000
    Proceeds from issuance of stock (net) ...............        3,086,749           816,496
                                                               -----------       -----------
      Net cash provided from financing activities .......        3,122,376         1,451,726
                                                               -----------       -----------
      Net increase in cash ..............................          609,092            52,092
Cash, beginning of year .................................           62,103            10,011
                                                               -----------       -----------
Cash, end of year .......................................      $   671,195       $    62,103
                                                               ===========       ===========
Supplemental cash flows information:
    Cash paid during the year for interest ..............      $   111,132       $    45,092
Noncash items:
    Debt and accrued interest converted to equity .......        1,536,848           200,000
  
    Note issued for warrant exercise ...................           125,000

    Cancellation of note payable for warrant exercise ..            98,481
</TABLE>

       The accompanying notes are an integral part of the financial statements
                                       F-5
<PAGE>   27
                         INDUSTRIAL IMAGING CORPORATION

                   STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)


<TABLE>
<CAPTION>
                                                      Series A Convertible
                                                         Preferred Stock        Common Stock
                                                      --------------------  --------------------                              
                                                                                                   Additional                 
                                                                                                    Paid-In      Accumulated  
                                                        Shares    Amount      Shares     Amount     Capital        Deficit    
                                                        ------    -------   ----------  --------  -----------   ------------  
<S>                                                    <C>        <C>       <C>         <C>       <C>           <C>           
Balance at March 31, 1996 ........................      633,200   $ 6,332    3,537,037  $ 35,370  $ 4,675,368   $ (6,071,615) 
Issuance of common stock for cash, net of issuance
  costs of $32,964 ...............................                             830,000     8,300      788,736                 
Exercise of warrants for cash ....................                             230,000     2,300      227,700                 
Shares issued in conjunction with bridge loans ...                             112,370     1,124      170,173                 
Compensation expense relating to stock options ...                                                     26,400                 
Recapitalization of Orbis, Inc. ..................                             524,891     5,249      (15,789)                
Conversion of preferred shares to common stock ...     (633,200)   (6,332)     633,200     6,332                              
Net loss .........................................                                                                (1,894,554) 
                                                       --------   -------   ----------  --------  -----------   ------------  
Balance at March 31, 1997 ........................           --        --    5,867,498    58,675    5,872,588     (7,966,169) 

Issuance of common stock for cash, net of issuance
  costs of $265,410 ..............................                           3,000,000    30,000    2,704,590                 
Exercise of warrants .............................                           1,287,420    12,874      562,766                 
Compensation expense relating to Warrants ........                                                    125,000                 
Issuance of common stock for debt  conversions ...                             735,283     7,353    1,529,495                 
Net loss .........................................                                                                (2,433,554) 
                                                       --------   -------   ----------  --------  -----------   ------------  
Balance at March 31, 1998 ........................           --   $    --   10,890,201  $108,902  $10,794,439   $(10,399,723) 
                                                       ========   =======   ==========  ========  ===========   ============  
</TABLE>

<TABLE>
<CAPTION>
                                                                        Total
                                                                    Shareholders'
                                                           Note        Equity 
                                                        Receivable    (deficit)
                                                        ----------  -------------
<S>                                                     <C>         <C>         
Balance at March 31, 1996 ........................                  $(1,354,545)
Issuance of common stock for cash, net of issuance
  costs of $32,964 ...............................                      797,036
Exercise of warrants for cash ....................                      230,000
Shares issued in conjunction with bridge loans ...                      171,297
Compensation expense relating to stock options ...                       26,400
Recapitalization of Orbis, Inc. ..................                      (10,540)
Conversion of preferred shares to common stock ...                           --
Net loss .........................................                   (1,894,554)
                                                        ---------   -----------
Balance at March 31, 1997 ........................             --    (2,034,906)

Issuance of common stock for cash, net of issuance
  costs of $265,410 ..............................                    2,734,590
Exercise of warrants .............................       (125,000)      450,640
Compensation expense relating to Warrants ........                      125,000
Issuance of common stock for debt  conversions ...                    1,536,848
Net loss .........................................                   (2,433,554)
                                                        ---------   -----------
Balance at March 31, 1998 ........................      $(125,000)  $   378,618
                                                        =========   ===========
</TABLE>


     The accompanying notes are an integral part of the financial statements


                                       F-6
<PAGE>   28


                         INDUSTRIAL IMAGING CORPORATION

                          NOTES TO FINANCIAL STATEMENTS


A.   ORGANIZATION AND DESCRIPTION OF BUSINESS

     Nature of Business

         Triple I Corporation (the "Company" or "Triple I"), a Delaware
corporation, was organized as a successor to AOI Systems, Inc., whose assets and
technologies it purchased in October 1992, for the purpose of manufacturing and
selling optical inspection systems in the printed circuit board industry. The
Company operates under the trade name of AOI International and has manufacturing
operations based in Lowell, Massachusetts with customers located in the United
States, Europe, and Asia.

     Exchange

         On November 16, 1995, the Board of Directors of the Company approved a
transaction with Orbis, Inc. ("Orbis"), a publicly held corporation, whose only
activity had been expenses during the fiscal year relating to filing fees and
minimal overhead costs. Orbis had no significant revenue for the last four
fiscal years prior to the merger. On December 5, 1996, the Orbis shareholders
approved the transaction between Triple I and Orbis, whereby the shareholders of
Triple I exchanged 100% of the outstanding Common Stock of Triple I for 90% of
the outstanding common stock of Orbis (the "Exchange"). On February 1, 1997, the
Exchange was completed as the Company obtained approval from 100% of its
shareholders. The Exchange was accounted for as a capital stock transaction and
treated as a recapitalization of Triple I with Triple I as the acquiror (reverse
acquisition). The costs of the Exchange were charged to other expense and no
goodwill was recorded.

         In connection with the Exchange, Orbis reincorporated from a Rhode
Island corporation to a Delaware corporation and changed its name to Industrial
Imaging Corporation via a merger of Orbis into Industrial Imaging Corporation.
As a result, Triple I became a wholly owned subsidiary of Industrial Imaging
Corporation.


B.   MANAGEMENT'S FINANCING AND CAPITAL FORMATION PLANS

         Since its inception, the Company has suffered recurring losses from
operations and has been unable to pay certain debt obligations. The remedies
available to the debt holders include immediate demand of payment and
foreclosure. These conditions raise substantial doubt about its ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty. The ultimate
success of the Company is dependent upon its


                                       F-7
<PAGE>   29
                         INDUSTRIAL IMAGING CORPORATION

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)


ability to continue to raise financing and significantly increase contract
revenue or product sales. However, the Company's capital requirements may change
depending upon numerous factors, including the demand for the Company's product.
In November, 1997, the Company raised $3 million in a private equity
transaction. Management believes that additional capital will be required to
aggressively pursue market penetration. In view of the Company's current
financial condition, the Company plans to continue to aggressively manage its
working capital and expenses while pursuing product sales opportunities as well
as strategic or other business relationships and pursuing additional capital.

C.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Principles of Consolidation

     The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. Intercompany transactions and balances have
been eliminated in consolidation.

     Inventories

         Inventories are stated at the lower of cost or market. Cost is
determined on a first-in, first-out (FIFO) basis.

     Property And Equipment

         Property and equipment are recorded at cost. Depreciation and
amortization are computed using the straight-line method over the lesser of the
estimated useful lives of the assets, 3 to 5 years, or lease term. Maintenance
and repair costs are expensed as incurred; renewals and betterments are
capitalized. Upon the sale or retirement of fixed assets, the accounts are
relieved of the cost and the related accumulated depreciation with any resulting
gain or loss included in income.

     Patents

         Purchased patents are valued at cost and amortized on a straight-line
basis over five years.

     Revenue Recognition

         Sales of inspection systems and evaluation units are recorded when
customer acceptance requirements are met. Revenue from service maintenance
contracts is deferred and is recognized over the term of the contract, generally
one year. Revenue from government grants is recognized when specific contract
requirements have been met and no significant contingencies remain under the
contract. The Company generally requires payment from customers in U.S. dollars
as part of its normal payment terms. Fluctuations in foreign exchange rates to
date have not had a material effect on the Company's financial statements.


                                       F-8
<PAGE>   30
                         INDUSTRIAL IMAGING CORPORATION

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)


     Income taxes

         The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes,"
which requires the use of an asset and liability approach for financial
accounting and reporting for income taxes. Under this method, deferred tax
assets and liabilities are recognized for the expected future tax consequences
of temporary differences between the carrying amount and the tax basis of assets
and liabilities using the current statutory tax rates. If it is more likely than
not that some portion or all of a deferred tax asset will not be realized, a
valuation allowance is recognized.

     Net Loss Per Common Share

     In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 requires the
presentation of both basic and diluted earnings per share and replaces the
previously required standards for computing and presenting earnings per share.
Earnings per share amounts for all periods have been presented to conform to the
requirements of SFAS 128. The adoption of SFAS 128 had no effect on the
Company's financial statements.

     Research And Development

         Expenditures for research, development and engineering of products and
manufacturing processes are expensed as incurred. Cost reimbursement under
collaborative research agreements are recorded as offsets to research and
development expenses.

     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 dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.

     New Accounting Standards Not Yet Adopted

         In June 1997, the Financial Accounting Standard Boards issued two new
pronouncements. Results of operations and financial position will be unaffected
by the implementation of these new standards.

         Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income" establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distribution to owners. Among other disclosures, SFAS
No.

                                       F-9
<PAGE>   31
                         INDUSTRIAL IMAGING CORPORATION

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)


130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income to be reported in a
financial statement that is displayed with the same prominence as other
financial statements.

         SFAS 131, "Disclosures About Segments of an Enterprise and Related
Information", which supercedes SFAS No. 14, "Financial Reporting for Segments of
a Business Enterprise," establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic area and major customers. SFAS No. 131 defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.

         Both of these standards are effective for financial statements for
periods beginning after December 15, 1997, and require comparative information
for earlier years to be restated. Management does not expect implementation of
these standards to materially affect the future financial statements and
disclosures.

     Concentrations of Credit Risk

     A significant portion of the Company's sales are to customers whose
principal activities relate to the printed circuit board industry, including a
heavy concentration of sales to customers in foreign countries. (See note P).
Although the Company generally requires advance deposits or letters of credit
from customers, the Company sometimes extends credit to its foreign customers
and collection may be more difficult in the event of a default.

D.   ACCOUNTS RECEIVABLE

         In the normal course of business, the Company extends credit terms on a
customer-by-customer basis based on its evaluation of collectibility exposure.
Management's estimates of losses in this area are recorded through an evaluation
of the adequacy of the allowance for doubtful accounts. The risk of loss from
any concentrations of credit risk with respect to trade receivables is mitigated
by management's evaluation, the policy of securing larger dollar sales with
substantial deposits at order and ship dates, and the incentive for customers to
maintain their credit standing in order to receive ongoing technical service.

         During the year ended March 31, 1998 and March 31, 1997, accounts
receivable in the amounts of $1,174,763 and $347,500, respectively, were
factored, without recourse, to a related party. Specific invoices were sold
under individual purchase and sale agreements. The Company receives a portion of
the value of a receivable at the date of the sale. Subsequent receipts of sold
receivables are forwarded in full to the factor. Interest is calculated at Prime
+ 4% over the time the money owed the


                                      F-10
<PAGE>   32
                         INDUSTRIAL IMAGING CORPORATION

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)


factor is outstanding. The transaction is completed when the Company receives
the remaining balance of the receivable, net of interest charges, from the
factor. Interest on these contracts totaled $72,967 and $21,257 during the year
ended March 31, 1998 and 1997, respectively.

E.   INVENTORIES

     Inventories consist of the following:


<TABLE>
<CAPTION>
                                                 MARCH 31,             MARCH 31,
                                                   1998                  1997
                                                ----------            ----------
<S>                                             <C>                   <C>       
Raw materials ......................            $  746,748            $  949,895
Work in process ....................               366,320               596,277
Finished goods .....................               882,126               331,807
                                                ----------            ----------
                                                $1,995,194            $1,877,979
                                                ==========            ==========
</TABLE>

F.   PROPERTY AND EQUIPMENT

         Property and equipment consists of the following:


<TABLE>
<CAPTION>
                                                           MARCH 31,    MARCH 31,
                                                             1998         1997
                                                           --------     --------
<S>                                                        <C>          <C>     
Machinery and equipment ..............................     $ 55,613     $ 55,613
Computer equipment, including $10,001 in capital
   leases in 1998 and 1997 respectively ..............       78,785       61,837
Computer software ....................................       17,136       14,949
Furniture and fixtures ...............................       44,752       24,837
                                                           --------     --------
                                                            196,286      157,236
Less: accumulated depreciation and amortization ......      137,136      122,980
                                                           --------     --------
                                                           $ 59,150     $ 34,256
                                                           ========     ========
</TABLE>

         Depreciation expense for the years ended March 31, 1998 and 1997, was
$14,156 and $22,217, respectively.

G.   INTANGIBLE ASSETS

         The Company holds several patents that were purchased. These patents
are stated at the acquisition cost of $531,250 and are amortized using the
straight-line method over 5 years. Amortization expense was $61,979 and $106,250
for the years ended March 31, 1998 and 1997, respectively.

    


                                      F-11
<PAGE>   33
                         INDUSTRIAL IMAGING CORPORATION

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)


H. COMMITMENTS AND CONTINGENCIES

         The Company is obligated under a lease agreement for an office and
manufacturing facility in Lowell, Massachusetts, expiring on November 30, 1998.

         Under the terms of the lease, the Company must pay base rent of $9,970
per month plus the Company's pro rata share of certain costs paid by the
landlord. Total rent expense was $131,051 and $133,639 for the years ended March
31, 1998 and 1997, respectively.

    The amount of future minimum lease payments under the operating lease is as
follows:


<TABLE>
<S>                                                         <C>    
           1999..........................................   $79,760
                                                            -------
           Total minimum lease payments..................   $79,760
                                                            =======
</TABLE>

         On August 1, 1994 the Company entered into a cooperative agreement with
the U.S. Department of Energy ("DOE") to research optics. As of March 31, 1998,
the Company had incurred $462,000 in project expenses and had received $462,000
in matching funds from the DOE which have been recorded as cost reimbursement
against research and development expense to the extent of costs incurred, and
has fulfilled its responsibilities under the contract.

         On November 28, 1994 the Company entered into an eight-year license and
collaboration agreement with Polaroid Corporation ("Polaroid") to promote the
development, marketing, and sales in the field of printed circuit board
production, and to collaborate in the fields of Automatic Inspection and PCB
PhotoTool generation.

         Under the Polaroid Agreement, the Company is required to meet certain
sales and performance milestones to maintain the Company's exclusivity
concerning the technology. The Company and Polaroid are in the process of
resolving a dispute regarding exclusivity. Management believes that the ultimate
resolution of this dispute will not have a material effect on the Company's
financial statements.

         In March 1996, the Company entered into a purchase agreement with
Centennial Technologies, Inc. ("Centennial") whereby Centennial had agreed to
purchase components and materials up to $3 million on behalf of the Company and
resell them to the Company. The Company has agreed to pay Centennial upon full
payment from the Company's customers as systems are sold. The agreement was


                                      F-12
<PAGE>   34
                         INDUSTRIAL IMAGING CORPORATION

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)


effective until June 30, 1997 and required that purchases must be specifically
authorized by Centennial. As of March 31, 1996, Centennial had authorized
purchases for the first $750,000. In May 1997, the Company and Centennial agreed
to terminate the purchase agreement. The Company liquidated amounts owed to
Centennial under the agreement by paying approximately $132,000 in cash and
agreeing to issue 600,000 shares of common stock to payoff the remaining balance
of approximately $1.2 million.

I.   ACCRUED EXPENSES

         Accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                                        MARCH 31,       MARCH 31,
                                                          1998            1997
                                                        --------        --------
<S>                                                     <C>             <C>     
Accrued vacation ...............................        $ 89,866        $106,343
Accrued professional fees ......................         110,886         131,546
Accrued payroll and related expenses ...........         263,109         356,890
Accrued warranty ...............................         157,398         115,885
Accrued interest and other .....................         212,953         247,289
                                                        --------        --------
                                                        $834,212        $957,953
                                                        ========        ========
</TABLE>

J.   DEBT

     The following is a summary of the Company's debt obligations:


<TABLE>
<CAPTION>
                                                                                            MARCH 31,   MARCH 31,
                                                                                              1998        1997
                                                                                            --------    --------
<S>                                                                                         <C>         <C>
Collateralized demand note with assignee for the benefit of creditors for the
     former AOI Systems, Inc., due January 30, 1995. The note was renegotiated
     in August 1997 to a five year payment schedule including interest at a
     rate of 8.0% ......................................................................    $163,750    $130,000
Uncollateralized subordinated note with a related party, principal due December 31,
     1996, interest rate of 8.4%, interest only payments due quarterly .................      50,000      50,000
Uncollateralized note with a related party, principal due October 23, 1996, interest
     rate of 10% payable at maturity ...................................................       1,520     100,000
Uncollateralized note with a related party, principal due October 23, 1996, interest
     rate of 8.4% payable at maturity ..................................................     100,000     100,000
Uncollateralized note with a related party, principal due June 6, 1996, interest rate of
     10% payable at maturity ...........................................................      15,000      15,000
Uncollateralized note with a related party, principal due June 6, 1996, interest rate of
     10% payable at maturity ...........................................................      15,000      15,000
Uncollateralized note with a related party, principal due June 6, 1996, interest rate of
     10% payable at maturity ...........................................................       5,000       5,000
Uncollateralized note with a related party, principal due June 6, 1996, interest rate of
     10% payable at maturity ...........................................................      50,000      50,000
Uncollateralized note with a related party, principal due January 15, 1999, interest
     rate of 10% payable at maturity ...................................................     150,000     150,000
Uncollateralized note with a related party, principal due January 21, 1999, interest
     rate of 10% payable at maturity....................................................      50,000      50,000
</TABLE>


                                      F-13
<PAGE>   35
                         INDUSTRIAL IMAGING CORPORATION

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)


<TABLE>
<S>                                                                                      <C>         <C>     
Uncollateralized note with a related party, principal due February 6, 1999, interest
     rate of 10% payable at maturity ................................................      50,000      50,000
Uncollateralized note with a related party, principal due February 6, 1999, interest
     rate of 10% payable at maturity ................................................      50,000      50,000
Uncollateralized note with a related party, principal due February 6, 1999, interest
     rate of 10% payable at maturity ................................................      50,000      50,000
Uncollateralized note with a related party, principal due February 6, 1999, interest
     rate of 10% payable at maturity ................................................      25,000      25,000
Uncollateralized note with a related party, principal due February 6, 1999, interest
     rate of 10% payable at maturity ................................................      25,000      25,000
Uncollateralized note with a related party, principal due February 11, 1999, interest
     rate of 10% payable at maturity ................................................      50,000      50,000
Uncollateralized note, principal due in  monthly payments of $6,836 plus interest at
     8.4% ...........................................................................      17,281      13,866
Capital lease obligations ...........................................................                   1,538
                                                                                         --------    --------
                                                                                          867,551     930,404
Less amounts due within one year ....................................................     715,334     480,404
                                                                                         --------    --------
                                                                                         $152,217    $450,000
                                                                                         ========    ========
</TABLE>

         In February 1996, the Company and various debt holders entered into an
agreement to convert $1,270,637 in unpaid debt and interest into 1,270,637
shares of the Company's common stock and warrants to purchase 150,000 shares of
common stock at $1.00 per share through February 6, 1999. In addition, the
Company and certain debt holders agreed to extend the maturity on $200,000 in
notes until October 23, 1996, however, a portion of this debt is still
outstanding.

         In May, 1996, the Company issued a note to a related party for
$200,000, bearing interest of 10% per annum, due May, 1997. In June 1996, the
related party converted this $200,000 unpaid debt into 200,000 shares of common
stock, and purchased 250,000 shares of common stock at $1.00 per share. In
August 1996, the Company issued a note to a related party for $100,000 bearing
interest of 12.25% per annum, due September, 1996. This note was repaid in
January, 1997 plus accrued interest. In November 1996, the Company issued a note
to a related party for $130,000 bearing interest of 12.25% per annum, due 90
days from the date of issuance. This note was repaid in January, 1996 plus
accrued interest. In December 1996, the Company issued a note to a related party
for $150,000 due in December 1999, bearing interest of 10% per annum.

         In January 1997, a shareholder of the Company converted a loan in the
amount of $150,000 to a subordinated note which bears interest at 10% per annum
and is payable in January 1999. The Company issued 44,100 shares of common stock
to the noteholder in conjunction with this transaction. The common stock was
recorded in equity at $1.00 per share or a total of $44,100 which the Company
deemed to be fair market value with the offset to other expense. Payment of this
note is accelerated in the event the Company raises a certain amount of equity
financing. In addition, a shareholder of the Company loaned the Company $50,000
in January 1997. The Company issued a subordinated promissory note which bears
interest at 10% per annum and is due in two years. Payment of this note is
accelerated in the event the Company raises a certain amount of equity
financing. In addition, the 


                                      F-14
<PAGE>   36
                         INDUSTRIAL IMAGING CORPORATION

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)


Company issued 14,700 shares of common stock to the noteholder in conjunction
with this transaction. The common stock was recorded in equity at $1.00 per
share or a total of $14,700 which the Company deemed to be fair market value
with the offset to other expense.

         In January 1997, the Company through Schneider Securities, Inc. (the
"Placement Agent"), commenced the 1997 bridge financing through the sale of 5
units, each of which consists of a $50,000 subordinated promissory note bearing
interest at an annual rate of 10% and 10,714 shares of the Company's common
stock. The promissory notes are due two years after issue and payment is
accelerated in the event the Company raises a certain amount of equity
financing. In February, 1997, the Company raised $250,000 through the sale of 5
units and issued 53,570 shares of common stock. The common stock was recorded in
equity at $2.10 per share or a total of $112,497 which the Company deemed to be
fair market value, based upon the recent exchange, with the offset to other
expense.

         In August 1997, the Company renegotiated a collateralized demand note
payable, which was in default, to a new note with a fifty seven month
amortization including interest at 8% per annum. Unpaid interest was added to
the new principal which amounts to $163,750. The payments consist of twelve
payments of $1091, twelve payments of $2,500, twelve payments of $5,000, twelve
payments of $6,000, eight payments of $3,527, and one payment of $2,184. The
Company also issued warrants to purchase 41,000 shares of the Company's common
stock at $4.00 per share through June 30, 2002. At the date of the issuance, the
value of the warrants was not material.

         In November, 1997, the Company offered a 50% discount of the exercise
price to all warrantholders of the Company's common stock for a specified period
of time. A director of the Company canceled a promissory note due from the
Company for $100,000 in exchange for the exercise of warrants at a total
exercise price of $98,480. The balance of the note payable plus accrued interest
will be paid to the note holder in cash.

         The above debt instruments contain numerous covenants and remedies upon
default including immediate demand of payment and foreclosure. As of March 31,
1998, the Company had not repaid various borrowings that had become due and
therefore is in default. In addition, the collateralized note is secured by all
assets of the Company.

K.   SHAREHOLDERS' EQUITY

         Through Schneider Securities, Inc. (the "Placement Agent"), the Company
raised $559,210 (net of issuance costs of $140,790) from February 1996 through
March 1996. In April 1996, the Company raised $147,036 (net of issuance costs of
$32,964) for the Private Placement (the "Private Placement"). The Company also
issued warrants as part of the Private Placement, which were issued with an
exercise price equal to the price of the common stock issued during the Private
Placement. In accordance with the Private Placement, the Company issued to the
Placement Agent warrants for the purchase of 88,000 shares of common stock
exercisable on April 27, 1997 at an exercise price of $1.20 per share. In
November 1997, 69,229 of these warrants were exercised at a discount. In
addition, the Company issued warrants to purchase 44,000 shares of the Company's
common stock


                                      F-15
<PAGE>   37
                         INDUSTRIAL IMAGING CORPORATION

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)


at an exercise price of $1.20 per share, to legal counsel in conjunction with
the Private Placement. The Company accounts for the warrants at fair value. At
the date of issuance, the value of the warrants was not material.

         In June 1996, a related party purchased 200,000 shares of common stock
at $1.00 per share. In January 1997, a shareholder exercised warrants to
purchase 230,000 shares of common stock at $1.00 per share.

         As of March 31, 1998, the Company had not repaid various borrowings
that had become due and therefore was in default. In February 1996, the Company
and various debt holders entered into an agreement to convert $1,270,637 of
unpaid debt and interest into 1,270,637 shares of the Company's common stock. In
addition, one debt holder agreed to exchange $100,000 of debt for warrants to
purchase 150,000 shares of the Company's common stock at $1.00 per share through
February 6, 1999.

         The Company has 10,890,201 and 5,867,498 shares of voting common stock
issued and outstanding at March 31, 1998 and March 31, 1997, respectively.
Holders of common stock are entitled to receive dividends only when declared by,
and at the discretion of, the Board of Directors. An aggregate of 800,000 shares
of voting common stock are reserved as follows: 200,000 shares for options under
the 1992 Stock option plan; and 600,000 share for options under the 1995 Stock
option plan.

         The Company has authorized 1,300,000 shares of preferred stock, with a
par value of $.01 per share. At March 31, 1998 and March 31, 1997, no shares
were issued and outstanding. In February, 1997, 633,200 preferred shares were
converted to common shares on a one for one basis.

         In November, 1997, an outside investor executed a Securities purchase
agreement to invest $3 million in the Company by purchasing 3,000,000 shares of
the Company's common stock at $1.00 per share. In accordance with the agreement,
the Company also issued warrants to purchase 1,000,000 shares of common stock at
$1.00 per share through November 12, 2002, and issued warrants to purchase
1,000,000 shares of common stock at $2.00 per share through November 12, 2002.
The investor was granted demand registration rights starting six months from the
closing date for both the common shares purchased and the warrants granted. In
addition, the investor will hold a seat on the board of directors. The agreement
contains certain covenants which restrict future activities of the Company
including mergers or acquisitions, borrowings, issuance of securities, payment
of dividends, granting a security interest in Company assets, and the purchase
or sale of assets. The investment has been funded and closing and issuance costs
(including commissions) amounted to approximately $265,000.

         During the year ended March 31, 1998, the Company entered into various
agreements resulting in the issuance of 735,283 shares of common stock in
exchange for the release of amounts owed to various vendors amounting to
$1,536,848.

     EARNINGS PER SHARE

         In the last quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting standards No. 128, "Earnings per Share", which requires the
presentation for both basic and diluted earnings per share on the face of the
Statements of Operations and the restatement of all prior periods earnings per
share amounts. Assumed exercise of options and warrants are not included in the


                                      F-16
<PAGE>   38
                         INDUSTRIAL IMAGING CORPORATION

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)


calculation of diluted earnings per share since the effect would be
antidilutive. Accordingly, basic and diluted net loss per share do not differ
for any period presented.

         The following table summarizes securities that were outstanding as of
March 31, 1998 and 1997 but not included in the calculation of diluted net loss
per share because such shares are antidilutive:


<TABLE>
<CAPTION>
                                          March 31                  
                               ------------------------------
                                     1998           1997           
                                     ----           ----           
<S>                                 <C>            <C>                  
Warrants                            4,095,919      3,342,402      
Stock Options                         562,500        477,000        
</TABLE>


L.   STOCK WARRANTS

         The Company has issued stock warrants as part of certain debt and
equity transactions and accounts for warrants when issued at fair value. At date
of issuance the value of these warrants was not material. The following
summarizes the warrant issuances for the three classes of stock authorized by
the Company.

     Common Stock Warrants

         Numerous warrants listed below provided antidilution provisions. The
number of shares and/or the share prices have been adjusted to reflect the
effect of the events triggering the antidilution provisions. In December 1993
the Company issued to an officer, who personally guaranteed corporate
indebtedness, warrants to purchase 500,000 shares of common stock at $.50 per
share through December 22, 1998. These warrants were exercised at a discount in
November 1997. Also in December 1993, the Company issued in connection with
debt, warrants to purchase 20,000 shares of common stock at $.20 per share
through December 22, 2003. In August 1994 the Company issued to several
directors and stockholders, warrants to purchase 200,000 and 249,551 shares of
common stock at $1.00 per share, respectively through August 22, 2004 and August
22, 2002, respectively. In November 1997, 256,199 of these warrants were
exercised at a discount. In October 1994, the Company issued in connection with
debt, warrants to purchase 99,986 shares of common stock at $1.00 per share
through October 5, 2002. In November 1997, 44,989 of these warrants were
exercised at a discount. In December 1994, in connection with certain equity
financing, the Company issued warrants to purchase 100,014 shares of common
stock at $1.00 per share through December 15, 2002. In June 1995, the Company
issued in connection with debt, warrants to purchase 282,023 shares of common
stock at $1.00 per share through April 6, 2003. In May 1997, 100,014 of these
warrants were exercised. In November 1997, 71,989 of these warrants were
exercised at a discount.

         In October 1995, in connection with debt, the Company issued warrants
to purchase 250,000 shares of common stock at $1.00 per share through October,
1998. In November 1997, 95,000 of these warrants were exercised at a discount.
The Company, in February 1996, also issued warrants to


                                      F-17
<PAGE>   39
                         INDUSTRIAL IMAGING CORPORATION

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)


purchase 150,000 shares of common stock at $1.00 per share through February
1999, in conjunction with the debt conversion and forgiveness of debt. In
November 1997, these warrants were exercised at a discount. In February 1997,
the Company issued warrants to purchase 958,925 shares of common stock at $1.00
per share through April 24, 2002 and are exercisable the earlier of February 28,
2001, or when certain revenue or net income amounts are attained.

         In November, 1997, the Company offered a 50% discount of the exercise
price to all warrantholders of the Company's common stock for a specified period
of time, which has expired. Warrantholders exercised warrants to purchase
1,187,406 shares of common stock at prices from $.25 per share to $.60 per
share. Warrants for the purchase of 3,137,396 shares of common stock were not
exercised resulting in the exercise price for the warrants reverting back to
their original exercise prices.  In connection with this transaction, the
Company recognized a compensation charge of $125,000 in fiscal 1998. The Company
received $252,145 in cash, received a promissory note from an officer of the
Company for $125,000, interest and principal is payable in four years, and
accrues interest at an rate of 8.5% per annum. The stock purchased is pledged as
collateral against the note. In addition, a director of the Company cancelled a
promissory note due from the Company for $100,000 in exchange for the exercise
of warrants at a total exercise price of $98,480. The balance of the note
payable plus accrued interest were paid to the noteholder in cash. 

     Series B Preferred Stock Warrants

         In 1994 the Company issued warrants for the purchase of 250,007 and
27,720 shares of Series B Preferred Stock at $1.00 per share through August 22,
2004 and December 22, 2003, respectively. In September 1994, the Company issued
warrants for the purchase of 22,176 shares of Series B Preferred Stock at $1.00
per share through September 15, 2004. All of these warrants were converted to
common stock warrants in February 1997.

M.   INCOME TAXES 

         At March 31, 1998, the Company had net operating loss ("NOL")
carryforwards of approximately $9,500,000 for federal and Massachusetts income
tax purposes. These carryforwards expire through 2013. In addition, the Company
had Research and Experimentation ("R&E") credit carryforwards of approximately
$60,000 and $25,000 for federal and Massachusetts income tax purposes,
respectively. Utilization of these NOL and R&E credit carryforwards may be
limited pursuant to the provisions of Section 382 of the Internal Revenue Code.

         The components of the deferred tax assets and liabilities are as
follows (dollars in thousands):

<TABLE>
<CAPTION>
                                                            MARCH 31,   MARCH 31,
                                                              1998        1997
                                                            ---------   ---------
<S>                                                         <C>         <C>     
Deferred Tax Assets/(Liabilities):
Accrued expenses and other................................  $    310    $    451
Patents...................................................       136         133
R&E credits ..............................................        85          85
NOL carryforwards ........................................     3,832       2,762
                                                            --------    --------
Total deferred tax asset .................................     4,363       3,431
</TABLE>


                                      F-18
<PAGE>   40
                         INDUSTRIAL IMAGING CORPORATION

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)


<TABLE>
<S>                                                         <C>         <C>    
Valuation allowance .....................................     (4,363)     (3,431)
                                                            --------    --------
Net deferred tax asset ..................................         --          --
                                                            ========    ======== 
</TABLE>

         Due to the uncertainty surrounding the realization of the deferred tax
assets in future income tax returns, the Company has recorded a full valuation
allowance against its otherwise recognizable deferred tax assets.

N.   EMPLOYEE BENEFIT PLAN

         Effective October 26, 1992, the Company implemented a deferred
compensation plan (the "Plan") under Section 401(k) of the Internal Revenue
Code. Under the Plan, employees are permitted to contribute, subject to certain
limitations. The Company's contribution to the Plan is discretionary and the
Company has not contributed to the Plan since its inception. In January 1998,
the Company amended the plan to include a match of 50% of the first 7% of
employee contributions.

O.   EMPLOYEE STOCK OPTION PLAN

         During 1993, the Company adopted, subject to shareholder approval, a
stock award and incentive plan (the "1993 Plan") which permits the issuance of
options or stock appreciation rights (SARs) to selected employees and
independent contractors of the Company. The plan reserves 200,000 shares of
common stock for grant and provides that the term of each award be determined by
the Board of Directors charged with administering the plan. In 1996, the Company
adopted the 1996 Stock option Plan (the "1996" Plan), which permits the issuance
of options or stock appreciation rights (SAR"S) to selected employees,
non-employee directors, and independent contractors of the Company. The plan
reserves 600,000 shares of common stock for grant and provides that the term of
each award be determined by the Board of Directors charged with administrating
the plan.

         Under the terms of the plans, options granted may be either
nonqualified or incentive stock options and the exercise price, determined by
the Board of Directors, may not be less than the fair market value of a share on
the date of grant. SARs and limited SARs granted in tandem with an option shall
be exercisable only to the extent the underlying option is exercisable and the
grant price shall be equal to the exercise price of the underlying option. In
May, 1996 and January, 1997 the Company granted 100,000 options and 50,000
options respectively, at $1.00 per share to officers of the Company. Also, in
November, 1996, 130,600 options were granted to employees at $1.00 per share.
During the year ended March 31, 1997, the Company, in connection with certain
stock option grants, recognized $26,400 in compensation expense, due to
extending the exercise period which resulted in a remeasurement date. In
October, 1997, 193,700 options were granted to employees and directors at $1.00
per share.


                                      F-19
<PAGE>   41
                         INDUSTRIAL IMAGING CORPORATION

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)



<TABLE>
<CAPTION>
         Details of stock options are as follows:                         WEIGHTED AVERAGE
                                                            SHARES         EXERCISE PRICE
                                                       ----------------    --------------
<S>                                                    <C>                 <C> 
Year ended March 31, 1997                                                 
     Granted.........................................       280,600             1.00
     Exercised.......................................             0       
     Canceled........................................             0       
                                                           --------           ------
     Outstanding at end of year......................       477,000              .79
                                                           --------           ------
     Exercisable at end of year......................       114,872              .38
                                                           ========           ======
                                                                          
                                                                          
                                                                          
Year ended March 31, 1998                                                 
     Granted.........................................       193,700             1.00
     Exercised.......................................             0       
     Canceled........................................       108,200       
                                                           --------           ------
     Outstanding at end of year......................       562,500             1.14
                                                           --------           ------
     Exercisable at end of year......................       179,964              .79
                                                           ========           ======
</TABLE>


     In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123"). SFAS 123 is effective for periods beginning after
December 15, 1995, and requires that companies either recognize compensation
expense for grants of stock, stock options, and other equity instruments based
on fair value, or provide pro forma disclosure of net income and earnings per
share in the notes to the financial statements. The Company adopted the
disclosure provisions of SFAS 123  and has applied APB Opinion 25 and related
Interpretations in accounting for its plans.


     Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates as calculated in
accordance with SFAS 123, the Company's net loss and loss per share for the
years ended March 31, 1998 and March 31, 1997 would have been increased to the
pro forma amounts indicated below:

     

<TABLE>
<CAPTION>
                                 March 31, 1998                March 31, 1997
                            --------------------------   --------------------------
                                              Loss Per                     Loss Per
                             Net Loss          Share      Net Loss          Share
                             ----------       --------    ----------       --------
<S>                         <C>               <C>        <C>               <C>     
As reported                 $(2,433,554)      $  (.30)   $(1,894,554)      $  (.42)

Pro Forma                   $(2,478,041)      $  (.31)   $(1,916,682)      $  (.45)
</TABLE>




                                      F-20
<PAGE>   42
                         INDUSTRIAL IMAGING CORPORATION

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)


         The fair value of each stock option is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions used for grants in the fiscal year 1998 and 1997
respectively: Dividend yield of 0% for both years, and an expected volatility
of 46.1% for both years and risk free interest rate of 6.1% for both years.
The weighted average fair value of options granted the year ended March 31, 1998
and 1997 was $.30 per share and $.46 per share, respectively.


The following table summarizes information about stock options at March 31,
1998:


<TABLE>
<CAPTION>
                            Options Outstanding                   Options Exercisable
                 ------------------------------------------  -----------------------------
                     Weighted Average
   Range of         Number    Contractual  Weighted Average     Number    Weighted Average
Exercise Prices  Outstanding      Life      Exercise Price   Exercisable   Exercise Price
---------------  -----------  -----------  ----------------  -----------  ----------------
<S>              <C>          <C>          <C>               <C>          <C>  
  $  0.20           91,340        4.87          $0.20           85,180         $0.20
  $  1.00          421,160        8.77          $1.00           84,784         $1.00
  $  4.00           50,000        8.77          $4.00           10,000         $4.00
                   -------                                     -------            
  $0.20-4.00       562,500        8.14          $1.14          179,964         $0.79
                   =======                                     =======
</TABLE>


P.   SIGNIFICANT CUSTOMERS AND DOMESTIC AND EXPORT SALES

     Significant Customers

         Sales to significant customers were as follows:


<TABLE>
<CAPTION>
          YEAR ENDED                 SIGNIFICANT               PERCENTAGE OF
           MARCH 31                   CUSTOMERS       AMOUNT      REVENUES
----------------------------------   -----------     --------  -------------
<S>                                  <C>             <C>       <C>
1998..........................        Customer A     $909,835       40%
1998..........................        Customer B      400,376       17%
1998..........................        Customer C      250,000       11%
</TABLE>

<TABLE>
<CAPTION>
          YEAR ENDED                 SIGNIFICANT               PERCENTAGE OF
           MARCH 31,                  CUSTOMERS       AMOUNT      REVENUES
----------------------------------   -----------     --------  -------------
<S>                                  <C>             <C>       <C>
1997..........................        Customer A     $515,272       28%
1997..........................        Customer B      460,000       25%
1997..........................        Customer C      274,781       15%
1997..........................        Customer D      227,230       12%
</TABLE>


     Domestic and Export Sales


                                      F-21
<PAGE>   43
                         INDUSTRIAL IMAGING CORPORATION

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)


         Domestic and export sales as a percentage of revenues were as follows:

<TABLE>
<CAPTION>
                                                       YEAR ENDED
                                                     MARCH 31, 1998
                                               -------------------------
                                                 AMOUNT               %
                                               ---------             ---
<S>                                            <C>                   <C>
Domestic..........................             $ 789,244             34%
Europe............................             1,389,134             60%
Asia..............................               126,831              6%
</TABLE>

<TABLE>
<CAPTION>
                                                       YEAR ENDED
                                                     MARCH 31, 1997
                                               -------------------------
                                                 AMOUNT               %
                                               ---------             ---
<S>                                            <C>                   <C>
Domestic..........................             $ 377,835             20%
Europe............................               990,808             54%
Asia..............................               484,933             26%
</TABLE>


Q. OTHER EXPENSE

     Included in other expense for the year ended March 31, 1997 is $171,297,
which represents the cost of shares of the Company's common stock issued in
conjunction with loans made to the Company in January and February, 1997. (See
Note J).


R.   MERGER EXPENSES

         The costs of the Exchange with Orbis, consisting of legal costs,
printing costs, and accounting costs amounted to $179,787, and have been
included in fiscal 1997 operating expenses. (See Note A).


                                      F-22