<PAGE>
 
================================================================================
                    U.S. SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                  FORM 10-QSB

   [X]   QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934
         FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996

                                      OR

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

                        Commission File Number 1-11836

                             STYLES ON VIDEO, INC.
       (Exact Name of Small Business Issuer as Specified in Its Charter)

            DELAWARE                                     95-4389082
  (State of Other Jurisdiction of                     (I.R.S. Employer
  Incorporation or Organization)                     Identification No.)

                          667 RANCHO CONEJO BOULEVARD
                        NEWBURY PARK, CALIFORNIA 91320
                   (Address of Principal Executive Offices)

                                (805) 375-0996
               (Issuer's Telephone Number, Including Area Code)

                              101 HODENCAMP ROAD
                        THOUSAND OAKS, CALIFORNIA 91360
  (Former Name, Former Address and Fiscal Year, if Changed Since Last Report)


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

                               Yes [X]   No [ ]

  Concurrent with the filing of this Report on Form 10-QSB, the registrant is
 filing all previously filed reports required to be filed under Section 13 or
              15(d) of the Exchange Act as of February 28, 1997.

   State the number of shares outstanding of each of the issuer's classes of
               common equity as of the latest practicable date.

     COMMON STOCK, $0.001 PAR VALUE 8,852,759 SHARES AS OF MARCH 21, 1997

           Transitional Small Business Disclosure Format (Check One)

                               Yes [ ]   No  [X]

================================================================================
<PAGE>
 
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

                             STYLES ON VIDEO, INC.
                          CONSOLIDATED BALANCE SHEETS
                                  (Unaudited)
                                     ASSETS
<TABLE>
<CAPTION>
                                                                          September 30, 1996   December 31, 1995
                                                                          ------------------   -----------------
<S>                                                                       <C>                  <C>
Current assets:
 
 
   Cash and cash equivalents                                                    $  1,010,000        $  2,778,000
 
   Accounts receivable, less allowance of $264,000 and
     $267,000 at September 30, 1996 and December 31, 1995,
     respectively                                                                    245,000             200,000
 
 
   Income taxes receivable                                                            26,000             327,000
 
   Inventories                                                                       614,000             806,000
 
   Prepaid expenses and other current assets                                         230,000             225,000
                                                                                ------------        ------------
 
       Total current assets                                                        2,125,000           4,336,000
 
Property and equipment, net                                                          983,000             991,000
 
Long-term receivables, less allowance of $577,000 at September 30,                
  1996 and December 31, 1995                                                               -               1,000 
 
Goodwill, net of accumulated amortization of $666,000
  and $527,000 at September 30, 1996 and December 31, 1995,
  respectively                                                                     4,819,000           5,027,000
 
 
Debt issuance costs, net of accumulated amortization of $245,000 and
  $13,000 at September 30, 1996 and December 31, 1995,
  respectively                                                                       167,000             279,000
 
 
Other assets                                                                          73,000             107,000
                                                                                ------------        ------------
 
       Total assets                                                             $  8,167,000        $ 10,741,000
                                                                                ============        ============
 
</TABLE>
                      LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>

<S>                                                                             <C>                 <C>
Current liabilities:
 
   Accounts payable                                                             $    915,000        $  1,327,000
 
   Accrued expenses                                                                  759,000             388,000
 
   Customer advances                                                                 868,000             868,000
 
   Advance from stockholder                                                                -              48,000
 
   Current portion of notes payable and obligations                                                   
     under capital leases                                                          1,860,000             139,000 
                                                                                ------------        ------------ 
       Total current liabilities                                                   4,402,000           2,770,000
 
Note payable                                                                       1,450,000           3,117,000
 
Obligations under capital leases                                                      69,000              89,000
 
Minority interest in consolidated subsidiary                                         823,000           1,101,000
 
Commitments and contingencies
 
Stockholders' equity:
 
   Preferred stock, par value $.001; 1,000,000 shares                                                 
     authorized; 500 shares of Series A issued and outstanding at
     September 30, 1996 and December 31, 1995                                              -                   - 
 
   Preferred stock, par value $.001; 1,000,000 shares
     authorized; 500 shares of Series B issued and outstanding at
     September 30, 1996, none at December 31, 1995                                         -                   -
 
 
   Common stock, par value $.001; 10,000,000 shares
     authorized; 4,505,000 shares issued and outstanding
     at September 30, 1996 and December 31, 1995                                       4,000               4,000
 
   Additional paid-in capital                                                     16,237,000          16,187,000
 
   Accumulated deficit                                                           (14,818,000)        (12,527,000)
                                                                                ------------        ------------
 
       Total stockholders' equity                                                  1,423,000           3,664,000
                                                                                ------------        ------------
 
       Total liabilities and stockholders' equity                               $  8,167,000        $  1,074,100
                                                                                ============        ============
 
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                     - 2 -
<PAGE>
 
                             STYLES ON VIDEO, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
     For the three and nine month periods ended September 30, 1996 and 1995
                                  (Unaudited)
<TABLE>
<CAPTION>
 
 
                                                                 Three months ended                  Nine months ended
                                                                     September 30                       September 30
                                                             -----------------------------      -------------------------------
                                                                1996              1995             1996                1995
                                                             -----------       -----------      -----------         -----------
<S>                                                          <C>               <C>              <C>                 <C>
Revenues                                                                                                    
 Systems and related software sales                          $   155,000       $   437,000      $   470,000         $ 2,267,000
 Camera sales                                                    416,000           400,000        1,719,000           1,207,000
 Photography sales                                               666,000                 -        1,463,000                   -
 Other revenues                                                   30,000           237,000           48,000             368,000
                                                             -----------       -----------      -----------         -----------
    Total revenues                                             1,267,000         1,074,000        3,700,000           3,842,000
Cost of revenues                                                                                            
 Cost of systems and software sold                                     -            93,000           32,000           1,110,000
 Cost of camera sales                                            330,000           260,000        1,254,000             823,000
 Cost of photography sales                                       202,000                 -          517,000                   -
 Other costs                                                           -            78,000                -             122,000
                                                             -----------       -----------      -----------         -----------
    Total cost of revenues                                       532,000           431,000        1,803,000           2,055,000
                                                             -----------       -----------      -----------         -----------
    Gross profit                                                 735,000           643,000        1,897,000           1,787,000
Operating expenses                                                                                          
 Selling, general and administrative                           1,524,000         1,656,000        5,063,000           5,756,000
 Research and development                                        156,000           241,000          454,000             704,000
 Depreciation and amortization                                   144,000           107,000          428,000             301,000
                                                             -----------       -----------      -----------         -----------
    Total operating expenses                                   1,824,000         2,004,000        5,945,000           6,761,000
                                                             -----------       -----------      -----------         -----------
    Loss from operations                                      (1,089,000)       (1,361,000)      (4,048,000)         (4,974,000)

Interest income (expense), net                                  (158,000)           52,000         (468,000)            113,000
Legal settlement                                               1,700,000                 -        1,700,000                   -
Other (expense)                                                        -            (7,000)               -             (17,000)
Minority interest in net losses of consolidated                                                             
 subsidiary                                                      105,000           128,000          278,000             274,000
                                                             -----------       -----------      -----------         -----------
                                                                                                             
      Income (loss) before income taxes                                                                                         
       and extraordinary item                                    558,000        (1,188,000)      (2,538,000)         (4,604,000)
          
Provision (benefit) for income taxes                                   -            (1,000)           3,000               4,000
                                                             -----------       -----------      -----------         -----------
    Income (loss) before                                         558,000        (1,187,000)      (2,541,000)         (4,608,000)
     extraordinary item                                                                                     
Forgiveness of debt, net of tax of $0                             85,000                 -          250,000                   -
                                                             -----------       -----------      -----------         -----------
           Net income (loss)                                 $   643,000       $(1,187,000)     $(2,291,000)        $(4,608,000)
                                                             ===========       ===========      ===========         ===========
Net income (loss) per common share                                 $0.14            $(0.26)          $(0.51)             $(1.02)
                                                             ===========       ===========      ===========         ===========
Weighted average common shares outstanding                     4,505,000         4,505,000        4,505,000           4,505,000
                                                             ===========       ===========      ===========         ===========
</TABLE>
  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                     - 3 -
<PAGE>
 
                             STYLES ON VIDEO, INC.
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                  For the nine months ended September 30, 1996
                                  (Unaudited)
<TABLE>
<CAPTION>
 
                                                                     
                                                                                    
                                Series A         Series B                                            
                                Preferred       Preferred                                            
                                  Stock           Stock              Common Stock   
                             ---------------   ----------------    -----------------            
                                                                                        Additional
                             No. of     Par    No. of     Par      No. of      Par        Paid-in     Accumulated     Stockholders'
                             Shares    Value   Shares    Value     Shares     Value       Capital       Deficit           Equity 
                             ------    -----   ------    ------   ---------   ------    -----------   ------------    -------------
<S>                           <C>      <C>      <C>     <C>      <C>         <C>        <C>           <C>             <C>
Balance, December 31, 1995     500     $   -       -     $    -   4,505,000   $4,000    $16,187,000   $(12,527,000)     $ 3,664,000
Net loss                         -         -       -          -           -                       -     (1,581,000)      (1,581,000)

                               ---     -----     ---     ------   ---------   ------    -----------   ------------      -----------
Balance, March 31, 1996        500         -       -          -           -    4,000     16,187,000    (14,108,000)       2,083,000
Issuance of Series B             -         -     500          -                              50,000              -           50,000
 Preferred Stock                                                         
Net loss                         -         -       -          -           -        -              -     (1,353,000)      (1,353,000)

                               ---     -----     ---     ------   ---------   ------    -----------   ------------      -----------
Balance, June 30, 1996         500         -     500          -   4,505,000    4,000     16,237,000    (15,461,000)         780,000
Net income                       -         -       -          -           -        -              -        643,000          643,000
                               ---     -----     ---     ------   ---------   ------    -----------   ------------      -----------
Balance, September 30, 1996    500         -     500          -   4,505,000   $4,000    $16,237,000   $(14,818,000)     $ 1,423,000
                               ===     =====     ===     ======   =========   ======    ===========   ============      ===========
 
</TABLE>



  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                     - 4 -
<PAGE>
 
                             STYLES ON VIDEO, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
             For the nine months ended September 30, 1996 and 1995
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                                                                 Nine months ended
                                                                                      ----------------------------------------
                                                                                      September 30, 1996    September 30, 1995
                                                                                      ------------------    ------------------
<S>                                                                                <C>                   <C>
Cash flows from operating activities:
  Net loss                                                                                $(2,291,000)          $(4,608,000)
   Adjustments to reconcile net loss to net cash used in operating activities:
    Depreciation and amortization                                                             453,000               301,000
    Amortization of debt issuance costs                                                       329,000                     -
    Forgiveness of debt, net of tax                                                          (250,000)                    -
    Write-off of loan from stockholder                                                        (48,000)                    -
    Minority interest in consolidated subsidiary                                             (278,000)             (274,000)
      Changes in operating assets and liabilities:
       Accounts receivable                                                                    (45,000)             (132,000)
       Income taxes receivable                                                                301,000               929,000
       Inventories                                                                            192,000               177,000
       Prepaid expenses and other current assets                                               (5,000)              (10,000)
       Long-term receivables and other assets                                                                       (34,000)
       Accounts payable and accrued expenses                                                  209,000               654,000
                                                                                          -----------           -----------
       Net cash used in operating activities                                               (1,433,000)           (2,997,000)
                                                                                          -----------           -----------
 
Cash flows from investing activities:
      Purchase of property and equipment                                                     (152,000)             (248,000)
                                                                                          -----------           -----------
       Net cash used in investing activities                                                 (152,000)             (248,000)
                                                                                          -----------           -----------
 
Cash flows from financing activities:
       Proceeds received from issuance of preferred stock                                                                 -
       Repayment of loan receivable from stockholder                                           50,000               450,000
       Repayment of advance from stockholder                                                        -              (152,000)
       Repayment on notes payable and capital lease obligations                            (1,218,000)              (22,000)
       Proceeds received from issuance of notes payable                                     1,200,000               300,000
       Debt issuance costs                                                                   (215,000)                    -
                                                                                          -----------           -----------
        Net cash used in financing activities                                                (183,000)              576,000
                                                                                          -----------           -----------
        Net decrease in cash and cash equivalents                                          (1,768,000)           (2,669,000)
     Cash and cash equivalents, beginning                                                   2,778,000             4,361,000
                                                                                          -----------           -----------
     Cash and cash equivalents, ending                                                    $ 1,010,000           $ 1,692,000
                                                                                          ===========           ===========
 
     Supplemental disclosure of cash flow information:
     ------------------------------------------------
     Cash paid during the year for:
        Income taxes                                                                      $     3,000           $         -
        Interest                                                                          $    44,000           $    17,000

</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                     - 5 -
<PAGE>
 
                             STYLES ON VIDEO, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              September 30, 1996
                                  (Unaudited)


(1) General

    (a) The accompanying unaudited consolidated financial statements of Styles
on Video, Inc. ("SOV") and subsidiaries, (collectively, "the Company") have been
prepared in accordance with generally accepted accounting principles ("GAAP")
and in accordance with the instructions to Form 10-QSB.  Accordingly, these
consolidated financial statements do not include all of the information and
footnotes required by GAAP for complete financial statements.  In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included and all such adjustments are of a normal recurring nature.  The
consolidated results of operations for the three and nine months ended September
30, 1996 are not necessarily indicative of the results to be expected for the
full year.  For more complete information, including a discussion of various
factors that may affect the future financial position and results of operations
of the Company, refer to the Company's Report on Form 10-KSB for the year ended
December 31, 1995, as filed with the Commission on March 24, 1997.

(2) Related Party Transactions

    IDI Financing Transactions.  The Company and FYI have entered into a series
of transactions with IDI and certain related entities for the purpose of raising
capital to fund the Company's operations and those of FYI.  Jeffrey A. Safchik
is Chief Executive Officer of IDI's corporate general partner and was appointed
as Chief Executive Officer of the Company after the series of transactions in
1995 described below which gave IDI a majority of seats on the Company's Board
of Directors.  Mr. Safchik resigned all positions with the Company in July 1996.
IDI beneficially owns approximately 50.1% of the Company's outstanding Common
Stock, including 132,000 shares of Common Stock held by Greenstreet Partners, an
affiliate of IDI.  Additionally, upon exercise of warrants and conversion of the
Preferred Stock, IDI will own approximately 71% of the Company's outstanding
Common Stock on a fully diluted basis.

    In September 1995, the Company and FYI received short-term bridge financing
of $300,000 from Multinational Trading Corp., a Florida corporation ("MTC").
MTC and IDI are companies with overlapping but not identical management.  In
October 1995, MTC made additional advances of $75,000 to the Company.  The
Company repaid the $375,000, plus interest accrued thereon and transaction fees,
with a portion of the $3,000,000 it received from IDI in the transaction
described immediately below.  In November 1995, pursuant to a Note and Preferred
Stock Purchase Agreement, dated as of November 20, 1995 (the "1995 Agreement"),
the Company and FYI issued to IDI $2,950,000 principal amount of 10% Senior
Notes due June 30, 1998 (the "1995 Notes").  Additionally, the Company issued to
IDI 500 shares of Series A Preferred for $50,000 and Common Stock Purchase
Warrants (the "1995 Warrants") entitling IDI to purchase shares of the Company's
Common Stock equivalent to 40% of the fully diluted shares of Common Stock
outstanding on November 20, 1995.  The exercise price of the 1995 Warrants was
$1.12 per warrant share, which represented the estimated consolidated book value
per issued and outstanding share of the Company on the date of the 1995
Agreement.  The exercise price of the 1995

                                     - 6 -
<PAGE>
 
                             STYLES ON VIDEO, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              September 30, 1996
                                  (Unaudited)

Warrants was subsequently reduced to $.075 per warrant share as described below.
The 1995 Warrants may be exercised at any time prior to November 20, 2005.

    The terms of the Series A Preferred give the holder of the Series A
Preferred the right to designate four of the Company's Board of Directors.  IDI
has appointed Messrs. Geller, Porter and Shutler as its designees on the Board
of Directors and has the right to elect a director to fill one of the two
current vacancies on the Board.

    Pursuant to a Note and Preferred Stock Purchase Agreement, dated as of May
14, 1996 (the "1996 Agreement), as amended, the Company and FYI agreed to issue
up to $1,200,000 aggregate principal amount of 10% Senior Notes Due June 30,
1998 (the "1996 Notes" and together with the 1995 Notes, the "Notes") in a
series of purchases of such 1996 Notes between the Closing Date (as defined) and
September 15, 1996.  Each purchase of 1996 Notes was contingent upon the Company
and FYI meeting certain minimum performance targets.  IDI also purchased 500
shares of Series B Preferred, for $50,000 and received Common Stock Purchase
Warrants (the "1996 Warrants" and together with the 1995 Warrants, the
"Warrants").  The 1996 Warrants have an exercise price of $.075 per warrant
share and are exercisable until November 20, 2005.

    On May 30, 1996, IDI purchased $371,712 principal amount of 1996 Notes, of
which $271,712 was used to repay principal and interest on certain interim loans
made to the Company and FYI by IDI and IDI-related entities in April 1996.  IDI
purchased an additional $250,000, $100,000, $150,000 and $180,000 principal
amount of 1996 Notes in June, July, and August 1996 and January 1997,
respectively.

    The 1995 Agreement and the 1995 Warrants were amended in 1996 to conform to
the provisions of the 1996 Agreement and the 1996 Warrants, and the exercise
price of the 1995 Warrants was reduced to $0.075, the exercise price of the 1996
Warrants.

    The issuance of the 1996 Warrants and the Series B Preferred triggered the
anti-dilution provisions of the 1995 Warrants and the Series A Preferred,
resulting in the 1995 Warrants and the Series A Preferred being exercisable for
and convertible into 3,914,882 shares of Common Stock and 238,095 shares of
Common Stock, respectively, as of May 14, 1996.  Additionally, the 1996 Warrants
were exercisable for 53,286,228 shares of Common Stock, and the Series B
Preferred was convertible into 666,666 shares of Common Stock.  On a fully-
diluted basis, IDI held Warrants and Preferred Stock exercisable for and
convertible into 58,105,871 shares of Common Stock.

    The authorized Common Stock of the Company consists of 10,000,000 shares,
all of which are issued and outstanding or reserved for issuance pursuant to
outstanding warrants or stock option plans, before taking into account the
Preferred Stock and the 1996 Warrants.

    Pursuant to the terms of the 1996 Agreement, the Company agreed that by
October 31, 1996 it would take all corporate action, including obtaining
stockholder approval, necessary to authorize and

                                     - 7 -
<PAGE>
 
                             STYLES ON VIDEO, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              September 30, 1996
                                  (Unaudited)

reserve for issuance a number of shares of Common Stock at least equal to the
number of shares of Common Stock into which the Series A Preferred, Series B
Preferred, 1996 Warrants as well as the other outstanding warrants may be
converted or exercised.  Originally, failure of the Company to take all
corporate action necessary to authorize and reserve for issuance the number of
share of Common Stock underlying all of the foregoing Stock by October 31, 1996
constituted a breach of a restrictive covenant in the 1996 Agreement, which
could have caused, among other things, acceleration of the 1996 Notes.  The
October 31, 1996 deadline has been extended to May 1, 1997.

    In addition, the 1996 Warrants and the other warrants issued in connection
with the 1996 financing transaction were to become exercisable upon the earlier
to occur of October 31, 1996 and the date on which all such corporate and
stockholder actions were taken by the Company.  The October 31, 1996 date has
been extended to May 1, 1997.

    The Notes bear interest at the rate of 10% per annum, payable monthly.  The
1996 Notes provide for principal payments of $500,000 on March 31, June 30,
September 30 and December 31, 1997 and March 31, 1998.  On January 15, 1997, the
due date for the March 31, 1997 principal payment was extended to not later than
May 1, 1997 as described below.  The 1996 Notes are payable in five equal
quarterly installments commencing June 30, 1997.  The remaining principal is due
and payable on June 30, 1998.  The 1996 Agreement amended the 1995 Agreement to
allow the Company to defer interest payments due between May 31, 1996 and
December 31, 1996, if the combined operating cash flow of the Company and FYI is
negative, provided that monthly interest payments must be made in months where
the combined operating cash flow of the Company and FYI is positive and that all
deferred accrued and unpaid interest shall be paid in full on or before December
31, 1996.  On January 15, 1997, the interest deferral was extended from December
31, 1996 to not later than May 1, 1997.

    The Notes are subject to mandatory redemption (in whole or in part) under
certain circumstances, including upon receipt of proceeds from the issuance of
equity by the Company or FYI (subject to certain exceptions) or proceeds of a
sale or other disposition of assets (other than sales of inventory in the
ordinary course of business, certain sales of obsolete or worn out equipment and
certain approved sales).  Holders of the Notes have a put right enabling them to
cause the Company and FYI to repurchase the Notes, at par, in the event of a
sale, merger, change of control or the public offering of securities involving
the Company of FYI.

    Substantially all of the assets of the Company and FYI are pledged as
collateral for the Notes.  The holder of the Notes has the right to foreclose on
such assets or take other protective measures upon the occurrence of an event of
default under 1995 Agreement or the 1996 Agreement which is not timely cured or
waived.  The Company and FYI are subject to various restrictive covenants,
including limitations on the incurrence of additional indebtedness, capital
expenditures, investments, transactions with affiliates and consolidation,
merger and sale of assets.  The Company and FYI also must satisfy certain
financial tests during the term of the Agreement, including the maintenance of
certain mandatory net worth and earnings levels, determined at the end of each
calendar quarter.  The failure to comply with the restrictive covenants or pass
the financial tests constitute an event of default under the 1995

                                     - 8 -
<PAGE>
 
                             STYLES ON VIDEO, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              September 30, 1996
                                  (Unaudited)

Agreement and the 1996 Agreement.  In January 1997, IDI subordinated its first
priority security interest in FYI's hospital contracts and proceeds thereof to
Hasco International, Inc. (see Subsequent Events - FYI Sale).

    The holders of the Preferred Stock are entitled to receive  dividends of $10
per share per annum prior to the distribution of any dividends to the holders of
Common Stock.  Dividends accrue whether or not declared by the Board of
Directors of the Company.  The Preferred Stock is subject to optional redemption
by the Company, at a redemption price of $100 per share plus any accrued
dividends.  The Preferred Stock is convertible at any time, in whole or in part,
into shares of Common Stock, at a per share conversion equal to the higher of
the current market or book value of the Common Stock at the date of conversion.
The holders of the Series A Preferred, voting as a class, are entitled to elect
four of the Company's directors.  In the event of a change of control, as
defined in the 1995 Agreement and the 1996 Agreement, the Company must offer to
redeem the Preferred Stock.  The sale of the FYI assets constitutes a change of
control because the Company is selling a substantial amount of its assets.  If a
change of control occurs, the Company must offer to redeem the Series A
Preferred and the Series B Preferred for $100 per share in addition to any
accrued dividends, which currently amount to $7,500 for the Series A Preferred
and $5,000 for the Series B Preferred.  The stockholder of the Series A
Preferred and the Series B Preferred has 30 days from the date of the change of
control to elect redemption of the Preferred shares.

    IDI also received certain registration rights with respect to the Warrants,
the shares of Common Stock issuable upon conversion of the Preferred Stock and
the shares of Common Stock issuable upon exercise of the Warrants.

    The 1996 Agreement was conditioned upon settlement of a suit brought by the
Company against its former outside accounting firm and certain individual
defendants entitled Styles On Video, Inc. v. Kellogg & Andelson, et al.,
                    --------------------------------------------------- 
Superior Court of the State of California, County of Los Angeles, Case No. BC
14268.  Pursuant to the settlement of such suit, Kellogg & Andelson agreed to
pay $1,700,000 to the Company (the "Kellogg Settlement").  The funds were
released from escrow upon the settlement of the Class Action, as described
below, in July 1996.  Of the Kellogg Settlement proceeds, $870,000 was applied
to repayment of the 1996 Notes.  After partial repayment of the 1996 Notes, and
payment of certain legal expenses in connection with the 1996 Agreement, the net
proceeds of the Kellogg Settlement to the Company were $430,000, which was added
to the Company's general working capital.  In April 1995, the Company settled a
class action suit which was filed against the Company and certain of its
officers and directors in 1994 (the "Class Action") as well as a shareholders'
derivative suit which named the directors and certain of the officers of the
Company (the "Class Action Settlement").  Pursuant to the Class Action
Settlement, the Company agreed to deliver to the plaintiff class warrants to
purchase 1,750,000 shares of Common Stock and the Company recorded a promissory
note in the principal amount of $250,000.  The exercise price on the warrants is
$.075 per share and the warrants   are redeemable by the Company at any time
over the five-year life of the warrants for $5 per warrant.  The Company's
director and officer liability insurance carriers also agreed to pay to the
plaintiff class $2,250,000.  With regard to the derivative suit, Guy de Vreese
surrendered 250,000 shares of the

                                     - 9 -
<PAGE>
 
                             STYLES ON VIDEO, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              September 30, 1996
                                  (Unaudited)

Company's Common Stock and options for 150,000 shares of the Company's Common
Stock.  The shares of Common Stock are to be distributed to the plaintiff class
and the options were canceled.

    The Company and FYI have guaranteed each other's obligations under the 1995
Agreement and the 1996 Agreement.

    On January 15, 1997, the Company, FYI and IDI entered into several
agreements (the "January 1997 Agreements").  The Company and IDI entered into a
Securities Exchange Agreement (the "Exchange Agreement") which provided for the
issuance of 4,347,427 shares of its Common Stock to IDI in exchange for all of
the 1995 Warrants and for 1996 Warrants with respect to 1,867,029 shares of
Common Stock.  IDI remains the holder of 1996 Warrants for 51,419,199 shares of
Common Stock.

    In addition, the Company, FYI and IDI agreed to increase the amounts
borrowed under the 1996 Notes by $180,000 to a total of $1,200,000.  At the same
time, the obligation represented by the Bridge Note dated September 19, 1996, as
amended (the "Bridge Note"), between the Company, FYI and IDI, was decreased by
$180,000 under the Seventh Amendment to Bridge Note, dated January 15, 1997 (the
"Seventh Amendment"), from up to $1,157,000 to up to $977,000.  Each successive
amendment to the Bridge Note, including the Seventh Amendment, amended the due
date and the amounts due pursuant to the Bridge Note.  The due date of the
Seventh Amendment was extended to not later than May 1, 1997.  As of January 31,
1997, the Company has borrowed $927,000 pursuant to the Bridge Note and is
entitled to draw the remaining $50,000 upon receipt by the Company of certain
income tax refunds.  Substantially all of the assets of the Company and FYI are
pledged as collateral for the Bridge Note.  IDI has the right to foreclose on
such assets or take other protective measures upon the occurrence of an event of
default under the Bridge Note which is not timely cured or waived.  In January
1997, IDI subordinated its first priority security interest in FYI's hospital
contracts and proceeds thereof to Hasco in connection with the sale of the FYI
business. See "Subsequent Events".

    The Company, FYI and IDI also entered into a General Amendment and Waiver
Agreement to (i) amend specific provisions of the 1995 Agreement, the 1996
Agreement, the 1996 Warrants, and the Certificate of Designation for Series B
Preferred Stock of SOV (collectively, the "Agreements"), and (ii) waive each of
the breaches or defaults with respect to specific provisions of the Agreements
as of January 15, 1997.  The amendments extended:  (i) the date by which the
Company must take all corporate action necessary to authorize and reserve for
issuance the number of shares of Common Stock into which the Series B Preferred
Stock and 1996 Warrants may be converted or exercised from October 31, 1996 to
not later than May 1, 1997; (ii) the deferral of interest payments due pursuant
to the Notes from December 31, 1996 to not later than May 1, 1997; and (iii)
extended the first principal repayment date of the 1995 Notes from March 1, 1997
to not later than May 1, 1997.  In addition, the amendments reduced certain
minimum performance targets in the 1995 Agreement and 1996 Agreement.

    The Company also issued a Series D Warrant (the "Series D Warrant") to IDI
which is exercisable for up to 61,803,805 shares of the Company's Common Stock
at an exercise price of $.075 per share, unless the Market Price is greater.
The Series D Warrants are contingent upon the occurrence

                                     - 10 -
<PAGE>
 
                             STYLES ON VIDEO, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              September 30, 1996
                                  (Unaudited)
 
 
of a proposed reverse stock split.  If the reverse stock split is approved and
the Company and IDI complete the second exchange of securities described below,
then the Series D Warrants will not be exercisable.  However, if the reverse
stock split is not approved by 5:00 p.m., Los Angeles time, on April 15, 1997,
then the Series D Warrants may be exercised by IDI prior to November 20, 2005.

    If the proposed reverse stock split is approved by the stockholders, the
Company intends to complete a second exchange of securities with IDI pursuant to
which the Company will issue an additional 39,342,461 (pre-reverse split) shares
of its Common Stock to IDI in exchange for all of the remaining 1996 Warrants
with respect to 51,419,199 (pre-reverse split) shares of the Company's Common
Stock, together with the surrender of the Series D Warrants.  After the second
security exchange, IDI would continue to hold 500 shares of the Company's Series
A Preferred and 500 shares of the Company's Series B Preferred, as well as
43,689,888 (pre-reverse split) shares of the Company's Common Stock, equivalent
to 67% of the shares anticipated to be outstanding on the date of the second
exchange, April 15, 1997.

    Cancellation of Certain FYI Common Stock.  In connection with the
transactions contemplated by the 1996 Agreement, Dana Arnold, the then-President
of FYI, exchanged his shares of FYI common stock (20% of the outstanding shares)
for warrants exercisable for 7,749,449 shares of the Common Stock of the
Company.  The shares of FYI previously held by Arnold were canceled.  As a
result of such transaction, FYI is now a wholly owned subsidiary of the Company.
Due to the triggering of certain provisions of the Exchange Agreement, the
warrants became exercisable for 7,597,508 shares of the Company's Common Stock.

    Employment  Agreement with FYI's Chief Executive Officer.  Effective as of
April 5, 1994, FYI entered into an employment agreement with Dana I. Arnold.
This agreement provided that Mr. Arnold would serve as Chairman of the Board,
Chief Executive Officer, President and Secretary of FYI.  In addition, the
agreement covered a three-year term expiring in April 1997, for which the annual
base compensation to be paid was $180,000.  The agreement was canceled in May
1996, and FYI entered into a new employment agreement with Mr. Arnold, expiring
in May 1998, with an annual base compensation of $100,000.  Under the latter
agreement, if certain cash flow conditions were met, the annual base
compensation to be paid would be increased $175,000.  The agreement also
provided that Mr. Arnold would continue to serve as Chairman of the Board, Chief
Executive Officer, President and Secretary of FYI and that if Mr. Arnold was
terminated without cause, he would be entitled to receive a lump sum payment
equal to the aggregate salary due to him for the then remaining term of the
agreement and immediate vesting of any unvested options and warrants.  In
December 1996, Mr. Arnold resigned from all positions with the Company and FYI
pursuant to a termination and settlement agreement.  The agreement provides that
Mr. Arnold shall receive his current salary until no later than March 31, 1997.
On the closing of the FYI Sale, Mr. Arnold is entitled to receive all unpaid
salary due to him under the employment agreement expiring in May 1998 at an
annual base compensation of $100,000.  In addition, all of the warrants to
purchase shares of the Company's Common Stock held by Mr. Arnold fully vest on
the closing of the FYI Sale.  See "Subsequent Events."

                                     - 11 -
<PAGE>
 
                             STYLES ON VIDEO, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              September 30, 1996
                                  (Unaudited)
 
 
    Issuance of Warrants to Director.  In May 1996, the Company issued warrants
to purchase 80,000 shares of SOV's common stock to Ann Ehringer representing the
Independent Committee in connection with the 1996 Agreement.  The exercise price
is $.075 per warrant.  The warrants vest 40,000 in May 1996 and 40,000 in April
1997.  The Company has granted the warrant holder certain registration rights
related to these warrants.

    Consulting Agreement.  The Company entered into a consulting agreement (the
"Consulting Agreement") with K. Eugene Shutler, who later became its Chief
Executive Officer, for services relating to the Company's business.  In exchange
for the services, the Company is obligated to pay the consultant $12,500 per
month plus expenses.  In addition, pursuant to the Consulting Agreement, the
Company issued warrants to purchase 250,000 shares of SOV's common stock at an
exercise price of $.075 per share, which management believes represents the fair
market value at the date of issuance.  The warrants vest 100,000 in April 1996
and the remaining 150,000 on a pro-rata basis over the subsequent twelve month
period.  The Company has granted the warrant holder certain registration rights
related to these warrants.  The Consulting Agreement terminated and warrants
ceased vesting on August 1, 1996, at which time the Company entered into an
employment agreement with him.

    Employment Agreement with Company's Chief Executive Officer.  In August
1996, the Company entered into an employment agreement with K. Eugene Shutler.
The agreement has an initial two-year term and contains certain renewal
provisions.  Pursuant to the agreement, the Company will pay him an annual base
salary of $230,000, subject to increase at the sole discretion of the Board of
Directors.  In addition, he will be eligible to receive a one-time bonus of
$50,000 if certain cash flow conditions are met.

    If Mr. Shutler's employment is terminated, under certain circumstances, he
is entitled to a termination payment of up to 100% of his annual base salary.
Concurrently with the execution of the employment agreement, he was granted
warrants to purchase an aggregate number of shares at an exercise price of $.075
per share of the Company's common stock constituting 5% of the Company's common
stock on a fully-diluted basis, which vest at the rate of 4% per month beginning
August 1996.  In addition, the Company terminated its prior Consulting Agreement
with him.

    Employment Agreement with Dycam's Chief Executive Officer.  On February 7,
1994, Dycam entered into an employment agreement with John A. Eding.  This
agreement provided that Mr. Eding would serve as President of Dycam and provided
for (a) an initial three-year term, (b) a base salary of $120,000 per annum and
(c) options to purchase 45,000 shares of the Company's Common Stock at $8.67 per
share, which were repriced during 1996 to $.075 per share.  The agreement
expired in February 1997.

    Loan Transaction with Dycam.  In December 1994, Dycam made a secured loan of
$500,000 to the Company.  Dycam determined that extending this loan was in the
best interest of Dycam and its stockholders, as the loan enabled the Company to
continue funding FYI, and thereby supported the

                                     - 12 -
<PAGE>
 
                             STYLES ON VIDEO, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              September 30, 1996
                                  (Unaudited)
 
 
development and manufacture of the specialized digital camera which FYI would
purchase from Dycam.  In January 1995, Dycam made an additional secured loan of
$500,000 to the Company.  The two loans have been memorialized in a single note
(the "Secured Note") which bears interest at the prime rate plus two percentage
points and called for payments of interest only for eight months with all
principal and accrued interest due and payable on September 1, 1995.  In
connection with the 1995 Agreement, Dycam extended the maturity date of the
Secured Note to December 31, 1998.  The Company has made all interest payments
on the Secured Note in a timely fashion.  The note is secured by a first
priority interest in the 1,916,667 shares of Dycam's common stock owned by the
Company.  If the Company should default on its obligation pursuant to the Notes,
Dycam may not be repaid under the Secured Note and will be entitled to receive
back up to the 1,916,667 shares of Dycam's common stock held by the Company.

    Intercompany Transactions Between FYI and Dycam.  Under the terms of an
agreement with FYI, Dycam agreed to provide an exclusive right to use Dycam
technology in the hospital baby portrait market through April 2005.  FYI
received an option to purchase up to 5,000 Dycam cameras at predetermined prices
and to receive continual upgrades of camera technology and agreed to pay Dycam
royalties of 7.5% of net sales from all hospitals using FYI portrait service.
Dycam agreed to defer this royalty until the earlier of the first month in which
FYI has positive operating cash flow and April 30, 1997.  If FYI has its camera
system manufactured by someone other than Dycam, FYI agreed to pay Dycam a
"Camera Technology Fee" for each camera installed in a hospital served by FYI,
instead of the 7.5% royalty described above.  Dycam earned approximately
$170,000 and $32,000 under this agreement in the years ended December 1996 and
1995, respectively.  Dycam also agreed to finance the first 200 cameras bought
by FYI for terms of 36 to 48 months with equal monthly payments of principal and
interest, with interest computed at a rate of 2% over the Wall Street Journal
prime rate.  At the closing of the FYI Sale, FYI and Dycam will terminate their
existing contractual relationships.  See "Subsequent Events".

    Loan Transaction With Former Chief Executive Officer.  In December 1994, the
Company received a $200,000 advance from Guy de Vreese, the then-Chief Executive
Officer of the Company. Approximately $150,000 was repaid during the three
months ended March 31, 1995 and approximately $50,000 of this advance, which was
not memorialized in a written document, was outstanding as of December 31, 1995.
In July 1996, the Company was released from the obligation in connection with
the settlement of the Class Action.

    Stock Options.  In May 1996, stock options previously granted to certain of
the Company's officers, and employees were repriced from $3.00-$8.67 to $.075
per share, the fair market value as determined at the date of the repricing.

    Lease of Executive Offices.  From January to April 1996, the Company's
executive offices were located at 101 Hodencamp Road, Thousand Oaks, CA 91360,
pursuant to a month-to-month sublease with rental payments of approximately
$1,000 per month, which approximated the current market rental

                                     - 13 -
<PAGE>
 
                             STYLES ON VIDEO, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              September 30, 1996
                                  (Unaudited)
 
 
rate for such space.  FYI's then Chief Executive Officer, Dana Arnold, is a
significant stockholder and officer of the privately-held company which
subleased the executive offices to FYI.

    Other.  See "Subsequent Events."

(3) Subsequent Events

    (a) Stock Incentive Plan - In August 1996 - the Company adopted a stock
option plan (the "1996 Plan") which provides for the granting of incentive or
non-statutory options to employees, consultants, officers and directors who will
contribute to the Company's long-range success.  The Company has reserved
approximately 5,000,000 shares of common stock for issuance under the plan.
Such options generally will be granted at fair market value at the date of grant
and vest over time.  Full implementation of the 1996 Plan and related
transactions is subject to shareholder approval to adopt the 1996 Plan and to
increase the authorized share capital of the Company.

    (b) IDI Financing Events - In September 1996, the Company received a state
income tax refund totaling $301,000 which was used to repay IDI debt.

    (c) FYI Sale - On December 13, 1996, the Company and FYI signed a letter of
intent to sell substantially all of the assets, together with the assumption of
certain liabilities, of FYI to Hasco (the "FYI Sale").  Hasco operates First
Foto, a competitor of FYI in the newborn hospital photographic business.
Effective January 31, 1997, the Company and FYI executed definitive agreements
with Hasco for the FYI Sale, which is expected to close in April 1997.  The sale
price of $4,533,060 is payable $3,468,000 in cash at the closing and $1,065,000
in twelve equal quarterly installments of $88,750 commencing three months after
the closing.  The sale price is subject to adjustment for certain hospital
contract terminations and certain operating results prior to closing.  The
obligation of Hasco to make the installment payments is unsecured and non-
interesting bearing.

    The assets of FYI to be sold to Hasco (the "Purchased Assets") include
substantially all of the operating assets of FYI, excluding certain intellectual
property rights owned by FYI.  With certain exceptions, Hasco will assume
substantially all obligations that arise after the closing under all hospital
and other specified contracts of FYI that are included in the Purchased Assets,
all of FYI's capital lease obligations, and all trade payables and commissions
arising after the closing.  Hasco will not assume, and FYI will remain liable
for, all obligations and liabilities arising prior to the closing, and certain
hospital guarantee and commission payments.

    The Company has agreed to deliver to Hasco an option permitting Hasco to
purchase from the Company that number of shares of Dycam common stock equal to
4.9% of the outstanding shares of the common stock of Dycam on the Closing Date
(approximately 152,921 shares as of January 31, 1997).  The exercise price of
this three-year option to be granted to Hasco will be equal to the average
closing price for Dycam common stock during the period from January 31, 1997
through the closing date.

                                     - 14 -
<PAGE>
 
                             STYLES ON VIDEO, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              September 30, 1996
                                  (Unaudited)
 
 
    Hasco and FYI will enter into a sublease pursuant to which Hasco will sublet
FYI's principal operating facility in Newbury Park, California from the date of
the closing through December 31, 1998.  The rental payments under the sublease
will be approximately equal to FYI's occupancy costs under the primary lease
agreement during that period.  The primary lease agreement expires May 31, 2000.
The Company intends either to negotiate an earlier termination of the lease with
the landlord or to seek a subtenant for the remaining balance of the lease.

    At the closing, FYI and Dycam will terminate their existing contractual
relationship involving the use by FYI of Dycam's cameras, software and other
supporting goods and services, and Hasco and Dycam will enter into a Dycam
Master Agreement (the "Dycam Master Agreement"), with respect to the assumption
of FYI's digital camera lease obligations to Dycam, the leasing by Hasco of
additional Dycam digital cameras, and a royalty-free license of certain digital
camera technology by Dycam to Hasco, certain hardware and software support
services to be provided by Dycam for a three-year period commencing on the
closing date and certain additional terms.  Under the Dycam Master Agreement,
Hasco will be required to pay Dycam specified leasehold payments for leased
cameras, a $300,000 fee (payable quarterly over a three-year period) for the
support services and the cost of certain hardware upgrades.

    On January 22, 1997, Hasco loaned FYI $60,000 pursuant to a 10% promissory
note due January 31, 1997.  On January 31, 1997, Hasco and FYI entered into a
loan agreement (the "Loan Agreement') pursuant to which Hasco will lend to FYI
up to $180,000 per month, up to a maximum of $540,000, at an interest rate of
10% per annum (the "Hasco Loan").  As of January 31, 1996, FYI has borrowed
$180,000 pursuant to the Loan Agreement, including $60,000 on the promissory
note which was added to the Hasco Loan balance.  Borrowings under the Loan
Agreement are secured by a first priority security interest in FYI's hospital
contracts and proceed thereof.  IDI agreed to subordinate its rights to the
rights of Hasco in connection with this loan.  The Company executed the Hasco
Loan Agreement and related promissory note as co-borrower and co-maker.  All
amounts due under the Loan Agreement will be cancelled at Closing through the
assumption of these liabilities by Hasco.  The purchase price will not be
subject to reduction for the amount cancelled, except under certain
circumstances.  If the FYI Sale is terminated or if the closing has not occurred
by April 22, 1997, all amounts under the Loan Agreement will become due and
payable ninety days following the terminating event.

    The FYI Sale is subject to the approval of the stockholders of the Company.
The Company expects to receive the requisite approval of its stockholders at a
meeting planned to be held in April 1997.

    In connection with the FYI Sale, each of the Company, FYI and Dycam entered
into a mutual release with Hasco with respect to all claims arising between them
prior to the execution of the FYI Sale agreements, including those claims
asserted in certain litigation then pending between FYI and Hasco.

    (d) Other - See "Related Party Transactions" and "Contingencies."

                                     - 15 -
<PAGE>
 
                             STYLES ON VIDEO, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              September 30, 1996
                                  (Unaudited)
 
 
(4) Contingencies

    (a) In April 1995, the Company settled a class action suit which was filed
against the Company and certain of its officers and directors in December 1994
as well as a shareholders' derivative suit which named the directors and certain
of the officers of the Company.  The settlement received final approval by the
District Court in July 1996.  Pursuant to the terms of the final settlement, as
amended, the Company agreed to deliver to the plaintiff class warrants to
purchase 1,750,000 shares of the Company's common stock and has recorded a
promissory note in the principal amount of $250,000 at December 31, 1994,
payable in three equal installments on July 1, 1996, January 1, 1997 and July 1,
1997 at 9% interest.  As of January 31, 1997, the Company has not made any
payments on the obligation.  The exercise price of the warrants is $.075 per
share.  The warrants will have a five-year life and are redeemable by the
Company at any time for $5 per warrant.  Issuance of warrants to purchase
approximately 1,000,000 of the Company's common stock is subject to stockholder
approval to increase the authorized share capital of the Company.  Also as part
of the settlement, the Company's director and officer liability insurance
carriers agreed to pay $2,250,000.  In the derivative case, Guy de Vreese, the
former Chairman and Chief Executive Officer of the Company, surrendered 250,000
shares of the Company's common stock held by him and of options for 150,000
shares of the Company's common stock held by him.  The shares surrendered by Mr.
de Vreese are to be distributed to the class plaintiffs and the options have
been canceled.

    (b) In October 1995, Durian Technologies, Inc. and Durian Finance
(collectively, "Durian") filed a complaint against Styles on Video, Inc. for
breach of contract, fraud and negligent representation in connection with
financing arrangements with Durian for the benefit of Styles On Video, Inc. and
seeks accounting, and declaratory relief.  Durian also seeks an unspecified
amount of damages.  Styles on Video, Inc. responded to the complaint in January
1996.  Styles on Video, Inc. intends to vigorously defend the suit and assert
appropriate counterclaims.

    (c) In February 1995, Thomas D. Leaper ("Leaper") the Company's former Chief
Operating Officer and Chief Financial Officer, filed a complaint against SOV for
breach of contract, emotional distress and wrongful termination.  The case was
dismissed in July 1996 concurrent with the settlement of the lawsuit against the
Company's former independent accountants.

    (d) In January 1996, the Company filed a suit against its former independent
accountants, the accounting firm of Kellogg & Andelson, along with individual
accountants James Walters, William Wall, Frederick Flax, and Thomas Leaper, who
also served as the Company's former Chief Operating Officer and Chief Financial
Officer (collectively, "K&A").  The suit asserted claims for professional
negligence, breach of contract and breach of fiduciary duty against these
defendants arising out of the services rendered by K&A in connection with the
Company's 1993 year-end audit and 1994 quarterly reports.  The Company sought
compensatory damages in excess of $54 million, as well as punitive damages and
injunctive relief.  The suit was settled and received final approval in July
1996.  Pursuant to the settlement, the accounting firm paid $1,700,000 to the
Company.

                                     - 16 -
<PAGE>
 
                             STYLES ON VIDEO, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              September 30, 1996
                                  (Unaudited)
 
 
    (e) In March 1996, FYI filed a suit against its major competitor, Hasco.
The suit asserts, among other things, claims for unreasonable restraint of
trade, monopolistic practices, unfair competition, trade libel, and false and
misleading advertising.  FYI seeks compensatory damages in excess of $10
million, as well as punitive damages and injunctive relief.  During the last
quarter of 1996, the suit was dismissed without prejudice and the parties
entered into a tolling agreement with respect to the statute of limitations.
The terms of the FYI Sale provide that upon closing this suit will be dismissed
with prejudice.  See "Subsequent Events".

    (f) In 1996, a previous provider of the Company's excess director's and
officer's liability insurance ("AESIC") filed a suit claiming that they are
entitled to $1,000,000 of the $1,700,000 received by the Company in connection
with settlement of the suit against the Company's former independent
accountants.  The Company intends to vigorously defend the suit and assert
appropriate counterclaims, if necessary.

    (g) The Company is also a party to various other actions arising in the
ordinary course of business which, in the opinion of management, will not have a
material adverse impact on the Company's financial condition.

(5)  Wind-down of Certain Operations

    In January 1996 the Company's Board of Directors determined that it was in
the best interests of the Company and its stockholders to eliminate the
Company's hairstyle and beauty imaging systems operations, as well as its
franchising operations.  The Company promptly began the wind-down of SOV's
hairstyle and beauty imaging systems operations and SSI's operations.  It ceased
the marketing and sales of its hairstyle and beauty imaging systems, and
terminated the employment of all employees involved in the marketing and sales
of such systems.  SOV continues to sell access disks (software required to
continue operating certain SOV hairstyle and beauty imaging systems, which
permits the user to conduct a specific number of imaging sessions) and ancillary
products which are currently part of its inventory.  SOV intends to continue to
sell access disks, which generate a higher gross margin percentage than system
sales, for the foreseeable future.

    All SSI employees have been terminated and the Company entered into
discussions with SSI's eighteen Area Developers regarding the cancellation of
their Area Development Agreements in exchange for consideration primarily
consisting of canceling the Area Developers' notes payable to SSI and of the
issuance of access disks to the Area Developers by SSI.  As of January 31, 1997,
the Company has entered into cancellation agreements with fifteen of SSI's Area
Developers.

                                     - 17 -
<PAGE>
 
                             STYLES ON VIDEO, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              September 30, 1996
                                  (Unaudited)
 
 
    Although there can be no assurances, management does not expect to incur
substantial liability with respect to the wind-down or sale of SOV's hairstyle
and beauty imaging systems operations or the wind-down of SSI.  The Company now
only sells access disks and ancillary products remaining in stock, and acts as a
holding Company for its remaining operating subsidiaries, Dycam and FYI.


Item 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

    THIS DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S REPORT ON
FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1995, AND THE COMPANY'S REPORTS ON
FORM 10QSB FOR THE QUARTERLY PERIODS ENDED MARCH 31, 1996 AND JUNE 30, 1996,
WHICH WERE FILED WITH THE COMMISSION ON MARCH 24, 1997.  THE INFORMATION
CONTAINED IN THE COMPANY'S REPORT ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31,
1995, AND THE COMPANY'S REPORTS ON FORM 10-QSB FOR THE QUARTERLY PERIODS ENDED
MARCH 31, 1996 AND JUNE 30, 1996, PROVIDES ADDITIONAL DISCUSSION OF THE
COMPANY'S CURRENT FINANCIAL POSITION AND RESULTS OF OPERATIONS, INCLUDING A
DISCUSSION OF VARIOUS FACTORS THAT MAY AFFECT THE FUTURE FINANCIAL POSITION AND
RESULTS OF OPERATIONS OF THE COMPANY.

    EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS ARE FORWARD LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES AND ARE BASED UPON JUDGMENTS
CONCERNING VARIOUS FACTORS THAT ARE BEYOND THE COMPANY'S CONTROL.  FOR
INFORMATION REGARDING POTENTIAL FACTORS THAT COULD AFFECT THE COMPANY'S FUTURE
RESULTS AND FINANCIAL CONDITION, REFER TO THE SECTION ENTITLED "FACTORS THAT MAY
AFFECT FUTURE RESULTS AND FINANCIAL CONDITION" CONTAINED IN ITEM 6 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION OF THE COMPANY'S
REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 WHICH WAS
FILED WITH THE COMMISSION ON MARCH 24, 1997.

                                     - 18 -
<PAGE>
 
Three months ended September 30, 1996 compared to the three months ended
------------------------------------------------------------------------
September 30, 1995
------------------

Revenues
--------

    The following table summarizes the Company's revenues for the three months
ended September 30, 1996 and 1995:
<TABLE>
<CAPTION>
                              Three Months Ended September 30,       Three Months Ended September 30,
                                           1996                                    1995                           
                              --------------------------------       --------------------------------              
                                                 Percentage of                          Percentage of              
                                                    Company                                Company                
                              Revenues              Revenues          Revenues            Revenues                
                              -----------        -------------       -------------      -------------              
<S>                           <C>                  <C>               <C>                   <C>                    
Consolidated                   $1,267,000             100%            $1,074,000             100%                 
SOV                               155,000              12                526,000              49                  
Dycam                             442,000              35                416,000              39                  
FYI                               666,000              53                129,000              12                  
SSI                                 4,000               -                  3,000               -                   
</TABLE>

 .   Consolidated Operations.  In January 1996, the Company elected to wind-down
    its hairstyle and beauty imaging systems and franchising operations.  During
    1996 and the first quarter of 1997, the Company focused its resources on its
    operating subsidiaries, FYI and Dycam.  In January 1997, the Company and FYI
    entered into an agreement to sell the FYI business to Hasco (see Notes to
    Consolidated Financial Statements - Subsequent Events), subject to the
    approval of the Company's stockholders.  The FYI Sale is expected to close
    in April 1997.  After the wind-down and sale are completed, SOV intends to
    sell access disks and act as a holding company.  The Company believes that
    its future revenue will be primarily derived from the operations of its
    Dycam subsidiary.

 .   Styles on Video.  Revenues from sales of SOV's imaging systems ("Systems"),
    software, and related products for the three months ended September 30, 1996
    decreased $371,000 or 71%, compared to the three months ended September 30,
    1995.  The overall decrease in sales was primarily the result of the
    decision in January 1996 to terminate sales of hairstyle and beauty imaging
    systems, precipitated by the general lack of market interest in SOV's
    existing products at their current price point.  The Company currently only
    sells access disks, and ancillary products remaining in stock.  The Company
    anticipates that the SOV line of business will generate only a minimal
    portion of the Company's revenues in 1996 and later years.

 .   Dycam.  Dycam's revenues are derived from sales of digital cameras and
    supporting software and accessory products, technology licensing fees, and
    contract engineering work.  Dycam's total revenues for the three months
    ended September 30, 1996 increased $26,000, or 6%, compared to the three
    months ended September 30, 1995.  The increase in revenue was primarily
    associated with increased camera sales.  Dycam believes that the increase in
    camera revenues is attributed to the general emergence of the digital camera
    market as a whole.  Dycam intends to continue to sell stock camera products.
    Dycam, however, believes its strength lies in the custom and contract
    engineering of digital imaging systems and intends to devote a substantial
    portion of its resources

                                     - 19 -
<PAGE>
 
    in the future to pursuing the custom and contract engineering business.
    Dycam derived only minimal revenues from contract engineering work during
    the three months ended September 30, 1996 and 1995.  The Company believes
    that, by the end of 1996, a substantial portion of Dycam's revenues will be
    derived from the sale/lease of cameras to and licensing revenue from FYI.
    The core element of the FYI camera system is a specialized digital camera
    subsystem engineered and produced by Dycam under an exclusive contract with
    FYI.  In addition to the sale/lease of cameras to FYI, Dycam's arrangement
    with FYI provides that, in exchange for certain development and maintenance
    services, Dycam is entitled to a 7.5% fee on all FYI sales.  Pursuant to
    deferral agreement executed in May 1996, certain development and maintenance
    fees may be accrued by FYI until April 30, 1997.  Dycam intends to defer the
    recognition of the related revenues until payment is received from FYI.
    Intercompany revenues are eliminated for consolidated reporting purposes.
    At the closing of the FYI Sale, FYI and Dycam will terminate their existing
    contractual relationships and Dycam will enter into a Dycam Master Agreement
    with Hasco.  See Notes to Consolidated Financial Statements - Subsequent
    Events.

 .   FYI.  FYI's revenues are derived from sales of newborn baby photographs and
    ancillary products.  FYI's revenues for the three months ended September 30,
    1996 increased $537,000 to $666,000 compared to the three months ended
    September 30, 1995.  Since its first sales in March 1995, revenues have
    consistently grown as the customer base has increased to over one-hundred
    twenty-five hospital accounts by January 31, 1997.  The Company has devoted
    significant marketing efforts and financial resources to the development and
    growth of the FYI business.  In January 1997, the Company and FYI entered
    into an agreement to sell the FYI business to Hasco.  The Company
    anticipates that FYI will generate revenues through the closing of the FYI
    Sale, which is anticipated to occur in April 1997, after which time no
    revenues will be generated from FYI.

 .   SSI.  SSI's revenues are primarily derived from the sale of franchises.  SSI
    has not sold any franchises since January 1995 and its Uniform Franchise
    Operating Circular has not been updated.  In January 1996, the Company
    commenced the wind-down of the SSI line of business.  The Company
    anticipates that the SSI line of business will generate only a minimal
    portion of the Company's revenues in 1996 and later years.

Gross Profit
------------

    Gross profit is comprised of revenues less direct costs and expenses.  The
following table summarizes the Company's gross profit for the three months ended
September 30, 1996 and 1995:
<TABLE>
<CAPTION>
                           Three Months Ended                             Three Months Ended                 
                           September 30, 1996                             September 30, 1995                                      
                -------------------------------------          -----------------------------------------                          
                                      Gross Profit as                                    Gross Profit as   
                                      Percentage of                                      Percentage of                            
                   Gross Profit          Revenues                 Gross Profit              Revenues                      
                -------------------   ---------------          ------------------        ---------------                          
<S>                 <C>                     <C>                   <C>                         <C>                                 
Consolidated         $735,000                58%                   $643,000                     60%                               
SOV                   157,000                99                     433,000                     82                                
Dycam                 110,000                25                     156,000                     38                                
FYI                   464,000                70                      51,000                     40                                
SSI                     4,000               100                       3,000                    100                        

</TABLE>

                                     - 20 -
<PAGE>
 
 .   Styles on Video.  SOV's overall gross profit decreased for the three month
    period ended September 30, 1996 compared to the three month period ended
    September 30, 1995 primarily due to the decision to terminate sales of
    hairstyle and beauty imaging systems in January 1996.  Gross profit as a
    percentage of revenues increased due to the increase in the percentage of
    revenue derived from the sale of access disks, which have a higher margin
    than system sales.

 .   Dycam.  Dycam's overall gross profit for the three months ended September
    30, 1996 decreased compared to the three months ended September 30, 1995.
    Gross profit as a percentage of reserves decreased, primarily as a result of
    increased revenues from, or decrease further, camera product sales with
    lower margins.  Gross margins may continue to remain at lower levels, or
    decrease further, if Dycam's custom product business does not contribute a
    significant portion of Dycam's total revenues.

 .   FYI.  FYI recognized its first sales in March 1995.  FYI's gross profit
    increased as FYI emerged from its start-up phase of operations.  FYI's gross
    profit excludes intercompany cost of revenues related to Dycam.

 .   SSI.  There are no significant direct costs associated with the sale of
    franchises.


Selling, General and Administrative
-----------------------------------

    Selling, general and administrative expenses consist of administrative
expenses, the salaries of corporate officers, office staff and sales personnel,
advertising and promotion, accounting, legal and other professional fees, and
rent and occupancy costs.  They exclude depreciation and amortization, which are
stated separately.  The following table summarizes the Company's selling,
general and administrative expenses for the three months ended September 30,
1996 and 1995:

<TABLE>
<CAPTION>
 
                                 Three Months Ended September 30,                    Three Months Ended September 30,  
                                            1996                                                    1995
                              --------------------------------------               ------------------------------------
                                                       Percentage of                                      Percentage of
                              Expenses                  Revenues                   Expenses                  Revenues
                              ---------                -------------               ----------             -------------
<S>                           <C>                          <C>                     <C>                        <C>
Consolidated                  1,524,000                     120%                   $1,656,000                    154%
SOV                             229,000                     148                       631,000                     20
Dycam                           291,000                      66                       292,000                     70
FYI                             997,000                     150                       703,000                    545
SSI                               7,000                     175                        30,000                  1,000
</TABLE>

 .   Styles on Video.  Selling, general and administrative expenses of SOV for
    the three months ended September 30, 1996 decreased $402,000, or 64%, from
    the three months ended September 30, 1995, and represented 15% of the
    Company's total selling, general and administrative expenses.  Salaries and
    benefits expenses decreased due to a decrease in the number of employees at
    all levels in all departments.  SOV made efforts to reduce selling, general
    and administrative expenses throughout 1995 and during the first two
    quarters of 1996.

                                     - 21 -
<PAGE>
 
    In January 1996, the Company decided to terminate the Company's hairstyle
    and beauty imaging systems operations. SOV ceased the marketing and sales of
    its hairstyle and beauty imaging systems, and terminated the employment of
    all employees involved in the marketing and sales of such systems. Selling,
    general and administrative expenses related to SOV's operations continue to
    exceed the gross profit derived therefrom. The Company continues to make
    efforts to keep SOV's expenses to a minimal level consistent with its
    current operations, including its activities as a holding company. SOV
    continues to sell access disks and ancillary products remaining in stock,
    and intends to do so for the foreseeable future.

 .   Dycam.  Selling, general and administrative expenses for the three months
    ended September 30, 1996 decreased $1,000 from the three months ended
    September 30, 1995, and represented 19% of the Company's total selling,
    general and administrative expenses.

 .   FYI.  Selling, general and administrative expenses for the three months
    ended September 30, 1996 increased $294,000 or 42% from the three months
    ended September 30, 1995 and represented 65% of the Company's total selling,
    general and administrative expenses.  Salaries and benefits increased in
    1996 due to the addition of personnel to accommodate growth.  FYI continued
    to add staff during the remainder of 1996 and in 1997 based on growth.
    Other selling, general and administrative costs, including, commissions paid
    to hospitals, which are typically based on a percentage of FYI's revenues
    derived from each hospital, increased primarily due to FYI's growth.  In
    January 1997, the Company and FYI entered into an agreement to sell the FYI
    business.  The FYI Sale is expected to close in April 1997.

 .   SSI.  Selling, general and administrative expenses for the three months
    ended September 30, 1996 represented less than 1% of the Company's total
    selling, general and administrative expenses.  The Company took steps to
    reduce SSI's expenditures during 1995.  In January 1996, the Company decided
    to terminate SSI's operations.


Research and Development
------------------------

    Consolidated research and development expenses for the three months ended
September 30, 1996 were $156,000 (12% of consolidated revenues), a decrease of
$85,000, or 35%, compared to $241,000 (22% of consolidated revenues) for the
three months ended September 30, 1995.

 .   Styles on Video.  Research and development expenses for the three months
    ended September 30, 1996 were $0, compared to $49,000 the three months ended
    September 30, 1995.  SOV's product development activities ceased in January
    1996 with the Company's decision to eliminate SOV's hairstyle and beauty
    imaging operations.

 .   Dycam.  Research and development expenses for the three months ended
    September 30, 1996 were $137,000 (31% of Dycam's revenues), a decrease of
    $53,000, or 28%, from $190,000 (46% of Dycam's revenues) for the three
    months ended September 30, 1995.  The decrease in Dycam's research and
    development expenses is primarily attributable to reductions in the number
    of personnel, and the completion of development of certain products
    introduced in 1995.  Dycam believes that continuing research and development
    is essential to maintaining its competitive position, and expects to
    continue to expend funds in this area.

                                     - 22 -
<PAGE>
 
 .   FYI. Research and development expenses for the three months ended September
    30, 1996 were $19,000 compared to $2,000 for the three months ended
    September 30, 1995. The majority of FYI's research and development
    activities during the 1996 period were carried out in conjunction with Dycam
    and have been eliminated upon consolidation. FYI's research and development
    activities ceased in December 1996 with the Company's and FYI's decision to
    sell the FYI business.

 .   SSI.  There were no research and development expenses associated with SSI's
    operations.

Nine months ended September 30, 1996 compared to the nine months ended September
--------------------------------------------------------------------------------
30, 1995
--------

Revenues
--------

    The following table summarizes the Company's revenues for the nine months
ended September 30, 1996 and 1995:

<TABLE>
<CAPTION>
 
                                 Nine Months Ended September 30,                   Nine Months Ended September 30,
                                            1996                                               1995
                             ------------------------------------               ------------------------------------
                                                    Percentage of                                      Percentage of
                                                       Company                                            Company
                             Revenues                  Revenues                 Revenues                 Revenues
                             ----------             -------------               ----------             -------------
<S>                          <C>                        <C>                     <C>                        <C>
Consolidated                 $3,700,000                  100%                   $3,842,000                  100%     
SOV                             470,000                   13                     2,384,000                   62      
Dycam                         1,757,000                   47                     1,245,000                   32      
FYI                           1,463,000                   40                       177,000                    5      
SSI                              10,000                    -                        36,000                    1      

</TABLE>

 .   Consolidated Operations.  In January 1996, the Company elected to terminate
    its hairstyle and beauty imaging systems and franchising operations.  During
    1996 and the first quarter of 1997, the Company focused its resources on its
    operating subsidiaries, FYI and Dycam.  In January 1997, the Company and FYI
    entered into an agreement to sell the FYI business to Hasco (see Notes to
    Consolidated Financial Statements - Subsequent Events), subject to the
    approval of the Company's stockholders.  The FYI Sale is expected to close
    in April 1997.  After the wind-down and sale are completed, SOV intends to
    act primarily as a holding company.  The Company believes that its future
    revenues will be primarily derived from the operations of its Dycam
    subsidiary.

 .   Styles on Video.  Revenues from SOV's sales for the nine months ended
    September 30, 1996 decreased $1,914,000, or 80% compared to the nine months
    ended September 30, 1995.  The overall decrease in sales was primarily the
    result of the decision in January 1996 to terminate sales of hairstyle and
    beauty imaging systems, precipitated by the general lack of market interest
    in SOV's existing products at their current price point.

 .   Dycam.  Dycam's revenues for the nine months ended September 30, 1996
    increased $512,000, or 41% compared to the nine months ended September 30,
    1995.  The increase in revenue was primarily associated with increased
    camera sales.  Dycam believes that the increase in camera

                                     - 23 -
<PAGE>
 
    revenues is attributed to the general emergence of the digital camera market
    as a whole.  Dycam intends to continue to sell stock camera products.
    Dycam, however, believes its strength lies in the custom and contract
    engineering of digital imaging systems and intends to devote a substantial
    portion of its resources in the future to pursuing the custom and contract
    engineering business.  Dycam derived only minimal revenues from contract
    engineering work during the nine months ended September 31, 1996 and 1995.
    The Company believes that, by the end of 1996, a substantial portion of
    Dycam's revenues will be derived from the sale/lease of cameras to and
    licensing revenue from FYI.  The core element of the FYI camera system is a
    specialized digital camera subsystem engineered and produced by Dycam under
    an exclusive contract with FYI.  In addition to the sale/lease of cameras to
    FYI, Dycam's arrangement with FYI provides that, in exchange for certain
    development and maintenance services, Dycam is entitled to a 7.5% fee on all
    FYI sales.  Pursuant to a deferral agreement executed in May 1996, certain
    development and maintenance fees may be accrued by FYI until April 30, 1997.
    Dycam intends to defer the recognition of the related revenues until payment
    is received from FYI.  Intercompany revenues are eliminated for consolidated
    reporting purposes.  At the closing of the FYI Sale, FYI and Dycam will
    terminate their existing contractual relationships and Dycam will enter into
    a Dycam Master Agreement with Hasco.  See Notes to Consolidated Financial
    Statements - Subsequent Events.

 .   FYI.  FYI's revenues for the nine months ended September 30, 1996 increased
    $1,286,000 to $1,463,000 from $177,000 for the nine months ended September
    30, 1995.  Since its first revenues in March 1995, revenues have
    consistently grown as the customer base has increased to over one-hundred
    twenty-five hospital accounts by January 31, 1997.  The Company has devoted
    significant marketing efforts and financial resources to the development and
    growth of the FYI business.  In January 1997, the Company and FYI entered
    into an agreement to sell the FYI business to Hasco.  The Company
    anticipates that FYI will generate revenues through the closing of the FYI
    Sale, which is anticipated to occur in April 1997, after which time no
    revenues will be generated from FYI.

 .   SSI.  SSI's revenues are primarily derived from the sale of franchises.  SSI
    has not sold any franchises since January 1995 and its Uniform Franchise
    Operating Circular has not been updated.  In January 1996, the Company
    commenced the wind-down of the SSI line of business.  The Company
    anticipates that the SSI line of business will generate a minimal portion of
    the Company's revenues in 1996 and later years.

                                     - 24 -
<PAGE>
 
Gross Profit
------------

    The following table summarizes the Company's gross profit for the nine
months ended September 30, 1996 and 1995:

<TABLE>
<CAPTION>
 
                               Nine Months Ended September 30,                     Nine Months Ended September 30, 
                                            1996                                                 1995
                           ----------------------------------------             ----------------------------------------
                                                    Gross Profit as                                      Gross Profit as
                                                    Percentage of                                        Percentage of
                           Gross Profit                Revenues                 Gross Profit                Revenues
                           ------------             ---------------             ------------             ---------------
<S>                         <C>                         <C>                      <C>                           <C>
Consolidated                $1,897,000                    51%                    $1,787,000                      47%     
SOV                            438,000                    93                      1,274,000                      53      
Dycam                          503,000                    35                        422,000                      34      
FYI                            946,000                    55                         55,000                      31      
SSI                             10,000                   100                         36,000                     100      

</TABLE>

 .   Styles on Video.  SOV's overall gross profit decreased for the nine months
    ended September 30, 1996 compared to the nine months ended September 30,
    1995 primarily due to the decision to terminate sales of hairstyle and
    beauty imaging systems in January 1996.  Gross profit as a percentage of
    revenues increased due to the increase in the percentage of revenues derived
    from the sale of access disks, which have a higher margin than system sales.

 .   Dycam.  Dycam's overall gross profit for the nine months ended September 30,
    1996 increased compared to the nine months ended September 30, 1995
    primarily as a result of increased revenues.  Gross margins may continue to
    remain at lower levels, or decrease further, if Dycam's custom products
    business does not contribute a significant portion of Dycam's revenues.

 .   FYI.  FYI recognized its first sales in March 1995.  FYI's gross profit
    increased as FYI emerged from its start-up phase of operations.  FYI's gross
    profit excludes intercompany cost of revenues related to Dycam.

 .   SSI.  There are no significant direct costs associated with the sale of
    franchises.

                                     - 25 -
<PAGE>
 
Selling, General and Administrative
-----------------------------------

    The following table summarizes the Company's selling, general and
administrative expenses for the nine months ended September 30, 1996 and 1995:

<TABLE>
<CAPTION>
                               Nine Months Ended September 30,                      Nine Months Ended September 30,
                                          1996                                                    1995
                             ------------------------------------                ------------------------------------
                                                    Percentage of                                       Percentage of
                             Expenses                  Revenues                  Expenses                 Revenues
                             ----------             -------------                ----------             -------------
<S>                          <C>                         <C>                     <C>                               <C>
Consolidated                 $5,063,000                  137%                    $5,756,000                    150%    
SOV                           1,267,000                   57                      2,576,000                    108     
Dycam                           889,000                   51                        897,000                     72     
FYI                           2,888,000                  197                      1,895,000                  1,071     
SSI                              19,000                  190                        388,000                  1,078     

</TABLE> 
         
 .   Styles on Video.  Selling, general and administrative expenses for the nine
    months ended September 30, 1996 decreased $1,309,000, or 51%, from the nine
    months ended September 30, 1995, and represented 25% of the Company's total
    selling, general and administrative expenses.  Salaries and benefits
    decreased due to a decrease in the number of employees at all levels in all
    departments.  Marketing and advertising decreased due to steps taken to
    reduce costs.  SOV made efforts to reduce selling, general and
    administrative expenses throughout 1995 and 1996.

    In January 1996, the Company decided to terminate the Company's hairstyle
    and beauty imaging systems operations.  SOV ceased the marketing and sales
    of its hairstyle and beauty imaging systems, and terminated the employment
    of all employees involved in the marketing and sales of such systems.
    Selling, general and administrative expenses related to SOV's operations
    continue to exceed the gross profit derived therefrom.  The Company
    continues to make efforts to keep SOV's expenses to a minimal level
    consistent with its current operations, including its activities as a
    holding company.  SOV continues to sell access disks and ancillary products
    remaining in stock, and intends to do so for the foreseeable future.

 .   Dycam.  Selling, general and administrative expenses for the nine months
    ended September 30, 1996 increased $2,000 from the nine months ended
    September 30, 1995, and represented 18% of the Company's total selling,
    general and administrative expenses.

 .   FYI.  Selling, general and administrative expenses for the nine months ended
    September 30, 1996 increased $993,000, or 52%, from the nine months ended
    September 30, 1995 and represented 57% of the Company's total selling,
    general and administrative expenses.  Salaries and benefits increased due to
    the addition of personnel to accommodate growth.  FYI continued to add staff
    during the remainder of 1996 and in 1997 based on growth.  Other selling,
    general and administrative costs, including commissions paid to hospitals,
    which are typically based on a percentage of FYI's revenues derived from
    each hospital, increased primarily due to FYI's growth.  In January 1997,
    the Company and FYI entered into an agreement to sell the FYI business.  The
    FYI Sale is expected to close in April 1997.

                                     - 26 -
<PAGE>
 
 .   SSI.  Selling, general and administrative expenses of SSI for the six months
    ended June 30, 1996 decreased $369,000 and represented less than 1% of the
    Company's total selling, general and administrative expenses.  As of
    December 31, 1995, direct employees at SSI and marketing costs were reduced
    to zero.  In January 1996, the Company decided to terminate SSI's operations
    and commenced the wind-down of the SSI line of business.

Research and Development
------------------------

    Consolidated research and development expenses for the nine months ended
September 30, 1996 were $454,000  12% of consolidated revenues), a decrease of
$250,000, or 36%, compared to $704,000, 18% of consolidated revenues) for the
nine months ended September 30, 1995.

 .   Styles on Video.  Research and development expenses for the nine months
    ended September 30, 1996 were $0, a decrease of $56,000 compared to the nine
    months ended September 30, 1995.  SOV's product development activities
    ceased in January 1996 with the Company's decision to eliminate SOV's
    hairstyle and beauty imaging operations.

 .   Dycam.  Research and development expenses for Dycam for the nine months
    ended September 30, 1996 were $435,000, 25% of Dycam's revenues), a decrease
    of $144,000, or 25%, compared to $579,000 47% of Dycam's revenues) for the
    nine months ended September 30, 1995, and represented all of the Company's
    total research and development expenses.  The decrease in Dycam's research
    and development expenses is primarily attributable to reductions in the
    number of personnel, and the completion of development of certain products
    introduced in 1995.  Dycam believes that continuing research and development
    is essential to maintaining its competitive position, and expects to
    continue to expend similar levels of funds in this area.

 .   FYI.  Research and development expenses for the nine months ended September
    30, 1996 were $19,000, a decrease of $50,000 compared to the $69,000 for
    nine months ended September 30, 1995.  The majority of FYI's research and
    development activities during the 1996 period were carried out in
    conjunction with Dycam and have been eliminated upon consolidation.
    Research and development expenses during the 1995 period represented FYI's
    share of new product development activities associated with the design and
    manufacture of the prototype digital camera and system for the photography
    of newborn babies at hospitals.  FYI's research and development activities
    ceased in December 1996 with the Company's and FYI's decision to sell the
    FYI business.

Depreciation and Amortization
-----------------------------

    The Company's depreciation and amortization expenses consist primarily of
the amortization of goodwill which resulted from the Company's acquisition of
Dycam.  Such goodwill is being amortized over a twenty year term at the rate of
$23,000 per month.  Depreciation and amortization expense (including amounts
charged to cost of revenues) for the nine months ended September 30, 1996 was
$453,000, an increase of $152,000 from $301,000 for the nine months ended
September 30, 1995.  The increase primarily resulted from increased depreciation
of fixed assets acquired by Dycam and FYI during the nine months ended September
30, 1996.

                                     - 27 -
<PAGE>
 
Liquidity and Capital Resources
-------------------------------

    During the nine months ended September 30, 1996, the Company relied
primarily upon cash on hand, including intercompany advances and cash received
from sales, to finance its cash operating losses and the expansion of FYI.
FYI's capital expenditures were also financed in part by a capital lease.

    At September 30, 1996, the Company had consolidated cash and cash
equivalents of $1,010,000, a decrease of $1,768,000 from $2,778,000 at December
31, 1995.  The Company's working capital at September 30, 1996 was ($2,277,000),
a decrease of $4,344,000 when compared to $1,566,000 at December 31, 1995.
Working capital reduction was primarily the result of a reduction in cash used
in operations, net of related party notes and advances, and net changes in other
current assets and liabilities described below.  The current ratio at September
30, 1996 was 0.5 to 1 compared to 1.6 to 1 at December 31, 1995.

 .   Styles on Video.  SOV's cash and cash equivalents at September 30, 1996 were
$2,000, down $5,000 from $3,000 at December 31, 1995.  Inventories decreased
$47,000 due to sales of product.   Income taxes receivable decreased $301,000,
due to SOV's receipt of tax refunds.  Accounts payable decreased $361,000 due to
discounts and payment on aged payables. SOV's working capital (excluding
intercompany balances) at September 30, 1996 was $(1,750,000) compared to
$(1,545,000) at December 31, 1995.  The current ratio was 0.1:1 at September 30,
1996 compared to 0.3:1 at December 31, 1995.  The working capital reduction was
primarily the result of a decrease in cash which was used in operations to fund
losses, net of funds received from the settlement of the K&A suit in July 1996,
related party notes and advances, and changes in other current assets and
liabilities described above.  SOV continued to use cash to fund cash operating
losses throughout 1996.

    In November 1995, SOV, FYI and International Digital Investors, L.P., a
Delaware limited partnership ("IDI") entered into a Note and Preferred Stock
Purchase Agreement (the "1995 Agreement").  Pursuant to the 1995 Agreement, IDI
invested $3,000,000 in SOV and FYI.  In consideration for such investment, SOV
and FYI issued 10% secured notes in the original principal amount of $2,950,000,
with interest payable monthly, and quarterly principal payments of $500,000
commencing March 31, 1997 (the "1995 Notes").  In addition, SOV issued $50,000
worth of 10% Senior Series A Convertible Preferred Stock, $100 par value.
Moreover, the 1995 Agreement requires the Company to issue sufficient warrants
so that when they are exercised, IDI will control 40% of the Company's common
stock on a fully diluted basis (the "1995 Warrants").  FYI received net proceeds
of $2,307,000 from the $3,000,000 financing, after repayment of the Bridge
Financing, its associated interest, and transaction fees.  Additionally, SOV
received $50,000 for the issuance of 10% Senior Series A Convertible Preferred
Stock.  Pursuant to the 1995 Agreement, as amended March 1996, funds totaling
$750,000 were available to SOV, all of which had been advanced to SOV by FYI as
of August 31, 1996.  The remaining funds were used for the furtherance of FYI's
expansion.  The 1995 Agreement was amended again in May 1996 and January 1997 to
provide, among other things, for the deferral of interest to not later than May
1, 1997, less restrictive covenants and a lower exercise price of the 1995
Warrants.  At December 31, 1995 and 1996, the Company was not in compliance with
certain of the 1995 Agreement's financial covenants, however, the Company has
obtained a waiver of these defaults from IDI.  The Company may require
additional covenant relief in the future.  There can be no assurance that IDI
will grant a waiver for any future noncompliance.  If defaults occur in future
periods, and waivers are not obtained, and the Company's assets are taken in
satisfaction of the amounts due pursuant to the 1995 Agreement, and no excess
remains, funds will not be

                                     - 28 -
<PAGE>
 
available to meet SOV's obligations, including, without limitation, the
repayment of a $1,000,000 note owed to Dycam.  For additional information see
"Related Party Transactions."

    In 1995, SOV entered into a settlement of certain class action and
derivative suits which received final approval from the District Court in July
1996.  Pursuant to the Final Settlement, SOV agreed to deliver to the plaintiff
class warrants to purchase 1,750,000 shares of the Company's common stock and a
$250,000 promissory note payable in three equal semi-annual installments
commencing July 1996.  As of January 31, 1997, no payments have been made
towards the debt.  See "Contingencies".

    In January 1996, the Company decided to discontinue SOV's hairstyle and
beauty imaging systems operations.  The Company anticipates that SOV's operating
activities will continue to use cash and that its minimal cash balance will
continue to decline.  Since the last quarter of 1995, the Company has
successfully negotiated significant discounts of certain of its accounts payable
balances, and intends to negotiate a reduction in its remaining accounts
payable.  No guarantee, however, can be made that the Company will be able to
successfully negotiate reductions on its remaining outstanding accounts payable.

    In May 1996, pursuant to a Note and Preferred Stock Purchase Agreement (the
"1996 Agreement"), as amended, SOV and FYI agreed to issue up to $1,200,000
aggregate principal amount of 10% Senior Notes due June 30, 1998 (the "1996
Notes" and together with the 1995 Notes, the "Notes") in a series of purchases
of such 1996 Notes between the May 1996 closing date and September 15, 1996.
Each purchase of 1996 Notes is contingent upon the Company and FYI meeting
certain minimum performance targets.  IDI also purchased 500 shares of Series B
Preferred, for $50,000 and received Common Stock Purchase Warrants (the "1996
Warrants" and together with the 1995 Warrants, the "Warrants").  Payment of
interest is deferred to not later than May 1, 1997.

    In May 1996, IDI purchased $520,000 principal amount of 1996 Notes, of which
$270,000 was used to repay principal and interest on certain interim loans made
to the Company and FYI by IDI and IDI-related entities in April 1996.  IDI
purchased an additional $250,000, $100,000 and $150,000 principal amount of 1996
Notes in June, July and August 1996, respectively.  The Company did not meet the
September 15, 1996 minimum performance targets, and IDI did not purchase the
final series of 1996 Notes totaling $180,000 until January 1997.

    The 1995 Agreement and the 1995 Warrants were amended in May 1996 to conform
to the provisions of the 1996 Agreement and the 1996 Warrants, and the exercise
price of the 1995 Warrants was reduced to $0.075, the exercise price of the 1996
Warrants.

    From September 1996 through January 1997, the Company and FYI borrowed an
additional $927,000 from IDI pursuant to a $977,000 Bridge Note.

    In July 1996, the K&A suit was settled and the accounting firm agreed to pay
$1,700,000 to the Company.  See "Contingencies".  Of the proceeds, $870,000 was
applied to the repayment of the 1996 Notes.  After partial repayment of the 1996
Notes, and payment of certain legal expenses in connection with the 1996
Agreement, the net proceeds of the settlement to the Company were $430,000,
which was added to the Company's general working capital, and used to fund the
operations of SOV and FYI.

    Effective January 31, 1997, SOV and FYI entered into an agreement to sell
the FYI business to Hasco.  In January 1997, FYI borrowed $180,000 from Hasco
pursuant to the Loan Agreement whereby Hasco will lend to FYI up to a total of
$540,000 prior to the closing (see "Subsequent Events").  The

                                     - 29 -
<PAGE>
 
proceeds of the FYI sale, net of transaction costs and satisfaction of FYI's
obligations (excluding its indebtedness to IDI), will not be sufficient to fully
repay the Company's and FYI's obligations to IDI, or to fully satisfy the
Company's other liabilities to its creditors.  After the closing of the FYI
Sale, IDI will continue to have a first priority security interest in all
remaining assets of the Company, including the remaining net proceeds from the
FYI sale, except for the second priority position it holds on the shares of
Dycam common stock owned by the Company, as to which Dycam has a first priority
security interest.

    In order for the Company to continue its operations after the FYI sale, it
will be required to obtain additional financing from IDI or other sources, or
IDI will need to consent to postpone the repayments due from the Company and FYI
on all or part of the Company's and FYI's notes payable to IDI.  Neither IDI nor
any other sources have indicated a willingness to loan additional funds to the
Company.  Additionally, IDI has not indicated an intention to consent to the
postponement of the repayment it is entitled to on the Notes payable to IDI from
the Company and FYI.

    In addition, the Company believes that the combined cash impact of a
settlement of the Durian and AESIC loss contingencies, more fully described in
"Contingencies" will not be significant.  If (a) a significant negative result
is achieved with respect to the Durian and/or AESIC matters, (b) management
cannot achieve its operating plan or (c) funding is not available or proves
insufficient to cover the shortfalls, SOV will find it necessary to further
reduce its levels of expenditures or undertake other such actions as will be
appropriate, and will be otherwise unable to achieve its goals or continue its
operations.

 .   Dycam.  At September 30, 1996, Dycam had cash and short-term investments on
hand of $925,000, down $449,000 from $1,374,000 at December 31, 1995.  The
decrease was primarily a result of the decrease in cash, which was used to fund
Dycam's operating losses.

    Inventories decreased $112,000.  Dycam's working capital (excluding
intercompany balances) at September 30, 1996 was $1,404,000, a decrease of
$621,000 when compared to $2,025,000 at December 31, 1995.  The working capital
reduction was primarily the result of cash operating losses, net of changes in
other current assets described above.  The current ratio at September 30, 1996
was 0.7 to 1 compared to 11.2 to 1 at December 31, 1995.  Dycam does not have
any long-term indebtedness and does not currently maintain any credit
facilities.

    Since the closing of its rights offering in 1994, Dycam has expended a
substantial portion of the $4,976,000 raised in that offering, including
advancing $1,000,000 to SOV pursuant to a secured loan originally due in
September 1995 and later extended to December 1998.  The purpose of the advance
was to provide funds for the operation and expansion of FYI.  All interest
payments pursuant to the note have been made in a timely fashion by SOV.  If the
Company defaults on the 1995 or 1996 Agreements, and IDI exercises its rights,
Dycam may not be repaid and will be entitled to receive back up to the 1,916,667
shares of Dycam's common stock owned by SOV which secure the $1,000,000 note
payable to Dycam.

    Dycam believes that its existing cash balances, payments due under the
intercompany loan, payments due for deferred license revenues, and cash flow
from operations will be sufficient to meet its cash requirements through
September 1997, after which time it may be required to raise capital.  In
addition, to the extent Dycam experiences growth in the future, or its cash flow
from operations is less than anticipated, Dycam may be required to obtain
additional sources of cash, or scale back its operating and research and
development expenses to a level sustainable under such a situation.  There is no
assurance that additional sources of cash will be available.

                                     - 30 -
<PAGE>
 
 .   FYI.  At September 30, 1996, FYI had cash and short-term investments on hand
of $86,000.  During the nine months ended September 30, 1996, FYI relied
primarily upon cash on hand, funds received pursuant to the 1996 Notes,
intercompany advances from SOV, and revenues from sales to finance its
operations and expansion.  Additionally, certain capital expenditures were
financed by capital leases which have a three year term and provide for the
purchase of the equipment at the end of the lease term.  FYI's revenues
commenced in March 1995.

    The decrease in cash for the nine months ended September 30, 1996 primarily
reflects cash operating losses for the period, and capital expenditures.  FYI's
working capital (excluding intercompany balances) at September 30, 1996 was
($1,183,000), a decrease of $2,312,000 when compared to $1,239,000 at December
31, 1995.  FYI's current ratio at September 30, 1996 was 0.2 to 1, compared to
3.6 to 1 at December 31, 1995.

    As described above, in November 1995, SOV, FYI and IDI, entered into the
1995 Agreement.  FYI received net proceeds of $2,307,000 from the $3,000,000
financing, after repayment of the Bridge Financing, its associated interest, and
transaction fees.  Pursuant to the transaction, as amended in March 1996, up to
$750,000 of the funds were available to SOV, approximately all of which had been
advanced to SOV as of August 31, 1996.  As discussed above, the Company was not
in compliance with certain of the Agreement's financial covenants at December
31, 1995 and 1996, however, the Company has obtained a waiver of these
violations from IDI.  In May 1996, SOV, FYI and IDI entered into the 1996
Agreement, providing additional financing up to $1,200,000.  Additionally, from
September 1996 through January 1997, IDI advanced $927,000 to SOV and FYI
pursuant to a $977,000 Bridge Note due not later than May 1, 1997.

    FYI expects that working capital requirements through the closing of the FYI
Sale, which is expected to occur on or about April 15, 1997, will continue to be
funded through a combination of cash on hand, cash receipts from product sales,
and additional advances pursuant to the Hasco Loan.  Management believes that
the Hasco Loan currently in place will be sufficient to allow for FYI to
continue to meet its cash flow requirements through the closing of the FYI Sale.
To the extent cash flow from operations is less than anticipated, or if amounts
available under the Hasco Loan prove insufficient to cover the shortfalls, or if
the FYI Sale is not consummated, FYI will be required to obtain additional
financing, scale back its marketing and research and development activities to a
level sustainable under such circumstances, or undertake other such actions as
may be appropriate, and will be otherwise unable to achieve its goals or
continue its operations.

 .   SSI.  At September 30, 1996, SSI had cash and short term investments on hand
of $1,000, its only current asset.  SSI's working capital (excluding
intercompany balances) at September 30, 1996 was $(18,000).  For the nine months
ended September 30, 1996, SSI did not have any cash operating losses and did not
use any cash.

    SSI stopped the sale of franchises in January 1995.  SSI no longer has any
employees, and any corporate administrative matters are handled by SOV on behalf
of SSI.  In January 1996, the Company commenced the wind-down of the SSI line of
business and expects cash provided and used by SSI to comprise only a minimal
portion of the Company's cash flow in 1996 and later years.

                                     - 31 -
<PAGE>
 
PART II. OTHER INFORMATION

Item 1 Legal Proceedings - (1)

Item 2 Changes in Securities - None

Item 3 Defaults Upon Senior Securities - None

Item 4 Submission of Matters to a Vote of Security Holders - None

Item 5 Other Information - None

Item 6 Exhibits and Reports on Form 8-K - (1)

Exhibit No.     Document
----------      --------
  27.1          Financial Data Schedule

(1)  Incorporated by reference from Styles on Video, Inc.'s Report on Form 10-
     KSB for the fiscal year ended December 31, 1995 filed with the Commission
     on March 24, 1997.

                                     - 32 -
<PAGE>
 
                                   SIGNATURES

    In accordance with the requirements of the Exchange Act, the registrant,
Styles on Video, Inc., caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
 
      Signature                   Title                        Date
      ---------                   -----                        ----            
                         Chairman of the Board and
                          Chief Executive Officer
/s/ K. Eugene Shutler     (Principal Executive Officer)    March 21, 1997
-----------------------
    K. Eugene Shutler
 
 
                          Chief Financial Officer
                           (Principal Accounting 
/s/ Nancy H. Galgas        Officer and Secretary)          March 21, 1997
-----------------------
    Nancy H. Galgas
 
 
 
 
 

                                     - 33 -