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

                                   Form 10-QSB

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

       For the fiscal year ended December 31, 1997

                                        OR

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

Commission file number 0-28088

                                 MODACAD, INC.
       -----------------------------------------------------------------
       (Exact name of small business issuer as specified in its charter)

            California                                  95-4145930
 -------------------------------          ------------------------------------
 (State or other jurisdiction of          (IRS Employer Identification Number)
 incorporation or organization)

    1954 Cotner Avenue, Los Angeles                        90025
----------------------------------------                 ----------
(Address of principal executive offices)                 (Zip Code)

                                  (310) 312-9826
                           ---------------------------
                           (Issuer's telephone number)

      Securities registered under Section 12(b) of the Exchange Act: None

         Securities registered under Section 12(g) of the Exchange Act:

                                  Common Stock
                                ----------------
                                (Title of Class)
                                            
Check whether the registrant (1) filed all reports required to be filed by 
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such 
shorter period that the registrant was required to file such reports), and (2) 
has been subject to such filing requirements for the past 90 days. Yes X  No 
                                                                      ---   ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be 
contained, to the best of registrant's knowledge, in definitive proxy or 
information statements incorporated by reference in Part III of this Form 
10-KSB or any amendment to this Form 10-KSB. [ ]

The registrant's revenues for its most recent fiscal year were $4,449,857.

The aggregate market value of the voting stock held by non-affiliates of the 
registrant was $64,979,397 based on the average bid and asked prices of $16.75 
per share as quoted on the NASDAQ National Market on March 13, 1998.

The number of outstanding shares of the registrant's common stock, as of March 
13, 1998, was 6,060,974.

Documents Incorporated by Reference: Portions of the registrant's definitive 
Proxy Statement to be delivered to shareholders in connection with their Annual 
Meeting of Shareholders to be held in June 1998 are incorporated into Part III
of this Annual Report.

Transitional Small Business Disclosure Format: Yes    No  X
                                                  ---    ---           
<PAGE>
                                     PART I

Item 1.    Description of Business

The Company

ModaCAD, Inc. ("ModaCAD" or the "Company") was incorporated in 1988 to develop, 
market and support software products based on its proprietary modeling and 
rendering technology for use in industrial design applications, including the 
apparel, textile and home furnishings industries.  The Company's goal was to 
develop software operating on personal computers ("PCs") that would enable 
non-technical users to create and model 3-D synthetic objects from 2-D images 
and render such objects in real time with photo-realistic quality.  The Company 
initially focused its efforts on developing computer aided design ("CAD") 
products for the industrial design segments of the textile and apparel 
industries.  Beginning in 1993, the Company began broader marketing efforts, 
including the introduction of electronic merchandising products, which efforts 
were increased starting in 1994.  In late 1995, the Company began efforts to 
expand its business into consumer PC software, initially through the 
development of a new consumer software product line, entitled 3D Home Interiors 
(TM), aimed at the do-it-yourself home decorating and design marketplace.  
In 1996, the Company completed development of 3D Home Interiors which has been 
licensed to Broderbund Software, Inc. ("Broderbund") for publication, marketing 
and distribution.  In late 1997, the Company continued to expand its business 
into e-commerce consumer oriented applications by signing an agreement with 
Intel Corporation ("Intel") to distribute and co-develop an Internet 
(or e-commerce) content manager software.  Content managers are defined as 
web-enabled software designed to present content necessary for e-commerce.  
As such, content managers are the key "front-end" to emerging e-commerce 
applications.  The Company anticipates that this first e-commerce software will 
be released during the third quarter of 1998, but there can be no assurance 
that such release will occur at that time.

Discussion of certain matters contained in this Annual Report on Form 10-K may 
constitute forward-looking statements within the meaning of the Private 
Securities Litigation Reform Act of 1995 (the "Reform Act") and, as
such, may involve risks and uncertainties.  Those forward-looking statements 
relate to, among other things, expectations of the business environment in 
which the Company operates, projections of future performance, product 
introductions, perceived opportunities in the market and statements regarding 
the Company's mission and vision.  The Company's actual results, performance 
and achievements may differ materially from the results, performance and 
achievements expressed or implied in such forward-looking statements.  
From time to time, the Company details other risks with respect to its business 
and financial results and conditions in its filings with the Commission.

Products

ModaCAD's current and future products are divided into three principal product 
groups: commercial (CAD and electronic merchandising products), consumer 
(3D Home Interiors products), and e-commerce (Internet content manager fashion 
application being co-developed with Intel).  The Company's products are built 
principally using object-oriented technology and written in the C++ programming 
language.  Most of the products are available on Windows and Macintosh 
operating systems.  ModaCAD's products are based principally on its proprietary 
"core" rendering technology.  The main features of this core technology are (i) 
real-time rendering performance on standard PC hardware platforms (e.g., PCs 
equipped with Intel Pentium 133MHz or better microprocessors and at least 16 
megabytes of random access memory), (ii) photo-realistic visual simulations and 
(iii) easy authoring processes.

                                       1
<PAGE>

Current Products

CAD Products

The Company's CAD software comprises a family of four products - ModaDRAPE 
(Registered), ModaToolkit (TM), ModaSKETCH (TM) and ModaWEAVE (Registered)- 
designed to perform modeling, rendering and support tasks.  The target market 
for these products is major industrial design companies.  ModaDRAPE, 
ModaToolkit and ModaSKETCH are "bundled" together as the ModaDESIGN PRO (TM) 
textile suite; ModaWEAVE, which runs only on the Macintosh operating system, is 
sold separately.

Traditionally, manufacturers of design-intensive items such as fashion, 
textiles, footwear, home furnishings, furniture and home improvement products 
have marketed their products by first prototyping them and then producing
samples for buyers to evaluate.  Because of the time and expense of the 
sampling process, manufacturers have increasingly been turning to the concept 
of "virtual sampling."  Currently, the Company's CAD software is used to
model 3D product visualizations from simple 2D images, render a photo-realistic 
picture of simulated products, place them inside a simulated 3D space, such as 
a room interior, and perform the entire rendering process in real
time without the need for special or customized hardware.  The ease of use, 
operability on standard PCs and the photo-realistic 3D image production of the 
ModaCAD industrial design product line serves to decrease the time and expense 
of product design.

The ModaDESIGN PRO textile suite is a fully integrated design system capable of 
real-time rendering, modeling 3D surface details onto 2D images, image 
processing, artwork development and catalog authoring.  ModaDESIGN PRO includes 
several powerful applications developed to assist design and merchandising 
teams in all phases of product, textile and catalog development.  
ModaDESIGN PRO's components include a proprietary textile design system, an 
embedded draping system as well as image processing, sketching and painting 
tools.

ModaDRAPE is the modeling and real-time rendering software component.  
ModaToolkit is the software component that controls color management, texture 
management, repeat generation, screen printing separations, color reduction
function and color changes.  ModaSKETCH is the artwork development, image photo 
retouching and image processing software developed by and licensed from a third 
party.  The ModaDESIGN PRO system is sold with various options depending upon 
the user's application, and the ModaWEAVE textile weaving simulation software 
is sold separately. The Company also sells an entry-level version of the 
ModaDRAPE software, called Envision (Registered), which offers a more limited 
feature set than ModaDRAPE.

ModaDESIGN PRO provides a direct interface with leading graphic software 
programs, enabling designers to access ModaDESIGN PRO directly without having 
to shut down other graphic design applications.  ModaDESIGN PRO is intended to 
streamline design and merchandising tasks, thereby reducing product development 
time and expense. ModaDESIGN PRO features the functionality to create "virtual 
samples" prior to actual product development and is designed to allow users to 
create presentations, storyboards, and promotional material.  ModaDESIGN PRO 
also enables users to create comprehensive interactive image databases for use 
in the Company's electronic merchandising catalogs, sales representative 
systems and kiosk programs.

Major companies which are users of the Company's CAD products include Jantzen, 
Burlington Industries, Hasbro, Pendleton Mills, Fleetwood Enterprises, 
Williamson-Dickies, Woolworth Canada, Oxford Industries and VF Corporation.

                                       2
<PAGE>

Electronic Merchandising Products

The Company's electronic merchandising software was designed to enable 
retailers to reduce expensive product inventories by allowing "virtual" samples 
of products to be presented on a computer screen directly to customers.  This 
software is used together with interactive kiosks and other desktop PC-based 
point-of-sale systems in retail stores for special-order products to allow 
consumers to visualize, in an interactive format, special order options (such 
as fabric styles or finishes) and preview their "customized" products prior to
purchasing.

The Company's electronic merchandising technology represents an improvement 
over traditional multimedia kiosk software by offering, in addition to catalogs 
of products, the ability to manipulate or "design" customized products in a 
photo-realistic, real-time 3D environment.  The Company believes that the 
interactive "design" function of its technology is of critical importance to 
industries offering special order merchandise, such as home furnishings, home 
design and home improvements.  As part of its electronic merchandising 
business, the Company has received orders from major retailers and 
manufacturers to produce numerous electronic catalogs on CD-ROMs containing 
"digital product content" used at the point-of-sale together with the 
Company's electronic merchandising software.  An example of such implementation 
is a furniture retailer using a ModaCAD-produced CD-ROM catalog to access a 
manufacturer's lines of upholstered furniture and to visualize in 
photo-realistic detail the "draping" of special-order fabrics onto available 
furniture frames.

The Company's electronic merchandising products are divided into three 
categories: (i) client/server technology, (ii) software products with embedded 
rendering functions for special-order product visualization compatible with
kiosk hardware and desktop PCs and (iii) CD-ROM-based product catalogs in a 
compatible format.  Such products feature real-time rendering for 
visualization, electronic order collection and special order visualization and
validation.  ModaFINITY (TM) is the Company's point-of-sale electronic 
merchandising software for in-store cataloging and visualization of products.  
ModaFINITY  is available with the following product options: ModaCATALOG (TM), 
an apparel-specific version; and the Server version, using a Local Area Network 
to manage network client/server implementations of ModaFINITY.  The ModaFINITY 
software can also be effectively used as an internal line development and 
merchandising tool in large retail and manufacturing operations.

ModaPLAN (TM) was released in 1997 and is a new strategic space management 
software solution which is derived from the Company's proprietary 3D rendering 
and electronic merchandising technologies.  ModaPLAN enables retailers and 
store designers to create and view 3D, photo-realistic renderings of store 
layouts and "planograms" via powerful client/server-based technology.  
ModaPLAN is designed to allow the user to integrate store layouts and 
planograms from one centralized database which contains both product and 
fixture information.  ModaPLAN is expected to distinguish itself from other 
similar software by the quality of its 3D rendering of objects in layout form 
as well as the ability to provide unlimited views of virtual store plans and 
layouts.  ModaPLAN merges the Company's advanced virtual reality technology and 
relational databases into a productive planning, merchandising and analysis 
tool for the retail marketplace.

                                       3
<PAGE>

ModaVISION (TM) is a new commercial product which combines the Company's 
patented rendering technology, 3D photo-realistic visualization and proprietary 
electronic merchandising technology to create a powerful point-of-purchase 
sales tool for retailers.  Targeted primarily for use by retailers as well as 
home-builders, ModaVISION is designed to be an in-store sales tool and the 
Company expects it to have broad interest to a number of industries.  
ModaVISION enables sales representatives working with customers, to create a 
virtual shopping cart of actual retail-branded products and then drag and drop 
desired selections into a virtual room scene designed for customers to 
visualize such products in a simulated 3D environment.  Although ModaVISION is
considered to be a professional design application, its familiar and easily 
understood menus, toolbars and shortcuts do not require the skills of a 
professional designer.

Major companies that use the Company's electronic merchandising, 
manufacturer-specific catalogs for use with point-of-sale interactive kiosks, 
and store planning products include Sears, Levitz Furniture, Crate & Barrel,
Broyhill Furniture, Ashley Furniture and Duckhead.

Consumer Products

During the fourth quarter of 1996, the Company completed development of the 
initial title in its CD-ROM-based consumer home decorating software series 
utilizing the Company's proprietary visualization and content management 
technologies.  This consumer software package was licensed to Broderbund 
Software, Inc. for publication, marketing and distribution.  Broderbund 
unveiled the product under the name 3D Home Interiors during the first
quarter of 1997 and released the product during the Spring of 1997.  3D Home 
Interiors is being marketed as a complementary product to Broderbund's existing 
3D Home Architect (TM) software.  Both products represent the first two titles 
of Broderbund's 3D Home Series (TM).  3D Home Interiors and subsequent 
ModaCAD-authored titles in the 3D Home Series are expected to enable consumers 
to perform sophisticated home design and decorating on PCs, using digital 
content catalogs of merchandise readily available through retailers, in an 
interactive, photo-realistic, 3D environment.  3D Home Interiors is targeted 
primarily at specific interior and home design projects which the Company 
considers to be of broad consumer appeal.

3D Home Interiors employs the Company's 3D virtual reality, real-time rendering 
and expert design technology for consumer use.  The products contain 
comprehensive cataloging features for electronic product browsing and 
visualization in cooperation with product manufacturers and retailers.  
The inclusion of electronic catalogs of actual merchandise for use in the 
Company's design software, with drag and drop simplicity, combined with
information on special-order options, allows each user to become a "contract 
specifier" for his or her home decorating project.

                                       4
<PAGE>

In addition to revenues from the sales of 3D Home Interiors and subsequent 3D 
Home Series titles that ModaCAD intends to author, the Company envisions that 
as such products achieve substantial market penetration, they may generate 
revenues from "publishing and advertising" fees charged to vendors who want 
their products to be featured in the 3D Home Series.  Although the Company 
currently receives some small fees from retailers and manufacturers for 
inclusion of their products in 3D Home Interiors, there is no assurance that 
the product will generate demand sufficient to charge significant fees.  The 
Company has established relationships with some content providers 
(manufacturers and retailers) essential for 3D Home Interiors and subsequent 
ModaCAD-authored 3D Home Series titles and has produced digital content 
component catalogs of their products for use with 3D Home Interiors.  The 
Company continues to establish relationships with new vendors to feature their 
product catalogs in subsequent versions of 3D Home Interiors and the 3D Home 
Series.  The Company believes that the time and effort it would take a third 
party to establish such relationships and produce such digital component 
catalogs provide the Company with a competitive advantage, although there can 
be no assurance that competitors of the Company will not devote the resources 
necessary to establish relationships and produce such digital component 
catalogs.

The digital content underlying the product catalogs contained within 3D Home 
Interiors features the names of major retailers such as JCPenney, Wallpapers To 
Go, Hunter Douglas Window Fashions, Marvin Windows and Doors, Z Gallerie, 
Phillips, GE Appliances and Ikea as well as their brand name products.

Future Products

E-Commerce Content Managers

In several recent publications sources, including Business Week, have 
identified e-commerce as the fastest growing segment of the computer 
visualization and graphics industry.  Furthermore, it is estimated that 
e-commerce alone will evolve into a $327 billion market by 2002, according to a 
report published by Forrester Research cited in the Los Angeles Times in July 
1997.

A key goal of ModaCAD's future growth strategy is to deliver a series of 
e-commerce (or Internet) content managers based upon the Company's proprietary 
photo-realistic rendering and content management technologies for each major 
retail segment throughout U.S. commerce.  ModaCAD-developed 3D Home Interiors, 
published by Broderbund, is the first example of these types of content 
managers that bridge visualization requirements and practical e-commerce 
applications, with a particular focus on the home furnishing and home design 
arenas.  In the Company's third quarter of 1998, ModaCAD expects to launch its 
first e-commerce content management software for the apparel/fashion industry 
which represents one of the largest segments of retailing and e-commerce 
potential in general, but there can be no assurance that such release will 
occur at that time.  ModaCAD is co-developing with Intel on this first fashion 
product.  Additionally, ModaCAD's goal is to unveil additional e-commerce 
content managers during fiscal 1998 and 1999 which will be targeted at a 
variety of horizontal markets.

                                       5
<PAGE>

The Company believes its e-commerce content manager's capabilities offer value 
to consumers beyond traditional printed catalogs.  This technology combines 
powerful visualization tools with the ability to organize, filter and manage 
digital product information in an advanced technological environment that 
showcases merchandise and services in a way that is informative, practical and 
useful to consumers.  The Company believes that having the ability to shop, 
research product information and visualize potential purchases in a 
photo-realistic virtual reality environment creates an incentive for consumers 
to purchase goods and services on-line in that it enables consumers to 
circumvent time and travel issues which can be key problems associated with 
unenjoyable shopping experiences.

The Company anticipates that its e-commerce product will generate revenues 
during 1998; however, the amount of revenues and timing of their receipt will 
depend on the Company's success in marketing, and consumer acceptance of the 
product.


E-Script Software Development Kit

The Company refers to its core e-commerce (or Internet) content manager 
technology as "E-Script." E-Script technology is an object-oriented software 
development kit based on the distributed COM architecture and is compatible 
with Microsoft's ActiveX controls.  Such compatibility allows the Company to 
mix the core functionality of E-Script with the ease of interface development 
of Visual Studio, including Java, C++ and HTML.  Additionally E-Script 
architecture is fully compatible with web-based tools.  E-Script technology is 
ideally suited to creating content management technology.

One of the Company's goals is to pursue multiple areas of consumer trade as it 
applies to e-commerce, using its E-Script technology.  The Company intends to 
enable many industry specific content managers from this common E-Script 
technology.  The concept is to offer specialized applications that offer value 
to consumers in each specific area of commerce, while maintaining a common 
content format and delivery mechanism.

E-Script allows for the following main functions:  reality-accurate 3D 
rendering; 2D image processing in real-time including image composition and 
alpha blending; progressive refinement push technology; rule-based behaviors 
and business rules modeling (including pricing and validation); peer-to-peer 
data communication and data sharing and real-time 3D virtual reality browsing 
and data-management functions.  ModaCAD's development strategy is to use the 
common core E-Script technology at the heart of all its end-user content 
managers and to wrap each one with an interface which is industry-specific 
using standard HTML & Java layers.  This strategy allows for fast application 
development from a common architecture.

Marketing, Sales and Distribution

Commercial Products

The Company markets its commercial products through its direct sales force and 
a network of authorized dealers and distributors.  During 1998, the Company 
intends to implement a value-added reseller ("VAR") distribution channel for 
its commercial product lines, but will maintain a limited direct sales force 
for key customers and major national accounts.  This scaled down sales force 
will also be responsible for managing VAR activities and productivity.

                                       6
<PAGE>

The Company or VAR will (i) provide the customer with appropriate software for 
use under license, (ii) advise the customer of any computer hardware it needs 
to buy, upgrade or adapt in order to utilize the software, (iii) assist the 
customer in the creation of the database of the customer's products or designs, 
and (iv) provide ongoing training and support in the use of the product package.

The Company employs 10 sales people and 19 marketing people.  In addition to 
its Los Angeles headquarters, the Company maintains one additional sales office 
in New York.  Internationally, the Company has established an exclusive 
distribution arrangement for certain European territories with ModaCAD Europe 
and has established nonexclusive dealerships in locations such as Japan, South 
Korea, Australia, India, Columbia, Brazil, New Zealand and Thailand.  ModaCAD 
Europe has been the largest purchaser of the Company's commercial products 
since it was established.  Sales to ModaCAD Europe decreased in 1997 compared 
to 1996.  In 1996 and 1997, such sales accounted for approximately 12% and 8%, 
respectively, of the Company's total sales.

ModaCAD licenses its software under either license agreements or site license 
agreements, the latter being used principally for major corporate accounts.  
ModaCAD offers quantity discounts for multiple-unit purchases and special 
discounts to accredited educational institutions.  The Company advertises its 
products in trade magazines and conducts direct mail, telemarketing and a media 
editorial campaign in industry trade press and general business publications.  
In addition, the Company participates in major computer industry, home 
furnishings and fixtures, store planning and apparel trade shows throughout the 
United States.

Consumer Products

In March 1996, the Company entered into a Software Development and Publishing 
Agreement with Broderbund ("the Broderbund Agreement"), appointing Broderbund 
as publisher of the ModaCAD-developed 3D Home Interiors and subsequent ModaCAD 
authored 3D Home Series software titles.  Broderbund has been distributing and 
marketing 3D Home Interiors domestically and internationally to PC hardware and 
software retailers and resellers, home furnishing and fixture retailers and 
home improvement stores since the product's release in late Spring 1997.  Under 
the Broderbund Agreement, the Company is responsible for the design and 
development of the 3D Home Interiors and related derivative works, including 
upgrades and foreign language adaptations, subject to Broderbund's final 
editorial control over the products.  Broderbund has been granted exclusive 
worldwide rights to publish 3D Home Interiors and derivative works thereof.  
Broderbund is responsible for marketing and promotion of the products and for 
customer support after publication.

Broderbund is a leading software publisher and distributor.  During 1997, 
Broderbund reported that it released over 40 new software products including 
new titles, upgrades to existing titles and transfers of existing titles to new 
hardware platforms.

                                       7
<PAGE>

The Company and Broderbund also intend to market 3D Home Interiors and 
subsequent 3D Home Series titles through the Internet and other on-line 
services and direct-to-consumer channels.  The Company plans to use the Internet
and other emerging on-line media to create sites relating to home decorating 
and home furnishings on the World Wide Web and other on-line networks.  The 
Company envisions using 3D Home Interiors, together with websites or other 
computerized or networked "environments" created by the Company or third-party 
manufacturers, vendors or sellers of advertising space (such as magazines) to 
present an array of complementary services, product shopping, updating options 
and other services.  Through such channels of distribution, consumers 
interested in home decorating could experience interactive demonstrations of 3D 
Home Interiors and order the product on-line.  The Company believes that in 
implementing such measures, it will establish itself in the emerging e-commerce 
or on-line marketplace as a leading provider of digital content managers of 
products for home shopping, for home furnishing, for in-home decorating and, 
eventually, for products in other industries which the Company's software
products may penetrate.

E-Commerce Products

ModaCAD entered into an Agreement with Intel Corporation in November 1997 to 
develop an e-commerce content manager targeted for distribution to the fashion 
and apparel industry.  Although specific product details have not been 
disclosed, the two companies have agreed to work together to develop and 
deliver rich visual and interactive content that is optimized for Pentium 
(Registered) II processor-based PCs.  Using advanced Internet push technology 
and multimedia enhancements, the Company believes that this e-commerce fashion 
solution will enable a rich and personalized end-user shopping experience.

The Company will also be exploring new methods by which to distribute 
e-commerce consumer software applications.  The Company's ultimate goal is to 
develop a complete product line of fashion products and other focused 
applications that are intended to service the broader e-commerce market segment.

Competition

The computer software design and electronic merchandising markets are 
intensely competitive and subject to rapidly changing technologies and evolving 
product standards.  In the broad computer software design and electronic 
merchandising markets, the Company competes with numerous companies providing 
CAD and rendering software, including companies such as Computer Design Inc., 
Gerber Garment Technology, Inc., Info Design, Lectra Systems, Inc., and 
Intellitek Computer Corporation.  Some of the Company's existing and potential 
competitors in the software design and electronic merchandising markets have 
significantly greater financial, technical, sales and marketing resources than 
the Company, have longer operating histories than the Company, and have better 
brand name recognition.

The Company believes that principal competitive factors in the commercial 
product markets in which the Company competes include product functionality and 
ease of use, product performance and reliability, customer service and support, 
vendor credibility and brand awareness, technological advantages and 
price/performance characteristics.  The Company believes that its products 
compete favorably with the products of its competitors principally due to the 
advantages of their real-time photo-realistic modeling and rendering functions, 
ease-of-use with existing Macintosh and Windows operating systems, and in the 
case of its electronic merchandising and 3D Home Interiors products, 
integration with a digital database of manufacturers' product catalogs.  
Although the Company believes that it competes favorably in the markets it 
serves, there can be no assurance that new or established competitors will not 
offer products superior to, or lower in price than, those of the Company.

                                       8
<PAGE>

The consumer software market is increasingly competitive, with numerous 
suppliers directing new products into a highly differentiated and rapidly 
developing marketplace.  The Company believes that the principal competitive
factors in the consumer software market include product features and 
performance, product reliability, ease-of-use, product reputation, price, 
timeliness of product upgrades and quality of customer support and service.  
The Company's competitors in this market include several large companies with 
substantially greater financial, technical, marketing and other resources than 
the Company, as well as numerous companies of varying sizes and resources, 
including Broderbund, SoftKey Software, Inc., Expert Software, Inc., Softdesk, 
Inc., Autodesk, Inc. and Books-that-Work.  Although Broderbund and ModaCAD have 
entered into a Publishing and Distribution Agreement for 3D Home Interiors 
which contains certain mutual non-compete covenants, this agreement does not 
prohibit Broderbund from publishing or distributing similar products which 
could compete with the Company's products, including Broderbund's previously 
released 3D Home Architect.  Additionally, the Company expects increased 
competition from new competitors who may in the future publish competitive home 
decorating software products.  The Company believes that the use of its core 
rendering technology in its 3D Home Interiors product, and use of digitized 
catalogs of actual products with the system, give its products the sufficient
attributes to provide an initial competitive advantage in the consumer software 
market.

Estimates of the existing and future size and scope of the e-commerce market as 
well as the on-line business-to-consumer segment vary from industry analyst to 
industry analyst.  While dollar amounts attributed to this market growth vary, 
sources appear to agree upon the fact that e-commerce, Internet shopping or any
derivatives thereof are likely to become a very large business.  ModaCAD 
believes that technology developers that enable this revolution in making 
e-commerce a pervasive means of transacting business, stand to generate sizable
revenues and reap substantial profits.  The industry as such is highly 
fragmented at this time, and the Company has no knowledge of any direct 
competitor to ModaCAD's recently unveiled e-commerce fashion solution.  The
Company believes it has a legitimate opportunity to capture material market 
share for both its new and future product lines and formats within the rapidly 
emerging e-commerce arena.

Dependence on Significant Customers

During 1996 and 1997, the Company's largest commercial product purchaser, 
ModaCAD Europe, accounted for approximately 12% and 8%, respectively, of the 
Company's total revenues.  During 1996 and 1997, Broderbund, accounted for 
approximately 44% and 6.7%, respectively of the Company's total revenues.  
During 1997, Intel accounted for approximately 34% of the Company's total 
revenues.  The Company may continue to be dependent on these three or more 
significant customers, the loss of which could have a material and adverse 
effect on the Company's business.

                                       9
<PAGE>

Patents and Proprietary Rights

The Company holds two United States patents.  The first one covers the 
Company's core rendering and modeling technology.  The second one covers 3D 
modeling techniques.  In addition to patent protection, the Company relies on a 
combination of (i) trade secret, copyright and trademark laws, (ii) 
confidentiality and nondisclosure agreements and (iii) other contractual and 
technical measures to protect its proprietary rights.  There is no assurance 
that these measures will deter misappropriation of the Company's proprietary 
rights.  The Company employs a "lock and key" system with respect to the 
proprietary information underlying its software.  This system is designed to 
ensure that only certain key employees have access to such information, all of 
whom have signed confidentiality and nondisclosure agreements.  The Company has 
five trademarks and eight registered trademarks, including the mark ModaCAD.  
The Company believes that its products, trademark and other proprietary rights 
do not infringe on the proprietary rights of third parties.  There can be no 
assurance, however, that third parties will not assert infringement claims 
against the Company in the future with respect to current or future products
or that any such asserted claims may not result in costly litigation.

Research and Development

ModaCAD believes that its success will depend primarily on its ability to 
maintain and enhance its current product lines, develop new products, maintain 
technological competitiveness, fulfill an expanding range of customer 
requirements and to pursue expansion opportunities into new markets.  ModaCAD's 
management has consistently explored and will continue to explore innovative 
new technologies, business strategies and opportunities in an effort to broaden 
the usability of its proprietary rendering and content management technologies.
The Company also believes that research and development is a key element of its 
continued success and is striving to bring market enhancements to its products 
and updates on a continual basis, to enable its customers to take advantage of 
new technologies as they are developed.  ModaCAD's primary expenses for research
and development include the personnel costs of the Company's specialists in 
engineering, software infrastructure, interface development, database 
technologies and 3D computer graphic design.  Research and development expenses
also include the depreciation and cost of maintenance of computer hardware used 
in research and development.

The Company's development teams are continuously working toward new 
developments, extensions and enhancements to its core rendering engine in an 
ongoing effort to maintain and extend ModaCAD's leadership in this area.  The
Company is also exploring the feasibility of developing a line of less 
sophisticated, lower-priced "pro-sumer" software products that would be 
marketed and sold through a VAR channel.  The adaptation of ModaCAD's 
professional design and rendering tools into "pro-sumer" applications are being 
designed to appeal to smaller industrial designers and retailers that would 
otherwise find the Company's products cost prohibitive.

ModaCAD conducts research and development in a variety of advanced technical 
areas, including object-oriented technology, specifications and rule-driven 
technology, as well as evolving imaging technologies.  ModaCAD is also 
developing a series of extensions to traditional scene-based 3D environments 
that are capable of achieving higher rendering resolution and increased levels 
of photo-realism.

                                       10
<PAGE>

To date, the Company has designed and developed all of its products internally 
with the exception of two utility software products offered with the ModaDESIGN 
system.  The Company was principally a product development company with respect 
to its industrial design and electronic merchandising products until 1993, when 
the Company developed marketing and product distribution capability.  As of 
December 31, 1997, 42 of the Company's 86 full-time employees were employed in 
various aspects of research and development activities.  The Company's research 
and development expenditures (other than expenses that are required to be 
capitalized under FASB 86) totaled $2,217,000 or 66% of revenues in 1996 and 
$2,828,000 or 64% of revenues in 1997.  During such periods, no significant 
amount of the Company's research and development expenditures was customer 
sponsored.

Employees

As of December 31, 1997, the Company employed 86 full-time employees, including 
27 in sales and marketing, 22 in engineering, 21 in product development, 12 in 
administration and 4 in customer support services.  The Company also employs 9 
consultants who work in product development.  The Company believes that its 
future success will depend, in part, on its ability to continue to attract, 
hire and retain highly qualified personnel.  The competition for such personnel 
in the computer software industry is intense.  None of the Company's employees 
are represented by a labor union, and the Company has never experienced a work 
stoppage.  The Company believes that its relations with its employees are good.

Item 2.    Description of Property

The Company is in the process of moving its executive headquarters to a 23,000 
square-foot facility in Culver City, California, under a lease that will expire 
in December 2005 with an option to extend the lease term for ten years.  The 
facility was necessary to accommodate the Company's recent growth in its sales, 
marketing and engineering personnel.  The Company acquired this additional 
space at commercially reasonable terms.  ModaCAD intends to sub-lease its 
current Los Angeles properties and does not foresee any difficulty in doing so.

Currently, ModaCAD's executive headquarters are located in a 5,100 square-foot 
facility in Los Angeles, California, under a lease that expires in November 
2000.  The Company also maintains a second 10,000 square-foot office in Los 
Angeles for its engineering operations under a lease that expires in June 2002. 
The Company leases approximately 2,400 square feet in High Point, North 
Carolina, under a lease that expires in June 1999, for production and customer 
service activities, directed primarily at electronic merchandising customers 
and consumer product lines.  The Company leases approximately 1,500 square feet 
in New York primarily for facilitating sales and marketing support activities 
in the Northeast region under a lease that expires in August 1999.  The Company
previously maintained a small office in Los Angeles for computerized catalog 
production under a month-to-month lease which was terminated in May 1997.

The Company anticipates that it may require additional space in High Point in 
the first half of 1998 to handle the expected increased levels of production 
and customer support activities.  The Company believes it can readily acquire 
any needed additional space when and as needed on commercially reasonable terms.


                                       11
<PAGE>

Item 3.    Legal Proceedings

           None.


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


                                       12
<PAGE>

                                    PART II

Item 5.    Market for Common Equity and Related Stockholder Matters

Trading Prices of Securities

Prior to November 11, 1997, the Company's common stock and warrants were traded 
in the NASDAQ SmallCap Market under the trading symbols "MODA" and "MODAW," 
respectively.  On November 11, 1997, the Company's common stock commenced 
trading in the NASDAQ National Market under the same trading symbol "MODA".  
The high and low bid prices for each quarter of 1996 and 1997 for the Company's 
common stock and warrants are as follows:

                                                            Bid Prices
                                                     High                Low
              Common Stock
              1st Quarter 1996                       6-1/8              4-1/8
              2nd Quarter 1996                      6-11/16             3-3/4
              3rd Quarter 1996                       5-3/4                4
              4th Quarter 1996                       6-1/4              4-1/2
              1st Quarter 1997                        10                5-5/8
              2nd Quarter 1997                      17-5/8              7-3/8
              3rd Quarter 1997                        19               12-5/8
              4th Quarter 1997                      25-5/8             15-1/2

              Warrants
              1st Quarter 1996                       2-1/4              1-3/8
              2nd Quarter 1996                       2-5/8              1-3/8
              3rd Quarter 1996                       2-3/8              1-1/2
              4th Quarter 1996                      2-13/16             1-1/2
              1st Quarter 1997                      4-11/16            1-7/16
              2nd Quarter 1997                      10-3/8              2-1/8
              3rd Quarter 1997                      11-3/4             6-1/16
              4th Quarter 1997                         -                  -

The first quarter 1996 figures above are based on trading prices of the 
Company's securities on March 29, 1996, the only trading day for the Company's 
securities in that quarter after the effective date of the Company's SB-2 
Registration Statement in connection with the Company's initial public offering 
("IPO").  Market prices for the listed warrants were not available after the 
warrants were deleted from listing in the NASDAQ SmallCap Market at July 30, 
1997.  Such deletion from listing resulted from warrants being exercised by the 
warrant holders or redeemed by the Company during the period between June 19, 
1997 and July 29, 1997.  At December 31, 1997, the Company had approximately 
1,700 shareholders of record.  The Company did not declare or pay dividends on 
its common stock during 1996 or 1997 and does not intend to pay dividends in 
the foreseeable future.

                                       13
<PAGE>

Recent Sales of Unregistered Securities

During 1997, the Company sold the following securities which were not 
registered under the Securities Act of 1933, as amended (the "1933 Act"):

(a)      On August 28, 1997, the Company granted to a non-employee director in 
         consideration for services to the Company a five-year warrant to 
         purchase 2,000 shares of common stock at an exercise price of $17.00 
         per share.  On October 27, 1997, the Company granted to two 
         non-employee directors in consideration for services to the Company 
         ten-year warrants to purchase a total of 4,000 shares of common stock 
         at an exercise price of $17.50 per share.

(b)      On November 13, 1997, the Company, in conjunction with entering a 
         software development agreement with Intel Corporation("Intel"), 
         granted Intel a five-year warrant to purchase 126,316 shares of common 
         stock at an exercise price of $19.00 per share.

Exemption from the registration provisions of the 1933 Act for all of the 
transactions described above is claimed pursuant to Section 4(2) of the 1933 
Act and/or Rule 504 of Regulation D promulgated thereunder on the grounds that 
such transactions did not involve any public offering.  The purchasers in such 
transactions represented their intention to acquire the securities for 
investment only and not with a view to the distribution thereof.  Appropriate 
legends were affixed to the certificates evidencing the securities issued in 
such transactions.  All purchasers either received adequate information about 
the Company or had access to such information.

In April 1996, the Company completed its initial public offering ("IPO") of 
securities and received approximately $6,300,000 net proceeds from the offering 
after paying underwriters' fees and costs associated with the offering as of 
March 1996.  The Company used the net proceeds of that offering approximately 
as follows:

 Repurchase of the Company's Common Stock                            $  900,000
 Repayment of Principal and Interest of Bridge Loan                     415,000
 Repayment of Short-term Note to the Company's Officers/shareholders    315,000
 Marketing and Distribution of the Company's Products                   300,000
 Payment of Accrued Officer Incentive Compensation                      166,000
 Expansion of Office                                                    102,000
 Costs of Additional Personnel                                          150,000
 Research and Development of the Company's Products (other than 3DHI) 2,554,000
 Research and Development of the 3-D Home Interiors Product             618,000
 Purchase of Equipment                                                  780,000
                                                                     ----------
   Total Proceeds Used                                               $6,300,000
                                                                     ==========
 
The uses of the proceeds comply with the use of proceeds section of the 
Company's prospectus dated March 27, 1996 in connection with the Company's IPO 
with the exception of $618,000 used in research and development of the 3-D
Home Interiors product and $780,000 used in purchase of the equipment.

                                       14
<PAGE>

Proceeds used in research and development of the Company's 3-D Home Interiors 
product increased to approximately $618,000, which is $218,000 over the 
$400,000 allocated such uses as described in the use of proceeds section of
the Company's prospectus.  The increase was primarily due to expanded scope of 
development of the 3-D Home Interiors product beyond its initial specifications 
to increase features and functionality provided to the users.  The expansion 
caused the company spend additional personnel costs, including in connection 
with development and production of computerized catalogs relative to the 
project.

Proceeds used in purchase of equipment increased to approximately $780,000, 
which is $530,000 over the $250,000 allocated such uses as described in the use 
of proceeds section of the Company's prospectus.  The increase was primarily 
due to the expansion of the Company's software development.  As the number of 
personnel in the research and development group increased, more computer 
equipment and software were acquired for their use.

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

The following discussion should be read in conjunction with the information 
under  "Item 7.  Financial Statements" and the Company's financial statements 
and notes thereto and other financial data  included elsewhere herein.  Certain 
statements under this caption constitute "forward-looking statements" under the 
Reform Act which involve risks and uncertainties.  The Company's actual results 
may differ significantly from the results discussed in such forward-looking 
statements.  Factors that could cause actual results to differ materially 
include the following: (i) unforeseen technical or other obstacles in the 
development or production of the Company's software products, (ii) customer 
acceptance of the new, updated or revised versions of the Company's software 
products, (iii) the Company's ability to produce its products on a 
cost-effective and timely basis and (iv) factors not directly related to the 
Company, such as the marketing plans of the Company's 3-D Home Interiors 
software by the publisher, competitive pressures on pricing, market conditions 
in general, competition, technological progression, product obsolescence and 
the changing needs of potential customers and the software, textile, apparel, 
home furnishings and home design industries in general. 

General

The Company was incorporated in 1988 to develop, market and support software 
products based on its proprietary modeling and rendering technology for use in 
industrial design applications including the apparel, textile and home 
furnishings industries.  The Company's products utilize the Company's 
proprietary modeling and rendering technology, operate on standard personal 
computers running Macintosh or Windows operating systems and are grouped
into two principal product groups: commercial (computer aided design or "CAD" 
and electronic merchandising products) and consumer.

The Company's CAD software products are used principally by industrial 
designers to model three-dimensional synthetic objects from two-dimensional 
images and to render such objects in real time with photorealistic imagery.  
The Company's electronic merchandising products combine the Company's 
technology with digital product catalogs produced by the Company or by product 
manufacturers using the Company's CAD software.  During 1997, the Company's 
revenues generated from sales of its CAD and electronic merchandising products 
experienced a 39% growth from the previous year.

                                       15
<PAGE>

In 1996, the Company completed its development of the 3-D Home Interiors 
product and recognized $1,500,000 revenue in connection with the completion of 
the development of such product.  In the second quarter of 1997, the Company 
commenced receiving royalties from sales of that consumer product by its 
publisher.

In November 1997, the Company signed an agreement with Intel for the 
co-development and distribution of interactive software to be used in 
connection with Intel's Pentium (Registered) II processor.  The companies 
agreed to co-develop an e-commerce solution for fashion retailers and 
manufacturers using advanced Internet push technology and multimedia 
enhancements which are intended to enable a rich and personalized end-user 
shopping experience.  In the fourth quarter of 1997, the Company generated a 
significant portion of its total revenue in 1997 as a result of the fulfillment 
of certain obligations pursuant to the agreement with Intel.

Results of Operations

The following table sets forth selected items from the Company's statements of 
operations (in thousands) for the years ended 1997 and 1996 and the percentages 
that such items bear to net sales:

<TABLE>
<CAPTION>
                                                  Year Ended December 31,                    
                                        ---------------------------------------
                                                1997                 1996
                                        -------------------  ------------------
<S>                                     <C>         <C>       <C>         <C>
Net sales                               $  4,450    100.0%    $  3,370    100.0%
Cost of sales                                 87      1.9          115      3.4
Selling, general and administrative        3,394     76.3        2,338     69.3
Research and development                     172      3.9           78      2.3
Amortization of software development costs   774     17.4          295      8.8
                                        --------    -----    ---------    -----        
  Total expenses                           4,427     99.5        2,826     83.8
                                        --------    -----    ---------    -----
Income from operations                        23      0.5          544     16.2
Investment income                            331      7.5          102      3.0
                                        --------    -----    ---------    -----
Net income                              $    354      8.0%    $    646     19.2%
                                        ========    =====    =========    ===== 
</TABLE>

1997 Compared with 1996

Net Sales

Net sales increased $1,080,000, or 32%, to $4,450,000 in 1997 from $3,370,000 
in 1996 primarily due to sales increases in the Company's commercial products 
(electronic merchandising and CAD products) and revenue increases from consumer 
products, consulting and training services and maintenance fees.  However, net 
sales attributable to hardware sales decreased by $8,000 due to the Company's 
decision in 1995 to phase out its hardware sales. The Company generated no 
hardware sales revenue in 1997.

Sales of electronic merchandising software and CAD products increased $646,000, 
or 39%, to $2,285,000 in 1997 from $1,639,000 in 1996 primarily due to $400,000 
of sales revenue generated from two of the Company's new customers in 1997.  
The remaining $246,000 increase from 1996 to 1997 represents an overall sales 
increase from the Company's existing customers.

                                       16
<PAGE>

Revenue generated from consumer products increased net sales by $282,000, or 
19%, to $1,802,000 in 1997 from $1,520,000 in 1996 due to $125,000 consumer 
software development services provided to and $181,000 royalty payments 
received from the Company's publisher, Broderbund Software ("Broderbund"), in 
connection with the sales of the Company's 3-D Home Interiors product in 1997.  
In 1997, $1,500,000 revenue was generated from the Company's fulfillment of 
certain obligations pursuant to an agreement with Intel in connection with the
co-development of consumer software.  In 1996, $1,500,000 revenue was 
attributable to an agreement between the Company and Broderbund of its interior 
home decorating consumer software products.

The Company received $136,000 in revenue generated from consulting services in 
1997 compared to no revenue from consulting services in 1996.  Those revenues
were attributable to the software consulting services provided to the Company's 
customers in conjunction with the sales of commercial products and the 
customer's annual conference meeting.

Training services revenue increased by $15,000, or 28%, to $69,000 in 1997 from 
$54,000 in 1996 primarily due to the Company's decision to terminate the 
relationship with an independent contractor and to provide customer training 
itself.  Net sales resulting from products maintenance fees increased $9,000 in 
1997 from 1996.

Cost of Sales

Cost of sales decreased $28,000, or 24%, to $87,000 in 1997 from $115,000 in 
1996. This decrease is primarily due to a $58,000 decrease in cost of hardware 
sales, which was offset by a $30,000 increase in the cost of commercial product 
sales. The decrease in the cost of hardware sales was due to the Company's 
decision to phase out its hardware sales which historically generated low 
profit margins. The increase in the cost of commercial product sales reflected 
the sales increase in commercial products.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $1,056,000, or 45%, to 
$3,394,000 in 1997 from $2,338,000 in 1996.  This increase was primarily due to 
three factors.  First, personnel costs increased $390,000, or 33%, to 
$1,573,000 in 1997 from $1,183,000 in 1996.  The increase in personnel costs 
resulted from the hiring of additional personnel in late 1996 and 1997 to 
support the Company's increased operating activities.  Second, certain related 
costs including travel, marketing, telephone and office supplies expenses 
increased $477,000, or 72%, to $1,143,000 in 1997 from $666,000 in 1996.  The 
increases in the marketing expenses reflect the implementation of the Company's 
planned expansion into new markets in late 1996 and 1997.  Third, professional
services including accounting, legal and consulting services increased 
$264,000, or 148%, to $442,000 in 1997 from $178,000 in 1996.  The increase in 
professional services was primarily due to the Company's increased requirements 
for these services in 1997 compared to 1996 as a result of the Company's status 
as a public company and increased business activities in 1997.

                                       17
<PAGE>

Research and Development

The Company incurred $3,000,000 of research and development costs in 1997, of 
which $2,828,000 was capitalized as software development costs and $172,000 was 
expensed, compared to $2,217,000 for 1996, of which $2,139,000 was capitalized 
and $78,000 was expensed.  The 35% increase in research and development 
expenditure from 1996 to 1997 was primarily due to the hiring of additional 
personnel to perform software programming services in connection with the 
further development of the Company's commercial and consumer products.

Amortization of Software Development Costs

The amortization of software development costs increased $479,000, or 162%, to 
$774,000 in 1997 from $295,000 in 1996 as the Company began marketing 
(and amortizing development costs associated with) several new versions of
software products in 1997.

Investment Income

Investment income increased $229,000, or 225%, to $331,000 in 1997 from 
$102,000 in 1996 due to the increase in income generated from a money market 
account in which the unexpended proceeds from the Company's IPO and the 
proceeds received upon the exercise by warrant holders of the Company's public 
warrants after notice of redemption made in June 1997 are maintained.

Income Taxes

The Company recorded no provision for income taxes in 1997 and 1996 due to the 
utilization of net operating loss carryforwards.


                                       18
<PAGE>

Liquidity and Capital Resources

On June 19, 1997, upon meeting the requisite criteria for redemption of 
redeemable common stock purchase warrants issued in the Company's IPO (i.e. the 
closing bid price for the Company's common stock averaged in excess of
$7.50 for a period of 20 consecutive trading days ending within 15 days of the 
notice of redemption), the Company notified the holders of the publicly traded 
warrants that it intended to redeem any unexercised warrants outstanding on 
July 29, 1997.  As a result of the notification, the warrant holders exercised 
warrants to purchase 1,609,084 shares of the Company's common stock for an 
aggregate exercise price of $10,459,046 and the Company redeemed the remaining 
916 unexercised warrants for $9.

In connection with loans made to the Company by a third party in December 1995 
and January 1996, the Company granted such third-party lender warrants to 
purchase an aggregate of 200,000 units which warrants had a two-year term, each 
with an exercise price of $4.00 per unit.  Each warrant provided the holder 
with the right to purchase one unit, comprised of one share of the Company's 
common stock and one redeemable warrant exercisable to purchase one share of 
common stock at a price of $6.50 per share for a period of five years beginning 
March 27, 1996.  In 1997, the warrant holder (or its transferees) exercised 
warrants to purchase 200,000 units for an exercise price of $800,000.  
The warrant holder further exercised his  redeemable common stock purchase 
warrants to purchase 200,000 shares of common stock for an exercise price of 
$1,300,000.

In connection with the IPO, the Company issued to the principal underwriter in 
the IPO, for $1,400, a warrant to purchase 140,000 units, at a per unit 
exercise price of $6.00, each unit consisting of one share of Common Stock and 
one redeemable warrant exercisable to purchase one share of Common Stock at an 
exercise price of $9.10 per share.  Such warrants are exercisable for a 
four-year period which began March 27, 1997.  In 1997, the underwriter (or 
assignees of the underwriter) exercised a portion of the  warrants to purchase 
an aggregate of 88,300 shares of the Company's common stock and 88,300 
redeemable common stock purchase warrants for an aggregate exercise price of 
$529,800.  The underwriter (or its assignees) further exercised redeemable 
common stock purchase warrants to purchase 30,800 shares of the Company's 
common stock for $280,280.

The Company's gross accounts receivable balance increased $788,000, or 54%, to 
$2,243,000 at December 31, 1997, from $1,455,000 at December 31, 1996.  This 
increase was primarily due to a total receivable balance of $843,000 at 
December 31, 1997, related to the sales generated from six of the Company's 
major customers in 1997.  At December 31, 1997, a $750,000 receivable balance 
was related to revenue recognized in relation to the Company's fulfillment of 
certain obligations pursuant to an agreement with Intel in connection with the 
co-development consumer software.  At December 31, 1996, a non-recurring 
$750,000 receivable balance attributable to an agreement between the Company 
and Broderbund in connection with its interior home decorating software 
products.  The $750,000 receivable from Borderbund was received in March 1997.

The Company anticipates continuing to use its capital primarily to fund the 
activities related to the design, development, marketing, sales and support of 
the Company's products.  Together with its existing capital received from the 
exercise of warrants as a result of the Company's notice of warrant redemption 
in June 1997 and anticipated funds from operations, the Company believes that 
its capital resources will be sufficient to provide its anticipated cash needs 
for working capital and capital expenditure for at least the next 18 months 
although the Company may seek to raise additional capital before then, 
depending on various considerations and developments.  Thereafter, if cash 
generated from operations is insufficient to satisfy the Company's capital
requirements, the Company may have to sell additional equity or debt securities 
or obtain credit facilities, assuming the Company can do so on acceptable terms.


                                       19
<PAGE>

Item 7.    Financial Statements

                                 MODACAD, INC.
                              FINANCIAL STATEMENTS
                              FOR THE YEARS ENDED
                           DECEMBER 31, 1997 AND 1996



                                       20
<PAGE>

                                                                   MODACAD, INC.
                                                                        CONTENTS
                                                               December 31, 1997
================================================================================

                                                                        Page

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS                       23

FINANCIAL STATEMENTS

       Balance Sheet                                                     24

       Statements of Operations                                          25

       Statements of Stockholders' Equity                                26

       Statements of Cash Flows                                        27 - 28

       Notes to Financial Statements                                   29 - 40







                                       21
<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors and Stockholders
ModaCAD, Inc.

We have audited the accompanying balance sheet of ModaCAD, Inc. as of December 
31, 1997, and the related statements of operations, stockholders' equity and 
cash flows for each of the two years in the period ended December 31, 1997.  
These financial statements are the responsibility of the Company's management.  
Our responsibility is to express an opinion on these financial statements based 
on our audits.

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

In our opinion, the financial statements referred to above present fairly, in 
all material respects, the financial position of ModaCAD, Inc. as of December 
31, 1997, and the results of its operations and its cash flows for each of the 
two years in the period ended December 31, 1997 in conformity with generally 
accepted accounting principles.



SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

Los Angeles, California
March 2, 1998


                                       22
<PAGE>

                                                                   MODACAD, INC.
                                                                   BALANCE SHEET
                                                               December 31, 1997
================================================================================

<TABLE>
<CAPTION>
                                     ASSETS
<S>                                                               <C>
Current assets
   Cash and cash equivalents                                      $ 12,419,992
   Accounts receivable, 
      net of allowance for doubtful accounts of $81,500              2,161,152
   Prepaid expenses and other current assets                           747,776
                                                                  -------------
                 Total current assets                               15,328,920

Capitalized computer software development costs,
   net of accumulated amortization of $1,149,119                     4,853,560
Furniture and equipment, net (Note 2)                                1,074,604
Investment in and advances to unconsolidated subsidiary (Note 6)        55,324
Other assets                                                            91,648
                                                                  -------------
                     Total assets                                 $ 21,404,056
                                                                  =============

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
   Accounts payable and accrued expenses (Note 3)                 $    360,720
   Deferred income                                                     104,281
                                                                  -------------
                 Total current liabilities                             465,001
                                                                  -------------

Commitments (Note 3)

Stockholders' equity (Note 4)
   Common stock, no par value
      15,000,000 shares authorized
      6,022,974 shares issued and outstanding                       25,517,352
   Accumulated deficit                                              (4,578,297)
                                                                  -------------
                 Total stockholders' equity                         20,939,055
                                                                  -------------
                     Total liabilities and stockholders' equity   $ 21,404,056
                                                                  =============
</TABLE>

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

                                       23
<PAGE>


                                                                   MODACAD, INC.
                                                        STATEMENTS OF OPERATIONS
                                                For the Years Ended December 31,
================================================================================
                           
<TABLE>
<CAPTION>

                                      
                                                             1997        1996
                                                         ----------- -----------
<S>                                                      <C>         <C>
Net sales (Note 5)                                       $ 4,449,857 $ 3,370,222
                                                         ----------- -----------

Expenses
  Cost of sales                                               87,470     114,854  
  Selling, general and administrative                      3,393,765   2,338,227 
  Research and development                                   171,769      78,105
  Amortization of capitalized software development costs     774,135     295,465 
                                                         ----------- -----------
    Total expenses                                         4,427,139   2,826,701
                                                         ----------- -----------
Income from operations                                        22,718     543,521

Other income
  Other income                                                11,190           -
  Investment income                                          320,367     101,914
                                                         ----------- -----------
    Total other income                                       331,557     101,914

Net income                                               $   354,275 $   645,435   
                                                         =========== ===========

Basic earnings per share                                 $      0.07 $      0.20
                                                         =========== ===========
Diluted earnings per share                               $      0.06 $      0.20
                                                         =========== ===========
Weighted average common shares outstanding                 4,800,918   3,247,766
                                                         =========== ===========
</TABLE>

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


                                       24
<PAGE>
   
                                                                   MODACAD, INC.
                                              STATEMENTS OF STOCKHOLDERS' EQUITY
                                                For the Years Ended December 31,
================================================================================
                           
<TABLE>
<CAPTION>

                                      Common Stock      Accumulated    
                                  Shars      Amount       Deficit      Total
                               ---------- ------------ ------------ ------------
<S>                            <C>        <C>          <C>          <C>
Balance, December 31, 1995     1,418,454  $ 1,618,117  $(5,578,007) $(3,959,890)
Sale of common stock           1,610,000    7,930,728                 7,930,728
Offering cost                              (1,672,984)               (1,672,984)
Conversion of notes payable
  and accrued interest-
  related parties                900,000    4,545,175                 4,545,175
Repurchases of shares           (312,168)    (900,000)                 (900,000)
Stock issued for compensation     12,549       62,744                    62,744
Warrants exercised               236,955        9,125                     9,125
Issueance of warrants for
  services                                      1,000                     1,000
Net income                                                 645,435      645,435
                               ---------- ------------ ------------ ------------
Balance, December 31, 1996     3,865,790   11,593,905   (4,932,572)   6,661,333
Common stock issued for
  Stock options exercised         29,000      149,376                   149,376
  Warrants exercised           2,128,184   13,369,126                13,369,126

Warrant redemption cost                      (167,055)                 (167,055)
Issuance of warrants for
  services                                    572,000                   572,000
Net income                                                 354,275      354,275
                               ---------- ------------ ------------ ------------
Balance, December 31, 1997     6,022,974  $25,517,352  $(4,578,297) $20,939,055
                               ========== ============ ============ ============
                                           
</TABLE>

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

                                       25
<PAGE>

                                                                   MODACAD, INC.
                                                        STATEMENTS OF CASH FLOWS
                                                For the Years Ended December 31,
================================================================================

<TABLE>
<CAPTION>
                                                             1997        1996
                                                         ----------- -----------
<S>                                                      <C>         <C>
Cash flows from operating activities
  Net income                                             $  354,275  $  645,435
  Adjustments to reconcile net income to net cash
     provided by (used in) operating activities
        Depreciation                                         65,655      23,859
        Amortization of capitalized software 
           development costs                                774,135     295,465    
        Provision for loss on accounts receivable            52,000     209,386
        Issuance of warrants for services rendered           12,000       1,000
        (Increase) decrease in
           Accounts receivable                             (870,299) (1,173,611)
           Prepaid expenses and other current assets        (34,343)   (139,463)
           Other assets                                     (69,208)    (10,480)
        Increase (decrease) in
           Accounts payable and accrued expenses            (10,022)    (41,669)
           Deferred income                                   29,501      14,782
                                                          ---------- -----------
   Net cash provided by (used in) operating activities      303,704    (175,296)
                                                          ---------- -----------
Cash flows from investing activities
   Purchase of furniture and equipment                     (616,166)   (617,468)
   Capitalized computer software development cost        (2,682,956) (2,069,104)
                                                         ----------- -----------
   Net cash used in investing activities                 (3,299,122) (2,686,572)
                                                         ----------- -----------
Cash flows from financing activities
   Payments on note payable                                       -    (250,000)
   Payments on officers/stockholders note payable           (75,000)   (200,000)
   Purchase of common stock                                       -    (900,000) 
   Sale of common stock                                           -   7,930,728
   Stock options exercised                                  149,376           -
   Warrants exercised                                    13,369,126       9,125
   Offering cost                                                  -  (1,602,246)
   Warrant redemption cost                                 (167,055)          -
                                                         ----------- -----------
   Net cash provided by financing activities             13,276,447   4,987,607  
                                                         ----------- -----------

Net increase in cash                                     10,281,029   2,125,739
Cash and cash equivalents, beginning of year              2,138,963      13,224
                                                        ------------ -----------
Cash and cash equivalents, end of year                  $12,419,992  $2,138,963
                                                        ============ ===========

                      
</TABLE>
   The accompanying notes are an integral part of these financial statements.


                                       26
<PAGE>
                 
                                                                   MODACAD, INC.
                                            STATEMENTS OF CASH FLOWS (Continued)
                                                For the Years Ended December 31,
================================================================================

Supplemental disclosures of cash flow information
During the years ended December 31, 1997 and 1996, the Company paid no income 
taxes and $0 and $14,700, respectively, in interest.

Supplemental schedule of non-cash investing and financing activities
In 1996, the Company converted the note payable - related party principal 
amount of $3,073,713 and $1,471,462 of accrued interest into 900,000 shares of 
common stock of the Company, concurrently with the closing of the IPO.

During the year ended December 31, 1996, the Company issued common stock of 
12,549 to certain employees for stock awards accrued in prior years.  During
the year ended December 31, 1997, the Company issued 126,316 warrants valued
at $560,000 for development expenses that will be performed in 1998.















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


                                       27
<PAGE>

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Organization and Line of Business
         ModaCAD, Inc. (the "Company") was incorporated in California on 
         February 4, 1988. The Company designs, markets, and supports advanced 
         virtual reality, rendering, and modeling software for industrial design
         and retail customers primarily in the apparel, textile, home 
         furnishings, and home design industries.

         Cash and Cash Equivalents
         For purpose of the statements of cash flows, the Company considers all 
         highly-liquid investments purchased with original maturities of three 
         months or less to be cash equivalents.  As of December 31, 1997, the 
         cash and cash equivalents included amounts held in a checking and a 
         money market account of approximately $60,000 and $12,360,000, 
         respectively.

         Software Development Costs
         Software development costs are capitalized in accordance with 
         Statement of Financial Accounting Standards ("SFAS") No. 86, 
         "Accounting for the Cost of Computer Software to Be Sold, Leased, or
         Otherwise Marketed."  Capitalization of software development costs 
         begins upon the establishment of technological feasibility and is 
         discontinued when the product is available for sale.  The establishment
         of technological feasibility and the ongoing assessment for 
         recoverability of capitalized software development costs require 
         considerable judgment by management with respect to certain external 
         factors, including, but not limited to, technological feasibility, 
         anticipated future gross revenues, estimated economic life, and 
         changes in software and hardware technologies. Capitalized software 
         development costs are comprised primarily of direct overhead, payroll 
         costs, and consultants' fees of individuals working directly on the 
         development of specific software products.

         Amortization of capitalized software development costs is provided on 
         a product-by-product basis on the straight-line method over the 
         estimated economic life of the products (not to exceed three years).
         Management periodically compares estimated net realizable value by 
         product to the amount of software development costs capitalized for 
         that product to ensure the amount capitalized is not in excess of the
         amount to be recovered through revenues.  Any such excess of 
         capitalized software development costs over expected net realizable 
         value is expensed at that time.

         Furniture and Equipment
         Furniture and equipment are recorded at cost.  Depreciation and 
         amortization are provided using the straight-line method over an 
         estimated useful life of five years. Maintenance and minor 
         replacements are charged to expenses as incurred.  Gains and losses on 
         disposals of furniture and equipment are included in the results of 
         operations.

                                       28
<PAGE>

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         Joint Venture Investment and Advances
         The Company has a 40% interest in ModaMAGIC, Inc. ("ModaMAGIC"). 
         ModaMAGIC was formed to produce an interactive, multi-media CD-ROM for 
         the consumer market. As of December 31, 1997, ModaMAGIC had no 
         revenues and is actively marketing its product.

         The Company reports its share of income and losses of ModaMAGIC under 
         the equity method of accounting.

         Revenue Recognition
         The Company recognizes revenues related to software licenses and 
         software maintenance in compliance with the American Institute of 
         Certified Public Accountants ("AICPA") Statements of Position No. 97-2,
         "Software Revenue Recognition."  Product revenue is recorded at the 
         time of shipment, net of estimated allowances and returns. Any 
         insignificant post-contract support obligations are accrued for at the 
         time of the sale. Post contract customer support ("PCS") that is 
         bundled with an initial licensing fee, and is for one year or less is 
         recognized at the time of the initial licensing, if collectability of 
         the resulting receivables is probable.  When a PCS is sold under a 
         separate agreement, the revenue is recognized on a straight-line basis 
         over the life of the PCS agreement, generally twelve months.

         Research and Development Costs
         Research and development costs are charged to expense as incurred.  
         These costs consist primarily of salaries, consulting fees, and direct 
         overhead.

         Income Taxes
         The Company accounts for income taxes in accordance with SFAS No. 109, 
         "Accounting for Income Taxes."  Deferred taxes are provided on a 
         liability method whereby deferred tax assets are recognized for
         deductible temporary differences, and deferred tax liabilities are 
         recognized for taxable temporary differences.  Temporary differences 
         are the differences between the reported amounts of assets and 
         liabilities and their tax bases. Deferred tax assets are reduced by a 
         valuation allowance when, in the opinion of management, it is more 
         likely than not that some portion of all of the deferred tax assets
         will not be realized.  Deferred tax assets and liabilities are 
         adjusted for the effects of changes in tax laws and rates on the date 
         of enactment.


                                       29
<PAGE>

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         Net Income Per Share
         For the year ended December 31, 1997, the Company adopted SFAS No. 
         128, "Earnings per Share."  Basic earnings per share is computed by 
         dividing income available to common stockholders by the weighted
         average number of common shares outstanding.  Diluted earnings per 
         share is computed similar to basic earnings per share except that the 
         denominator is increased to include the number of additional common
         shares that would have been outstanding if the potential common shares 
         had been issued and if the additional common shares were dilutive.  
         Earnings per share for 1996 has been restated using the methodologies 
         of SFAS No. 128.

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

         Fair Value of Financial Instruments
         The Company measures its financial assets and liabilities in 
         accordance with generally accepted accounting principles.  For certain 
         of the Company's financial instruments, including cash and cash
         equivalents, accounts receivable, and accounts payable and accrued 
         expenses, the carrying amounts approximate fair value due to their 
         short maturities.

         Concentrations of Credit Risk
         Financial instruments which potentially subject the Company to 
         concentrations of credit risk consist of cash and trade receivables.  
         The Company places its cash with high quality financial institutions 
         and at times may exceed the FDIC $100,000 insurance limit. The Company 
         sells products on a worldwide basis and extends credit based on an 
         evaluation of the customer's financial condition, generally without 
         requiring collateral. Exposure to losses on receivables is principally 
         dependent on each customer's financial condition.  The Company 
         monitors its exposure for credit losses and maintains allowances for 
         anticipated losses.

                                       30
<PAGE>

NOTE 2 - FURNITURE AND EQUIPMENT

         Furniture and equipment at December 31, 1997 consisted of the 
         following:
<TABLE>
               <S>                                         <C>
               Office equipment                            $    85,097
               Computer equipment and software               1,355,891
               Furniture and fixtures                          166,753
               Leasehold improvements                           89,067
                                                          ------------  
                                                             1,696,808
               Less accumulated depreciation                   622,204
                                                          ------------
                   Total                                   $ 1,074,604
                                                          ============
</TABLE>

         Depreciation expense for the years ended December 31, 1997 and 1996 
         was $210,712 and $93,818, respectively, of which $145,047 and $69,959, 
         respectively, were capitalized as software development costs.


NOTE 3 - COMMITMENTS

         Leases
         The Company leases certain facilities for its corporate and operations 
         offices under long-term, non-cancelable operating lease agreements 
         that expire through November 30, 2000.

         Future minimum aggregate lease payments under non-cancelable operating 
         leases with initial or remaining terms of one year or more at December 
         31, 1997 were as follows:
<TABLE>
<CAPTION>
                  Years Ending
                  December 31,
                      <S>                                  <C>
                      1998                                 $    531,181
                      1999                                      577,631
                      2000                                      542,262
                      2001                                      480,396
                      2002                                      437,898
                      Thereafter                              1,317,997
                                                           ------------ 
                           Total                           $  3,887,365
                                                           ============
</TABLE>
         Rent expense for the years ended December 31, 1997 and 1996 was 
         approximately $192,000  and $81,000, respectively, of which $120,000 
         and $74,000, respectively, were capitalized as software development 
         costs.

                                       31
<PAGE>

NOTE 3 - COMMITMENTS (Continued)

         Employment Agreements
         The Company has entered into employment agreements, expiring through 
         December 31, 2002, with certain key officers of the Company.  These 
         officers will receive aggregate annual salaries of $300,000.  Also, an
         aggregate bonus of 10% of net income before taxes is payable, not to 
         exceed $300,000; as of December 31, 1997, the Company has accrued 
         approximately $44,000 for these bonuses.  In addition, if the market 
         value of the Company's common stock is greater than $10 per share for 
         any 20 consecutive trading days during any fiscal year, the Company 
         will grant options to purchase an aggregate of 100 shares of common 
         stock for each $1,000 of net income before taxes in that fiscal year 
         up to a maximum of 120,000 options over the life of the employment 
         agreements.  These options will be exercisable at a price equal to the 
         market value per share as of the date of the grant.  During the years 
         ended December 31, 1997 and 1996, 74,454 and 0 options, respectively, 
         were granted related to these agreements.


NOTE 4 - STOCKHOLDERS' EQUITY

         Sale of Common Stock
         In 1996, the Company completed an initial public offering ("IPO") of 
         its common stock. The offering consisted of 1,400,000 units at $5.01 
         per unit, each unit consisting of one share of common stock and one 
         redeemable common stock purchase warrant.  The 1,400,000 warrants have 
         an exercise price of $6.50 per share and expire in March 2001. Also, 
         the Company granted the principal underwriters a 45-day option to 
         purchase up to 210,000 additional units at $5.01 solely for the 
         purpose of covering over-allotment.  The underwriters exercised this 
         option on April 25, 1996.

         In connection with the IPO, the Company issued to the principal 
         underwriter in the IPO, for $1,400, a warrant to purchase 140,000 
         units, at a per unit exercise price of $6.00, each unit consisting of 
         one share of common stock and one redeemable warrant exercisable to 
         purchase one share of common stock at an exercise price of $9.10 per 
         share.  Such warrants are exercisable for a four-year period which 
         began March 27, 1997.  In 1997, the underwriter (or assignees of the 
         underwriter) exercised a portion of the warrants to purchase an 
         aggregate of 88,300 shares of the Company's common stock and 88,300 
         redeemable common stock purchase warrants for an aggregate exercise 
         price of $529,800.  The underwriter (or its assignees) further 
         exercised redeemable common stock purchase warrants to purchase 30,800 
         shares of the Company's common stock for $280,280.


                                       32
<PAGE>

NOTE 4 - STOCKHOLDERS' EQUITY (Continued)

         Sale of Common Stock (Continued)
         On June 19, 1997, upon meeting the requisite criteria for redemption 
         of redeemable common stock purchase warrants issued in the Company's 
         1996 IPO (i.e., the closing bid price for the Company's common stock
         averaged in excess of $7.50 for a period of twenty consecutive trading 
         days ending within fifteen days of the notice of redemption), the 
         Company notified the holders of the publicly traded warrants that it
         intended to redeem any unexercised warrants outstanding on July 29, 
         1997.  As a result of the notification, the warrant holders exercised 
         warrants to purchase 1,609,084 shares of the Company's common stock 
         for an aggregate exercise price of $10,459,046, and the Company 
         redeemed the remaining 916 unexercised warrants for $9.

         In connection with loans made to the Company by a third party in 
         December 1995 and January 1996, the Company granted such third-party 
         lender warrants to purchase an aggregate of 200,000 units which 
         warrants had a two-year term, each with an exercise price of $4.00 per 
         unit.  Each warrant provided the holder with the right to purchase one 
         unit, comprised of one share of the Company's common stock and one
         redeemable warrant exercisable to purchase one share of common stock 
         at a price of $6.50 per share for a period of five years beginning 
         March 27, 1996.  In 1997, the warrant holder exercised warrants to
         purchase 200,000 units for an exercise price of $800,000.  The warrant 
         holder further exercised his redeemable common stock purchase warrants 
         to purchase 200,000 shares of common stock for an exercise price of 
         $1,300,000.

         Repurchase of Shares
         In connection with the IPO by the Company, the Company repurchased 
         from a stockholder 312,168 shares of common stock for $900,000.

         Stock Split
         In connection with the IPO by the Company, the Board of Directors and 
         stockholders of the Company approved in December 1995, a .2596772 for 
         one reverse stock split of its outstanding common stock.  In addition, 
         the number of authorized shares of common stock was increased to 
         15,000,000 shares.  All per share data presented has been 
         retroactively restated to show the effects of this stock split.

         Shares Issued for Services
         During 1996, the Company issued 12,549 shares of common stock to 
         employees of the Company for employee stock awards accrued for in 
         prior years.  The value of the compensation was based on the price of 
         the Company's stock on the date the stock awards were quoted.


                                       33
<PAGE>

NOTE 4 - STOCKHOLDERS' EQUITY (Continued)

         Warrants
         In December 1996, the Company issued 250,000 common stock purchase 
         warrants to an outside consultant that are exercisable at a price of 
         $5.00 per share, expiring in December 1999.  In accordance with SFAS
         No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), 
         the Company has valued these warrants at the current market value of 
         the services to be rendered by the warrant holder.  For the years 
         ended December 31, 1997 and 1996, the Company has recognized $12,000 
         and $1,000, respectively, of consulting expense related to these 
         warrants.  As of December 31, 1997, these warrants have not been
         exercised.

         In 1997, the Company entered into a distribution and development 
         agreement.  Under the agreement, the Company has issued 126,316 
         warrants to purchase its common stock at an exercise price of $19.00 
         for services to be provided to the Company under this agreement.  In 
         accordance with SFAS No. 123, the Company has valued these warrants at 
         the current market value of the services to be rendered by the warrant 
         holder.  As of December 31, 1997, the Company has recorded a prepaid 
         expense of $560,000 for the services to be rendered to the Company in 
         1998.

         Stock Option Plan
         In 1995, the Company adopted the 1995 Stock Option Plan (the "Plan") 
         which expires in 2006.  In June 1997, the Plan was amended, upon 
         receipt of shareholder approval, to increase the number of shares of
         common stock authorized for issuance pursuant to the exercise of stock 
         options under the Plan from 300,000 to 750,000 shares.  As of December 
         31, 1997, the Company had granted options to purchase a total of 
         487,000 shares of common stock to employees with exercise prices 
         ranging from $4.6875 to $16.25 per share.

         The Company has adopted only the disclosure provisions of SFAS No. 
         123.  It applies Accounting Principles Bulletin ("APB") Opinion No. 
         25, "Accounting for Stock Issued to Employees," and related
         interpretations in accounting for its plans and does not recognize 
         compensation expense for its stock-based compensation plans other than 
         for restricted stock and options/warrants issued to outside third 
         parties.  If the Company had elected to recognize compensation expense 
         based upon the fair value at the grant date for awards under its plan 
         consistent with the methodology prescribed by SFAS No. 123, the 
         Company's net income and earnings per share would be reduced to the 
         pro forma amounts indicated below:


                                       34
<PAGE>

NOTE 4 - STOCKHOLDERS' EQUITY (Continued)

         Stock Option Plan (Continued)
<TABLE>
<CAPTION>
                                                        For the Years Ended
                                                           December 31,           
                                              ---------------------------------
                                                    1997              1996     
                                              --------------     --------------
                Net income (loss)
                <S>                            <C>                <C>
                    As reported                $    354,275       $    645,435
                                               ============       ============
                    Pro form                   $ (1,365,274)      $    327,435
                                               ============       ============

                Basic earnings (loss) per common share

                    As reported                $       0.07       $       0.20
                                               ============       ============
                    Pro forma                  $      (0.28)      $       0.10
                                               ============       ============
</TABLE>

         These pro forma amounts may not be representative of future 
         disclosures because they do not take into effect pro forma 
         compensation expense related to grants made before 1995.  The fair 
         value of these options was estimated at the date of grant using the 
         Black-Scholes option-pricing model with the following weighted-average 
         assumptions for the years ended December 31, 1997 and 1996: dividend   
         yields of 0% and 0%, respectively; expected volatility of 65% and 45%, 
         respectively; risk-free interest rates of 5.7% and 7%, respectively; 
         and expected life of 4.1 and 7.2 years, respectively.  The weighted 
         average fair value of options granted during the years ended December 
         31, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
                                                               1997      1996     
                                                            --------- ---------
          <S>                                                <C>       <C>
           Exercise price exceeds grant date market price    $ 7.55    $      -
           Exercise price equal to grant date market price   $ 4.23    $   2.88
           Exercise price less than grant date market price  $ 9.76    $      -
</TABLE>
         The Black-Scholes option valuation model was developed for use in 
         estimating the fair value of traded options which have no vesting 
         restrictions and are fully transferable.  In addition, option valuation
         models require the input of highly subjective assumptions including 
         the expected stock price volatility.  Because the Company's employee 
         stock options have characteristics significantly different from those 
         of traded options, and because changes in the subjective input 
         assumptions can materially affect the fair value estimate, in 
         management's opinion, the existing models do not necessarily provide a 
         reliable single measure of the fair value of its employee stock
         options.

         The following summarizes the stock options transactions under the 
         stock option plan:


                                       35
<PAGE>

NOTE 4 - STOCKHOLDERS' EQUITY (Continued)

         Stock Option Plan (Continued)
<TABLE>
<CAPTION>

                                               Weighted-               Weighted-
                                                Average                 Average
                                Stock Options  Exercise      Other     Exercise
                                Outstanding      Price     Warrants      Price
                                ------------- ----------- ----------- ----------
           <S>                       <C>         <C>       <C>          <C>  
           Balance, December 31,
             1995                          -     $     -           -    $     -
               Granted               204,000     $  4.96   2,202,000    $  6.07
                                -------------              ----------   

           Balance, December 31,
             1996                    204,000     $  4.96   2,202,000    $  6.07
               Granted               733,454     $ 16.29     420,616    $ 10.95
               Exercised             (29,000)    $  5.15  (2,128,184)   $  6.28
               Canceled                    -     $     -        (916)   $  6.50
                                -------------              ----------  

           Outstanding, December
            31, 1997                 908,454     $ 14.10     493,516    $  9.31
                                =============              ==========

           Exercisable, December
            31, 1996                  84,000     $  4.91
                                =============              
           Exercisable, December
            31, 1997                 371,854     $ 11.74     493,516
                                =============              ==========

         The weighted average remaining contractual lives of the options and 
         warrants are 7.52 and 2.84, respectively, at December 31, 1997.
</TABLE>

NOTE 5 - SALES

         Major Customers
         During the year ended December 31, 1997, the Company did business with 
         one customer whose sales comprised approximately 34% of net sales.

         During the year ended December 31, 1996, the Company did business with 
         two customers whose sales comprised approximately 45% and 12%, 
         respectively, of net sales.

         Export Sales
         For the year ended December 31, 1997, the Company had export sales of 
         approximately $957,000 principally comprised of $761,000 in Europe, 
         $91,000 in Asia, and $105,000 in other geographic regions.


                                       36
<PAGE>

NOTE 5 - SALES (Continued)

         Export Sales (Continued)
         For the year ended December 31, 1996, the Company had export sales of 
         approximately $510,000 principally comprised of $398,000 in Europe, 
         $54,000 in Asia, and $58,000 in other geographic regions.


NOTE 6 - RELATED PARTY TRANSACTIONS

         The Company has an agreement to provide computer programming services 
         to ModaMAGIC which is billed at cost.  For both of the years ended 
         December 31, 1997 and 1996, the Company billed $0 in services.

         In 1996, the Company converted the note payable - related party 
         principal amount of $3,073,713 and accrued interest of $1,471,462 into 
         900,000 shares of common stock of the Company, concurrently with the
         closing of the IPO.


NOTE 7 - PROFIT SHARING

         In 1996, the Company adopted the ModaCAD 401(k) Plan (the "Plan").  
         The Plan is available to substantially all employees who meet length 
         and service requirements.  On September 1, 1996, all permanent and 
         full-time employees of the Company became participants.  Participants 
         may elect to contribute not less than 3% and no more than 15% of their 
         annual compensation.  The Plan has a Company discretionary profit 
         sharing provision which the Company, for years with income before 
         taxes, will contribute from 0% to 5% of income before taxes.  The 
         amount of the profit sharing contribution will be determined each year 
         by the Company.  For the years ended December 31, 1997 and 1996, 
         employer contributions under the Plan were approximately $22,000 and 
         $34,000, respectively.


                                       37
<PAGE>

NOTE 8 - INCOME TAXES

         A reconciliation of the provision for income tax expense with the 
         expected income tax computed by applying the federal statutory income 
         tax rate to income before provision for income taxes is as follows:

<TABLE>
<CAPTION>
                                                                  December 31,          
                                                                -------------- 
                                                                 1997    1996 
                                                                -----   -----
            <S>                                                  <C>     <C>
            Income tax computed at federal statutory tax rate    34.0%   34.0%
            State taxes  (net of federal benefit)                 6.3     6.3
            Utilization of net operating loss carryforwards     (40.3)  (40.3)
                                                                -----   ----- 
                 Total                                              -%      -%
                                                                =====   =====
</TABLE>
         As of December 31, 1997, the Company has federal net operating loss 
         carryforwards of approximately $3,497,000 which expire through 2012.

         Significant components of the Company's deferred tax liabilities and 
         assets for federal income taxes consist of the following:
<TABLE>
<CAPTION>
            <S>                                                    <C>
            Deferred tax assets              
               Net operating loss carryforwards                    $ 1,290,686
               Capitalized research and development cost for tax       111,992
               Research credits                                        565,820
               Other                                                    81,456
                                                                   -----------
                                                                     2,049,954
            Valuation allowance for deferred tax assets             (1,828,335)
                                                                   -----------   
                                                                       221,619
            Deferred tax liabilities
               Furniture and equip                                     (85,712)
               Deferred state taxe                                    (135,907)
                                                                   -----------
                   Net deferred tax asset                          $         -
                                                                   ===========
</TABLE>

         At December 31, 1997, the Company has provided a valuation allowance 
         for the deferred tax asset since management has not been able to 
         determine that the realization of that asset is more likely than not.

         The net change in the valuation allowance for the year ended December 
         31, 1997 was a decrease of $96,665.


                                       38
<PAGE>

NOTE 9 - EARNINGS PER SHARE

         Earnings per share for the year ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
                                                Income       Shares    Per Share
                                             (Numerator) (Denominator)   Amount
                                             ----------- ------------- ---------
             <S>                             <C>           <C>          <C>
             Basic EPS
                 Income available to common
                      stockholders           $  354,275    4,800,918    $  0.07

             Effect of dilutive securities
                 Options and warrants                 -      706,664
                                             ----------    ---------

             Diluted EPS
                 Income available to common
                      stockholders plus
                      assumed conversions    $  354,275     5,507,582   $  0.06

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

                                       39
<PAGE>

Item 8.    Changes in and Disagreements with Accounts on Accounting and 
           Financial Disclosure

           None


                                       40
<PAGE>

                                    PART III

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

Incorporated by reference to the sections of the Company's definitive Proxy 
Statement for the Annual Meeting of Shareholders to be held in June 1998 (the 
"Proxy Statement"), entitled "Election of Directors," "Executive Officers" and 
"Common Stock Ownership of Principal Shareholders and Management-Section 16(a) 
Beneficial Ownership Reporting Compliance" to be filed with the Commission.

Item 10.   Executive Compensation

Incorporated by reference to the section of the Company's Proxy Statement 
entitled "Executive Compensation" to be filed with the Commission.

Item 11.   Security Ownership of Certain Beneficial Owners and Management

Incorporated by reference to the section of the Company's Proxy Statement 
entitled "Security Ownership of Certain Beneficial Owners and Management" to be 
filed with the Commission.

Item 12.   Certain Relationships and Related Transactions

Incorporated by reference to the section of the Company's Proxy Statement 
entitled "Certain Relationships and Related Transactions" to be filed with the 
Commission.


                                       41
<PAGE>

Item 13.   Exhibits and Reports on Form 8-K

           (a)    Exhibits:

                  3.1    Amended and Restated Articles of Incorporation(1)
                  3.2    Bylaws of Registrant, as amended(1)
                  *4.1   Warrant dated as of November 13, 1997 issued to Intel
                         Corporation(2)
                  10.1   Facilities lease dated November 6, 1997 between 
                         Sepulveda Group, LLC, as lessor, and Registrant, as 
                         lessee(2)
                  *10.2  Development Agreement between the Registrant and Intel 
                         Corporation dated November 12, 1997(2)
                  23.1   Consent of Singer, Lewak, Greenbaum & Goldstein, 
                         L.L.P.(2)
                  27.1   Financial Data Schedule (2)

           (b)    Reports on Form 8-K

                  None
                       

* Confidential treatment is being requested with respect to portions of this 
exhibit, and such confidential portions have been deleted and separately filed 
with the Securities Exchange Commission pursuant to Rule 24b-2 promulgated
under the Exchange Act of 1934.


(1)   Incorporated by reference to the Company's Registration Statement on Form 
      SB-2 (Commission File No. 333-1166-LA) filed with the Commission on 
      February 7, 1996.

(2)   This exhibit is being filed electronically in the electronic format 
      specified by EDGAR.


                                       42
<PAGE>

                                   SIGNATURE

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

                                       ModaCAD, INC.


Date:  March 18, 1998                  By:   /s/  JOYCE FREEDMAN
                                       ------------------------- 
                                       Joyce Freedman
                                       Chairman of the Board and
                                       Chief Executive Officer

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

<TABLE>
<S>                          <C>                             <C> 
 /s/  JOYCE FREEDMAN         Chairman of the Board and         March 18, 1998
------------------------     Chief Executive Officer         -----------------
      Joyce Freedman                                                Date


/s/  MAURIZIO VECCHIONE      President,                        March 18, 1998  
------------------------     Chief Operating Officer and     -----------------       
     Maurizio Vecchione      Director                               Date


/s/  LEE FREEDMAN            Vice President, Finance,          March 18, 1998  
------------------------     Chief Financial Officer and     -----------------   
     Lee Freedman            Director                               Date


/s/  ANDREA VECCHIONE        Secretary and Director            March 18, 1998 
------------------------                                     -----------------    
     Andrea Vecchione                                               Date


/s/  STEPHEN WYLE            Director                          March 18, 1998 
------------------------                                     -----------------    
     Stephen Wyle                                                   Date


/s/  PETER FRANK             Director                          March 18, 1998 
------------------------                                     -----------------    
     Peter Frank                                                    Date
 

/s/  LESLIE SALESON          Director                          March 18, 1998 
------------------------                                     -----------------    
     Leslie Saleson                                                  Date

</TABLE>


                                       43
<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
                                                                  Sequentially
 Exhibit Number                   Description                     Numbered Page
---------------   ----------------------------------------------  -------------
      <S>         <C>                                             <C>
      3.1         Amended and Restated Articles of 
                  Incorporation(1)
      3.2         Bylaws of Registrant, as amended(1)
      *4.1        Warrant dated as of November 13, 1997 issued 
                  to Intel Corporation(2)
      10.1        Facilities lease dated November 6, 1997 between 
                  Sepulveda Group, LLC, as lessor, and Registrant, 
                  as lessee(2)
      *10.2       Development Agreement between the Registrant and
                  Intel Corporation dated November 12, 1997(2)
      23.1        Consent of Singer, Lewak, Greenbaum & Goldstein,
                  L.L.P.(2)
      27.1        Financial Data Schedule(2)
 
</TABLE>

                                                                      
* Confidential treatment is being requested with respect to portions of this 
exhibit, and such confidential portions have been deleted and separately filed 
with the Securities Exchange Commission pursuant to Rule 24b-2 promulgated
under the Exchange Act of 1934.


(1)   Incorporated by reference to the Company's Registration Statement on Form 
      SB-2 (Commission File No. 333-1166-LA) filed with the Commission on 
      February 7, 1996. 

(2)   This exhibit is being filed electronically in the electronic format 
      specified by EDGAR.
                                       44
<PAGE>