<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 10-K

(Mark One)

[X]  Annual Report pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934. For the fiscal year ended: June 30, 1997

                                       OR

[ ]   Transition Report pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934. For the transition period from ______ to ______.

                         Commission File Number 0-25012

                                  CENSTOR CORP.
             (Exact name of registrant as specified in its charter)


               California                                      94-2775712
    (State or other jurisdiction of                         (I.R.S. Employer
     incorporation or organization)                       Identification Number)

540 N. Santa Cruz Ave., #277, Los Gatos                            95030
(address of principal executive offices)                         (zip code)


     Registrant's telephone number, including area code: (408 ) 298 - 8400

        SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                      Series B Convertible Preferred Stock

         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
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]  No [ ]

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K 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-K or any
amendment to this Form 10-K. [X]

         The aggregate market value of voting stock held by non-affiliates of
the registrant as of September 15, 1997 was $20,919,839. This valuation is based
on the fair market value of the Registrant's stock as determined by the
Registrant's Board of Directors at the time of issuance of such stock and may
not reflect current fair market value.

         At September 15, 1997 registrant had outstanding 8,523,751 shares of
Common Stock.


<PAGE>   2
                                     PART I

ITEM 1.           BUSINESS

         The following discussions contain forward-looking statements regarding
future events or the future financial performance of Censtor Corporation, (the
"Company" or "Censtor") that involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth in the documents the Company files from time to time with the Securities
and Exchange Commission.

         GENERAL

         Censtor was incorporated in 1981, and until early calendar 1996, had
been focused on developing technology for and manufacturing high performance
contact recording heads and media for the computer disk drive industry. The
Company has been unable to raise the capital required to pursue its former
strategy of manufacturing contact recording heads and, accordingly, on July 18,
1996, the Company completed a transaction with Read-Rite Corporation
("Read-Rite") to concentrate its efforts on licensing rather than licensing and
manufacturing. The transaction with Read-Rite (the "Read-Rite Transaction")
involved the purchase by Read-Rite of Censtor's manufacturing and research and
development operations including the tangible assets, contracts and lease
liabilities related thereto together with a grant by Censtor to Read-Rite of a
non-exclusive license to Censtor's patents and other intellectual property
rights related to the Company's technology.

         The Company owns or has applied for fundamental patents pertaining to
micro-miniature, low-cost read/write heads and special surface treatments for
disk media that allow continuous head/disk contact during operation ("contact
recording") without excessive wear. Most heads available commercially are
designed to operate at a microscopic distance or "fly" above the surface of the
disk on a cushion of air and come into true contact with the disk only when the
drive is turned off or "powered down." Historically, increases in areal density
(the number of bits of data stored in a unit of area, usually quoted in square
inches, on the surface of the recording disk) have come primarily from
reductions in flying height. Contact recording has not been possible because of
the excessive wear and crash problems inherent in operating conventional head
designs in continuous contact with the disk media. The Company believes that 
Censtor technology solves these problems.

         The Company's present business model calls for the Company to license
contact, pseudo-contact and suspension recording technologies to disk drive
manufacturers. Currently, Censtor has sold licenses to nine disk drive and disk
drive component manufacturers (IBM, Fujitsu, Hitachi, Maxtor, NEC, Western
Digital, Denka, Read-Rite and TDK) who bought the licenses based upon their
expectations that the Company's technologies may be used in the future or
because they recognized they were utilizing Censtor's technology.

         BUSINESS STRATEGY

         Censtor's strategy is to perfect its patent protection and proprietary
rights to the disk drive technology developed by it over the last 16 years, and
to exploit that technology through licensing or other strategic transactions
with disk drive manufacturers and other related companies. The Company has been
unsuccessful in its efforts to sell licenses to the Company's technology to some
prospective licensees who, in management's opinion, are infringing the Company's
patents. Accordingly, management and the Board of Directors have concluded that
the Company would benefit from leadership with extensive experience in patent
enforcement. Management has sought, and found, such capability in, and has
entered into a relationship with, Mr. Gary Summers of Teklicon, Inc.
("Teklicon") and Mr. Charles C. Pierpoint III with I. P. Managers, Inc. ("IPM").
IPM has relationships with intellectual property law firms and has an exclusive
contract with Teklicon, a high technology consulting firm specializing in
consulting and expert witness services to the legal profession. Teklicon will
perform marketing and technology due diligence and IPM will provide the




                                      -2-
<PAGE>   3
legal services. Management believes the Company's arrangement with IPM and
Teklicon will provide the best available leadership while minimizing the short
term cash obligations of the Company while it seeks to complete new license
agreements and collect royalties from existing licensees.

         MAINTENANCE AND ENHANCEMENT OF PATENT PORTFOLIO

         To protect and enhance its large investment in head and media
development, the Company maintains an aggressive patent prosecution strategy and
has obtained several patents covering low mass recording heads. The Company's
patent portfolio currently includes 20 issued United States patents, 15 pending
United States patent applications, 10 foreign patents and 14 foreign patent
applications. 

         COMPETITION AND TECHNOLOGICAL CHANGE

         The disk drive component industry is intensely competitive.
Participants in the industry include both independent component suppliers as
well as large disk drive and computer manufacturers that supply their internal
component requirements. These companies have greater financial, marketing and
technological resources than the Company. The Company also competes with
companies offering products based on alternative data storage and retrieval
technologies. Technological advances in magnetic, optical, semiconductor or
other technologies, or the development of new technologies, could result in the
introduction of competitive products with superior performance to and
substantially lower prices than the Company's technology can provide, which
could render the Company's technology noncompetitive or obsolete, thereby
adversely affecting the Company's results of operations.

         The market for the Company's technology is intensely competitive and
characterized by rapidly changing advances in head and media technologies. These
advances result in frequent product introductions, short product life cycles and
increased product capabilities that may result in significant performance
improvements and price reductions. Specifically, the Company is subject to
competition from manufacturers of thin film inductive and MR heads, as well as
thin film media based on use of conventional flying head and longitudinal
recording technologies. Head and media product performance has been improving
steadily due to a combination of increased transducer efficiency, improved media
performance, smaller slider size, lower flying heights, and pseudo-contact heads
and it is expected to continue to improve. In addition to enabling lower flying
heights, the cost of advanced inductive flying heads is being decreased by the
reduction in the size of the slider, which permits fabrication of more sliders
per wafer. There can be no assurance that the Company's potential performance
will be realized in practice or can be maintained over the improvements to
conventional inductive heads.

         LICENSES WITH DISK DRIVE AND COMPONENT MANUFACTURERS

         The Company has entered into license agreements with six of the
approximately twenty-five disk drive manufacturers in the world: IBM, Fujitsu,
Hitachi, Maxtor, NEC and Western Digital, and with three component manufacturers
- Denka, Read-Rite and TDK. The Company has executed license agreements with
initial license fees of $27.0 million and has received $7.5 million of
non-refundable advance royalty payments from these licensees. The Company
entered into the license agreement with TDK on September 25, 1997. Some of these
agreements provide that no future licenses granted by the Company will be more
favorable than the existing licenses and that the licensee may grant restricted
sub-licenses to component suppliers. Others permit the licensees to acquire the
right to appoint subcontractors in exchange for the payment of additional
license fees and royalties. The specific terms of the license agreements vary
depending on when the licenses were entered into, whether or not the Company has
rights to future royalty payments from the licensee, whether the license extends
to not only the Company's patents but also its trade secret information, and
whether the licensee is 




                                      -3-
<PAGE>   4
expected to become a component supplier.

         ENVIRONMENTAL REGULATIONS

         Although the Company no longer engages in any manufacturing or research
and development activities, in the past the Company has been subject to a
variety of governmental regulations relating to the use, storage, discharge,
handling, emission, generation, manufacture and disposal of toxic or other
hazardous substances used to manufacture and test the Company's micro Flexhead
component. The Company believes that it has been in compliance in all material
respects and at all material times with such regulations and that it had
obtained all necessary environmental permits to conduct its business. Any
failure in the past by the Company to control the use, disposal or storage of,
or adequately restrict the discharge of, hazardous or toxic substances could
subject the Company to significant liabilities.

         HUMAN RESOURCES

        As of June 30, 1997, the Company had five full-time employees, all
engaged in general and administrative functions. However, three of these
employees terminated their employment at the end of August 1997 and one
terminated on September 3, 1997. The one remaining employee is responsible for
the finance and administrative duties for the Company while outside sources
will be utilized for the Company's intellectual property management duties.

         EXECUTIVE OFFICERS OF THE REGISTRANT

         On September 3, 1997, at the Company's Annual Meeting of Shareholders,
three new directors were elected. A Board of Directors Meeting followed,
consisting of these new directors who subsequently elected Sabine Austin to the
positions of President, Chief Executive Officer and Chief Financial Officer.

<TABLE>
<CAPTION>
NAME                          AGE     POSITION
----                          ---     --------
<S>                            <C>    <C>                                                   
Sabine Austin                  38     Chief Executive Officer, President, Chief Financial
                                      Officer, Corporate Secretary and Director
Gary J. Summers                54     Director
Charles C. Pierpoint III       56     Director
</TABLE>

         SABINE AUSTIN has been President, Chief Executive Officer, Chief
Financial Officer and Corporate Secretary of Censtor Corp. and a member of the
Board of Directors since September 1997. She joined the Company in March 1987
as a cost accountant and financial analyst and became Manager of Finance and
Administration in August 1989 and Finance Director in January 1996. Ms. Austin
received her BA degree in Math-Econometrics from the University of California at
Santa Barbara in 1981 and an MBA from Santa Clara University in 1986.

         GARY J. SUMMERS has been a member of the Company's Board of Directors
since September 1997. He has been President, Chief Executive Officer and
Founder of Teklicon, Inc., a high technology consulting firm and wholly owned
subsidiary of Forensic Technologies International Corporation, that provides
consulting and expert witness services to the legal profession, since 1985. In
this capacity he is providing consulting services to Censtor relative to
prospective future licensees. During the last 10 years, Mr. Summers has focused
on high technology intellectual property Litigation, ADR and Licensing services
in the areas of complex technologies such as semiconductors, computer systems,
software, mechanical and chemical systems and telecommunications. He is a member
of IEEE, ETA Kappa Nu, Tau Beta Pi and the American Board of Certified Forensic
Examiners. He received his BSEE and MSEE degrees from the University of Houston
in 1969 and 1970, respectively.




                                      -4-
<PAGE>   5
         CHARLES C. PIERPOINT III has been a member of the Company's Board of
Directors since September 1997. He has been a sole practitioner of law in
California since 1976 and is a principal in IPM. He is also presently an
instructor of Administration of Justice at the College of San Mateo and
previously taught Contract Law at San Mateo Law School. Mr. Pierpoint graduated
from the University of San Diego, School of Law, in 1972 and earned his Bachelor
of Arts in Political Science from Pennsylvania Military College in 1963.

ITEM  2.          PROPERTIES

         Until August 21, 1997, the Company's corporate offices consisted of
approximately 2,000 square feet of office space located in San Jose, California.
The Company's lease on this facility was to expire on May 2, 1999, however, the
Company has been notified that the landlord wishes to terminate this lease
effective December 11, 1997 since the Company moved to a smaller location in Los
Gatos, California. The Company formerly leased approximately 40,000 square feet
located in San Jose, California. Although this lease was assigned to Read-Rite
in connection with the Read-Rite Transaction, the Company has agreed, at the
request of the landlord, to guarantee Read-Rite's obligations under such lease.

ITEM 3.           LEGAL PROCEEDINGS

                  Not Applicable.

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

         On September 3, 1997, the Company's annual meeting of shareholders was
held. At this meeting, the shareholders elected Sabine Austin, Gary Summers and
Charles C. Pierpoint III to serve as directors of the Company until the next
Annual Meeting of Shareholders or until a successor has been duly elected and
qualified. Of the directors, Sabine Austin received 15,261,683 votes in favor of
her election with 100,000 votes opposed; Gary Summers received 15,251,683 votes
in favor and 110,000 opposed; and Charles Pierpoint received 15,241,683 votes in
favor and 120,000 votes opposed. At the annual meeting, the shareholders also
ratified the appointment of Ernst & Young LLP as the Company's independent
auditors with 15,991,683 shares voting in favor of such ratification, 80,000
shares opposed and 10,000 shares abstaining.





                                      -5-
<PAGE>   6
                                     PART II

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

         As of June 30, 1997, the Company had outstanding 8,545,994 shares of
common stock held by 145 shareholders, 6,617,299 shares of Series A Preferred
Stock held by 15 shareholders and 8,370,508 shares of Series B Convertible
Preferred Stock held by 557 shareholders. There is no established public trading
market for any class of the Company's equity securities.

         The Company has not paid any dividends on any of its capital stock and
does not anticipate that any cash dividends will be declared in the foreseeable
future. The holders of Preferred Stock are entitled to certain preferences with
respect to dividends and other preferences.










                                      -6-
<PAGE>   7
ITEM 6.           SELECTED CONSOLIDATED FINANCIAL DATA


<TABLE>
<CAPTION>
                                                                     Fiscal Year Ended June 30,
                                         ---------------------------------------------------------------------------------
                                              1993             1994             1995             1996             1997
                                         -------------    -------------    -------------    -------------    -------------
<S>                                      <C>              <C>              <C>              <C>              <C>          
Statement of Operations Data:
     License revenues                    $   2,682,666    $   7,845,799    $   3,515,472    $   3,202,704    $   4,088,332
Expenses:
     Research and development                9,411,161       11,723,752       11,448,501        8,261,638               --
     Selling, general & administrative       2,126,641        2,372,255        2,846,235        2,393,233        1,799,046
                                         -------------    -------------    -------------    -------------    -------------
         Total expenses                     11,537,802       14,096,007       14,294,736       10,654,871        1,799,046
                                         -------------    -------------    -------------    -------------    -------------
Operating income (loss)                     (8,855,136)      (6,250,208)     (10,779,264)      (7,452,167)       2,289,286

Gain on transfer of research &                      
     development operations                         --               --               --               --        1,596,706
Interest and other expense, net             (1,863,683)      (1,486,025)        (959,146)      (1,032,112)        (114,359)
Minority interest in loss of
     subsidiary                                     --               --           81,650          194,642               --
                                         -------------    -------------    -------------    -------------    -------------
Income (loss) before income tax
     expense                               (10,718,819)      (7,736,233)     (11,656,760)      (8,289,637)       3,771,633  
Income tax expense                                  --               --          290,350          319,450           68,333
                                         -------------    -------------    -------------    -------------    -------------
Net income (loss)                        $ (10,718,819)   $  (7,736,233)   $ (11,947,110)   $  (8,609,087)   $   3,703,300
                                         =============    =============    =============    =============    =============

Net income (loss) per share              $       (1.17)   $       (0.84)   $       (1.29)   $       (0.93)   $        0.16
                                         =============    =============    =============    =============    =============

Weighted average number of shares
 used in computing per share amount          9,190,000        9,211,000        9,255,000        9,301,000       23,534,000

BALANCE SHEET DATA:
Cash and cash equivalents                $   3,136,240    $   8,613,200    $   1,368,891    $     199,998    $     799,928
Working capital (deficiency)                (6,298,326)       6,215,308       (2,878,918)      (8,406,743)        (944,315)
Total assets                                 6,471,377       12,627,804        4,519,001        1,481,767          854,981
Long term obligations, excluding
     current maturities                     25,510,479       14,309,130       14,304,589       14,488,311               --
Accumulated deficit                        (79,614,020)     (87,350,253)     (99,297,363)    (107,906,450)    (104,203,150)
Net capital deficiency                     (29,409,664)      (4,365,839)     (14,515,928)     (22,649,811)     (18,946,511)
</TABLE>




                                      -7-
<PAGE>   8
ITEM 7.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS
                  Unless otherwise indicated, references to years in this
                  section refer to fiscal years ending June 30.

         The following discussion and analysis contains forward-looking
statements regarding future events or the future financial performance of
Censtor that involve risks and uncertainties. The Company's actual results could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth in the documents the
Company files from time to time with the Securities and Exchange Commission.

RESULTS OF OPERATIONS

         OVERVIEW

         The Company was formed in 1981 to develop perpendicular recording
technology, and to manufacture head and disk components for disk drives. The
Company subsequently shifted the focus of its development efforts from
perpendicular to longitudinal contact recording technology. To date, the
Company's principal source of revenue has been license fees from disk drive
manufacturers. While the Company's license agreements typically provide for
on-going royalty payments by licensees based upon sales of products
incorporating the Company's technology, to date none of the Company's licensees
has commercialized products using the Company's technology and the Company has
received no recurring royalty revenue. Until this fiscal year, the Company had
not been profitable in any fiscal period since inception and, as of June 30,
1997, had an accumulated deficit of $104.2 million. There can be no assurance
that the Company will achieve or sustain significant revenues or profitability
in the future.

         Censtor's operating plans for fiscal 1998 focus on the perfection of
the Company's patent protection and other proprietary rights and the possible
exploitation of such rights through licenses or other strategic transactions
with disk drive manufacturers and other related companies. The Company expects
to finance these operations through sales of additional licenses such as the one
entered into between the Company and TDK Corporation subsequent to year-end.
There can be no assurance that the Company will be able to sustain its
operations beyond 1998 without the sale of such additional licenses.

         LIQUIDITY AND CAPITAL RESOURCES

         Since its inception, the Company has financed its operations primarily
through private placements of its equity and debt securities and, to a lesser
extent, through licensing and research and development agreements. During the
fiscal year ended June 30, 1995, the Company generated net cash from financing
activities of $832,000, resulting primarily from proceeds of $2.0 million from
the sale of preferred stock of a subsidiary of the Company which was partially
offset by $1.1 million of principal payments on capital leases. In 1996, the
Company generated net cash of $6.6 million resulting primarily from $7.5 million
in notes payable and short term borrowing offset by $1.4 million in capital
lease payments. In 1997, the Company used $5.5 million in financing activities
due primarily to the repayment of notes payable and short term borrowing. During
fiscal 1995 and 1996, the Company used net cash in its operations of $8.3
million and $8.1 million, respectively. In 1997, the Company generated cash from
operations of $4.9 million. In 1995 and 1996, the Company received payments of
license fees and non-refundable prepaid royalties from several licensees, which
caused net cash used in operations to be less than the Company's net loss. In
addition, particularly in 1995 and 1996, the Company delayed payments on
accounts payable to conserve cash prior to completion of then-anticipated new
financing.

         The Company generated net cash from investing activities of $205,000 in
1995 consisting of $379,000 used for additions to property and equipment and
$584,000 provided by proceeds from the sale and




                                      -8-
<PAGE>   9
leaseback, and sale of fixed assets. In 1996, the Company generated net cash
from investment activities of $358,000 consisting of $192,000 used for additions
to property and equipment and $550,000 provided by proceeds from the sale and
leaseback, and sale of fixed assets. In 1997, the Company generated $1.1 million
primarily from the sale of certain fixed assets to Read-Rite in the Read-Rite
Transaction.

         The Company's ability to fund its cash requirements and assert its
intellectual property rights in the future depends largely upon its success in
seeking new licensees. The Company believes the cash received from the license
agreement with TDK will enable it to fund its planned operations through fiscal
1998. The Company's commitments for cash payments in fiscal year 1998 are
primarily for operating expenses, which, going forward may include significant
litigation expense.

         RESULTS OF OPERATIONS

         Revenues

         The Company's major revenue source has been fees from license
agreements with disk drive manufacturers. License fees are generally recognized
over the estimated period in which the Company expects to provide support in
connection with the license. All deferred revenue pertaining to licenses sold to
disk drive manufacturers have been recognized as revenue in fiscal 1996 since
the Company can no longer provide technical support to its licensees as a result
of the Read-Rite Transaction. The license fee from Read-Rite in connection with
the Read-Rite Transaction will be recognized over a period of six years.

         The Company's revenues were $3.5 million, $3.2 million and $4.1 million
in 1995, 1996 and 1997, respectively. Revenues in 1995 consisted primarily of
the amortization of the Hitachi license that was sold in December 1994. Revenues
in fiscal 1996 consisted primarily of the continued and complete amortization of
the Hitachi license fee as well as the NEC license sold in August 1995. Revenues
in 1997 were the result of the amortization of the Read-Rite and Western Digital
license fees. These licenses were entered into at the beginning of the fiscal
year.

         Research and Development

         Research and development expenses decreased from $11.4 million in 1995
to $8.3 million in 1996 and were eliminated in 1997. This is attributed to
Read-Rite's hiring of most of Censtor's employees on February 5, 1996 and the
subsequent acquisition of the Company's research and development operations. In
the future the Company expects no R&D expenses.

         Selling, General and Administrative Expenses

         Selling, general and administrative expenses decreased from $2.8
million in 1995 to $2.4 million in 1996 to $1.8 million in 1997. The decreases
in 1996 and 1997 were due to a reduction in the use of outside legal counsel for
patent filings because the Company hired an "in-house" patent counsel in April
1995, as well as the reduced headcount and operations.

         Interest and Other Expense, Net

         Interest and other expense, net, consists primarily of interest on the
Company's outstanding indebtedness and capital leases. Interest and other
expense, net, remained constant in 1995 and 1996 at $1.0 million and decreased
to $100,000 in 1997. The decrease in 1997 was due to the fact that the Company
repaid or had been forgiven almost all of its interest bearing debt at the
beginning of the fiscal year.

         Gain on Transfer of Research and Development Operation

         The Company recognized a gain of $1.6 million in fiscal 1997 relating
to the Read-Rite Transaction. The gain consists of $899,000 related to the
forgiveness of certain promissory notes and $698,000 related to the gain on sale
of fixed assets and the transfer of the Company's workforce.

         Income Taxes

         As of June 30, 1997, the Company had federal net operating loss and
credit carryforwards of approximately $90.0 million and $3.4 million,
respectively, expiring in various years beginning in 1998 through




                                      -9-
<PAGE>   10
2011. The Company also has state net operating loss and credit carryforwards of
approximately $34.0 million and $1.4 million respectively. The state operating
loss carryforwards will expire in various years beginning in 1998 through 2002
while the credit carryforwards will expire in various years beginning in 2003
through 2011. Tax law provides that the use of net operating loss and credit
carryforwards are restricted if there is a substantial change in the ownership
of the Company. Due to prior years' equity transactions, such a change has
occurred. Approximately $75.0 million of federal net operating loss and
substantially all credit carryforwards are subject to an annual limitation. The
annual limitation is approximately $1.2 million per year. The balance of $15.0
million federal net operating loss carryforwards can be used without limitation.
Similar limitations apply to state carryforwards. Income tax expense in 1995 and
1996 represents foreign withholdings in connection with license agreements.
Income tax expense in 1997 represents a provision for alternative minimum taxes.

ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The information required by this item is incorporated by reference to
the Consolidated Financial Statements set forth on pages F-1 through F-20.

ITEM 9.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                  AND FINANCIAL DISCLOSURE.

                  Not Applicable.





                                      -10-
<PAGE>   11
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Information regarding Directors and Executive Officers is included in
Part I hereof under the caption "Executive Officers of the Registrant" and is
incorporated by reference into this Item 10.

ITEM 11. EXECUTIVE COMPENSATION

         Summary Compensation Table. The following table sets forth the
compensation paid by the Company for the year ended June 30, 1997 to the Chief
Executive Officer (the "named officer") during that year:

<TABLE>
<CAPTION>
                                                                          LONG-TERM
                                             ANNUAL COMPENSATION         COMPENSATION 
                                             -------------------     ---------------------
                                                                     SECURITIES UNDERLYING       ALL OTHER
    NAME AND PRINCIPAL POSITION      YEAR     SALARY       BONUS        OPTION(#)(1)(2)        COMPENSATION(3)
    ---------------------------      ----     ------       -----     ---------------------     ----------------
<S>                                  <C>      <C>         <C>                <C>                   <C>  
Russell M. Krapf(4)                  1997     207,684     129,225            510,206               2,598
  President, Chief Executive         1996     184,381       9,654             75,000                 488
  Officer                            1995     166,730      26,650            100,000                 775
</TABLE>

-------------------
(1)  The stock options granted to the named officer vest as to 1/48 of the
     shares per month at the end each month after the date of grant; provided,
     however, that in certain cases options are not first exercisable until six
     months after the date of grant. The options are exercisable at a price of
     $0.046 per share and expire ten years from the date of grant.

(2)  There are no other long-term incentive compensation plans which require
     disclosure.

(3)  Reflects premiums paid by the Company on behalf of the named officer for
     term life insurance with benefits payable to beneficiaries designated by
     the officer.

(4)  Mr. Krapf was appointed President and Chief Executive Officer effective
     April 22, 1996 and resigned this position effective September 4, 1997. Mr.
     Krapf's stock options expire December 3, 1997.







                                      -11-
<PAGE>   12
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth certain information regarding the
beneficial ownership of the Company's outstanding shares of Common Stock and
Preferred Stock (on an as converted basis) as of September 15, 1997 by (i) each
person known to the Company beneficially to own 5% or more of the outstanding
shares of its Common Stock or Preferred Stock, (ii) each of the Company's
directors, (iii) each of the Company's executive officers named in the Summary
Compensation Table below, and (iv) all directors and executive officers as a
group. Except as indicated in the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by them, subject to community property
laws where applicable.

<TABLE>
<CAPTION>
                                                 PREFERRED STOCK (1)              COMMON STOCK                  TOTALS(2)
                                           ------------------------------  --------------------------  --------------------------
                                                                                                        NUMBER OF       PERCENT
                                            NUMBER OF          PERCENT      NUMBER OF       PERCENT     COMMON       OF COMMON
                                              SHARES           OF CLASS       SHARES        OF CLASS   EQUIVALENTS   EQUIVALENTS
                                           BENEFICIALLY      BENEFICIALLY  BENEFICIALLY  BENEFICIALLY  BENEFICIALLY  BENEFICIALLY
        NAME OF OWNER                         OWNED             OWNED         OWNED          OWNED       OWNED          OWNED
        -------------                      ------------      ------------  ------------  ------------  ------------  ------------
<S>                                          <C>                 <C>        <C>               <C>        <C>             <C>   
Brentwood Associates(3) ...............      1,298,244           8.66%      3,438,593         40.34%   4,736,837         20.15%
   11150 Santa Monica Boulevard,
   Suite 1200
   Los Angeles, CA 90025

Aeneas Venture Corporation(4) .........      2,938,225          19.60               0             0    2,938,225         12.50
   600 Atlantic Avenue,
   26th Floor
   Boston, MA 02210-2203

Wolfensohn Associates II L.P.(5) ......        413,172           2.76       1,066,211         12.51    1,479,383          6.29
   590 Madison Avenue, 32nd Floor
   New York, NY 10022

J.P. Morgan Investment Corporation(6) .        363,796           2.43       1,060,244         12.44    1,424,040          6.06
   60 Wall Street, 14th Floor
   New York, NY 10260-0060

New Enterprise Associates(7) ..........      1,424,590           9.50               0             0    1,424,590          6.06
   1119 St. Paul Street
   Baltimore, MD 21202

William R. Timken .....................              0              0         798,830          9.37      798,830          3.40
   Hambrecht & Quist
   1 Bush Street
   San Francisco, CA 94104

Fujitsu Limited .......................              0              0         784,682          9.21      784,682          3.34
   1015 Kamikodanaka
   Nakahara-ku, Kawasaki-shi
   Kanagawa-ken 211
   Japan

Russell M. Krapf(8) ...................              0              0         319,016          3.71      319,016          1.36

Sabine Austin(9) ......................              0              0               0             0            0             0

Gary J. Summers .......................              0              0               0             0            0             0

Charles C. Pierpoint III ..............              0              0               0             0            0             0

All directors and executive officers as              0              0               0             0            0             0
a group (3 persons)
</TABLE>


 *   Less than one percent

(1)  Includes Series A Preferred and Series B Preferred. Preferred Stock is
     reflected on an as-converted to Common Stock basis. As of September 15, 
     1997, each share of Series A and Series B Preferred converts into one 
     share of Common Stock.

(2)  Reflects Preferred Stock (on an as-converted to Common Stock basis) and
     Common Stock combined.




                                      -12-
<PAGE>   13
(3)  Includes: 1,257,196; 2,366,978; 875,764; and 236,899 shares held
     respectively by Brentwood Associates II, Brentwood Associates III,
     Brentwood Associates IV and Evergreen II, L.P., of which 229,289; 429,253;
     160,002; and 43,343 shares, respectively, are shares of the Company's
     Series A Preferred, and 108,494; 222,972; 82,519; and 22,372 shares,
     respectively, are shares of the Company's Series B Preferred. Mr. Hagopian,
     the Chairman and a Director of the Company is a General Partner of
     Brentwood Associates. Mr. Hagopian disclaims beneficial ownership of the
     shares owned by Brentwood Associates.

(4)  Includes 2,678,141 shares of the Company's Series A Preferred and 260,084
     shares of the Company's Series B Preferred.

(5)  Includes 273,116 shares of the Company's Series A Preferred and 140,056
     shares of the Company's Series B Preferred. Richard C.E. Morgan, a former
     Director of the Company, is a General Partner of Wolfensohn Partners L.P.
     Mr. Morgan disclaims beneficial ownership of the shares held by Wolfensohn
     Partners L.P.

(6)  Includes 223,796 shares of the Company's Series A Preferred and 140,000
     shares of the Company's Series B Preferred.

(7)  Includes 1,274,853 and 149,737 shares held respectively by New Enterprise
     Associates V ("NEA") and Spectra Enterprise Associates ("Spectra"), of
     which 1,071,256 and 131,788 shares, respectively, are shares of the
     Company's Series A Preferred and 203,597 and 17,949 shares, respectively,
     are shares of the Company's Series B Preferred. NEA and Spectra are
     independent partnerships; however, the General Partners of Spectra are also
     General Partners of NEA. James A. Cole, a Director of the Company, is a
     Partner of NEA and the Managing General Partner of Spectra. Mr. Cole
     disclaims beneficial ownership of the shares owned by NEA and Spectra.

(8)  Includes 319,016 shares subject to stock options which are exercisable
     within 60 days of September 15, 1997.

(9)  Ms. Austin's stock options were canceled in lieu of the incentive
     compensation agreement she entered into with the Company effective July 29,
     1997.






                                      -13-
<PAGE>   14
ITEM  13.         CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The Company has entered into the following transactions with its
officers and directors since July 1, 1996:

         In September 1990, Harold J. Hamilton, a retired executive officer and
a past director of the Company, exercised stock options as to 244,821 shares of
the Company's Common Stock and, in lieu of payment to the Company for such
exercise, Mr. Hamilton delivered to the Company a promissory note in the
principal amount of $71,500. The note was called and the stock was canceled by
action of the Board of Directors on June 25, 1997.

         In September 1990, Edwin V.W. Zschau, a former director of the Company,
exercised stock options as to 282,485 shares of the Company's Common Stock and
in lieu of payment to the Company for such exercise, Dr. Zschau delivered to the
Company a promissory note in the principal amount of $82,500. The note was due
April 23, 1997 and was not extended. The Board of Directors called the note and
canceled the stock on June 25, 1997.

         In September 1990, Russell M. Krapf, former CEO and President of the
Company, exercised stock options as to 188,323 shares of the Company's Common
Stock and, in lieu of payment to the Company for such exercise, Mr. Krapf
delivered to the Company a promissory note in the principal amount of $55,000.
Upon his resignation in February 1992, and pursuant to the terms of the
Restricted Stock Purchase Agreement between Mr. Krapf and the Company, the
Company repurchased 76,585 of these shares. On June 25, 1997, pursuant to its
terms, the promissory note was canceled upon surrender by Mr. Krapf of the
remaining shares.

         The Company's Bylaws provide that the Company is required to indemnify
its officers and directors to the fullest extent permitted by California law,
including those circumstances in which indemnification would otherwise be
discretionary, and that the Company is required to advance expenses to its
officers and directors as incurred. Further, the Company has entered into
indemnification agreements with its officers and directors. The Company believes
that its charter and bylaw provisions and indemnification agreements are
necessary to attract and retain qualified persons as directors and officers.

         On July 7, 1997, Russell M. Krapf notified the Company that he
intended to resign his position as President and CEO effective September 4,
1997. On July 29, 1997, the Company entered into a consulting agreement with Mr.
Krapf for a period up to one year. Mr. Krapf will be paid $45,000 for these
consulting services.

         On July 29, 1997, the Company created an incentive compensation program
for Ms. Sabine Austin to serve as a director of the Company. This program will
pay Ms. Austin a bonus equal to 1.5% of all net licensing revenue received by
the Company as long as she serves as a director.

         On July 31, 1997, the Company entered into an exclusive license with
IPM, whereby IPM will be Censtor's agent to enforce its current licenses and to
negotiate licenses with prospective licensees. IPM also has an exclusive
contract with Teklicon whereby Teklicon will perform marketing and technology
due diligence. Under this agreement, IPM will be paid between 15-45% of the net
proceeds of such activities depending upon the source of revenue. Mr. Charles
Pierpoint is a principal with IPM and Mr. Gary Summers is a principal with
Teklicon.

         The Company believes that all of the transactions set forth above were
made on terms no less favorable to the Company than could have been obtained
from unaffiliated third parties. All future transactions between the Company and
its officers, directors, principal shareholders and affiliates will be approved
by a




                                      -14-
<PAGE>   15
majority of the Board of Directors, including a majority of the independent and
disinterested outside directors on the Board of Directors, and will be on terms
no less favorable to the Company than could be obtained from unaffiliated third
parties.

         Additionally, certain shareholders beneficially owning more than 5% of
the Company's capital stock made loans to the Company in the first calendar
quarter of 1996. Fifty percent of the principal balances of these loans plus
accrued interest on that portion were repaid from the proceeds received by the
Company at the closing of the Read-Rite Transaction, while the remainder plus
accrued interest on the remaining portion was repaid on April 18, 1997.










                                      -15-
<PAGE>   16
                                     PART IV

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

         (a) Documents Filed with Report

                1) Financial Statements.

                The following Consolidated Financial Statements of Censtor Corp.
                and subsidiaries, and the Report of Independent Auditors are
                included at pages F-1 through F-20 of this Annual Report on Form
                10-K.
                
<TABLE>
<CAPTION>
                                               DESCRIPTION                                       PAGE NO.
                                               -----------                                       --------
                <S>                                                                                 <C>
                Report of Ernst & Young LLP, Independent Auditors ..............................    F-2

                Consolidated Balance Sheets as of June 30, 1996 and 1997 .......................    F-3

                Consolidated Statements of Operations for each of the Three Years in the Period     F-4
                Ended June 30, 1997

                Consolidated Statements of Net Capital Deficiency for each of the Three Years in    F-5
                the Period Ended June 30, 1997

                Consolidated Statements of Cash Flows for each of the Three Years in the Period     F-6
                Ended June 30, 1997

                Notes to Consolidated Financial Statements .....................................    F-7

                
</TABLE>

                2) Financial Statement Schedules.

                No schedules have been filed as part of this report because they
                are not applicable or are not required or the information
                required to be set forth therein is included in the consolidated
                financial statements or notes thereto.

                3) Exhibits

<TABLE>
<CAPTION>
                Exhibit
                Number        Description
                --------      -----------
                <S>           <C>
                3.1(5)        Restated Articles of Incorporation of
                              Registrant.

                3.2(1)        Amended and Restated Bylaws of Registrant.

                10.1(1)(4)    1990 Stock Plan and Form of Option Agreement.

                10.2(1)       Form of Indemnification Agreement entered into
                              between the Company and each of its directors and
                              officers.

                10.3(1)       Lease Agreement, dated November 28, 1983, between
                              the Company and The Sobrato Group, together with
                              amendments thereto.
</TABLE>




                                      -16-
<PAGE>   17
<TABLE>
<CAPTION>
                Exhibit
                Number        Description
                --------      -----------
                <S>           <C>
                10.4(1)(2)    License Agreement, dated September 23, 1991,
                              between the Company and Maxtor Corporation, as
                              amended.

                10.5(1)(2)    License Agreement, dated February 28, 1991,
                              between the Company and Fujitsu Limited, as
                              amended.

                10.6(1)(2)    Manufacturing License Agreement, dated August 26,
                              1988, between the Company and Denki Kagaku Kogyo
                              Kabushiki Kaisha, as amended.

                10.7(1)(2)    License Agreement, dated June 1, 1993, between the
                              Company and International Business Machines
                              Corporation.

                10.8(1)       Denka Promissory Note.

                10.9(3)       License Agreement, dated December 19, 1994,
                              between Hitachi, Ltd. and the Company. 

                10.10(5)      License Agreement, dated June 19, 1995, between
                              Contact Recording Technology, Inc. and the
                              Company.

                10.11(2)      License Agreement, dated August 7, 1995, between
                              NEC Corporation and the Company.

                10.12(6)      Agreement for Purchase and Sale of Assets by and
                              between Read-Rite Corporation and the Company.

                10.13(2)      License Agreement, dated August 12, 1996, between
                              Western Digital and the Company.

                10.14(7)      Assignment of Lease and Consent to Assignment,
                              dated July 2, 1996, between The Sobrato Group,
                              Censtor Corp. and Read-Rite Corp.

                10.15(7)      Fifth Amendment to Manufacturing License
                              Agreement, dated February 22, 1996, with Denki
                              Kagaku Kogyo Kabushiki Kaisha.

                10.16(7)      Amendment to Terms of Debentures, dated February
                              22, 1996, with Denki Kagaku Kogyo Kabushiki
                              Kaisha.

                10.17(7)      License Agreement, dated July 18, 1996, between
                              Read-Rite Corporation and the Company.

                10.18         Agreement between I.P. Managers, Inc. and the
                              Company dated July 31, 1997.

</TABLE>




                                      -17-
<PAGE>   18
<TABLE>
<CAPTION>
                Exhibit
                Number        Description
                --------      -----------
                <S>           <C>
                10.19         Incentive Compensation Agreement between the
                              Company and Sabine Austin, dated July 29, 1997.

                24            Power of Attorney (see signature page)

                27            Financial Data Schedule   
</TABLE>
-------------------------

(1)  Incorporated by reference to exhibits filed with Registrant's Registration
     Statement on Form 10 which became effective December 25, 1994.

(2)  Confidential Treatment requested for portions of Exhibit.

(3)  Incorporated by reference to exhibits filed with the Registrant's Quarterly
     Report on Form 10-Q for the quarter ended December 31, 1994.

(4)  Document indicated is a compensatory plan.

(5)  Incorporated by reference to exhibits filed with Registrant's Annual Report
     on Form 10-K for the year ended June 30, 1995.

(6)  Incorporated by reference to exhibit filed with Registrant's Proxy
     Statement relating to the Registrant's 1996 Annual Meeting of Shareholders.

(7)  Incorporated by reference to exhibits filed with Registrant's Annual Report
     on Form 10-K for the year ended June 30, 1996.

         (b) Reports on Form 8-K

                 Not applicable.

         (c) Exhibits

                 See response to Item 14(a)(3) above.

         (d) Financial Statement Schedules

                 See response to Item 14(a)(2) above.





                                      -18-
<PAGE>   19
                                   SIGNATURES

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


                                      Registrant

                                      CENSTOR CORP.


September 29, 1997                    By: /s/ Sabine Austin
                                          -------------------------------------
                                          Sabine Austin
                                          President and Chief Executive Officer


                                POWER OF ATTORNEY

         KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Sabine Austin as his
attorneys-in-fact, with full power of substitution for him in any and all
capacities, to sign any and all amendments to this Form 10-K, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact or his substitute or substitutes, may do or cause to be
done by virtue hereof.

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>
          Signature                         Capacity in Which Signed                     Date
          ---------                         ------------------------                     ----
<S>                                 <C>                                            <C> 
/s/ Sabine Austin                   President, Chief Executive Officer and         September 29, 1997
------------------------------      Director (Principal Executive Officer,
Sabine Austin                       Principal Financial and Accounting Officer)


 /s/ Gary J. Summers                Director                                       September 29, 1997
------------------------------
Gary J. Summers


/s/ Charles C. Pierpoint III        Director                                       September 29, 1997
------------------------------
Charles C. Pierpoint III
</TABLE>





                                      -19-
<PAGE>   20


                                  CENSTOR CORP.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS




<TABLE>
<S>                                                                     <C>
Report of Ernst & Young LLP, Independent Auditors........................F-2
Consolidated Balance Sheets as of June 30, 1996 and 1997.................F-3
Consolidated Statements of Operations for Each of the
   Three Years in the Period Ended June 30, 1997.........................F-4
Consolidated Statements of Net Capital Deficiency for Each of the
   Three Years in the Period Ended June 30, 1997.........................F-5
Consolidated Statements of Cash Flows for Each of the
   Three Years in the Period Ended June 30, 1997.........................F-6
Notes to Consolidated Financial Statements...............................F-7
</TABLE>


                                      F-1


<PAGE>   21


                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Censtor Corp.

We have audited the accompanying consolidated balance sheets of Censtor Corp. as
of June 30, 1996 and 1997, and the related consolidated statements of
operations, net capital deficiency, and cash flows for each of the three years
in the period ended June 30, 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 consolidated financial position of Censtor Corp. at
June 30, 1996 and 1997, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended June 30, 1997, in
conformity with generally accepted accounting principles.




San Jose, California 
August 11, 1997, except for Note 8, 
as to which the date is
September 26, 1997




                                      F-2
<PAGE>   22
                                 CENSTOR CORP.

                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                  JUNE 30,
                                                          ------------------------
                                                             1996           1997
                                                          ----------     ----------
<S>                                                       <C>              <C>
ASSETS
Current assets:
   Cash and cash equivalents ..........................   $  199,998     $  799,928
   Receivables ........................................       14,336          6,316
   Prepaid expenses and other current assets ..........      111,135         38,221
   Property and equipment held for sale ...............      911,055            -
                                                          ----------     ----------
Total current assets ..................................    1,236,524        844,465

Property and equipment, at cost:
   Machinery and equipment ............................       45,703         45,703
                                                          ----------     ----------
                                                              45,703         45,703

   Accumulated depreciation ...........................       33,880         39,437
                                                          ----------     ----------
                                                              11,823          6,266

Restricted cash .......................................       94,450            -
Deposits and other assets .............................      138,970          4,250
                                                          ----------     ----------
Total assets ..........................................   $1,481,767     $  854,981
                                                          ==========     ==========
</TABLE>



<TABLE>
<CAPTION>
                                                                   JUNE 30,
                                                          ------------------------------
                                                             1996              1997
                                                          -------------    -------------
<S>                                                       <C>              <C>
LIABILITIES AND NET CAPITAL DEFICIENCY
Current liabilities:
   Short-term borrowings ...............................  $   6,450,000    $         -
   Accounts payable ....................................        974,889           66,372
   Notes payable to related parties ....................      1,000,000              -
   Accrued payroll and related expenses ................        232,278           48,471
   Deferred revenue ....................................            -          1,583,333
   Other current liabilities ...........................        378,257           90,604
   Obligations under capital leases ....................        607,843              -
                                                          -------------    -------------
Total current liabilities ..............................      9,643,267        1,788,780

Long-term obligations:
   Deferred revenue ....................................            -          5,333,335
   Subordinated debentures .............................     14,488,311              -
   Restructured debt obligation ........................            -         12,679,377

Net capital deficiency:
   Convertible preferred stock, no par value:
     Authorized shares - 25,000,000
     Issued and outstanding shares - 14,987,807 in 1996
       and 1997 ........................................     32,509,031       32,509,031
   Common stock, no par value:
     Authorized shares - 50,000,000
     Issued and outstanding shares - 9,303,344 in 1996
       and 8,545,994 in 1997 ...........................     50,508,593       50,241,660
   Warrants to purchase shares of preferred
     stock - 1,098,318 in 1996 and 1997 ................        253,050          253,050
   Capital surplus .....................................      2,263,708        2,263,708
   Accumulated deficit .................................   (107,906,450)    (104,203,150)
                                                          -------------    -------------

                                                            (22,372,068)     (18,935,701)
   Notes receivable from shareholders ..................       (277,743)         (10,810)
                                                          -------------    -------------

Net capital deficiency .................................    (22,649,811)     (18,946,511)
                                                          -------------    -------------
Total liabilities and net capital deficiency ...........  $   1,481,767    $     854,981
                                                          =============    =============
</TABLE>


                             See accompanying notes.

                                       F-3


<PAGE>   23


                                  CENSTOR CORP.

                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                     Years Ended June 30,
                                          --------------------------------------------
                                             1995            1996            1997
                                          ------------    ------------    ------------
<S>                                      <C>             <C>             <C>         
License revenues ........................ $  3,515,472    $  3,202,704    $  4,088,332

Costs and expenses:
   Research and development .............   11,448,501       8,261,638             -
   Selling, general, and administrative..    2,846,235       2,393,233       1,799,046
                                          ------------    ------------    ------------
Total expenses ..........................   14,294,736      10,654,871       1,799,046
                                          ------------    ------------    ------------

Operating income (loss)..................  (10,779,264)     (7,452,167)      2,289,286

Gain on transfer of research and
   development operation ................          -               -         1,596,706
Interest income .........................      173,379           5,481             -
Interest expense ........................   (1,106,488)     (1,183,680)       (275,140)
Other income (expense), net .............      (26,037)        146,087         160,781
Minority interest in loss of subsidiary..       81,650         194,642             -
                                          ------------    ------------    ------------
Income (loss) before income tax
   expense...............................  (11,656,760)     (8,289,637)      3,771,633

Income tax expense ......................     (290,350)       (319,450)        (68,333)
                                          ------------    ------------    ------------
Net income (loss)........................ $(11,947,110)   $ (8,609,087)   $  3,703,300
                                          ============    ============    ============

Net income (loss) per share ............. $      (1.29)   $      (0.93)   $       0.16
                                          ============    ============    ============

Weighted average number of shares
   used in computing per share amounts
   (in thousands)........................        9,255           9,301          23,534
                                          ============    ============    ============
</TABLE>


                             See accompanying notes.

                                       F-4


<PAGE>   24


                                  CENSTOR CORP.

                CONSOLIDATED STATEMENTS OF NET CAPITAL DEFICIENCY


<TABLE>
<CAPTION>
                                                               CONVERTIBLE
                                                             PREFERRED STOCK                    COMMON STOCK
                                                         --------------------------    ------------------------------
                                                           SHARES        AMOUNT           SHARES           AMOUNT
                                                         ----------   -------------    -------------    -------------
<S>                                                      <C>          <C>                  <C>          <C>          
Balance at June 30, 1994...............................  14,987,807   $  32,513,244        9,239,670    $  50,323,363
   Issuance of Series B preferred stock, net of
     issuance costs....................................         -            (4,213)             -                - 
   Issuance of common stock............................         -               -             35,055           11,634
   Cancelation of note receivable......................         -               -            (10,334)        (103,500)
   Net exercise of warrants in connection
     with capital leases...............................         -               -             36,078          276,000
   Issuance of warrants in connection with
     capital leases, exercisable at $2.50 per share....         -               -                -                -
   Capital surplus from investment in
     subsidiary........................................         -               -                -                - 
   Net loss                                                     -               -                -                - 
                                                         ----------   -------------    -------------    -------------
Balance at June 30, 1995...............................  14,987,807      32,509,031        9,300,469       50,507,497
   Issuance of common stock............................         -               -              2,875            1,096
   Issuance of warrants in connection with
     bank line of credit...............................         -               -                -                - 
   Expiration of warrants in connection with
     capital leases....................................         -               -                -                - 
   Capital surplus from investment in
     subsidiary........................................         -               -                -                - 
   Net loss............................................         -               -                -                - 
                                                         ----------   -------------    -------------    -------------
Balance at June 30, 1996...............................  14,987,807      32,509,031        9,303,344       50,508,593
   Cancelation of notes receivable.....................         -               -           (757,350)        (266,933)
   Net income..........................................         -               -                -                - 
                                                         ----------   -------------    -------------    -------------
Balance at June 30, 1997...............................  14,987,807   $  32,509,031        8,545,994    $  50,241,660
                                                         ==========   =============    =============    =============
</TABLE>


<TABLE>
<CAPTION>
                                                              WARRANTS TO PURCHASE            WARRANTS TO PURCHASE
                                                                 PREFERRED STOCK                  COMMON STOCK
                                                         -----------------------------   ------------------------------
                                                            SHARES          AMOUNT          SHARES            AMOUNT
                                                         -------------   -------------   -------------    -------------
<S>                                                      <C>            <C>              <C>              <C>          
Balance at June 30, 1994...............................     988,318   $     253,050         224,266    $     276,000
   Issuance of Series B preferred stock, net of
     issuance costs....................................         -               -               -                - 
   Issuance of common stock............................         -               -               -                - 
   Cancelation of note receivable......................         -               -               -                - 
   Net exercise of warrants in connection
     with capital leases...............................         -               -          (199,159)        (276,000)
   Issuance of warrants in connection with
     capital leases, exercisable at $2.50 per share....         -               -            80,000              -
                                                                                                                   
   Capital surplus from investment in
     subsidiary........................................         -               -               -                - 
   Net loss............................................         -               -               -                - 
                                                         ----------   -------------   -------------    -------------
Balance at June 30, 1995...............................     988,318         253,050         105,107              - 
   Issuance of common stock............................         -               -               -                - 
   Issuance of warrants in connection with
     bank line of credit...............................     110,000             -               -                - 
   Expiration of warrants in connection with
     capital leases....................................         -               -           (25,107)             - 
   Capital surplus from investment in
     subsidiary........................................         -               -               -                - 
   Net loss............................................         -               -               -                - 
                                                         ----------   -------------   -------------    -------------
Balance at June 30, 1996...............................   1,098,318         253,050          80,000              - 
   Cancelation of notes receivable.....................         -               -               -                - 
   Net income..........................................         -               -               -                - 
                                                         ----------   -------------   -------------    -------------
Balance at June 30, 1997...............................   1,098,318   $     253,050          80,000   $          - 
                                                         ==========   =============   =============    =============
</TABLE>



<TABLE>
<CAPTION>
                                                                                          NOTES
                                                                                        RECEIVABLE         TOTAL
                                                           CAPITAL     ACCUMULATED         FROM          NET CAPITAL
                                                           SURPLUS       DEFICIT       SHAREHOLDERS      DEFICIENCY
                                                         ----------   -------------    -------------    -------------
<S>                                                      <C>          <C>              <C>              <C>           
Balance at June 30, 1994...............................  $      -     $ (87,350,253)   $    (381,243)   $  (4,365,839)
   Issuance of Series B preferred stock, net of
     issuance costs....................................         -               -                -             (4,213)
   Issuance of common stock............................         -               -                -             11,634
   Cancelation of note receivable......................         -               -            103,500              -
   Net exercise of warrants in connection
     with capital leases...............................         -               -                -                -
   Issuance of warrants in connection with
     capital leases, exercisable at $2.50 per share....
                                                                -               -                -                -
   Capital surplus from investment in
     subsidiary........................................   1,789,600             -                -          1,789,600
   Net loss                                                     -       (11,947,110)             -        (11,947,110)
                                                         ----------   -------------    -------------    -------------
Balance at June 30, 1995...............................   1,789,600     (99,297,363)        (277,743)     (14,515,928)
   Issuance of common stock............................         -               -                -              1,096
   Issuance of warrants in connection with
     bank line of credit...............................         -               -                -                -
   Expiration of warrants in connection with
     capital leases....................................         -               -                -                -
   Capital surplus from investment in
     subsidiary........................................     474,108             -                -            474,108
   Net loss............................................         -        (8,609,087)             -         (8,609,087)
                                                         ----------   -------------    -------------    -------------
Balance at June 30, 1996...............................   2,263,708    (107,906,450)        (277,743)     (22,649,811)
   Cancelation of notes receivable.....................         -               -            266,933              -
   Net income..........................................         -         3,703,300              -          3,703,300
                                                         ----------   -------------    -------------    -------------
Balance at June 30, 1997...............................  $2,263,708   $(104,203,150)   $     (10,810)   $ (18,946,511)
                                                         ==========   =============    =============    =============
</TABLE>



                             See accompanying notes.

                                       F-5

<PAGE>   25


                                  CENSTOR CORP.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                             YEARS ENDED JUNE 30,
                                                                --------------------------------------------
                                                                    1995           1996            1997
                                                                ------------    ------------    ------------
<S>                                                             <C>             <C>             <C>         
OPERATING ACTIVITIES
Net income (loss)............................................   $(11,947,110)   $ (8,609,087)   $  3,703,300
Adjustments to reconcile net loss to net cash
   provided by (used in) operating activities:
     Depreciation and amortization...........................      1,594,956       1,456,658          18,043
     Gain on sale of fixed assets............................         (2,156)       (145,908)            -
     Gain on transfer of research                            
       and development operation.............................            -               -        (1,596,706)
     Interest on subordinated debentures.....................        774,016         816,856         191,066
     Loss applicable to minority interest....................        (81,650)       (194,642)            -
     Changes in assets and liabilities:
       Accounts receivables..................................         (3,113)         13,009           8,020
       Prepaid expenses and other current assets.............       (148,175)        211,051          72,914
       Accounts payable......................................        112,320         271,778        (908,517)
       Accrued payroll and related expenses..................        (40,346)       (205,173)       (183,807)
       Deferred revenue......................................      1,475,840      (2,062,498)      3,916,668
       Other current liabilities.............................        (15,853)        319,942        (287,652)
                                                                ------------    ------------    ------------
                                                                   3,665,839         481,073       1,230,029
                                                                ------------    ------------    ------------
Net cash provided by (used in) operating activities..........     (8,281,271)     (8,128,014)      4,933,329

INVESTING ACTIVITIES
Additions to property and equipment..........................       (378,731)       (191,668)            -
Deposits and other assets....................................            -               -           122,220
Proceeds from sale and leaseback
   and sale of fixed assets..................................        583,751         550,050       1,025,000
                                                                ------------    ------------    ------------
Net cash provided by investing activities....................        205,020         358,382       1,147,220

FINANCING ACTIVITIES
Proceeds from issuance of short- and
   long-term debt............................................            -               -           350,000
Proceeds from short-term borrowings..........................            -         1,000,000             -
Proceeds from notes payable..................................            -         6,450,000             -
Proceeds from sale of preferred stock of subsidiary..........      2,000,000         540,000             -
Purchase of certificate of deposit
   in connection with leases.................................        (94,450)            -               -
Principal payments under capital leases......................     (1,081,029)     (1,390,357)        (23,825)
Principal payments on short- and long-term debt..............            -               -        (5,901,244)
Release of certificate of deposit in connection with leases..            -               -            94,450
Net proceeds from sale of capital stock......................          7,421           1,096             -
                                                                ------------    ------------    ------------
Net cash provided by (used in) financing activities..........        831,942       6,600,739      (5,480,619)
                                                                ------------    ------------    ------------

Net increase (decrease) in cash and cash equivalents.........     (7,244,309)     (1,168,893)        599,930
Cash and cash equivalents at beginning of year...............      8,613,200       1,368,891         199,998
                                                                ------------    ------------    ------------
Cash and cash equivalents at end of year.....................   $  1,368,891    $    199,998    $    799,928
                                                                ============    ============    ============
</TABLE>


                             See accompanying notes.

                                       F-6


<PAGE>   26


                                  CENSTOR CORP.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  June 30, 1996

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Organization

         Censtor Corp. (the Company) licenses technology related to recording
heads and storage media utilizing contact magnetic recording technology. The
Company licenses its technology to disk drive and component manufacturers. In
June 1995, the Company formed a new subsidiary, Contact Recording Technology,
Inc. (CRT), to develop and manufacture contact longitudinal data storage heads
for the computer disk drive industry. The Company received an approximate 89.5%
interest in the subsidiary in exchange for agreements to license certain
technology and to provide certain services to the subsidiary. The remaining
10.5% interest was sold to two outside investors for $2 million.

         In September 1995, a potential third outside investor/joint venture
partner was issued a warrant to purchase 250,000 shares of preferred stock of
CRT at an exercise price of $4.00 per share, exercisable through December 31,
1995. The investor exercised the warrant to purchase a total of 135,000 shares
for a total of $540,000 for an approximate equity interest of 2.7%.

         Consolidation

         The accompanying consolidated financial statements include the accounts
of the Company, CRT, and its wholly owned subsidiary, Censtor Media Corp.
(Media), an inactive research and development company.

         Cash and Cash Equivalents

         The Company considers all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents. The Company invests
excess cash in money market funds with a local bank. These investments are
generally available upon demand and are collateralized by the assets of the bank
and the financial institution.


                                      F-7


<PAGE>   27

                                  CENSTOR CORP.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


         Financial Instruments

         Carrying amounts and fair values of financial instruments are as
follows:


<TABLE>
<CAPTION>
                                                     June 30,
                               -----------------------------------------------------
                                          1996                       1997
                               --------------------------     ----------------------
                                Carrying         Fair         Carrying       Fair
                                 Amount          Value         Amount       Value
                               -----------     ----------     --------     --------
<S>                            <C>             <C>            <C>           <C>      
Cash and cash equivalents ...  $   199,998     $  199,998     $799,928     $799,928

Borrowings:
   Short-term borrowings ....  $ 1,000,000     $1,000,000     $      -     $      -
Promissory note to potential
   licensee .................  $ 3,000,000            N/A     $      -     $      -
Notes payable ...............  $ 3,450,000     $3,450,000     $      -     $      -
Subordinated debentures .....  $14,488,311            N/A     $      -     $      -
</TABLE>


The fair values for cash and cash equivalents approximate the amounts reported
at the balance sheet dates. Fair values for the short-term borrowings and notes
payable approximate their carrying amounts. Fair value for the promissory note
to the potential licensee is not provided as it was exchanged for a license on
August 12, 1996 (see Note 3). Fair value for the subordinated debentures is not
provided as approximately $12,488,300 plus accrued interest of $191,000 was
forgiven on September 30, 1996. The remaining $2 million was paid on July 18,
1996 (see Note 3).

         Revenue Recognition

         License fees are generally recognized over the estimated period in
which the Company expects to provide support in connection with the license.

         Royalties from licensees on sales of licensed products will be
recognized when products incorporating the Company's technology are shipped by
the licensees or when nonrefundable payments are received.


                                      F-8


<PAGE>   28

                                  CENSTOR CORP.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

         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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

         Net Income (Loss) Per Share

         Net income per share is computed based upon the weighted average number
of outstanding shares of the Company's common stock and convertible preferred
stock on an if-converted basis, and dilutive common stock equivalents from the
exercise of stock options and warrants (using the treasury stock method). Common
stock equivalents from stock options and warrants are excluded from the
computation if their effect is antidilutive. The Company's stock options and
warrants were antidilutive for the year ended June 30, 1997 and, accordingly,
were not included in the weighted average number of shares.

         Net loss per share is computed based on the weighted average number of
outstanding shares of the Company's common stock. The Company's common stock
equivalent shares from convertible preferred stock and from stock options and
warrants were antidilutive for each of the two years ended June 30, 1995 and
1996 and, accordingly, were not included in the weighted average number of
shares.

         In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share," (FAS
128) which the Company will be required to adopt during the quarter ending
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute income per share and to restate all prior
periods. The new requirements will include a calculation of "basic" net income
per share, which will exclude the dilutive effect of convertible preferred
stock. The calculation of basic net income per share for fiscal 1997 results in
net income per share of $0.40. The Company's common stock equivalent shares for
the years ended June 30, 1995 and 1996 were antidilutive, and accordingly, there
will be no impact on net loss per share. Diluted earnings per share are not
materially different from net income (loss) per share amounts reported for the
years ended June 30, 1995, 1996, and 1997.


                                      F-9


<PAGE>   29

                                  CENSTOR CORP.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

         Major Licensees

         Significant customers accounted for the following percentages of net
sales in fiscal 1995, 1996, and 1997:


<TABLE>
<CAPTION>
                                   YEARS ENDED JUNE 30,
                     -----------------------------------------------
                         1995             1996              1997
                     ------------     ------------      ------------
<S>                      <C>               <C>               <C>  
Customer A               10%                -                 -
Customer B               82%               64%                -
Customer C                -                34%                -
Customer D                -                 -                33%
Customer E                -                 -                67%
</TABLE>


2. THE READ-RITE TRANSACTION

         On March 29, 1996, the Company entered into an agreement (the
Agreement) with Read-Rite Corporation (Read-Rite), a large manufacturer of
components for disk drives, that provided for the transfer to Read-Rite of the
Company's research and development operations, including the hiring of
eighty-four of its employees and the sale of certain of the Company's physical
assets, rights, and obligations under contracts related thereto (the Read-Rite
Transaction). The Agreement was approved by the Company's shareholders on July
11, 1996, and the Read-Rite Transaction closed on July 18, 1996 (the Closing).

         Additionally, on the Closing of the Read-Rite Transaction, the Company
granted a nonexclusive irrevocable worldwide license to Read-Rite covering the
Company's intellectual property, including the Company's rights in patents,
technology, and software.

         Gross proceeds to the Company in connection with the Read-Rite
Transaction were approximately $9.0 million, subject to certain adjustments
under the Agreement, of which $6.5 million was received on the Closing, $250,000
was received in November 1996, $250,000 was received in January 1997, $250,000
was received in March 1997, and the balance of $1.8 million was received in
April 1997. The gross proceeds were reduced by approximately $1.9 million,
related to partial repayment of the outstanding balance on certain notes payable
to Read-Rite. The remaining balance on the notes payable of approximately
$900,000 was forgiven (see Note 3).


                                      F-10


<PAGE>   30

                                  CENSTOR CORP.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

         Of the total proceeds, $8.0 million was in consideration for the grant
of the license and $1.0 million for the sale of assets and transfer of the
assembled workforce. The Company recognized a gain of approximately $700,000 in
connection with the sale of assets and the transfer of the assembled workforce.

         Of the net proceeds received at the Closing of the Read-Rite
Transaction, the Company used approximately $3.6 million to pay down obligations
that were due as of the Closing, including a $2.0 million payment to partially
repay outstanding accrued interest on certain subordinated debentures (see Note
3), $1.0 million to repay the Company's line of credit, and $598,000, including
accrued interest, to partially repay certain convertible promissory notes (see
Note 3) from investors. The remainder of the proceeds will be used for general
working capital purposes with respect to the Company's ongoing licensing
operations.

         The Company has granted to Read-Rite a security interest in its
intellectual property to secure certain obligations and warranties with respect
to the intellectual property for a period of six years following the effective
date of the Agreement. After the third year following the effective date of the
Agreement, the Company may terminate the security interest by depositing $4.0
million in an escrow account. Such amount is reduced by $1.0 million in each of
the two succeeding years, and the escrow terminates the following year.
Accordingly, the Company is recognizing $4.0 million of such license fee ratably
over the first three years following the Closing of the Read-Rite Transaction,
which approximates the time period during which the Company expects to be
incurring costs to maintain its patents in support of the Company's license
agreement with Read-Rite. Subsequently, amounts will be recognized as the escrow
fund described above is reduced.

3. DEBT

         Obligations Under Capital Leases

         On July 18, 1996, in connection with the sale of assets to Read-Rite,
all obligations under capital leases were transferred to Read-Rite.


                                      F-11


<PAGE>   31

                                  CENSTOR CORP.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

         Short-Term Borrowings

         In January 1996, several of the existing investors of Censtor loaned
the Company $1.0 million in exchange for promissory notes convertible into
shares of the next security issued by the Company. The Company repaid
approximately $598,000, including accrued interest of $51,000, out of the
proceeds from the Closing of the Read-Rite Transaction, and the due date of the
balance of such notes was extended until nine months after the Closing. The
Company repaid the remaining principal of $453,000 and accrued interest of
$37,000 on April 18, 1997.

         Between February and July 1996, the Company obtained bridge loans
totaling $2.8 million from Read-Rite as part of negotiations in connection with
the Read-Rite Transaction. These bridge loans were used to pay the operating
expenses of the Company until the Closing. Accordingly, on the Closing, the
Company received a net amount of $4.6 million from Read-Rite out of the $6.5
million first installment payable by Read-Rite in connection with the Read-Rite
Transaction.

         Subordinated Debentures

         The Company's subordinated debentures at June 30 are summarized as
follows:


<TABLE>
<CAPTION>
                                                                   1996                     1997
                                                               -----------             --------------
<S>                                                            <C>                     <C>           
Convertible subordinated debentures,
   due August 24, 1997, convertible at $26.55 of
   principal and accrued interest per share ....               $ 5,000,000             $            -
Accrued interest at 6% per year ................                 2,137,846                          -
Subordinated debentures, due January 17, 1998 ..                 5,000,000                          -
Accrued interest at 6% per year ................                 2,350,465                          -
                                                               -----------             --------------
                                                               $14,488,311             $            -
                                                               ===========             ==============
</TABLE>


                                      F-12


<PAGE>   32

                                  CENSTOR CORP.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

         On February 22, 1996, the subordinated debentures issued by the Company
were modified such that the Company was obligated to pay $2,000,000 against the
outstanding accrued interest on such debentures by July 31, 1996. On July 18,
1996, upon closing the Read-Rite Transaction, this amount was paid. Furthermore
the debenture holder agreed if certain financial conditions were not met, the
remaining accrued interest and principal balance on September 30, 1996 will be
forgiven in return for 5% of the royalties the Company receives from its present
and future licenses through the year 2001. The Company did not meet the
financial conditions, and consequently, the outstanding interest and principal
of $12,700,000 was forgiven. The future cash payments related to the royalty
payments now owed to such former debenture holder are currently indeterminate
and may exceed the carrying value of the debentures prior to the debt being
forgiven. Therefore, the Company has deferred recognition of any gain as a
result of the debt being forgiven until such time as the future cash payments
become estimable.

4. COMMITMENTS

         In connection with the Agreement, the Company transferred its principal
facility to Read-Rite who assumed the remaining lease payments. At that time,
the Company entered into a lease that expires in April 1999 for a smaller office
facility. A schedule of future minimum lease payments as of June 30, 1997 under
the new lease agreement is as follows:


<TABLE>
<C>                                        <C>    
1998 ...................................   $53,712
1999 ...................................    44,760
                                           -------
Total minimum lease payments............   $98,472
                                           =======
</TABLE>


         Rental expense for 1995, 1996, and 1997 was approximately $709,000,
$468,000, and $53,000, respectively.


                                      F-13


<PAGE>   33


                                  CENSTOR CORP.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

5. COMMON AND CONVERTIBLE PREFERRED STOCK

         Convertible Preferred Stock

         The preferred stock is divided into Series A and B preferred stock as
follows:


<TABLE>
<CAPTION>
                                                                  SHARES
                                                    ---------------------------------
                                                                         ISSUED AND
                                                       AUTHORIZED        OUTSTANDING          TOTAL
                                                    ---------------      ------------       ------------

        <S>                                             <C>               <C>              <C>        
         Series A.................................        7,500,000         6,617,299        $14,055,143
         Series B.................................       14,000,000         8,370,508         18,453,888
         Undesignated.............................        3,500,000                 -                  -
                                                    ---------------       -----------       ------------
                                                         25,000,000        14,987,807        $32,509,031
                                                    ===============       ===========       ============
</TABLE>

         The holders of Series A and B preferred stock are entitled to
noncumulative dividends, as declared by the Board of Directors out of legally
available funds, at a rate of $0.2124 and $0.25 per share, per annum,
respectively. After payment of the dividend preferences and payment to the
holders of common stock of noncumulative dividends, as declared by the Board of
Directors out of legally available funds, at a rate of $0.10 per share, per
annum, the preferred stock shall participate, as if converted on a
share-for-share basis with common stock, as to any dividends paid by the
Company. Such dividends are noncumulative.

         Series A and B preferred stock are convertible at any time after the
date of issuance into common stock on a one-for-one basis, subject to adjustment
for certain subsequent dilutive stock issuances. In addition, the Series A and B
preferred stock will automatically convert into common stock upon the closing of
an underwritten public offering of the Company's common stock at not less than
$4.00 per share, which results in gross proceeds of not less than $10,000,000,
or in the event of an affirmative vote of the holders of at least 51% of Series
A and B preferred stock.


                                      F-14


<PAGE>   34

                                  CENSTOR CORP.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

         Upon liquidation, the Series B preferred shareholders are entitled to
receive an amount equal to $2.50 per share plus the aggregate amount of any
declared but unpaid dividends, after which the Series A preferred shareholders
are entitled to receive an amount equal to $2.124 per share plus the aggregate
amount of any declared but unpaid dividends. After the distributions above have
been made, remaining amounts shall be distributed among the holders of Series A
and B preferred stock and common stock pro rata, based on the number of shares
of common stock held by each shareholder, assuming conversion of all preferred
stock. Preferred shareholders participate in the voting rights of the Company as
if their shares were converted to common stock.

         Warrants to Purchase Preferred Stock

         At June 30, 1997, certain of the Company's lessors held warrants to
purchase 301,318 shares of the Company's Series B preferred stock, exercisable
at $2.50 per share, through the later of September 2003 or five years after the
closing of a public offering of the Company's common stock.

         At June 30, 1997, the sales agent, in connection with the sale of the
Series B preferred stock, held warrants to purchase 687,000 shares of Series B
preferred stock, exercisable at $2.50 per share and expiring on March 23, 1998.
The warrants are convertible into warrants to purchase shares of common stock.

         At June 30, 1997, the Company's primary bank held warrants to purchase
approximately 110,000 shares of the Company's preferred stock at the lower of
$2.50 or the share price of the next security issued by the Company, exercisable
from November 2000 through February 2001.


                                      F-15


<PAGE>   35

                                  CENSTOR CORP.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

         Warrants to Purchase Common Stock

         At June 30, 1997, one of the Company's lessors held warrants to
purchase 80,000 shares of the Company's common stock, exercisable at $2.50 per
share through the later of January 2005 or five years after the closing of a
public offering of the Company's common stock.

         1990 Stock Option Plan

         The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB Opinion No. 25) and
related interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FAS 123), requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB Opinion No. 25,
because the exercise price of the Company employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.

         Outstanding options are granted at fair market value and generally
expire ten years after the date of grant. The exercise provisions of the option
grants are determined by the Board of Directors and are generally exercisable
over a 48-month period beginning six months after issuance.

         On October 3, 1996, the Company exchanged substantially all of its
outstanding options for new options to purchase common stock at $0.046 per
share, the fair market value on such date as determined by the Company's Board
of Directors and an independent consultant.

         The effect of applying FAS 123 to the Company's stock option grants
would not result in net loss amounts that are materially different from
historical amounts reported. Therefore, pro forma information is not separately
presented herein. Future pro forma net income results may be materially
different from actual amounts reported.


                                      F-16


<PAGE>   36

                                  CENSTOR CORP.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

         The following table summarizes option activity for the plan:


<TABLE>
<CAPTION>
                              SHARES                   OPTIONS OUTSTANDING
                                            -------------------------------------------
                             AVAILABLE                     OPTION PRICE      AGGREGATE
                             FOR GRANT       SHARES         PER SHARE          VALUE
                            ----------      ---------    ----------------   -----------

<S>                         <C>            <C>          <C>                 <C>
Balance at June 30, 1994       180,058      1,492,957    $0.2921 - $0.40    $   566,021
   Authorized ..........     1,500,000            -           $  -                  -
   Granted .............    (1,475,340)     1,475,340         $0.40             590,136
   Exercised ...........           -          (35,055)   $0.2921 - $0.40        (11,634)
   Canceled ............       333,105       (333,105)   $0.2921 - $1.062      (123,758)
                            ----------      ---------                       -----------
Balance at June 30, 1995       537,823      2,600,137    $0.2921 - $0.40      1,020,765
   Granted .............      (422,500)       422,500         $0.40             169,000
   Exercised ...........           -           (2,875)   $0.2921 - $0.40         (1,096)
   Canceled ............     1,546,354     (1,546,354)   $0.2921 - $0.40       (600,952)
                            ----------      ---------                       -----------
Balance at June 30, 1996     1,661,677      1,473,408    $0.2921 - $0.40        587,717
</TABLE>


<TABLE>
<CAPTION>
                                                             WEIGHTED
                                                          AVERAGE PRICE
                                                          -------------
<S>                         <C>            <C>               <C>               <C>
   Granted .............   (3,102,549)      3,102,549        $0.046              76,437
   Canceled ............    1,639,778      (1,639,778)       $0.046              (9,150)
                            ---------       ---------                          --------
Balance at June 30, 1997      198,906       2,936,179        $0.046            $655,004
                            =========       =========                          ========
</TABLE>

         There were 920,991, 769,398, and 1,297,367 options exercisable at June
30, 1995, 1996, and 1997, respectively. The average remaining contractual life
of options outstanding is 7.6 years.

         Stock Reserved for Future Issuance

         Shares of preferred and common stock reserved for future issuance are
1,098,318 shares and 19,301,210 shares, respectively, at June 30, 1997.


                                      F-17


<PAGE>   37

                                  CENSTOR CORP.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

6. INCOME TAXES

         Income tax expense for fiscal 1995 and 1996 consists of foreign
withholding taxes on license revenue and for fiscal 1997 consists of a
provision for alternative minimum taxes.

         Significant components of the Company's deferred tax assets for federal
and state income taxes are as follows:


<TABLE>
<CAPTION>
                                                 JUNE 30,
                                      ----------------------------
                                          1996            1997
                                      ------------    ------------
<S>                                   <C>             <C>         
Deferred tax assets:
   Net operating loss carryforwards   $ 35,203,000    $ 32,843,000
   Tax credit carryforwards .......      4,221,000       4,425,000
   Other ..........................      2,115,000       3,050,000
                                      ------------    ------------
Total deferred tax assets .........     41,539,000      40,318,000
Valuation allowance ...............    (41,539,000)    (40,318,000)
                                      ------------    ------------
Net deferred tax assets ...........   $        -      $        -
                                      ============    ============
</TABLE>

         The change in the valuation allowance was a net increase of $1,461,000
for fiscal 1996 and a net decrease of $1,221,000 for fiscal 1997. Income tax
expense reconciles to loss before income tax expense multiplied by the statutory
rate as follows:


<TABLE>
<CAPTION>
                                       YEARS ENDED JUNE 30,
                                1995          1996            1997
                            -----------    -----------    -----------
<S>                         <C>            <C>            <C>        
Tax at statutory rate ...   $(3,991,000)   $(2,885,000)   $ 1,282,355
Unbenefited tax losses ..     3,991,000      2,885,000     (1,282,355)
Foreign withholding taxes
  under license agreement       290,350        319,450         68,333
                            -----------    -----------    -----------
Income tax expense ......   $   290,350    $   319,450    $    68,333
                            ===========    ===========    ===========
</TABLE>


                                      F-18


<PAGE>   38

                                  CENSTOR CORP.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

         As of June 30, 1997, the Company had federal net operating loss and
credit carryforwards of approximately $90 million and $3.4 million,
respectively, expiring in various years beginning in 1998 through 2011. The
Company also has state net operating loss and credit carryforwards of
approximately $34 million and $1.4 million, respectively. The state operating
loss carryforwards will expire in various years beginning in 1998 through 2002,
while the credit carryforwards will expire in various years beginning in 2003
through 2011.

         Tax law provides that the use of net operating loss and credit
carryforwards are limited if there is a substantial change in the ownership of
the Company. Due to prior years' equity transactions, such a change has
occurred. Approximately $75 million of federal net operating loss and
substantially all credit carryforwards are subject to an annual limitation. The
annual limitation is approximately $1.2 million per year. The balance of $15
million of federal net operating loss carryforwards can be used without
limitation. Similar limitations apply to state carryforwards.

7. SUPPLEMENTAL CASH FLOW INFORMATION

         Payments for interest costs and significant noncash investing and
financing activities, not disclosed elsewhere, are as follows:


<TABLE>
<CAPTION>
                                                       YEARS ENDED JUNE 30,
                                                 1995         1996          1997
                                              ----------   ----------   ------------
<S>                                           <C>          <C>          <C>         
Interest paid .............................   $  282,484   $   67,958   $  2,088,000
Equipment purchased under capital leases      $  687,588   $   24,851   $        -
Conversion of note payable to license .....   $        -   $       -    $  3,000,000
Assignment of leases in connection with the
   Agreement ..............................   $        -   $       -    $    584,018
Cancelation of note receivable ............   $  103,500   $       -    $    266,933
</TABLE>


                                      F-19


<PAGE>   39

                                  CENSTOR CORP.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

8. SUBSEQUENT EVENT

         The employment of all but one of the Company's current employees was
terminated effective August 31, 1997. Immediately following the expiration of
all options outstanding pursuant to the 1990 Stock Option Plan, the plan shall
terminate.

         On September 25, 1997, the Company entered into a licensing arrangement
with TDK to license its technology. The Company received a nonrefundable payment
of $1.5 million on September 26, 1997. This payment is subject to a 10%
withholding tax by the Japanese authorities.



                                      F-20
<PAGE>   40

<TABLE>
<CAPTION>
                                EXHIBIT INDEX
                                -------------

                Exhibit
                Number        Description
                --------      -----------
                <S>           <C>
                3.1(5)        Restated Articles of Incorporation of
                              Registrant.

                3.2(1)        Amended and Restated Bylaws of Registrant.

                10.1(1)(4)    1990 Stock Plan and Form of Option Agreement.

                10.2(1)       Form of Indemnification Agreement entered into
                              between the Company and each of its directors and
                              officers.

                10.3(1)       Lease Agreement, dated November 28, 1983, between
                              the Company and The Sobrato Group, together with
                              amendments thereto.
</TABLE>




                                      -16-
<PAGE>   41
<TABLE>
<CAPTION>
                Exhibit
                Number        Description
                --------      -----------
                <S>           <C>
                10.4(1)(2)    License Agreement, dated September 23, 1991,
                              between the Company and Maxtor Corporation, as
                              amended.

                10.5(1)(2)    License Agreement, dated February 28, 1991,
                              between the Company and Fujitsu Limited, as
                              amended.

                10.6(1)(2)    Manufacturing License Agreement, dated August 26,
                              1988, between the Company and Denki Kagaku Kogyo
                              Kabushiki Kaisha, as amended.

                10.7(1)(2)    License Agreement, dated June 1, 1993, between the
                              Company and International Business Machines
                              Corporation.

                10.8(1)       Denka Promissory Note.

                10.9(3)       License Agreement, dated December 19, 1994,
                              between Hitachi, Ltd. and the Company. 

                10.10(5)      License Agreement, dated June 19, 1995, between
                              Contact Recording Technology, Inc. and the
                              Company.

                10.11(2)      License Agreement, dated August 7, 1995, between
                              NEC Corporation and the Company.

                10.12(6)      Agreement for Purchase and Sale of Assets by and
                              between Read-Rite Corporation and the Company.

                10.13(2)      License Agreement, dated August 12, 1996, between
                              Western Digital and the Company.

                10.14(7)      Assignment of Lease and Consent to Assignment,
                              dated July 2, 1996, between The Sobrato Group,
                              Censtor Corp. and Read-Rite Corp.

                10.15(7)      Fifth Amendment to Manufacturing License
                              Agreement, dated February 22, 1996, with Denki
                              Kagaku Kogyo Kabushiki Kaisha.

                10.16(7)      Amendment to Terms of Debentures, dated February
                              22, 1996, with Denki Kagaku Kogyo Kabushiki
                              Kaisha.

                10.17(7)      License Agreement, dated July 18, 1996, between
                              Read-Rite Corporation and the Company.

                10.18         Agreement between I.P. Managers, Inc. and the
                              Company dated July 31, 1997.

</TABLE>




                                      -17-
<PAGE>   42
<TABLE>
<CAPTION>
                Exhibit
                Number        Description
                --------      -----------
                <S>           <C>
                10.19         Incentive Compensation Agreement between the
                              Company and Sabine Austin, dated July 29, 1997.

                24            Power of Attorney (see signature page)

                27            Financial Data Schedule   
</TABLE>
-------------------------

(1)  Incorporated by reference to exhibits filed with Registrant's Registration
     Statement on Form 10 which became effective December 25, 1994.

(2)  Confidential Treatment requested for portions of Exhibit.

(3)  Incorporated by reference to exhibits filed with the Registrant's Quarterly
     Report on Form 10-Q for the quarter ended December 31, 1994.

(4)  Document indicated is a compensatory plan.

(5)  Incorporated by reference to exhibits filed with Registrant's Annual report
     on Form 10-K for the year ended June 30, 1995.

(6)  Incorporated by reference to exhibit filed with Registrant's Proxy
     Statement relating to the Registrant's 1996 Annual Meeting of Shareholders.

(7)  Incorporated by reference to exhibits filed with Registrant's Annual report
     on Form 10-K for the year ended June 30, 1996.





                                      -18-