<PAGE>
 
-------------------------------------------------------------------------------
                    U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  FORM 10-KSB

(Mark One)
[X]    ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE  SECURITIES
       EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

[ ]    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934

                         COMMISSION FILE NUMBER 0-22514
                             PHOTONICS CORPORATION
             (Exact name of registrant as specified in its charter)

        California                                   77-0102343
-------------------------------------------------------------------------------
(State or other jurisdiction of       (I.R.S. Employer Identification Number)
incorporation or organization)


                            1515 CENTRE POINTE DRIVE
                               MILPITAS, CA 95035
                    (Address of principal executive offices)

              Registrant's telephone number, including area code:
                                 (408) 942-4000

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

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

                         Common Stock, $0.001 par value

Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES [X]        NO [  ]

Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is met contained in this form, and no disclosure will be
contained or the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this form 10-KSB      [X]

Issuer's Revenues for fiscal year 1997:  $5,622,000

The aggregate market value of the voting stock held by non-affiliates computed
by reference to the average bid and asked prices of the Common Stock on 12/31/97
as reported on the Over The Counter Bulletin Board, was approximately $862,621.
Shares of Common Stock held by each officer and director and each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed affiliates.

As of December 31, 1997, the Registrant had outstanding 4,346,406 shares of
Common Stock.
________________________________________________________________________________
<PAGE>
 
INDEX


<TABLE>
<CAPTION>
                                                                                    PAGE NUMBER
<S>                                                                                 <C>
Part I
     Item 1  Business                                                                   2
             General                                                                    2
             Products and the Market                                                    2
             The Competition                                                            3
             Intellectual Property                                                      4
             Manufacturing                                                              4
             Patents and Licenses                                                       4
             Significant Customer                                                       4
             Backlog                                                                    5
             Employees                                                                  5
 
     Item 2  Properties                                                                 5
     Item 3  Legal Proceedings                                                          5
     Item 4  Submission of Matters to a Vote of Security Holders                        5
 
Part II
     Item 5  Market for Common Equity                                                   6
     Item 6  Management's Discussion and Analysis                                       6
             Liquidity and Capital Resources                                            7
             Other Matters                                                              8
     Item 7  Financial Statements                                                       8
     Item 8  Changes in and Disagreements with Accountants on Accounting
             And Financial Disclosures                                                  8
 
Part III
     Item 9  Director, Executive officers, Promoters and Control Person;                8
             Compliance with Section 16a of the Exchange Act
             Indemnification Agreement                                                  9
     Item 10 Executive Compensation                                                     10
             Board of Director's Report on Repricing of Options/SARs                    10
     Item 11 Security Ownership of Certain Beneficial Owners and Management             11
     Item 12 Certain Relationships and Related Transactions                             13
     Item 13 Exhibits and Reports on Form 8K                                            14
             Signature Page                                                             16
             Quarter 4 Income Statement Comparison                                      17

SECTION F

Independent Auditors Report                                     F-2
Consolidated Financial Statements                               F-3
Notes to Consolidated Financial Statements                      F-7
</TABLE> 

                                       1
<PAGE>
 
                             PHOTONICS CORPORATION
                                      dba
                              DTC DATA TECHNOLOGY
                                  FORM 10-KSB


INTRODUCTION

This report contains forward-looking statements and the Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of numerous factors, including those set forth below and
elsewhere in this report.  The Industry in which the Company competes is
characterized by extreme rapid changes in technology and frequent new product
introductions.  The Company believes that its long-term growth will depend
largely on its ability to continue to enhance existing products and to introduce
new products and features that meet the continually changing requirement of
customers.  While the Company has invested in new products and processes and
feels confident that it can keep abreast of current technology trends, there can
be no assurance that it can continue to introduce new products and features on a
timely basis or that certain of its products and processes will not be rendered
noncompetitive or obsolete by its competitors.

                                     PART I

ITEM 1.    BUSINESS

GENERAL

Photonics was incorporated in 1985 to design, develop and market wireless
infrared local area network products (IR-LAN) which would offer unique and cost-
effective connectivity solution based on diffuse infrared technology.

DTC Data Technology Corporation ("DTC) was founded in 1979 to design, develop
and market intelligent storage controllers and chop sets used primarily in
connection with IBM compatible personal computers.

On June 30, 1995 Photonics suspended operations as sales continued to be
significantly below the Company's Plan.  On August 31, 1995 Photonics entered
into an Asset Purchase Agreement ("the Agreement") with DTC Data Technology
Corporation, which was effective March 5, 1996.  In the Agreement, Photonics
acquired all the assets and certain liabilities of DTC in exchange for the
issuance to DTC of shares and rights to shares of common stock representing
77.5% of Photonics outstanding stock.

DTC stockholders own a majority of the shares of the combined entity, and the
management and control of the merged Company comes from DTC.  The transaction
was accounted for as though DTC was the acquirer.  Accordingly, the assets and
liabilities of Photonics Corporation were recorded at fair value.  The
historical results of operations of Photonics Corporation dba DTC Data
Technology, as reported herein, are those of DTC.

As DTC Data Technology has the established name recognition, and established
sales channels, it is the intent of the Company to eventually rename the company
DTC Data Technology Corporation.  In June of 1996 the Company filed a fictitious
name statement with the State of California and conducts its business as DTC
Data Technology.  The history reported herein belongs to DTC Data Technology.
The legal entity is Photonics Corporation dba DTC Data Technology.  For brevity
sake the Company is herein after referred to as DTC or the Company.

PRODUCTS AND THE MARKET

The intent, at the time of the Photonics/DTC acquisition, was to continue to
market the Photonics IR-LAN products and to find a strategic partner to help in
the development of the next generation of the IR-LAN product.

                                       2
<PAGE>
 
                             PHOTONICS CORPORATION
                                      dba
                              DTC DATA TECHNOLOGY
                                  FORM 10-KSB


Marketing Photonics products through DTC's sales channels failed.  However a
license agreement was signed during the first quarter of 1997 with Moldat
Wireless Technologies Ltd. ("Moldat") of Lod, Israel as an exclusive (except
existing agreements for Apple related products) licensee.  Under this agreement
the Company licensed its technology, products, trademarks and service marks
relating to its infrared Local Area Network business for royalty payments.
Moldat, (an infrared LAN company) will use Photonics 1 Mb technology and
products to augment its 10Mb business.  The Company continues to focus on its
IDE and Small Computer Systems Interface ("SCSI") product controllers and host
adapters. DTC's storage controllers are sophisticated electronic devices which
control the flow of data between a microcomputer's central processing unit and
peripheral storage devices such as floppy and hard disks, and increasingly
Compact Disk-Read Only Memory ("CD-ROMs).

DTC, in the past, had dominated the Integrated Device Electronics ("IDE") and
Enhanced IDE ("EIDE") market. Today, the transition from add-on IDE cards, to
on-board built-in IDE function is complete.  Now, the IDE controller cards are
used by Original Equipment Manufactures ("OEM") for inclusion with IDE CD-ROM,
Tape and other IDE peripheral devices.  System integrators and Value Added
Resellers ("VAR") use IDE input/output ("I/O") controller cards for maintaining
and upgrading existing systems to EIDE disk interface, high speed serial port,
Enhanced Parallel Port ("EPP") and Enhanced Capability Parallel Port ("ECP") for
high performance modems, printers, acanners and other new peripherals.  Sales
have also changed from mainly OEM to VARs and system integrators through
distribution and retailers.

The Company has broadened its product offerings in this IDE I/O market segment
and plans to continue to do.  ISA-IDE and VL-IDE I/O still represent a portion
of the Company's sales.  In late 1996 the Company introduced the ISA BUS EIDE
Ultima family of controller products.  In 1997 the Company introudced its first
Adaptec compatible SCSI products which have been well received in the market
place.  The Company also introduced several new serial, parallel port I/O
products for the upgrade market.

The Company had previously announced its intention to re-enter the SCSI market
and has successfully accomplished that goal during 1997.  The Company intends to
continue its introduct of new models during 1998 for  not only the SCSI market
but also the ECP and I/O markets.

THE COMPETITION

Most vendors of IDE controller have dropped out of the business segment.  DTC
plans to remain in that market place as long as demand remains viable.  Promise
and SIIG remain in the upgrade and I/O add-on markets and compete with the
Company's Ultima and I/O family of products.  DTC has broader sales channels,
stronger name recognition along with better access to low cost-manufacturing
when compared with either of these competitors.

In the SCSI market, the Company plans to offer a complete family of Adaptec
compatible SCSI products that should offer a superior alternative to Adaptec and
other competitors.  DTC currently markets a family of non-Adaptec compatible
SCSI products and a family of low-end Adaptec compatible SCSI products.  The
Company plans to enlarge its SCSI family substantially during 1998.

Other competitors, such as Promise, SIIG and Initio for example, market
purportedly technically superior but non-Adaptec compatible products at a lower
price than Adaptec without achieving significant success.  DTC believes it will
enjoy a larger measure of success with its Adaptec compatible SCSI line.  The
introduction of the low end Adaptec compatible SCSI line has already enjoyed
considerable success.

                                       3
<PAGE>
 
                             PHOTONICS CORPORATION
                                      dba
                              DTC DATA TECHNOLOGY
                                  FORM 10-KSB


The markets with which DTC operates are characterized by intense competition,
rapid technological and product changes, changing market requirements,
dependence upon highly skilled personnel, and significant expenditures for
product and marketing development.  DTC has a number of present and potential
competitors, many of whom have substantially greater financial, marketing and
other resources than DTC.  If DTC's competitors introduce new products which
offer improved performance and/or lower prices, DTC's revenue and income could
be adversely affected.

DTC believes that the principal competitive factors in the storage controller
market are compatibility, brand recognition, performance, sales support and
competitive pricing.  DTC believes it meets these important criteria.

INTELLECTUAL PROPERTY

Software and proprietary ASIC designs are important ingredients for success in
the controller market.  DTC has a large library of copyrighted IDE and SCSI
software drivers and utilities for various operating systems including DOS,
OS/2, UNIX, Novell, Windows 3.1 and Windows 95.

DTC, having designed several SCSI and IDE ASICs, acquired the design right to
the ASIC used in its low end DTC50c18 ISA-SCSI, and is in the process of
designing a PCI-SCSI ASIC.

The Company has studied the intellectual property issues and performed patent
searches related to the IDE, I/O and SCSI products which it is marketing, and
intends to market, and is unaware of any patents or intellectual property owned
by any other party which would impede the development of sale of any of its
current or planned IDE, I/O, ECP or SESI products.

MANUFACTURERS

Substantially all of DTC's printed circuit boards are manufactured by companies
located in the Far East.  At the present time approximately 80% of the Company's
storage controller requirements are produced in China.

In order to achieve early market introductions, the Company uses eithier ASICs
developed or co-developed by DTC design engineers, subcontracted ASIC designers,
and ASIC vendors' engineers or standard ICs marketed by semiconductor vendors.

PATENTS AND LICENSES

The Company holds various patents and intends to apply for additional patents
when it believes it is advantageous to do so.  DTC believes, however, that much
of its important technology resides in its proprietary software and trade
secrets.

Certain technologies have in the past been licensed to DTC from third parties.
Those licenses are gnerally perpetual, worldwide and, DTC believes, on
commercially reasonable terms.

Similarly, DTC periodically licenses its technology for which it receives
royalities.  Total royalty income for the year ending December 31, 1997 was
$188,736.80.

SIGNIFICANT CUSTOMER

During the fiscal year ended December 31, 1996 Ingram-Micro, a distributor,
accounted for 13.1% of net revenues.  During the fiscal year ended December 31,
1997 Ingram-Micro accounted for 22% of net sales with Comp USA, a retailer,
accouting for 15% of net sales.  (See Notes to Financial Statements, note 8)

                                       4
<PAGE>
 
                             PHOTONICS CORPORATION
                                      dba
                              DTC DATA TECHNOLOGY
                                  FORM 10-KSB


BACKLOG

DTC does not believe that backlog is a meaningful indicator of future sales.  It
is common industry proctice for purchasers of DTC's products to issue purchase
ordeers on a month to month basis rather than contract for delivery of products
over an extended period of time.  DTC's sales are primarily made pursuant to
purchase orders and contracts which are consistent with common industry
proctice, and may be canceled or modified by customers to provide for delivery
at a later date with little or no penalties.

EMPLOYEES

As of December 31, 1997 DTC employed 29 individuals, 22 who were on a full-time
basis and 7 who were considered part time or temporary employees. Twenty-Eight
(28) of these employees were located in the United States.  During 1997 DTC
ceased using temporary agencies to augment its work force and concentrated on
direct hiring of this segment of its work force to inspire consistency and
loyalty.  None of DTC's employees are represented by a labor union and DTC
considers its employee relations to be good.

ITEM 2.  PROPERTIES

The Company's principal executive and administrative office is located in a
23,000 square foot facility in Milpitas, California.  The current monthly
rental, including common area maintenance, is approximately $18,000.  A facility
in San Jose, California previously vacated by Photonics was under sub-lease
until mid-1997.  The Photonics lease of the facility then expired and there is
no further connection with DTC.

ITEM 3.  LEGAL PROCEEDINGS

In January 1994 Ms. Phyllis Azah, a former employee of DTC, filed a complaint in
the County of Santa Clara Superior Court, California alleging harassment and
discrimination by DTC and certain of its employees and claiming damages in the
amount of $100 million.  This suit was settled out of court in March 1997 for
$13,500.  Quarterly installments were paid to Ms. Azah in April, June and
September of 1997.  There is no further legal action pending,

The Company believes it is diligent in protecting it's employees, and fair in
its treatment of them, but cannot guarantee that such a claim will not be made
in the future.

From time-to-time DTC is involved in routine litigation as part of is normal
course of business.  Management believes the Company carries adequate product
liability insurance and these matters can be resolved without material adverse
effect on DTC's overall financial position, results of operations and cash
flows.

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

As was reported in the Company's form 10-KSB filed for the Quarter ending June
30, 1997, an annual Shareholder's meeting was held on June 2, 1997 at the
Corporate Office located at 1515 Centre Pointe Dr., Milpitas, California 95035.

No matters were submitted during the fourth quarter of 1997 to a vote of
security holders through the solicitation of proxies or otherwise.

                                       5
<PAGE>
 
                             PHOTONICS CORPORATION
                                      dba
                              DTC DATA TECHNOLOGY
                                  FORM 10-KSB



                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY

The Company's Common Stock trades on the Over The Counter Bulletin Board
("OTCBB") under the symbol: PHOX for the original Photonics Corporation and
under the symbol DTEC for the pre-merger DTC Data Technology Corporation.

<TABLE>
<CAPTION>

PHOTONICS                   High       Low          DTEC                            High         Low
<S>                          <C>       <C>          <C>                             <C>         <C> 
FISCAL YR. END 12/31/95                             FISCAL YR. END 2/28/95

 First Quarter               2 3/8      5/8                                           .16         .02
 Second Quarter              1 1/8      1/4                                           .20         .03
 Third Quarter                 1/2     5/16                                           .25         .11
 Fourth Quarter                1/4      1/8                                           .50         .11
 
AFTER 3/6/96 MERGER                                 FISCAL YR. END 2/29/96
Second Quarter   (6/30/96)   1 1/4      1/2         First Qtr   (5/30.95)             .50         .19
Third Quarter    (9/3096)    1          1/4         Second Qtr   (8/31/95)            .38         .13
Fourth Quarter   (12/31/95)    7/8      3/8         Third Qtr    (11/30/95)           .19         .16
                                                    Fourth Qtr.  (2/29/96)            .218        .062
 
FISCAL YR. END 12/31/97                             FISCAL YR. END 12/31/97
First Quarter
Second Quarter               .4375      .25                                           .12         .05
Third Quarter                .4375      .125                                          .09         .027
Fourth Quarter               .375       .0625                                         .0547       .02
</TABLE>

Neither Photonics Corporation nor DTC Data Technology has historically paid cash
dividends.  The Company currently intends to retain all future earnings for use
in its business and does not anticipate paying any cash dividends in the
foreseeable future

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS

The statements made concerning expected company performance and product
commercialization are foward-looking statements and as such are made pursuant to
the Safe Harbor Provisions of the Private Securities Litigation Reform Act of
1995.  The Company's 1996 10-KSB contains detailed risk factors that may
contribute to the actual results for 1997 and beyond which could materially
differ from forward-looking statements made by the Company.

The Company's revenues in fiscal 1997 increased to $5.622 million or 8% over
1996 revenues. While the Company did not meet its revenue projection for fiscal
1997 it did meet its goal of returning to profitability in its third and fourth
quarters. The 4th quarter of 1997 showed an increase in revenues of 31% with a
decrease in operating expense of 29%. This resulted in an operating profit of
$71 thousand in quarter 4 of 1997 as opposed to an operating loss of $890
thousand in the same period of fiscal 1996.

The gross margin, (revenue after deduction of cost of revenue) showed
significant improvement climbing from 21% at year-end 1996 to 37% at year-end
1997.  Due to this increase in gross margin and by reducing operating expense
4%, the Company was able to reduce its operating loss by 60%.  The Company
considers the 4th Quarter to be its significant turn-around quarter.  Revenues
increased 31% over the 4th Quarter of 1996 going from $1.3 million to $1.7
million.

                                       6
<PAGE>
 
                             PHOTONICS CORPORATION
                                      dba
                              DTC DATA TECHNOLOGY
                                  FORM 10-KSB


The Company's net loss (before foreign taxes) for fiscal 1997 was $399 thousand
as opposed to $2.024 million for fiscal 1996.

The Company instituted many cost cutting measures during 1996 and continued its
cost containment policy during 1997.  The Company had projected `no appreciable
increase' in operating expense for 1997 and was therefore pleased with a 4%
decease in operating expense.  Certainly the Company's ability to improve its
gross margin translated into bottom line profitability.

There was no gain or loss on disposal of assets or divestiture of business units
for the fiscal year ending December 31, 1997.

The Company believes that its re-entry into the SCSI market along with its
introduction of several new products led to its return to profitability during
the second half of 1997.  The Company took what it considered a sharper focus on
the needs of the market place and increased its business at the retail level by
approximately 55%.  The Company's plan for 1998 is to continue its introduction
of new products, to focus on an increase in market share in the OEM and VAR
segment of the industry, and to focus some sales efforts in the European and
Asian market places.

LIQUIDITY AND CAPITAL RESOURCES

There was a significant reduction in cash and cash equivalents at year-end 1997
compared to year-end 1996.  This reduction in cash was primarily due to uses of
cash to reduce liabilities.  The Company operated since March of 1997 without
any lines of credit from banks or asset based lenders.  The Company's source of
working capital during the year has been its accounts receivable and the sale of
556,915 shares of Series A Convertible Preferred Stock at $1.00 per share.

The Company was able to reduce current liabilities by $1.4 million, a reduction
of 31%.  As a part of the debt reduction process the company was able to convert
$630 thousand of debt to equity in the form of its Series A Convertible
Preferred Stock at $1.00 per share.

At December 31, 1997 there were 2,106,000 share of Series A Convertible
Preferred Stock issued.

The Company's Series A Convertible Preferred Stock ("Preferred Stock") carries a
10% cumulative dividend, payable twelve months in arrears in the form of Common
Stock.  The Preferred Stock is convertible at any time at the option of the
holder into an equal number of shares of the Company's Common Stock and will
also have a liquidation preference and voting rights.  At the option of the
Company, the Preferred Stock will be subject to mandatory conversion into an
equal number of shares of the Company's Common Stock provided that the closing
bid price for the Company's Common Stock equals or exceeds $2.50 per share (as
adjusted for any subsequent stock dividends, splits, or combinations of the
like) for twenty consecutive trading days and the Company has a currently
effective registration statement on file with the Securities and Exchange
Commission covering the underlying Common Stock to be issued upon conversion.
At the time of its sale, the Preferred Stock, and Common Stock issuable upon
conversion thereof, is not and will not be, registered under the Securities Act
of 1933, as amended (the "Act") and may not be offered or sold in the United
States absent registration or an applicable exemption from the registration
requirements.  This offering has targeted only sophisticated investors who meet
the definition of accredited investors as set for in Rule 501 of Regulation D
under the Act.

There are no letters of credit, financing arrangements, indentures or other such
credit agreements with restrictive covenants that will effect the Company.

                                       7
<PAGE>
 
                             PHOTONICS CORPORATION
                                      dba
                              DTC DATA TECHNOLOGY
                                  FORM 10-KSB


OTHER MATTERS

Inflation did not have a significant impact upon the results of operations of
the Company during the two fiscal years ended December 31, 1996 and December 31,
1997.

ITEM 7.  FINANCIAL STATEMENTS

The financial statements and supplementary data provided pursuant to this Item
are located in pages f-1 through f-20 of this report.

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

Effective April 2, 1996 Meredith, Cardoza & Lanz, LLP were formally instated as
the Company's independent auditing firm.  They were reconfirmed as such by the
Shareholders at their meeting of June 2, 1997.

                                    PART III

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

The following table sets forth certain information with respect to the executive
officers and directors of the Company.

<TABLE>
<CAPTION>
NAME                                AGE      POSITION WITH THE COMPANY
--------------------------------------------------------------------------------------------
<S>                                          <C>
David S. Lee                         60      Chairman of the Board and Director
James T. Koo                         56      President, Chief Executive Officer and Director
JoAn E. Hughes                       64      Chief Financial Officer
Ki Ching Yeung                       36      Vice President and Director
Robert Dilworth                      55      Director
John Miao                            45      Director
</TABLE>

During the year ending December 31, 1997 Gary N. Hughes resigned from the Board
of Directors.  John Miao was immediately appointed the fill the vacancy.

The following is certain information regarding the persons listed in the table
above:

Mr. Lee has been a member of the Board of DTC since 1986 and the Chairman of the
Board since 1987.  From 1985 to 1993 he was the President and Chief Executive
Officer of DTC.  Currently, Mr. Lee is also the Chairman of the Board of
Cortelco Systems Holding Corporation, a company in the telecommunications
business.  Mr. Is also a member of the Board of Directors of CMC Industries,
Inc., Plexsys International Corporation, Linear Technology Corporation, Synnex
Information Technologies, Inc., California Chamber of Commerce, National
Committee on United States-China Relations, Inc. and the Tech Museum of
Innovation.  In addition, Mr. Lee is a member of the Board of Regents for the
University of California.

Mr. Koo has served as the President and member of the Board of DTC since 1994.
From 1992 to 1994 he was a Vice President of Qume Corporation and General
Manager of DTC Data Technology Corporation, then a wholly owned subsidiary of
Qume Corporation.  Prior to joining DTC, Mr. Koo was with Mosel Vitelic, a
developer and manufacturer of  memory integrated circuits, from 1984 until April
1992.  There he held several positions including Senior Vice 

                                       8
<PAGE>
                             PHOTONICS CORPORATION
                                      dba
                              DTC DATA TECHNOLOGY
                                  FORM 10-KSB

 
President of Engineering, Operations, Marketing and Sales of Taiwan Operations,
and Vice President for the Static Random Access Memory (SRAM) group.

Ms. Hughes was appointed Chief Financial Office in February 1997.  Ms. Hughes
came to Data Technology Corporation in April of 1984 as the Controller.  After
the acquisition of Qume Corporation in June of 1988, Ms. Hughes was appointed
Director of Internal Audit.  In 1991 Ms. Hughes was appointed Chief Financial
Officer of DTC Data Technology Corporation, then a wholly owned subsidiary of
Qume Corporation.  Ms. Hughes came back to her position from  retirement.

Mr. Yeung has been a member of the Board of Directors, has served as Vice
President of DTC and President of Data Technology Hong Kong Limited since
November of 1994.  Since January of 1992 Mr. Yeung has served as President of
Broadsino Development Ltd., Great Concept Development Ltd., Actionwell
Development Ltd., First Alpha Ltd., and Unique Computer GmbH.  From 1982 to 1992
he was the President of Unicorn Electronic Company Ltd., a manufacturer of
electronic components.

Mr. Dilworth has served as a director of DTC since 1987.  He is the President
and Chief Executive Officer of Metricom, Inc., a manufacturer of RF pocket radio
communications networks and electronic meters.  Prior to joining Metricom, from
1985 to 1987 Mr. Dilworth served as President of Zenith Data Systems, a
microcomputer supplier and a wholly owned subsidiary of Zenith Electronics
Corporation.  Mr. Dilworth is also a director of VLSI Technology, Inc.

Mr. Miao has served as a director since July of 1997.  In 1981 as founder and
President, Mr. Miao established US operations and management team of American
Mitac Corporation in San Jose, California.  Mr. Miao was active in the capacity
until 1989.  Mr. Miao is currently President of BOC Leinhwa Industrial Gases
Co., Ltd. in Taiwan and President of Hantech Venture Capital Corporation in
Taiwan.

INDEMNIFICATION AGREEMENT

The Company's Articles of Incorporation and Bylaws provide for indemnification
of the officers and directors of the Company to the full extent permitted by
law.  The General Corporation Law of the State of California permits a
corporation to limit under certain circumstances, a director's liability for
monetary damages in actions brought by or in the right of the corporation.  The
Company's Articles of Incorporation also provide for the elimination of the
liability of directors for monetary damages to the full extent permitted by law.

The Company has entered into agreements to indemnify its directors and officers
in addition to the indemnification provided for in the Articles of Incorporation
and Bylaws.  These agreements provide that the Company will indemnify its
directors and officers for certain expenses (including attorneys' fees),
judgments, fines, and settlement amounts incurred in any action or proceeding,
including an action by or in the right of the Company, on account of services
rendered as a director or officer of the Company, as a director or officer of
any subsidiary of the Company, or as a director officer of any other enterprise
to which the person provides services at the request of the Company.  The
Company believes that these provisions and agreements are necessary to attract
and retain qualified persons as directors and officers.  The Company carries
director and officers' insurance.  At present, there is no pending litigation or
proceeding involving a director, officer or employee of the Company as to which
indemnification is sought, nor is the Company aware of any threatened litigation
or proceeding that may result in claims for indemnification.

The Company understands that the staff of the SEC is of the opinion that
statutory, charter, and contractual provisions as those described above have no
effect on claims arising under the 

                                       9
<PAGE>

                             PHOTONICS CORPORATION
                                      dba
                              DTC DATA TECHNOLOGY
                                  FORM 10-KSB

 
federal securities laws. The Company is not aware of any material threatened or
ongoing litigation or proceeding which may result in a claim for such
indemnification

ITEM 10.  EXECUTIVE COMPENSATION

Executive officers having cash compensation in excess of $100,000 paid or
accrued for services rendered during the years ending December 31,1997 and
December 31, 1996 are as follows:

<TABLE> 
<CAPTION> 
                                          Compensation                    Long Term Compensation
     Name and                Year           Salary           Bonus      Stock Option     All Other
 Principal Position         Ending           $ (3)             $            Award         $    (2)    
                                                                         Shares (1)
<S>                        <C>            <C>                <C>        <C>              <C> 
James T. Koo, Pres.        12/31/97         141,015                        30,000           2,000
 CEO & Director            12/31/96          93,472            0           62,612           2,000
</TABLE> 

1.  In fiscal 1997 an option to purchase 25,000 shares of Photonics was awarded
    to Mr. Koo and to each of the Directors who had served on the Board for a
    full year. These options were granted in appreciation of the time and effort
    afforded to the Company by the Directors who serve without remuneration. Mr.
    Koo was granted an option to purchase an additional 5,000 as an employee of
    the Company during a time when a general grant was made to all employees.

2.  Mr. Koo was a participant in the DTC 401(k) shared savings plan. The
    Company, as provided for in the `employer match' provision of the plan,
    contributed $2,000.

3.  As stipulated in the report for the period that ended December 31, 1996, the
    reporting period was for 10 operating months. The comparative reporting
    period was for 12 operating months for the period ending February 29, 1996.
    Therefore Mr. Koo's calendar year compensation was apportioned to reflect
    the amounts paid in each reporting period. Mr. Koo's salary being reported
    for the year ended December 31, 1997 is for a full twelve-month period.

                AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                            AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
 
                                             Securities              Value of
                                             Underlying          Unexercised In-the
                                         Unexercised Options      Money Options at
                               Value         at FY-end #             at FY-end $
                              Realized       Exercisable/            Exercisable/
    Name               #         ($)        Unexercisable           Unexercisable
<S>               <C>          <C>          <C>                  <C>
James T. Koo        17,742     2,794/0         0/74,870                  0/0
</TABLE>

BOARD OF DIRECTOR'S REPORT ON REPRICING OF OPTIONS/SARS

On April 22, 1996 the Company's Board of Directors granted all optionees,
including executive officer, under the Company's 1988 Stock Option Plan (the
"1988 Stock Option Plan") the opportunity to exchange their current higher-
priced options for new stock iptions with an exercise price set at the tne
current fair market value of the Company's common stock, which was $0.1550 per
share.  In addition, while most of the other terms of the new stock options
remained the same as those previously granted under the 1988 Stock Option Plan,
such new options provided for a five (5) year expiration date and were not
excercisable until April 22, 1997.

The Board of Directors granted optionees this 20-day opportunity to exchange and
reprice their to further the principal purpose of the Company's 1988 Stock
Option Plan which were to provide an 

                                       10
<PAGE>
                             PHOTONICS CORPORATION
                                      dba
                              DTC DATA TECHNOLOGY
                                  FORM 10-KSB

 
equity incentive to remain in the employment of the Company and to work
diligently in its best interests. Because many employees then held options
exercisable at prices significantly above the then current market price of the
Company's Common Stock, the Board of Directors determined that the purpose of
the 1988 Stock Option Plan would not be achieved and that it was critical to the
best interest of the Company and its shareholders that the Company retain the
services of such employees.

All stock options existing under the 1988 Stock Option Plan were rolled over
into the Company's 1997 Stock Option Plan as adopted by the Shareholders at
their meeting held on June 2, 1997.

(Also see Notes to Financial Statements, paragraphs 4 and 6)

The table below provides the specified information concerning all repricing of
option/SARs during the last ten (10) completed fiscal years of DTC awarded to
Executive Officers.  The options and exercise prices represented in the table
reflect the 0.147853 reverse split which became effective March 5, 1996.

                         TEN YEAR OPTION/SAR REPRICINGS
<TABLE>
<CAPTION>
                              Number                                                   Length of
                            Securities     Market Price     Exercise                   Original
                            Underlying      of stock at      Price         New        Option Term
                 Date of      Options         Time of      at time of    Exercise      at date of
 Name           Repricing   Repriced ($)   Repricing ($)   Repricing $   Price ($)     Repricing*
<S>             <C>         <C>            <C>             <C>           <C>          <C> 
James Koo        04/22/96       25,135        $0.1550       $1.6909       $0.1550     8 yrs 5 mos
President
</TABLE>

 .  Options were originally issued with 48 months vesting and 10-year expiration.
   Repriced options retain 48-month vesting and expire in 5 years.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth the shares of the Company's Common Stock
beneficially owned at December 31, 1997, by (I) each person who is known by the
Company to be the beneficial owner of more than five percent of the Common
Stock, (ii) by each of the directors, (iii) by each of the executive officers
listed in the Summary Compensation Table for 1997, and (iv) by all directors and
officers as a group.  The options, warrants and common and preferred stock
represented in this table reflect the 1 for 5 reverse split of Photonics stock
with became effective February 9, 1996 prior to the finalization of the merger.

The acquisition of DTC was consummated on March 5, 1996.  The agreement as
ratified by DTC Data Technology Corporation's Shareholders at their meeting held
on February 6, 1996, specifies "The Board of Directors of DTC would file a
Certificate of Dissolution in the state of Delaware after consummation of the
Acquisition.  Thereafter, DTC shall continue for a term of three years or
longer...".  After the dissolution is complete, the conversion of DTC stock to
Photonics stock will be affected at a conversion rate, which is at a multiplier
of 0.147853.  All calculations of beneficial ownership, exercise and conversion
of all outstanding options, warrants and other right to purchase shares of
common or preferred stock uses this multiplier as though the dissolution had in
fact occurred.

                                       11
<PAGE>

                             PHOTONICS CORPORATION
                                      dba
                              DTC DATA TECHNOLOGY
                                  FORM 10-KSB

 
<TABLE>
<CAPTION>
                                               Shares
                                            Beneficially      Note #       Percent
Beneficial Owner                               Owned           (1)          Owned
<S>                                         <C>               <C>          <C> 
David S. Lee, Chairman of the Board          1,117,951          (7)         16.6%
   c/o Photonics/DTC Data Technology
   1515 Centre Pointe Dr.
   Milpitas, CA 95035
 
Broadsino Computer Development, Ltd.           916,412          (6)         13.6%
  K.C. Yeung
  Room 1101, 1103 and 1104 Star Center
  443-451 Castle Peak Road
  Kwai Chung NT, Hong Kong
 
Domex Technology Corporation                   779,612          (5)         11.6%
  No. 2, Technology Rd. 1,
  Science-Based Industrial Park
  Hsinchu, Taiwan, ROC
 
James T. Koo, President                        559,341          (8)          8.3%
  c/o Photonics/DTC Data Technology
  1515 Centre Pointe Dr.
  Milpitas, CA 95035
 
Robert P. Dilworth, Director                    50,373                        *
 
John Miao, Director                            150,000          (9)          2.2%
 
All Officers and Directors as a group        2,794,077      (5 persons)     41.4%
</TABLE>
 .  Denotes less than 1%

1.  Beneficial Ownership is determined in accordance with the rules of the
    Securities and Exchange Commission and generally includes voting or
    investment power with respect to securities. Except as indicated by
    footnote, and subject to community property laws where applicable, the
    persons named in the table above have sole voting and investment power with
    respect to all shares of Common and Preferred Stock and options or warrants
    to purchase stock.

2.  Percentage calculations are based upon 4,323,560 shares of Common Stock,
    2,106,009 shares of Preferred stock and 303,951 warrants or options to
    purchase stock held by the beneficial owners.

3.  On August 31, 1995 Photonics, together with DTC, announced they had executed
    an agreement under which Photonics would acquire all the assets and certain
    liabilities of DTC in exchange for the issuance to DTC of Shares and/or
    rights to shares of common stock representing 77.5% of Photonics outstanding
    stock. The transaction was consummated on March 5, 1996. The transaction was
    treated as a purchase for accounting purposes. Since DTC stockholders owned
    a majority of the shares in the combined entity and retained management and
    board control, the transaction was accounted for as though DTC was the
    acquirer, though Photonics was the surviving legal entity.

                                       12
<PAGE>
                             PHOTONICS CORPORATION
                                      dba
                              DTC DATA TECHNOLOGY
                                  FORM 10-KSB

 
4.  On March 6, 1996, the Company's Board of Directors declared a 0.147853 to 1
    reverse stock split for DTC outstanding common stock. All reference to
    number of shares, and too per share information, have been adjusted to
    reflect the reverse stock split retroactive basis.

5.  On July 8, 1994 DTC entered into an agreement with DTC Technology
    Corporation (DTC Taiwan) and Compac International Company (Compac) (a
    subsidiary of DTC Taiwan) whereby DTC disposed of its interest in DTC
    Taiwan, assigned its interest in certain receivable, sold shares of its
    common stock and issued a convertible promissory note in consideration for
    the settlement of amounts owed by DTC to DTC Taiwan of approximately $12.4
    million. The $2 million subordinated convertible promissory note bore
    interest at 8% per annum and was payable in monthly minimum installment and
    convertible into nonvoting cumulative convertible redeemable preferred stock
    at the conversion price of $1.00 per share, with the preferred shares being
    convertible into common stock. On February 16, 1996, DTC effectively
    converted the remaining balance of the promissory note, $1,700,439 into
    $502,830 shares of common stock reflected in this table after applying the
    0.147358 multiplier. In late 1997 DTC Technology Corporation (DTC Taiwan)
    legally changed its name to Domex Technology Corporation.

6.  On February 18.1995, DTC and Broadsino Computer Development Ltd. of Hong
    Kong (Broadsino) consummated an agreement under which DTC authorized the
    sale of an aggregate of four million share of its common stock (1,600,000
    shares held in escrow) for the sum of $1.0 million or $0.25 per share. As
    consideration for the sale of its common stock, DTC received $300,000 in
    cash, $395,000 in saleable product and a 9% note receivable of $305,000. In
    fiscal 1996, the note was fully collected and the shares released from
    escrow. In March of 1997, in conjunction with the private placement of the
    Company's Series A Convertible Preferred Stock, Broadsino pledged to
    purchase 300,000 shares at $1.00 per share. A note receivable from Broadsino
    was established and 300,000 shares issued. At fiscal year-end 1997 $141,000
    had been paid against the note receivable with $159,000 remaining.

7.  In conjunction with the private placement of the Company's Series A
    Convertible Preferred Stock which closed on March 31, 1997, Mr. Lee
    purchased $517,407 shares at $1.00 per share. Of this amount Mr. Lee had
    contributed $100,000 in the form of a bridge loan during 1997

8.  In conjunction with the private placement of the Company's Series A
    Convertible Preferred Stock which closed on March 31, 1997, Mr. Koo
    purchased $267,069 shares.

9.  In conjunction with the private placement of the Company's Series A
    Convertible Preferred Stock which closed on March 31, 1997, M. Miao
    purchased $150,000 shares.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

A member of the Board of Directors and President of Broadsino (See Item 11, note
6) is also President of the Company's prime subcontractor for the production of
the Company's storage controllers, which meets approximately 75% of the
Company's product requirements.

The Company's agreement signed in 1994, to use DTC Technology, Taiwan (now known
as Domex) as its favored manufacturer for a minimum twelve-month period expired
in 1995.  The Company has not had any relationship with Domex during the year
ended December 31, 1997 but would consider making purchases in the future when
they are price competitive.

The Company entered into an agreement with CMC Industries (CMCI), a company
owned by DTC's largest shareholder and Chairman of the Board, wherein CMCI
assumed and paid specific 

                                       13
<PAGE>

                             PHOTONICS CORPORATION
                                      dba
                              DTC DATA TECHNOLOGY
                                  FORM 10-KSB

 
vendor invoices of the related party who is the Company's prime sub-contractor.
This note bore interest at 12% per annum, balance due upon demand. At December
31, 1996 the Company owed a total in principle and interest of $431,894. In
conjunction with the private placement of the Company's Series A Convertible
Preferred Stock, this debt was converted to said stock at $1.00 per share.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
 
                       Balance      Charged to   Charged                 Balance
                     At Beginning   Costs and    to Other                at End
Description           of Period      Expenses    Accounts   Deductions  of Period
-------------        ------------   ----------   --------   ----------  ----------
<S>                  <C>            <C>          <C>        <C>         <C>
December 31, 1996
-----------------
Allowances for:
 Doubtful Accounts    $   245,000   $  114,000   $  61,000       -       $  420,000

 Inventory Reserve    $ 1,206,000         -           -       $ 20,000   $1,186,000

December 31, 1997
-----------------
Allowances for:
 Doubtful Accounts    $   420,000         -      $  26,000    $219,000   $  227,000

 Inventory Reserve    $ 1,186,000         -      $ 100,000    $421,000   $  865,000
</TABLE> 



                                       14
<PAGE>
 
                                                                      EXHIBIT 11



                    COMPUTATION OF EARNINGS PER COMMON SHARE



                                                       1997          1996
                                                       ----          ----
Weighted average common shares outstanding          4,451,934     4,522,439
                                                    =========     =========

Net (loss) income                                  $ (459,000)   $  876,000
                                                    =========     =========

Basic (loss) earnings per common share             $    (0.10)   $     0.19
                                                    =========     =========




Exhibit 27-Financial Data Schedule

No Form 8-K filed

                                      15
<PAGE>
 
                             PHOTONICS CORPORATION
                                      dba
                              DTC DATA TECHNOLOGY
                                  FORM 10-KSB


 
                                   SIGNATURE


Pursuant to the requirements of Section 3 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.

                               PHOTONICS CORPORATION DBA DTC DATA TECHNOLOGY


                                   
Date:    March 18, 1998        BY:   /S/  JoAn E. Hughes
      ________________________    ___________________________________________
                                   JoAn E. Hughes
                                   Chief Financial Officer




                                      16
<PAGE>
 
                             PHOTONICS CORPORATION
                                      dba
                              DTC DATA TECHNOLOGY
                                  FORM 10-KSB

 
                     Consolidated Statements of Operations
                                Quarter 4, 1997
                                   (audited)
<TABLE>
<CAPTION>
 
                                                           Three Months ended December 31
                                                                1997       1996
<S>                                                         <C>             <C>
REVENUES:
Net Product Sales                                           $    1,697       $    1,298
 
Cost of Revenues                                                   967            1,196
 
Gross Profit                                                       730              102
 
OPERATING EXPENSES:
Research and Development                                            97              202
Selling, General and Administrative                                562              724
 
Total Operating Expense                                            659              926
 
Income <loss> from Operations                                       71             <824>
 
OTHER INCOME <EXPENSE>                                             154              <66>
 
Provision for taxes                                                  0                0
 
Net Income <loss>                                                  225             <890>
 
Net Income <loss> per share                                      $0.05           $<0.19>
 
Shares used in per share calculation                         4,451,934        4,522,439
</TABLE>

                                      17
<PAGE>
 
ITEM 7.  FINANCIAL STATEMENTS
         --------------------

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED FINANCIAL STATEMENT
SCHEDULES

<TABLE>
<CAPTION>
Consolidated Financial Statements                                                                 Page
---------------------------------                                                                 ----
<S>                                                                                              <C>
   Independent Auditors' Report                                                                   F-2
   Consolidated Balance Sheets, December 31, 1997 and 1996                                        F-3
   Consolidated Statements of Operations, fiscal year ended December 31, 1997                  
     and ten months ended December 31, 1996                                                       F-4
   Consolidated Statements of Shareholders' Deficiency, fiscal year ended                      
     December 31, 1997 and ten months ended December 31,1996                                      F-5
   Consolidated Statements of Cash Flows, fiscal year ended December 31, 1997                  
     and ten months ended December 31, 1996                                                       F-6
   Notes to Consolidated Financial Statements                                                     F-7
                                                                                               
Consolidated Financial Statement Schedules                                                     
------------------------------------------                                                     
                                                                                               
  Schedule II - Valuation and Qualifying Accounts                                                 14
  Exhibit 11 - Computation of Earnings per Common Share                                           15
</TABLE> 

                                      F-1
<PAGE>
 
                      MEREDITH, CARDOZO, LANZ & CHIU LLP
                      ----------------------------------
                         Certified Public Accountants



                         INDEPENDENT AUDITORS' REPORT
                         ----------------------------


To the Board of Directors and Shareholders
Photonics Corporation (dba DTC Data Technology)

We have audited the consolidated financial statements of Photonics Corporation
(dba DTC Data Technology) and subsidiaries as listed in the accompanying index.
In connection with our audits of the consolidated financial statements, we also
have audited the consolidated financial statement schedules as listed in the
accompanying index.  These consolidated financial statements and consolidated
financial statement schedules are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these consolidated
financial statements and consolidated financial statement schedules based on our
audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform our audits to
obtain reasonable assurance about whether the consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Photonics Corporation (dba DTC Data Technology) and subsidiaries as of December
31, 1997 and 1996, and the results of their operations and their cash flows for
the fiscal year ended December 31, 1997 and the ten months ended December 31,
1996, in conformity with generally accepted accounting principles.  Also in our
opinion, the related consolidated financial statement schedules, when considered
in relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.

The accompanying consolidated financial statements have been prepared assuming
that Photonics Corporation (dba DTC Data Technology) will continue as a going
concern.. As discussed in Note 1 to the financial statements, the Company's
recurring losses from operations and net capital deficiency raise substantial
doubt about its ability to continue as a going concern.  Management's plans in
regard to these matters are also described in Note 1.  The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.


/s/ Meredith, Cardozo, Lanz & Chiu LLP

San Jose, California
February 6, 1998

                                      F-2
<PAGE>
 
                             PHOTONICS CORPORATION

                           (DBA DTC DATA TECHNOLOGY)
                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1997 AND 1996


                                     ASSETS
                                     ------
                                    (Note 6)
<TABLE>
<CAPTION>
                                                                                                     1997       1996
                                                                                                   ---------    ---------
<S>                                                                                                <C>          <C>
Current assets:                                                              
  Cash and cash equivalents                                                                      $     5,000      104,000
  Available-for-sale securities (Note 2)                                                             171,000           --
  Due from related parties (Note 9)                                                                  159,000           --
  Accounts receivable, net of allowance for doubtful                         
    accounts of $227,000 and $420,000, respectively (Note 13)                                        939,000      849,000
  Other receivables                                                                                  289,000           --
  Inventories (Note  3)                                                                              920,000      950,000
  Prepaid expenses and other current assets                                                           58,000       84,000
                                                                                                   ---------    ---------
     Total current assets                                                                          2,541,000    1,987,000
                                                                             
Property and equipment, net (Note 4)                                                                 252,000      112,000
Other assets                                                                                          14,000       14,000
                                                                                                   ---------    ---------
                                                                                                 $ 2,807,000    2,113,000
                                                                                                   =========    =========
                    LIABILITIES AND SHAREHOLDERS' DEFICIENCY                 
                    ----------------------------------------                 

Current liabilities:                                                         
  Accounts payable                                                                               $ 1,426,000    1,309,000
  Due to related parties (Note 9)                                                                  1,105,000    2,130,000
  Accrued liabilities (Note 10)                                                                      441,000      924,000
  Other current liabilities                                                                           46,000       74,000
                                                                                                 -----------    ---------
     Total current liabilities                                                                     3,018,000    4,437,000
                                                                             
Due to related parties (Note 9)                                                                      477,000           --
                                                                                                 -----------    ---------
       Total liabilities                                                                           3,495,000    4,437,000
                                                                                                 -----------    ---------

Minority interest in subsidiaries                                                                    125,000      125,000
                                                                             
Commitments and contingent liabilities (Notes 6, 12 and 15)                  
                                                                             
Shareholders' deficiency (Note 7):                                           
                                                                             
  Preferred stock, $1.00 par value, authorized 3,600,000 shares;             
   issued 2,106,009 shares at December 31, 1997                                                    2,106,000           --
  Common stock, $.001 par value, authorized 20,000,000 shares;               
   issued 4,346,406 and 4,323,560 shares at December 31, 1997                
   and 1996, respectively                                                                         44,079,000   44,075,000
  Capital subscription                                                                                11,000       26,000
  Accumulated deficit                                                                            (47,163,000) (46,704,000)
  Cumulative translation adjustment                                                                  154,000      154,000
                                                                                                 -----------  -----------
     Total shareholders' deficiency                                                                 (813,000)  (2,449,000)
                                                                                                 -----------   -----------
                                                                                                 $ 2,807,000    2,113,000
                                                                                                 ===========   ===========
</TABLE>

         See accompanying Notes to Consolidated Financial Statements.

                                      F-3
<PAGE>
 
                             PHOTONICS CORPORATION
                           (DBA DTC DATA TECHNOLOGY)
                                        
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                      FOR THE YEAR ENDED DECEMBER 31, 1997
                   AND THE TEN MONTHS ENDED DECEMBER 31, 1996

<TABLE> 
<CAPTION> 
                                                         1997             1996
                                                         ----             ----
<S>                                                <C>              <C> 
Net revenues (Note 8)                              $   5,622,000        5,184,000

Cost of revenues (Note 9)                              3,487,000        4,099,000
       Gross profit                                    2,135,000        1,085,000
 
Operating expenses:
  Product development                                     438,000         520,000
  Selling, general and administrative                   2,456,000       2,497,000
                                                        ---------      ----------
     Total operating expenses                           2,894,000       3,017,000
                                                        ---------      ----------
 
       Loss from operations                              (759,000)     (1,932,000)
 
Other income (expense):
  Interest income                                              --           9,000
  Interest expense                                        (98,000)        (97,000)
  Other income (Note 11)                                  552,000          24,000
  Other expense                                           (94,000)        (28,000)
                                                        ---------      ----------
                                                          360,000         (92,000)
                                                        ---------      ----------
 
       Loss before income taxes                          (399,000)     (2,024,000)
 
Income taxes (Note 5)                                      60,000           1,000
                                                        ---------      ----------
 
       Loss before extraordinary item                    (459,000)     (2,025,000)
 
Extraordinary item, net of income taxes (Note 15)              --       2,901,000
                                                        ---------      ----------
 
       Net (loss) income                             $   (459,000)        876,000
                                                        =========      ==========

Basic (loss) earnings per common share               $      (0.10)           0.19
                                                        =========      ==========
Weighed average common shares outstanding               4,451,934       4,522,439
                                                        =========      ==========
</TABLE> 

         See accompanying Notes to Consolidated Financial Statements.

                                      F-4
<PAGE>
 
                             PHOTONICS CORPORATION
                           (dba DTC DATA TECHNOLOGY)
              CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIENCY
                   FOR THE YEAR ENDED DECEMBER 31, 1997 AND
                    THE TEN MONTHS ENDED DECEMBER 31, 1996
                            (Dollars in thousands)

<TABLE> 
<CAPTION> 
                     PREFERRED STOCK       COMMON STOCK        TREASURY STOCK                                   CUMULATIVE
                     ----------------    -----------------    -----------------     CAPITAL      ACCUMULATED   TRANSLATION
                     SHARES    AMOUNT    SHARES     AMOUNT    SHARES     AMOUNT   SUBSCRIPTION     DEFICIT      ADJUSTMENT    TOTAL
                     ---------  ------  ----------  --------  ---------  --------  -------------  ------------  -----------  -------

<S>                  <C>        <C>     <C>         <C>       <C>        <C>       <C>            <C>           <C>          <C>
Balances as of 
 February 29, 1996          --  $   --   3,193,717   $42,632    780,023     $(476)           500       (47,580)         154  (4,770)

 
 Issuance of 
  common stock
  under employee 
  benefit plans             --      --      2,383         3         --        --             --            --            --       3
 Retirement of 
  treasury stock
  (Note 7)                  --      --   (115,329)     (476)  (780,023)      476             --            --            --      --
 Capital sub-
  scriptions, net           --      --    354,847       600         --        --           (474)           --            --     126
 Photonics stock
  outstanding               --      --    887,942     1,316         --        --             --            --            --   1,316
 Net loss                   --      --         --        --         --        --             --           876            --     876
                     ---------  ------  ---------   -------   --------   -------           ----       -------   -----------  ------
Balances as of
 December 31, 1996          --      --  4,323,560    44,075         --        --             26       (46,704)          154  (2,449)

                     ---------  ------  ---------   -------   --------   -------           ----       -------   -----------  ------
 Issuance of common 
  stock under the 
  stock option 
  plans--                                  22,846         4         --        --             --            --            --       4
 Issuance of 
  preferred stock
  (Note 7)           2,091,020   2,091         --        --         --        --             --            --            --   2,091
 Capital sub-
  scriptions, net       14,989      15         --        --         --        --            (15)           --            --      --
 Net loss                   --      --         --        --         --        --             --          (459)           --    (459)

                     ---------  ------  ---------   -------   --------   -------           ----       -------   -----------  ------
 
Balances as of 
 December 31, 1997   2,106,009  $2,106  4,346,406   $44,079         --     $  --             11       (47,163)          154    (813)

                     =========  ======  =========   =======   ========   =======           ====       =======   ===========  ======
</TABLE>

                                      F-5
<PAGE>
 
                             PHOTONICS CORPORATION
                           (DBA DTC DATA TECHNOLOGY)
                                        
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                      FOR THE YEAR ENDED DECEMBER 31, 1997
                   AND THE TEN MONTHS ENDED DECEMBER 31, 1996
                                   (NOTE 14)
                                        
<TABLE>
<CAPTION>
                                                                                                1997         1996
                                                                                             -----------  -----------
<S>                                                                                       <C>               <C>
Cash flows from operating activities:
  Net (loss) income                                                                       $    (459,000)     876,000
  Adjustments to reconcile net (loss) income to net cash used in operating activities:
     Issuance of common stock under employee benefit plans                                                     3,000
     Issuance of preferred stock for forgiveness of debt                                         59,000           --
     Depreciation and amortization                                                               82,000      149,000
     Provision for doubtful accounts                                                           (193,000)     166,000
     Effect of adjustments to valuation allowances (Note 16)                                         --   (2,901,000)
     Changes in operating assets and liabilities:
       Accounts receivable                                                                     (196,000)     469,000
       Inventories                                                                               30,000      (90,000)
       Prepaid expenses and other current assets                                                 36,000       39,000
       Accounts payable                                                                         259,000     (335,000)
       Due to related parties                                                                  (247,000)    (205,000)
       Accrued liabilities                                                                     (483,000)    (463,000)
                                                                                             ----------   ----------
          Net cash (used in) operating activities                                            (1,112,000)  (2,292,000)
                                                                                             ----------   ----------
  Cash flows from investing activities:
     Proceeds from sale of investment                                                            57,000           --
     Purchase of property and equipment                                                        (222,000)     (44,000)
                                                                                             ----------   ----------
          Net cash (used in) investing activities                                              (165,000)     (44,000)
                                                                                             ----------   ----------
  Cash flows from financing activities:
     Proceeds from short-term debt                                                              691,000    1,067,000
     Repayments of short-term debt                                                              (74,000)          --
     Capital subscription                                                                            --      126,000
     Issuance of preferred stock                                                                557,000           --
     Issuance of common stock                                                                     4,000    1,102,000
                                                                                             ----------   ----------
       Net cash provided by financing activities                                              1,178,000    2,295,000
                                                                                             ----------   ----------
 
     Net (decrease) in cash and cash equivalents                                                (99,000)     (41,000)
 
     Cash and cash equivalents, beginning of year                                               104,000      145,000
                                                                                             ----------   ----------
     Cash and cash equivalents, end of year                                               $       5,000      104,000
                                                                                             ==========   ==========
</TABLE>


         See accompanying Notes to Consolidated Financial Statements.

                                      F-6
<PAGE>
 
                             PHOTONICS CORPORATION
                           (dba DTC DATA TECHNOLOGY)

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          DECEMBER 31, 1997 AND 1996



1.   Summary of Significant Accounting Policies
     ------------------------------------------

     The Company
     -----------

     Photonics Corporation, dba DTC Data Technology (the Company, Photonics), a
     California corporation, designs, develops, and markets Integrated Device
     Electronics (IDE) and Small Computer Systems Interface (SCSI) disk
     controller cards and Input/Output (I/O) product for personal computers. In
     June 1995, Photonics suspended the further development and production of
     products using its technology, ceased all marketing activities related to
     those products and terminated substantially all of its employees.  In March
     1996, Photonics Corporation acquired DTC Data Technology Corporation (DTC),
     a Delaware corporation. Following the merger, the Company formally
     discontinued the marketing of all networking products previously sold by
     Photonics, with DTC being the surviving business unit.

     DTC was founded in 1979 as an independent designer, developer and marketer
     of intelligent storage controllers and chip sets used primarily in
     connection with IBM-compatible personal computers. DTC designs proprietary
     integrated circuits for use in its storage controllers and chip sets. These
     circuits are fabricated by semiconductor manufacturers based on DTC's
     specifications. Final assembly and test of controller boards are performed
     by approved vendors both in the United States and abroad.

     Basis of Presentation
     ---------------------

     The consolidated financial statements of the Company have been prepared
     assuming that the Company will continue as a going concern.  The liquidity
     of the Company has been adversely affected by recurring losses resulting in
     an accumulated deficit and a capital deficiency at December 31, 1997.  Over
     the past five years, the Company has sold portions of its business
     considered to be outside the scope of its strategic focus in order to
     supplement working capital resources and reduce dependence on bank
     financing.

     Management believes that these steps, as well as outside investment
     participation and improved results of operations, will provide the Company
     with the opportunity to achieve its objectives.  There is, however, no
     assurance that the steps taken or programs in place will meet all of the
     Company's needs or that it will continue as a going concern.  The
     consolidated financial statements do not include any adjustments that might
     result from the outcome of this uncertainty.



                                                                     (continued)

                                      F-7
<PAGE>
 
                             PHOTONICS CORPORATION
                           (dba DTC DATA TECHNOLOGY)

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.   Summary of Significant Accounting Policies - continued
     ------------------------------------------------------

     Principles of Consolidation
     ---------------------------

     The accompanying consolidated financial statements include the accounts of
     the Company and its majority-owned subsidiaries after elimination of
     intercompany accounts and transactions.

     As of December 31, 1997 and 1996, the minority interest represents the
     minority stockholders' proportionate share of the equity of the
     subsidiaries, Qume Taiwan and Data Technology Hong Kong Ltd., which was
     0.6% and 0.6% , respectively.

     Purchase Accounting
     -------------------

     The acquisition of DTC by Photonics in 1996 has been treated as a
     "purchase" for accounting purposes.  Since DTC stockholders own a majority
     of the shares of the combined company and DTC retained management and board
     control, the acquisition was accounted for as though DTC were the acquiror.
     Accordingly, the assets and liabilities of Photonics were recorded at fair
     value and the historical results of operations of the combined company are
     those of DTC.

     Foreign Currency Translation
     ----------------------------

     Certain entities located outside the United States use the local currency
     as their functional currency.  Assets and liabilities are translated at
     exchange rates in effect at the balance sheet date, while revenues and
     costs are translated at monthly average exchange rates.  Translation gains
     and losses are accumulated as a separate component of shareholders'
     deficiency.

     For foreign entities operating in U.S. dollars, net nonmonetary assets are
     translated at historical exchange rates, and net monetary assets are
     translated at current exchange rates.  Translation gains and losses are
     included in the determination of the results of operations.

     Cash Equivalents
     ----------------

     The Company considers all highly liquid investments with original
     maturities of three months or less to be cash equivalents.

     Inventories
     -----------

     Inventories are stated at the lower of cost (first-in, first-out method) or
     market (net realizable value).



                                                                     (continued)

                                      F-8
<PAGE>
 
                             PHOTONICS CORPORATION
                           (dba DTC DATA TECHNOLOGY)

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   Summary of Significant Accounting Policies - continued
     ------------------------------------------------------

     Equipment and Leasehold Improvements
     ------------------------------------

     Equipment and leasehold improvements are stated at cost.  Depreciation on
     equipment and leasehold improvements is calculated on the straight-line
     method over the estimated useful lives of the assets, generally three to
     seven years.  Assets held under capital leases are amortized on a straight-
     line basis over the shorter of the lease term or the estimated useful life
     of the asset.

     Revenue Recognition
     -------------------

     Revenue is generally recognized upon shipment of product.  Sales to
     distributors are made pursuant to agreements which provide the distributors
     certain rights of return and price protection on unsold merchandise.
     Revenues from such sales are recognized upon shipment, with a provision for
     estimated returns and allowances recorded at that time.

     Income Taxes
     ------------

     The Company accounts for income taxes in accordance with Statement of
     Financial Accounting Standards (SFAS) No. 109.  Under SFAS No. 109,
     deferred tax liabilities or assets at the end of each period are determined
     using the tax rate expected to be in effect when taxes are actually paid or
     recovered.  Deferred income taxes as of December 31, 1997 and 1996,
     primarily result from certain expenses that are not currently deductible
     for tax purposes.

     Short-Term Investments
     ----------------------

     Short-term investments, consisting of publicly traded preferred and common
     stocks, are stated at fair value.  The Company has adopted Statement of
     Financial Accounting Standards No. 115, "Accounting for Certain Investments
     in Debt and Equity Securities" ("SFAS No. 115").  SFAS No. 115 requires
     companies to classify investments in debt and equity securities with
     readily determinable fair values as "held-to-maturity", "available for
     sale", or "trading" and established accounting and reporting requirements
     for each classification.  The Company classifies all short-term investments
     as "available for sale".  Securities classified as available for sale are
     reported at their fair market value with unrealized gains and losses
     reported as a separate component of shareholders' deficiency.



                                                                     (continued)

                                      F-9
<PAGE>
 
                             PHOTONICS CORPORATION
                           (dba DTC DATA TECHNOLOGY)

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   Summary of Significant Accounting Policies - continued
     ------------------------------------------------------

     Earnings Per Common Share
     -------------------------

     In February 1997, the Financial Accounting Standards Board issued SFAS No.
     128, "Earnings Per Share," which is required to be adopted on December 28,
     1997.  Conforming to SFAS No. 128, the Company has changed its method of
     computing earnings per share and restated all prior periods.  Under the new
     requirements for calculating earnings per share, the dilutive effect of
     stock options has been excluded.  The impact of SFAS No. 128 was not
     significant for the prior years reported.

     Use of Estimates
     ----------------

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

     Long-lived Assets
     -----------------

     Long-lived assets and certain identifiable intangibles held and used by the
     Company are periodically reviewed for impairment whenever events or changes
     in circumstances indicate that the carrying amount of an asset may not be
     recoverable.  In 1997 and 1996, there were no significant write-downs for
     impairment that effected the Company's financial position or consolidated
     results of operations.

     Stock-Based Incentive Program
     -----------------------------

     Financial Accounting Standards Board Statement No. 123 (SFAS 123),
     "Accounting for Stock-Based Compensation," encourages entities to recognize
     compensation costs for stock-based employee compensation plans using the
     fair value based method of accounting defined in SFAS No. 123, but allows
     for the continued use of the intrinsic value based method of accounting
     prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting
     for Stock Issued to Employees." The Company adopted SFAS No. 123 in the
     first quarter of fiscal 1996, and elected to continue to use the intrinsic
     value based method of accounting prescribed by APB Opinion No. 25
     supplemented by SFAS No. 123's required footnote disclosures.



                                                                     (continued)

                                      F-10
<PAGE>
 
                             PHOTONICS CORPORATION
                           (dba DTC DATA TECHNOLOGY)

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   Summary of Significant Accounting Policies - continued
     ------------------------------------------------------

     Fair Values of Financial Instruments
     ------------------------------------

     The following methods and assumptions were used by the Company in
     estimating its fair value disclosures for financial instruments:


          Cash and cash equivalents: The carrying amount reported in the balance
          sheet for cash equivalents approximates fair value.

          Investment securities: The fair values for marketable debt and equity
          securities are based on quoted market prices.

          Short-term debt: The fair value of short-term debt approximates cost
          because of the short period of time to maturity.

          Long-term debt: The fair value of long-term debt estimated based on
          current interest rates available to the Company for debt instruments
          with similar terms and remaining maturities.

     As of December 31, 1997, the fair values of the Company's financial
     instruments approximate their historical carrying amount.

     Reverse Stock Split
     -------------------

     On March 6, 1996, the Company's Board of Directors declared a 0.1478531 to
     1 reverse stock split.  All references to number of shares, except shares
     authorized, and to per share information, in the consolidated financial
     statements have been adjusted to reflect the reverse stock split on a
     retroactive basis.

     Adoption of New Accounting Pronouncements
     -----------------------------------------

     In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
     Income."  SFAS No. 130 establishes standards for reporting comprehensive
     income and its components in a financial statement that is displayed with
     the same prominence as other financial statements.  Comprehensive income,
     as defined, includes all changes in equity (net assets) during the period
     from non-owner sources.  Examples of items to be included in comprehensive
     income, which are excluded from net income, include foreign currency
     translation adjustments and unrealized gain/loss on available for sale
     securities.  The disclosure prescribed by SFAS No. 130 is not expected to
     have a material impact on the Company.



                                                                     (continued)

                                      F-11
<PAGE>
 
                             PHOTONICS CORPORATION
                           (dba DTC DATA TECHNOLOGY)

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   Summary of Significant Accounting Policies - continued
     ------------------------------------------------------

     In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
     an Enterprise and Related Information."  This statement establishes
     standards for the way companies report information about operating segments
     in annual financial statements.  It also establishes standards for related
     disclosures about products and services, geographic areas, and major
     customers.  The disclosure prescribed by SFAS No. 131 is not expected to
     have a material impact on the Company.

     Reclassifications
     -----------------

     Certain amounts in the 1996 financial statements have been reclassified to
     conform with the 1997 presentation.


2.   Available-For-Sale Securities
     -----------------------------

     As of December 31, 1997, the Company held 22,500 shares of the outstanding
     common stock of CMC Industries Corporation (Note 9).  The Company received
     the stock in exchange for a note payable to David Lee, who is Chairman of
     the Board of both companies.


     A summary of available-for-sale securities follows:

<TABLE>
<CAPTION>
 
                              1997      1996
                             -------  -------
<S>                          <C>      <C>
 
Cost of securities        $  171,000       --
Unrealized gain (loss)            --       --
                             -------  -------
                          $  171,000       --
                             =======  =======
</TABLE>

3.   Inventories
     -----------

     A summary of inventories follows:

<TABLE>
<CAPTION>
 
                              1997      1996
                             -------  -------
<S>                          <C>      <C>
 
Raw materials             $  148,000  118,000
Work-in-process              190,000  357,000
Finished goods               582,000  475,000
                             -------  -------
                          $  920,000  950,000
                             =======  =======
</TABLE>

4.   Property and Equipment
     ----------------------

     A summary of property and equipment follows:

<TABLE>
<CAPTION>
 
                                1997        1996
                             ----------  ----------
<S>                          <C>         <C>
Equipment                  $  2,534,000  2,312,000
Furniture and fixtures          277,000    277,000
Leasehold improvements           94,000     94,000
                              ---------  ---------
                              2,905,000  2,683,000
Less accumulated 
 depreciation and 
 amortization                 2,653,000  2,571,000
                              ---------  ---------
$                               252,000    112,000
                              =========  =========
</TABLE>

                                                                     (continued)

                                      F-12
<PAGE>
 
                             PHOTONICS CORPORATION
                           (dba DTC DATA TECHNOLOGY)

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


5.   Income Taxes
     ------------

     During 1997, Photonics incurred foreign taxes of approximately
     $58,000, relating to income earned during prior years by the Company's
     subsidiary in Hong Kong.  Income tax expense for the year ended December
     31, 1997 and for the ten months ended December 31, 1996 was $60,000 and
     $1,000 respectively.


          Deferred tax assets (liabilities) comprises the following:
<TABLE>
<CAPTION>
 
                                                        1997          1996
                                                    ------------  ------------
<S>                                              <C>              <C>
            Depreciation                         $      251,000       240,000
            Reserves not currently deductible           371,000       561,000
            Accrued liabilities                         135,000       329,000
            Net operating losses                     35,904,000    29,493,000
            Tax credit carryovers                     2,075,000     1,288,000
            Valuation allowance                     (38,736,000)  (31,911,000)
                                                    -----------   -----------
            Net deferred taxes                   $           --            --
                                                    ===========   ===========
</TABLE>


     The Company's effective tax rate differs from the statutory federal
     income tax principally as a result of Federal and state net operating
     losses for which a full valuation allowance has been provided.

     At December 31, 1997, the Company had approximately $101 million of
     regular net operating losses to offset future Federal income tax.  These
     carryforwards expire in the years 2001 through 2012.  In addition, the
     Company has approximately $2.1 million of Federal tax credits expiring 1999
     through 2010.

     The Tax Reform Act of 1986 imposed substantial restrictions on the
     utilization of net operating loss and tax credit carryforwards in the event
     of an "ownership change" as defined by the Internal Revenue Code.  If the
     Company has an "ownership" change as defined by the Internal Revenue Code,
     the Company's ability to utilize the Federal and California net operating
     losses could be reduced.  The Company has not made this determination as of
     December 31, 1997.

6.   Commitments
     -----------

     The Company leases its facilities under noncancelable lease agreements
     expiring through 1998.  The facility leases require the Company to pay
     certain maintenance and operating expenses such as taxes, insurance, and
     utilities.  Rent expense related to these operating leases was $177,000,
     and $178,000 for the year ended December 31, 1997, and the ten months ended
     December 31, 1996, respectively.  Future minimum lease payments required
     under the operating leases for 1998 are $103,000.  The Company is in
     negotiations to renew its leases and expects to do so successfully, under
     similar terms and conditions, before the lease terminates in July 1998.



                                                                     (continued)

                                      F-13
<PAGE>
 
                             PHOTONICS CORPORATION
                           (dba DTC DATA TECHNOLOGY)

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


7.   Capital Stock
     -------------

     Preferred Stock
     ---------------

     In December 1996, the Company entered into a Private Placement
     Memorandum (PPM) for the sale of up to 3,600,000 shares of Series A
     Convertible Preferred Stock, at $1.00 per share, with minimum lots being
     25,000 shares.  The Series A Convertible Preferred Stock is convertible
     into common stock on a 1 for 1 basis, carry a provision for a 10%
     cumulative dividend, with dividends in arrears greater than 12 months due
     being payable in the form of common stock and will also have a liquidation
     preference and voting rights.  As of December 31, 1997, the Company had
     issued 2,106,009 shares of preferred stock under the PPM agreement.

     Common Stock
     ------------

     During the ten months ended December 31, 1996, the Company retired
     115,329 shares of common stock held under the laws of the State of
     Delaware.  The Company also issued a total of 354,847 shares of the
     Company's common stock in private placement transactions with shareholders
     exempt from registration under the Securities Act, which generated net
     proceeds of approximately $600,000.

     Stock Warrants
     --------------

     As of December 31, 1997, the Company had outstanding warrants for
     46,250 shares of common stock, exercisable through November 1998 at prices
     from $38.75 per share to $54.00 per share, relating to a bridge loan
     financing and underwriting of the Company's initial public offering.

     Stock Option Plans
     ------------------

     During 1997, the Company terminated its Photonics and DTC stock option
     plans and rolled them into a new stock option plan (The 1997 Plan).

     FASB Statement 123, "Accounting for Stock-Based Compensation,"
     requires the Company to provide pro forma information regarding net income
     and earnings per share as if compensation cost for the Company's stock
     option plans had been determined in accordance with the fair value based
     method prescribed in FASB Statement 123.  The Company estimates the fair
     value of the stock options at the grant date by using the Black-Scholes
     option pricing-model with the following weighted average assumptions used
     for grants in 1997: dividend yield of 0; expected volatility of 202
     percent; risk-free interest rates of 5.9 percent; and expected lives of 5
     to 10 years for the plan options.  In 1996, the following assumptions were
     used for the Photonics and DTC plans: dividend yield of 0; expected
     volatility of 136 percent; risk-free interest rates of 6.4 percent; and
     expected lives of 5 to 10 years for the plan options.

                                                                     (continued)

                                      F-14
<PAGE>
 
                             PHOTONICS CORPORATION
                           (dba DTC DATA TECHNOLOGY)

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


7.   Capital Stock - continued
     -------------------------

     Under the accounting provisions of FASB Statement 123, the Company's
     net (loss) income and (loss) earnings per share would have been changed to
     the pro forma amounts indicated below:

<TABLE>
<CAPTION>
 
                             1997      1996
                           --------   -------
<S>                      <C>        <C>
Net (loss) income:
  As reported            $ (459,000)  876,000
                           ========   =======
  Pro forma              $ (506,000)  847,000
                           ========   =======
</TABLE>

Basic (loss) earnings per share:
  As reported            $    (0.10)     0.19
                           ========   =======
  Pro forma              $    (0.12)     0.19
                           ========   =======

     1997 Stock Option Plan
     ----------------------

     The 1997 Plan allows for the issuance of incentive and nonqualified
     stock options to employees and consultants of the Company and authorizes
     the issuance of up to 700,000 shares of the Company's common stock.
     Options granted under the 1997 Plan are generally for periods not to exceed
     10 years and generally must be at prices not less than 100% and 85%, for
     incentive and non-qualified stock options, respectively, of the estimated
     fair value of the stock on the date of grant as determined by the Board of
     Directors.  Options granted to shareholders who own greater than 10% of the
     outstanding stock are established at the estimated fair value of the stock
     on the date of grant.

     A summary of the status of the Company's 1997 Plan is as follows:

<TABLE>
<CAPTION>
 
                                                                          Weighted-Average
                                                             --------------------------------------
                                   Share      Exercise       Exercise      Fair Value     Remaining
                                  Options       Price          Price        at Grant         Life
-------------------------------   -------    -----------    -----------    ----------     ---------
<S>                               <C>        <C>            <C>            <C>            <C> 
Balance at December 31, 1996           --    $        --    $        --                          --
 Transferred from other plans     255,575    $0.16-$1.69    $      0.40
 Granted                          320,587    $0.19-$0.38    $      0.32       0.28
 Canceled                        (110,400)   $0.16-$1.69    $      0.28
 Exercised                        (17,671)   $      0.16    $      0.16
                                  -------
Balance at December 31, 1997      488,091    $0.16-$1.69    $      0.38                        3.61
                                  =======
</TABLE>

     In addition to the shares exercised above, 5,175 shares were exercised
     from the DTC stock option plan prior to that plan's termination.

     The number of options exercisable and their weighted-average exercise
     prices at December 31, 1997 was 99,760 at $0.67.



                                                                     (continued)

                                      F-15
<PAGE>
 
                             PHOTONICS CORPORATION
                           (dba DTC DATA TECHNOLOGY)

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


7.   Capital Stock - continued
     -------------------------

     Shared Savings Plan
     -------------------

     The Company maintains a Shared Savings Plan (the SSP) covering
     substantially all of its U.S. employees.  The SSP allows employees to defer
     from 2% to 12% of their compensation to the maximum amount permitted by
     law. Employee and Company contributions are considered tax deferred under
     Section 401(k) of the Internal Revenue Code.  Under the terms of the SSP,
     the Company will contribute, on a quarterly basis, shares of its common
     stock to each employee's account equal in value to 40% of the employee's
     contributions, limited, however to $2,000 or 6% of compensation per
     calendar year, whichever is less.  The Company's contributions vest at the
     rate of 25% for each full year of service, as defined, but become 100%
     vested upon normal retirement, disability or death. Contributions of the
     Company's common stock to the SSP were as follows:

                                                          Shares
                                                       Contributed      Market
                                                        to the SSP      Value
                                                        ----------    ---------

            Ten months ended December 31, 1996              2,383    $    3,000
                                                            =====      ========
            Year ended December 31, 1997                       --    $       --
                                                            =====      ========


     Investment by Broadsino Computer Development Ltd. of Hong Kong
     --------------------------------------------------------------

     On February 28 ,1995, the Company and Broadsino Computer Development
     Ltd. of Hong Kong (Broadsino) consummated an agreement under which DTC
     authorized the sale of an aggregate of four million shares of its common
     stock (1,600,000 shares held in escrow) for the sum of $1.0 million or
     $0.25 per share.  As consideration for the sale of its common stock, DTC
     received $300,000 in cash, $395,000 in inventory and a 9% note receivable
     of $305,000.  In fiscal 1996, the note was fully collected and the shares
     released from escrow.

     A condition of the above agreement required the Chairman, President
     and other members of the Company's management to purchase a minimum of
     $500,000, up to $1,000,000, of the Company's common stock at $0.25 per
     share. As of February 29, 1996, the Chairman and President had invested
     $500,000, which is reflected as a capital subscription in the stockholders'
     deficiency section of the consolidated balance sheet, however the related
     shares were not issued until March of 1996.



                                                                     (continued)

                                      F-16
<PAGE>
 
                             PHOTONICS CORPORATION
                           (dba DTC DATA TECHNOLOGY)

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


8.   Major Customers and Export Sales
     --------------------------------

     The operations of the Company are in one industry segment and include
     primarily the design, development, manufacture and sales of controller
     boards.  The Company's customers consist primarily of original equipment
     manufacturers, value-added resellers, value-added distributors, system
     integrators and dealers in this industry.

     The Company had the following financial information by geographic
     regions:

<TABLE>
<CAPTION>
 
                                     1997       1996
                                  ---------  ---------
<S>                            <C>           <C> 
Net revenues:
 Far East                      $      3,000     10,000
 Europe                              37,000    188,000
 North America                    5,582,000  4,986,000
                                  ---------  ---------
                               $  5,622,000  5,184,000
                                  =========  =========
</TABLE>

     For the year ended December 31, 1997, three customers accounted for 22%,
     15%, and 12% of net revenues, respectively.  For the ten months ended
     December 31, 1996, one customer accounted for 13% of net revenues.

9.   Related Party Transactions
     --------------------------
 
     A member of the Board of Directors and representative of Broadsino (Note
     7) is President of the Company's prime subcontractor for the production of
     the Company's storage controllers, which meets approximately 70% of the
     Company's requirements.  For the year ended December 31, 1997 and for the
     ten months ended December 31, 1996, the Company purchased approximately
     $1,072,000 and $1,717,000 from this prime subcontractor, respectively.  At
     December 31, 1997 and 1996, amounts due to this subcontractor were
     approximately $678,000 and $1,009,000, respectively.

     Notes Receivable
     ----------------

     In March 1997, the Company received a note from Broadsino for $300,000 in
     exchange for preferred stock.  At December 31, 1997, the Company, at the
     direction of Broadsino, offset $141,000 of the note against the then
     $819,000 accounts payable due to Broadsino.

     Notes Payable
     -------------

     During 1996, the Company entered into debt agreements with shareholders
     for approximately $602,000.  These debt agreements beared interest from 10%
     to 12% and were convertible to preferred stock on deman.  During the first
     quarter of 1997, these loans were converted into preferred stock.



                                                                     (continued)

                                      F-17
<PAGE>
 
                             PHOTONICS CORPORATION
                           (dba DTC DATA TECHNOLOGY)

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


9.   Related Party Transactions - continued
     --------------------------------------

     The Company also entered into an agreement with CMC California, Inc.
     (CMC), a company owned by a major shareholder and Chairman of the Board of
     Directors where CMC assumed and paid specific vendor invoices of the
     related party who is the Company's prime subcontractor.  This note payable
     bears interest at 12%, with the balance due on demand.  At December 31,
     1996, the Company owed approximately $391,000 to CMC.  During the first
     quarter of 1997, this amount was converted into preferred stock.

     During 1997, the Company entered into debt agreements with shareholders
     for approximately $874,000.  A summary of these debt agreements follows:

<TABLE>
<CAPTION>
                                                                                      1997          1996
                                                                                 -----------      --------
<S>                                                                              <C>              <C>
Bridge loan to shareholder at the rate of 15%; due on 
  demand; convertible to preferred stock                                           $ 295,000            --
 
Bridge loan to shareholder at the rate of 10%; due on 
  demand; convertible to preferred stock                                             229,000            --
 
Bridge loan to shareholder at the rate of 15%; due on 
  demand; convertible to preferred stock                                             350,000            --
                                                                                     -------       -------
                                                                                   $ 874,000            --
                                                                                     =======       =======
</TABLE>
10.  Accrued Expenses
     ----------------

     A summary of accrued expenses follows:

<TABLE>
<CAPTION>
                                                                                      1997          1996
                                                                                 -----------      --------
<S>                                                                              <C>              <C>
Accrued allowances for sales to distributors                                   $     221,000       326,000
Accrued professional fees                                                            102,000       299,000
Accrued payroll and related expenses                                                  91,000       242,000
Other accrued expenses                                                                27,000        57,000
                                                                                  ----------      ---------
                                                                               $     441,000       924,000
                                                                                  ==========      =========
</TABLE>

11.  Other Income
     ------------
          A summary of other income follows:

<TABLE>
<CAPTION>
                                                                                      1997          1996
                                                                                 -----------      --------
<S>                                                                              <C>              <C>
Debt forgiveness                                                               $     225,000            --
Royalty income                                                                       189,000            --
Miscellaneous other income                                                           138,000        24,000
                                                                                 -----------     ---------
                                                                               $     552,000        24,000
                                                                                 ===========     =========
</TABLE>

12.  Litigation
     ----------
 
     The Company is involved in litigation arising in the ordinary course
     of business. In the opinion of management, after consulting with legal
     counsel, these matters will be resolved without material adverse effect on
     the Company's financial position, results of operations or cash flows.

                                                                     (continued)

                                      F-18
<PAGE>
 
                             PHOTONICS CORPORATION
                           (dba DTC DATA TECHNOLOGY)

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


13.  Concentration of Credit Risk
     ----------------------------

     Financial instruments which potentially subject the Company to
     concentration of credit risk consist principally of cash and cash
     equivalents and trade receivables.  The Company places its cash and cash
     equivalents with high quality financial institutions and, by policy, limits
     the amounts of credit exposure to any one financial institution.

     A significant portion of the Company's accounts receivable are derived
     from one major class of customer (distributors) with the remainder spread
     across many other customers in various electronic industries.  The Company
     believes any risk of accounting loss is significantly reduced due to
     provision being made at the date of the sale for returns and allowances,
     diversity of its products, end-customers, geographic sales areas and
     insurance on foreign distributor sales.  The Company performs credit
     evaluations of its customers' financial condition whenever necessary.  The
     Company generally does not require cash collateral or other security to
     support customer receivables.

14.  Statements of Cash Flows
     ------------------------
 
     Supplemental disclosure of cash flow information:

<TABLE> 
<CAPTION> 
                                                                            1997      1996
                                                                           ------    ------
<S>                                                                      <C>        <C> 
       Cash paid for interest                                            $  37,000    43,000
                                                                           =======   =======
       Cash paid for income taxes                                        $  60,000     2,000
                                                                           =======   =======

       Noncash investing and financing activities:

       Issuance of preferred stock in payment of note payable            $  993,000       --
                                                                            =======  =======
       Issuance of preferred stock in payment of accounts payable         $ 241,000       --
                                                                            =======  =======
       Issuance of preferred stock in exchange for note receivable       $  300,000       --
                                                                            =======  =======
       Issuance of note payable for available-for-sale securities        $  229,000       --
                                                                            =======  =======
       Issuance of note payable in payment of accounts payable           $  477,000       --
                                                                            =======  =======
       Decrease note receivable balance in payment of
       accounts payable                                                  $  141,000       --
                                                                            =======  =======
       Issuance of preferred stock subscribed                            $   15,000  600,000
                                                                            =======  =======
       Acquisition of DTC by Photonics                                   $       --  214,000
                                                                            =======  =======
       Write-off of fully depreciated assets                             $       --  931,000
                                                                            =======  =======
</TABLE>

                                                                     (continued)

                                      F-19
<PAGE>
 
                             PHOTONICS CORPORATION
                           (dba DTC DATA TECHNOLOGY)

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


15.  Adjustments to Valuation Allowances
     -----------------------------------

     Litigation
     ----------

     In 1993, the Company's subsidiary in the United Kingdom (UK) initiated
     voluntary liquidation proceedings.  Subsequently, the court-appointed
     trustee for the creditors asserted a claim against the Company of
     approximately $800,000, which was recorded in the Company's results of
     operations and accrued expenses. On December 13, 1995 the Company settled
     the claims asserted by the creditors of its liquidated UK subsidiary for
     approximately $80,000, payable in eight monthly installments. During the
     ten months ended December 31, 1996,  the Company paid in full its
     settlement claim, receiving a release from the creditors, and recognized a
     gain on the settlement of the aforementioned liquidation preceding of
     approximately $730,000 which is included as an extraordinary item in the
     consolidated financial statements.

     Tax Claims
     ----------

     On July 8, 1994, DTC entered into an agreement with DTC Taiwan, and
     Compac for the disposition of DTC's interest in DTC Taiwan.  As a result of
     the disposition of DTC's interest in DTC Taiwan, the taxing authority of
     the Republic of Taiwan asserted a claim against DTC for approximately
     $1,800,000, which the Company made provision for.

     As part of the acquisition by Photonics, on May 13, 1996, DTC gave notice
     to all creditors of DTC's dissolution.  All creditors with claims against
     DTC were required, in the notice, to present their claims by July 12, 1996.
     As of December 31, 1996 and 1997, no claim(s) had been made by the Republic
     of Taiwan.

     In the Photonics acquisition of DTC, Photonics assumed all liabilities of
     DTC, except for certain liabilities/claims of DTC arising from the
     disposition of DTC Taiwan.  As the acquisition of DTC by Photonics has been
     treated as a purchase for accounting purposes, the Company recorded income
     of approximately $1,800,000 for the relief of debt/valuation allowance,
     which is included in other income, associated with the acquisition of
     certain liabilities.

     Tax Refund
     ----------

     In 1991, DTC received a $371,000 payroll tax refund associated with one
     of its subsidiaries.  As DTC was uncertain as to the nature of the refund,
     it recorded the receipt of cash as a liability and pursued investigating
     the matter.  Under Section 6532 of the Internal Revenue Code, any claim for
     an "Erroneous Refund" must be presented by the Internal Revenue Service
     within two years of preparation.  The statute of limitations on the tax
     refund has lapsed, and accordingly, the Company recorded a $371,000 relief
     of debt/valuation allowance, which is included in other income in the
     accompanying consolidated financial statements.

                                      F-20