<PAGE>   1

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

                                 FORM 10-KSB


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

For the fiscal year ended
December 31, 1996                                    Commission File No.33-27627

                                                          

                          3D IMAGE TECHNOLOGY, INC
           ------------------------------------------------------

           (Exact name of Registrant as specified in its charter)


       Delaware                                                       76-0265438
(State of incorporation)                       (IRS Employer Identification No.)

5172-G Brook Hollow Parkway, Norcross, Georgia                             30071
----------------------------------------------                        ----------
(Address of principal executive offices)                              (Zip Code)

Issuer's telephone number, including area code:                   (770) 416-8848
                                                                  --------------

 (Former name, former address and former fiscal year, if changed since last
                                   report)

         Securities Registered Pursuant to Section 12(g) of the Act:

          Common Stock (par Value $.001 Per Share) (Title of Class)
          ----------------------------------------

     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                              YES XXXX      NO
                                  ----         ----




<PAGE>   2


     Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is 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.

     Issuer's revenues for its most recent fiscal year: $5,297,084

     Aggregate market value of the voting stock held by nonaffiliates computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of a specified date within the past 60 days:
$11,851,960  as of February 28, 1997.

     21,117,788 Common Shares were outstanding as of December 31, 1996.

                     DOCUMENTS INCORPORATED BY REFERENCE

           Transitional Small Business Disclosure Format (check one)

                             Yes          No  X
                                 ----        ----



                                                                               2
<PAGE>   3


                              TABLE OF CONTENTS


<TABLE>
<CAPTION>


                                                                         Page

                                   PART I


<S>      <C>                                                               <C>
Item 1.  Description of Business..........................................  1 
                                                                              
Item 2.  Description of Property..........................................  4 
                                                                              
Item 3.  Legal Proceedings................................................  4 
                                                                              
Item 4.  Submission of Matters to a Vote of Security Holders..............  6 


                                   PART II


Item 5.  Market for Common Equity and Related Stockholder Matters.........  6

Item 6.  Management's Discussion and Analysis or Plan of Operation........  8

Item 7.  Consolidated Financial Statements................................ 11

Item 8.  Changes in and Disagreements with Accountants
         on Accounting and Financial Disclosure........................... 11


                                  PART III


Item 9.  Directors, Executive Officers, Promoters and Control Persons;
         Compliance with Section 16(a) of the Exchange Act................ 12

Item 10. Executive Compensation........................................... 13
         
Item 11. Security Ownership and Certain Beneficial Owners and Management.. 13
         
Item 12. Certain Relationships and Related Transactions................... 13
         
Item 13. Exhibits and Reports on Form 8-K................................. 14
</TABLE>





                                                                               3

<PAGE>   4



Item 1. Description of Business

     A. Business Development

     3D Image Technology, Inc. ("the Company") was incorporated on December 8,
1988, as American Eagle Investment Corp., under the laws of the State of
Delaware.

     Effective January 1, 1994, the Company changed its name to 3D Image
Technology, Inc. to reflect the Company's current operations.  The Company
manufactures and markets three-dimensional photographic products to the amateur
consumer photographic markets world-wide, including 3D amateur cameras, printer
processors and print material.

     During 1994, the Company began active marketing of the one-time-use "3D
Magic" camera in the United States, Japan and Europe, either directly or
through distributors.  In Japan, the one-time-use technology was licensed to
Image Technology Japan, a joint venture company in which Image Technology
International, Inc., parent of the Company, has a forty percent interest which
in turn subleased the technology to Konica Company and Kodak Japan, Ltd. for
manufacture and sale in Japan only.  The 3D one-time-use camera began marketing
in Japan in 1994 under the Konica and Kodak labels through this license
agreement and the Company received print material sales revenues from the
Japanese market in 1994 and 1995 as a result.

     During 1996, as in 1995, the Company incurred considerable direct sales
expenses, including trade shows in the United States and Europe.  The Company
continues to expand its U.S. and worldwide distribution channels for the 3D
Magic, and now has distribution agreements in place, or under negotiation, in
France, the Middle East, Singapore, Thailand, Malaysia, Hong Kong, the
Netherlands, Canada and other areas.  Total 1996 sales totaled $5,297,000,
slightly less than 1995 sales of $5,330,000.  The 1996 sales reflected
approximately $1,700,000 in increases in camera and printer processor sales,
and decreases of approximately $1,900,000 in affiliated print material sales.

     The Japanese market currently is licensed through Image Technology Japan
(ITJ) , a joint venture in which the parent of the Company holds a 40 percent
interest.  The other two venture partners are Noritsu Koki Company, Ltd., the
world's largest manufacturer of one-hour printer processors, with 40 percent,
and Photo Craft Company, Ltd., the largest commercial photographic laboratory
in Japan, with 20 percent.  ITJ has licensed the sale of the 3D Magic
one-time-use camera in Japan only to Kodak Japan, Ltd. and Konica, which are
distributing the one-time-use 3D camera in Japan under their own packaging and
trademarks.  The Company is engaged in negotiations with the other two venture
partners at ITJ to reacquire the rights to the Japanese market.

     In October 1994, the Company acquired its Netherlands distributor and
photofinisher and established 3D Image Europe B.V. in Amsterdam as a
wholly-owned subsidiary to act as a central laboratory for the European market.
The Company uses this location for processing of



                                                                               1

<PAGE>   5

prints from all of Europe.

     Until April 1, 1995, the Company manufactured 3D consumer cameras and
printer processing equipment through the Parent's Hong Kong-based subsidiary,
Image Technology (Hong Kong) Ltd., a Hong Kong corporation ("ITHK").  After
April 1, 1995 the Company began direct manufacture in its facilities in Hong
Kong and China.

     On July 1, 1995, the Company entered into separate Manufacturing and
Distribution Agreements (the "Agreements") with Image Technology International
(Far East) Ltd. ("ITFE"), a Hong Kong limited company and wholly-owned
subsidiary of the parent of the Company.  In conjunction with the Agreements,
the Company appointed and licensed ITFE to act as its agent in Hong Kong and
the Far East, including China, to supervise and assist in the manufacture and
distribution of 3D consumer products, including supervision of and technical
assistance in the manufacturing processes in China and in Hong Kong, as well as
the photofinishing facility, which operates in premises owned by Allen Lo,
Chairman and Chief Executive Officer of the Company.

     The 3D Magic camera currently is being distributed in the United States
through a number of outlets, including Ritz Camera, Wolf Camera, Revco and
Eckerd Drugs, Walgreen's and other retail chains.  The Company has an
arrangement with both Kodak's and Fuji's photofinishing networks to collect the
3D Magic camera for processing, forward the cameras to the Company and return
the prints through retail outlets to its customers.  The Company has another
agreement with the Ritz Camera chain to perform photofinishing at its
Washington D.C. metro laboratory.

     A significant relationship has been formed with Kalimar, Inc.  Kalimar is
one of the leading distributors of cameras to mass merchandisers and catalogue
retailers in the United States. Kalimar is marketing the 3D cameras under its
own label to key mass merchants.  Placement of Kalimar branded cameras occurred
in the second quarter of 1996 in the Walmart and Osco department store chains.

     Further inroads have been made in the Premium/Incentive market.  The
Company sold the 3D Magic camera as a promotional item in 1996 with Key
Pharmaceutical, Miller Brewing Company and Red Dog Beer, and Phillip Morris
with Parliament Cigarettes.

     The Company's shares are traded over the counter on the NASD Bulletin
Board under the symbol "TDIT".  High and low stock prices and dividends since
that point are noted on the following page:






                                                                               2

<PAGE>   6



<TABLE>
<CAPTION>

                      1996                          1995
                   Sales Price                  Sales Price      
                   -----------     Cash         -----------      Cash
                                   Dividends                     Dividends
    Quarter Ended  High    Low     Declared     High   Low       Declared
    -------------  -----   -----   ----------   ----   ---       ---------

    <S>            <C>     <C>     <C>          <C>    <C>       <C>
    March 31       $2.50   $2.00   $0.00        $2.31  $1.88     $0.00
    June 30        $2.25   $1.81   $0.00        $2.38  $2.00     $0.00
    September 30   $1.63   $1.63   $0.00        $4.88  $2.13     $0.00
    December 31    $1.25   $1.25   $0.00        $4.63  $2.25     $0.00
</TABLE>


     B. Business of Issuer

     The Image Tech 3D system utilizes standard color film and conventional
photographic processes which provide the advantages of simplicity, high quality
and low cost.  The flexibility of product design and system integration offers
numerous applications that will expand the global photographic industry.  The
principal products and services of the Company are:

     The Image Tech 3D One-Time-Use Cameras (3D Magic without flash and 3D
MagicPlus with flash) are 3-lens one-time-use cameras preloaded with
24-exposure 400 ISO high speed color film.  These cameras are fully recyclable,
which reduces manufacturing costs as well as meeting environmental concerns.

     The Image Tech 3D Reloadable Camera (3D Wizard) is a 3-lens reusable 3D
camera, manufactured in manufacturing facilities in China.  The 3DFX is a new
low cost, reusable camera designed for direct marketing introduced in 1996.

     The Company also manufactures the same basic line of cameras under the
Kalimar brand name under an agreement with Kalimar, Inc. Kalimar is a
manufacturer and distributor of low cost cameras.

     The Image Tech 3D Integrated Printer/Processor is a one-hour mini-lab
designed 3D consumer printer with built-in processor for printing and
processing of consumer 3D prints taken by the Company's 3-lens consumer
cameras.  These printers are designed to print 3-1/2" x 4-1/2", 5" x 7", or 8"
x 10" size 3D prints.

     The Image Tech High Definition 3D Color Print Material employs a newly
developed plastic extrusion technology to produce a single polymer base for
maximum transmission and sharpness. This base then is coated by Eastman Kodak
Company with its newest RA-4 emulsion and TiO2 reflective layer under an
exclusive arrangement with the Company.

     Demand for the Company's one-time-use 3D Magic and 3D MagicPlus remains
strong and enthusiastic.  In fact, preliminary market studies indicate
significant repeat business.  A major goal of the Company in 1996 and 1995 was
capital raising in order to build inventories of cameras, printers and print
material, to expand the marketing effort and to undertake advertising



                                                                               3
<PAGE>   7

and promotion of its products.  Currently, as a direct result of the growth of
the Company outpacing its limited working capital, the Company is working to
obtain equity capital to allow it to continue to achieve its goals as discussed
in greater detail in Item 6, Liquidity and Sources of Capital.

     In 1996 and 1995, little effort was placed on advertising and promotion
other than to the trade and distribution networks.  Limited working capital to
build inventories of cameras, printers and print material restricted maximum
potential growth which could be attained through large volume orders from major
U.S. discount department stores and similar large volume retailers.

     The Company has the exclusive right to develop, manufacture, market and
distribute 3D amateur consumer products using the unique 3D technology
developed by Image Technology International, Inc., parent of the Company.  The
Company has the rights to the amateur camera and technology pursuant to a
number of patents which have already been granted and a number of additional
patent applications which are in process, all by license from its parent, Image
Technology International, Inc. The Company has received opinions of patent
counsel that the patents and pending patent applications represent unique,
non-infringing proprietary technology.

Item 2. Description of Property

     The Company's property consists primarily of manufacturing equipment,
laboratory equipment, film processing and printing equipment. The equipment is
maintained at the ITFE manufacturing facilities in China and Hong Kong, and at
the Company's facilities in Atlanta and Amsterdam.

Item 3. Legal Proceedings

     There were no material proceedings pending in 1996 in which the Company
was named as a party.

     On March 13, 1995, Image Technology International, Inc. ("ITII"), parent
of the Company, filed a Complaint against Jerry C. Nims, NimsTec, LLC, LenTec
Imaging, Inc., and Thomas J. Steimer (collectively herein referred to as
"Defendant") in the Superior Court of Fulton County, Georgia.  Subsequently,
the case was transferred to the Superior Court of Walton County, Georgia.  The
Complaint alleges that commencing in approximately February 1994, Defendants
engaged in a course of conduct and conspiracy to injure and destroy the
business and reputation of ITII, including the 3D camera business operated by
the Company, in order to gain unfair and unlawful competitive advantage, by
making and disseminating false statements and false claims regarding ITII and
its principal officers and directors.

     ITII was granted a temporary restraining order against Defendants on March
14, 1995.  This restraining order was extended indefinitely on April 14, 1995
and remains in effect.  ITII is also seeking damages for Defendants'
intentional interference with ITII's business and contractual



                                                                               4
<PAGE>   8

relations, and for exemplary damages to deter similar fraudulent and unlawful
conduct, in an amount to be determined at trial.  Defendants filed answers to
the Complaint generally denying the allegations.  No claims have been filed in
the case by any Defendant against the Company or ITII.  The case is still
pending.

     On February 21, 1997, Image Technology International, Inc., parent of the
Company, filed a Declaratory Judgment action in the Superior Court of Gwinnett
County against Andrew Joel, ND3D B.V., Ruud Kallenbach and Marc Wolters,
seeking to declare that an Acquisition and Cooperation Agreement dated June 21,
1995 between Image Technology International, Inc., ND3D BV and ElectroGig
Nederalnd BV was not an enforceable contract and that the terms of the
agreement had never been satisfied.  The Agreement proposed the acquisition by
Image Technology International, Inc. of either the assets or the stock of ND3D,
with the form of the acquisition to be determined at a later date, and also
proposed the formation of a joint marketing and distribution venture with
ElectroGig and the delivery to Image Technology of 500 copies of new ElectroGig
3D software, represented to have a retail value of $10,000 per copy.  The
proposed transaction was subject to a number of conditions, including approval
by the Boards of Directors of all three entities, agreement on the actual
structure of the proposed acquisition and the delivery of a detailed asset list
by ND3D, all of which were required to be completed by July 15, 1995.  The
proposed acquisition was never submitted to the Board of Image Technology for
approval because none of the conditions were met by either ND3D or ElectroGig.
One of the named defendants, Andrew Joel, who was an officer and, indirectly, a
minority shareholder of ND3D BV, a Dutch company, became an employee of Image
Technology, Inc. on July 17, 1995 after the Agreement had expired. Ruud
Kallenbach was another minority shareholder of ND3D BV, and ElectroGig, another
Dutch company, held the majority interest.  Marc Wolters is the court appointed
administrator of the bankruptcy estate of ElectroGig, which filed for
bankruptcy in the Netherlands in the summer of 1996.  Had the proposed
transactions in the Agreement been carried out, then the consideration payable
on July 15, 1995 by Image Technology International, Inc. for either the ND3D
stock or assets, the 500 copies of ElectroGig software and the joint venture
relationship with EletroGig, would have been 3.25 percent of the shares of
Image Technology International, Inc. estimated to be outstanding after the
completion of the merger of the Company into Image Technology International,
Inc. which was then under discussion.  The Agreement estimated that the number
of shares would be 1,300,000 shares, also assuming that an equity investment in
Image Technology then under discussion, which would have involved the issuance
of an additional 10 million shares was completed.  Neither the merger nor the
investment was in fact completed, and the merger of the Company and Image
Technology International, Inc. has been postponed indefinitely for unrelated
reasons.

     The action also sought a determination that Mr. Joel, who was indicted on
January 23, 1997 by a federal grand jury in Colorado for RICO, RICO conspiracy,
money laundering and conspiracy to distribute cocaine, had breached his
employment agreement with Image Technology International, Inc.  Mr. Joel was
suspended from his employment effective January 27, 1997 and was terminated on
February 25, 1997.  Mr. Joel's indictment was based on allegations predating
his employment by Image Technology International, Inc., and prior to his
relocation from the United States to The Netherlands, and Image Technology had
no knowledge



                                                                               5
<PAGE>   9

of the matter prior to the return of the indictment.  The action also sought an
injunction against the defendants to restrain them from contacting Image
Technology's officers, directors, employees, agents, customers and clients,
which they had threatened unless Image Technology International, Inc. delivered
1,300,000 shares of stock to defendants.  Image Technology International, Inc.
considered these threats to be extortionate, since it had received no
consideration under the expired Agreement, and refused the demands.

     On February 27, 1997, one day before a scheduled hearing on Image
Technology's request for a temporary restraining order, Mr. Wolters removed the
case from the state court to the federal court in Atlanta on the theory that,
as a Dutch court appointed administrator of the ElectroGig bankruptcy estate,
he was a "sovereign foreign state".  Simultaneously,  ND3D BV filed a separate
action in the Atlanta federal court seeking unspecified damages, including
delivery of the shares provided for in the expired Agreement and damages for
alleged delivery by ND3D of its assets to Image Technology without
compensation.  The new lawsuit named Image Technology International, Inc., the
Company, Allen Lo, President of the Company, and Robert Hipple, Secretary and
Outside Legal Counsel of the Company, as defendants, although only Image
Technology International, Inc. was a party to the expired Agreement on the
basis of which ND3D filed its suit, and only Image Technology International,
Inc. allegedly received any benefit from the relationship with ND3D.  All of
the named defendants in the second action filed a Motion to Dismiss the case on
multiple grounds, including failure to state a cause of action and lack of
jurisdiction in the federal court.  That Motion is still pending along with a
Motion to Remand the original case filed by Image Technology International,
Inc., seeking to return the case to the State court so that Image Technology
can pursue its declaratory judgment request that the Agreement on which ND3D is
claiming recovery is null and void.  The Company has obtained an opinion of
independent counsel that the claim by ND3D against the Company is completely
without merit and appears to have been filed against it primarily as leverage
in an attempt to extort a settlement from Image Technology International, Inc.
The Company intends to vigorously defend against the unsupported claims of ND3D
and will pursue frivolous litigation damages against ND3D, Joel, and their
respective legal counsel, once the claims against the Company have been
dismissed.

Item 4. Submission of Matters to a Vote of Security Holders

     There were no matters submitted to a vote of the Company's security
holders during the fourth quarter of the fiscal period covered by this report.

Item 5. Market for Common Equity and Related Stockholder Matters

     The Company's shares are traded over the counter on the NASD Bulletin
Board under the symbol "TDIT".  The Company applied for full listing under the
NASDAQ Small Cap system in September 1995, but later withdrew the application.
The Company plans to refile the application in 1997 upon satisfaction of the
other Small Cap listing requirements.

     The number of shares issued of record as of December 31, 1996, is
21,117,788.  No



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<PAGE>   10

dividends of cash or stock have been paid by the Company in the past.  The
payment of dividends will depend entirely upon the Company's ability to
generate sufficient earnings, its financial needs and other unpredictable
factors.  It is not anticipated that common dividends will be paid in the
foreseeable future.

     On September 10, 1994, the Company issued a warrant to a third party to
purchase 50,000 shares of $.001 per value common stock.  The warrant carries an
exercise price of $1.50 per share and is exercisable at any time during the
five year period following the date of issuance.

     During 1995, an installment Subscription Agreement for 500,000 shares of
common stock of the Company at a price of $2.00 per Share, executed by Drummend
Pal, S.A. on August 30, 1994 and amended on October 21, 1994, was fulfilled and
the 500,000 shares were issued to Drummend Pal in 1995.  These shares are
restricted by agreement and cannot be transferred or sold for a period of one
year from the date of issue.  Drummend Pal S.A. is not affiliated in any way
with any officer, director or employee of the Company.

     In January 1996, the Company issued a warrant for the purchase of 400,000
shares of common stock at $2.40 per share, exercisable until June 30, 1997 or
one year after the effective date of a registration statement including the
shares underlying the warrant, whichever is later, to Kalimar, Inc., a
manufacturer and distributor of cameras and photographic supplies, as part of a
distribution agreement between the Company and Kalimar.  On exercise of the
initial warrant, a second warrant will be issued to Kalimar  for an additional
400,000 shares at a price equal to ten percent less than the average trading
price of the shares when the warrant was issued, plus $0.15. Since the shares
underlying the initial warrants have not been included in an effective
registration statement, the one year warrant exercise period has not yet begun
to run.

     In March 1996, a Subscription Agreement for 500,000 shares of common stock
of the Company was executed and the shares were issued for total consideration
of $1,175,000 received by the Company.  The Company paid issuance costs of
approximately $118,000.

     In September, 1996 the Company issued a warrant for the purchase of 60,000
shares of common stock at $2.625 per share, exercisable until September 13,
2001.


                                                                               7
<PAGE>   11



Item 6. Management's Discussion and Analysis of Plan of Operation

Results of Operations

     During 1996 the Company was successful in achieving higher camera and
printer processor sales.  Sales by product type in 1996 as compared to 1995
were as follows:



<TABLE>
<CAPTION>
----------------------------------------------------
REVENUES                  1996    %        1995    %
----------------------------------------------------

<S>                 <C>         <C>  <C>         <C>
Print Materials     $  221,008   4%  $2,161,276  41%
Cameras             $2,950,740  56%  $1,902,930  36%
Printer Processors  $1,211,130  23%  $  561,400  11%
Print Development   $  914,205  17%  $  704,327  12%
</TABLE>

     Higher 1996 sales of cameras were the direct result of the expanding
demand for the Company's unique products, combined with higher sales of printer
processors to the Asian market as the Company works to expand its market in
this rapidly growing part of the world. Certain reclassifications have been
made to the 1995 amounts to conform to the 1996 presentation of cost of goods
sold and selling expenses.

     Cost of sales increased by approximately $318,000, or 10%, from
approximately $3,135,000 for the year ended December 31, 1995 to approximately
$3,453,000 for the year ended December 31, 1996.  Such increases were directly
related to increases in sales of consumer cameras, printer processors and
related print development costs, the Company's core business lines.

     Gross margins on revenues decreased from approximately $2,195,000, or 41%,
for the year ended December 31, 1995 to approximately $1,844,000, or 35% for
the year ended December 31, 1996.  The decrease in gross margin was a result of
sales price adjustments required to increase sales volumes to larger volume
customers and the impact of the higher margin print material sale on 1995 gross
margins.

     Selling expenses were approximately $763,000 for the year ended December
31, 1996, or 14% of total revenues, as compared to approximately $488,000 for
the year ended December 31, 1995, or 9% of total revenues. The Company's sales
increases have been achieved in spite of limited marketing dollars available to
create any "pull" for the product from the retailer shelves.

     Research and development expenses were $284,000 for the year ended
December 31, 1995 as compared to $314,000 for the year ended December 31, 1996.

     General and administrative expenses decreased by approximately $840,000 to
approximately



                                                                               8
<PAGE>   12

$1,808,000 for the year ended December 31, 1996.  This decrease resulted in a
decline from 1995 due to the 1995 write-off of uncollectible advances to the
Company's Asian affiliates related to certain general, administrative, and
operating costs incurred by them on behalf of the Company, totaling
approximately $700,000 and decreases in unabsorbed manufacturing overhead of
$550,000.  These declines were offset by increases in professional fees of
$125,000, Asian bad debt expenses of $100,000, administrative operating
expenses in Europe of $125,000, and approximately $50,000 for increases in
expenses to support increased camera and printer processor sales.

     Interest expense was up in 1996 due primarily to the interest on the
$3,000,000 promissory note and interest paid on a past due accounts payable as
discussed in Note 7 and Note 8, respectively, of the financial statements. The
net loss for 1996 and 1995 also included $140,000 and $163,000, respectively,
of interest expense accrued on officer loans.

     The net loss decreased by approximately $50,000 from approximately
$1,372,000 to approximately $1,324,000 for the years ended December 31, 1995
and 1996 respectively.  The decrease in the 1996 loss as compared to 1995 is
primarily a result of declines in gross margin being more than offset by
decreases in administrative expenses.

     Accounts receivable increased by approximately $584,000, from
approximately $755,000 at December 31, 1995 to approximately $1,339,000 at
December 31, 1996 as a result of increases in sales of cameras in the United
States and printer processors in Asia.

     Receivables from affiliates increased in 1996 due to payments made by the
Company on behalf of an affiliate which is responsible for the commercial 3D
market development. This affiliate is a wholly owned subsidiary of the Parent,
ITII. These expenditures totaled approximately $1,800,000. To achieve repayment
of this debt, the Parent has executed an agreement dated April 8, 1997 to allow
the Company to repurchase $1,800,000 of shares owned by the Parent. This
transaction was based on a $2.00 per share price, which is consistent with the
Company's recent private placements, and will assist the Company by reducing
its outstanding shares.

     Accounts payable decreased by approximately $1,225,000, from approximately
$2,041,000 at December 31, 1995 to approximately $816,000 at December 31, 1996.
This decrease is attributable to a significant reduction in amounts due to a
trade creditor for purchases of print material.

     Payables to affiliates increased by $428,000 in 1996, from $0 in 1995 due
to the purchase of print material as discussed in Note 6 of the financial
statements.  Promissory notes increased by $3,000,000 in 1996 as the result of
transactions as discussed in Note 7 of the financial statements.

     No significant additional product research or development work is expected
during the next twelve months, and there are no plans to purchase or sell any
plant or significant equipment.



                                                                               9

<PAGE>   13

There are no expected significant changes in the number of employees of the
Company in the next twelve months, except as required to support increased
sales volume.

     On October 5, 1995, the Board of Directors of the Company approved the
merger of the Company with its parent, Image Technology International, Inc.,
with the Company being the surviving entity. The purpose of the merger was to
simplify the corporate structure and to combine all of the 3D photographic and
digital technologies into a single entity.  The merger has been delayed until
additional equity can be obtained.

Liquidity and Sources of Capital

     Cash used in operations during the year ended December 31, 1996 totaled
approximately $2,340,000 as compared to cash used by operations for the year
ending December 31, 1995 totaling approximately $459,000.  Such use of cash in
1996 was primarily related to operating uses and significant reductions in
accounts payable to an trade vendor for print material.

     As shown in the accompanying financial statements, the Company has
incurred recurring losses from operations which has also resulted in a working
capital deficiency.  These factors raise substantial doubt about the Company's
ability to continue as a going concern.

     The Company continues to seek additional sources of equity capital in
order to improve the Company's infrastructure and increase expenditures for
marketing and distribution. Management has also instituted some cost reduction
programs to reduce camera production and photofinishing costs.  Management is
considering alternatives to manufacturing cameras and photo processing
equipment through its affiliate (ITFE) in China, and believes that such
manufacturing may be performed more efficiently by a third party.  Management
believes these factors will improve liquidity and contribute towards achieving
profitability.  The financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going concern.

     On January 30, 1996, the Company executed a letter of intent with an Asian
investor (the "Investor"), providing for equity financing in an amount equal to
or less than $20 million.  On February 6, 1996, the Company received $3 million
as part of this financing agreement, and in exchange issued 1,492,537 common
shares at a price of $2.01 per share.  The initial funding agreement (the
"Agreement") provided for a due diligence period.  In the event that the
Investor determined not to make an additional investment, the Company, pursuant
to the Investor's exercise of the Put Right provisions of Section 11 of the
Agreement, agreed to redeem such initial $3 million investment. On November 12,
1996 the Investor converted the initial investment to a $3,000,000 promissory
note to be repaid on January 12, 1997 with interest at prime + 2%, or 10.25% at
December 31, 1996.  The promissory note was not repaid on January 12, 1997 and
the indebtedness is now considered to be in default as of April 12, 1997.
Interest incurred and paid to the Investor during 1996 and 1995 totaled
approximately $118,000 and $0 respectively.   Management continues to negotiate
with the investor to achieve a satisfactory resolution of this loan.



                                                                              10
<PAGE>   14



     Negotiations with other funding sources, suspended under the original
terms of the agreement, were resumed.  These negotiations are continuing and
both management and the Board of Directors of both the Company and it's parent,
Image Technology International, Inc., are making every effort to resolve the
current cash flow deficit and to consider other alternatives. The Company has
also delayed the plan of merger described in Note 8 of the financial
statements.

Impact of Inflation

     The impact of inflation upon the Company in 1996 and 1995 was not
significant, and is not expected to have a significant impact in the
foreseeable future.


Item 7. Consolidated Financial Statements

Index to Consolidated Financial Statements


<TABLE>
<S>                                                                                <C>
Report of Independent Auditors.....................................................F-1
                                                                                      
Consolidated Balance Sheets as of December 31, 1996 and December 31, 1995..........F-2
                                                                                      
Consolidated Statements of Operations                                                 
   for the years ended December 31, 1996 and December 31, 1995.....................F-4
                                                                                      
Consolidated Statements of Shareholders' Equity                                       
   for the years ended December 31, 1996 and December 31, 1995.....................F-5
                                                                                      
Consolidated Statements of Cash Flows                                                 
   for the years ended December 31, 1996 and December 31, 1995.....................F-6
                                                                                      
Notes to Consolidated Financial Statements.........................................F-7
</TABLE>


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

   Not Applicable.



                                                                              11
<PAGE>   15



Item 9. Directors,  Executive Officers, Promoters and Control Persons

     The following persons were the directors and executive officers of the
Company on December 31, 1996:



<TABLE>
<CAPTION>
         Name              Age  Position or Office
         ----------------  ---  --------------------------------------
         <S>               <C>  <C>
         Allen K.W. Lo     59   Director and President
         Robert J. Hipple  53   Secretary and Legal Counsel
         Sunny Ip          57   Director, Vice President and Treasurer
         Bruce Herstowski  43   Vice President, Sales and Marketing
</TABLE>


     Mr. Lo and Mr. Hipple have served in their current positions since
September 14, 1992.  Mr. Ip has served as a director since December, 1993.

     The business experience of the principal executive officers is as follows:

     ALLEN K.W. LO, a founder of Image Technology International, serves as
Chairman of the Board of Directors and President of the Company.  He is also a
principal shareholder, President and Chairman of Image Technology
International, Inc.  Mr. Lo is responsible for the overall administration of
the Company's operations, strategic planning, marketing, and sales.  In 1965,
Mr. Lo cofounded 3D Arts Industrial Ltd. (Hong Kong), and was involved in the
development of a 3D mass production lithographic process.  In 1967, 3D Arts
Industrial was purchased by The Asahi Group, a Japanese conglomerate.  Mr. Lo
served as a Director of an Asahi affiliate until 1970, during which time he
also directed research in 3D images.  After leaving Asahi, Mr. Lo came to the
United States and formed Dimensional Development Corporation, which later
became Nimslo Technology, Inc.  From 1971 until 1983, Mr. Lo served as Vice
Chairman and Director of Technology for Nimslo.  From 1984 to the present, Mr.
Lo has been involved in the development of the new generation of 3D technology
now owned by Image Technology International, Inc.  Mr. Lo currently holds
415,000 shares of stock in the Company.  Mr. Lo's salary for 1996 was $110,000.

     ROBERT J. HIPPLE, serves as Secretary and Outside Legal Counsel for the
Company.  He is also Secretary of Image Technology International, Inc.  Mr.
Hipple is the principal of an Atlanta-based law firm specializing in taxation,
business, and securities law.  The firm has an extensive international
practice.  Mr. Hipple served as an attorney with the Tax Division of the United
States Department of Justice, Washington, D.C., under the Attorney General's
Program for Honor Law Graduates; served as an adjunct professor in the Graduate
Tax Law Program of Georgetown University Law Center; and was a professor of law
at Emory University before returning to private practice in 1978.  Mr. Hipple
holds degrees from Wesleyan University in Connecticut, and from Georgetown
University Law Center.  Mr. Hipple holds no stock in the Company or in its
parent, Image Technology International, Inc. and receives no salary or other
compensation from the Company.  Mr. Hipple's law firm provides legal advice and
service to the

                                                                              12



<PAGE>   16

Company on a regular basis and is paid for the actual work performed.

     SUNNY L.P. IP, Vice President and Treasurer of Image Technology
International, Inc. currently serves as a Director and Vice President of the
Company and as Director of the Print Material Division. Mr. Ip was one of the
original members of the Nimslo Technology, Inc. research and development group.
Mr. Ip became an officer of ITII in 1984 and currently oversees general
corporate management, budget management, print material production development
and research for the improvement of 3D image quality.  Mr. Ip has extensive
knowledge of 3D image processing and photography and has directed many
professional photographers in the field of 3D photography.  Mr. Ip holds
190,000 shares of common stock in the Company.  Mr. Ip's salary for 1996 was
$66,000.

     BRUCE HERSTOWSKI, Vice President of Sales and Marketing, is responsible
for creating and implementing the Company's multinational marketing plan.  Mr.
Herstowski has been directly involved in sales and marketing in the
photographic industry since 1976.  From 1982 to 1986, Mr. Herstowski served as
Vice President of Pallas Photo Labs, a national chain of photo labs based in
Chicago.  He left Pallas in 1986 to concentrate on the increasing demand for
his services as an international consultant to the photo industry.  Mr.
Herstowski came to Image Technology in 1988 as the Company's Marketing Director
and became Vice President of Sales and marketing for the Company on January 1,
1994.  Mr. Herstowski currently holds 15,000 shares of common stock in the
Company.  Mr. Herstowski's salary for 1996 was $96,000.

Item 10. Executive Compensation

Mr. Lo, Mr. Ip, and Mr. Herstowski received salaries of $110,000, $66,000, and
$96,000 respectively from the Company in 1996.  None of the other officers and
directors received any compensation directly from the Company in connection
with their activities on behalf of the Company during the fiscal year ended
December 31, 1996.  Fifty percent of the salary expense for Mr. Lo and Mr. Ip
has been allocated to the parent company in 1996.  Mr. Hipple's law firm
received a total of $76,577 in legal fees from the Company in 1996.  Mr. Hipple
received no compensation personally from the Company in 1996 or 1995, directly
or indirectly through the parent.

Item 11. Security Ownership of Certain Beneficial Owners and Management

     As of December 31, 1996, Image Technology International, Inc. was the only
stockholder owning 5% or more of the common stock of 3D Image Technology, Inc.
Subsequently, an Asian investor acquired 1,492,537 shares of common stock,
representing more than five percent of the shares then outstanding.  However,
on November 12, 1996 this investor exercised their put right and the shares
were converted to a promissory note.  The shares are still outstanding as
collateral for this promissory note.



                                                                              13


<PAGE>   17

Item 12. Certain Relationships and Related Transactions

     Mr. Allen K.W. Lo, President and Chairman of the Board of Directors, is
also an officer, director and stockholder of Image Technology International,
Inc.

     Mr. Robert Hipple, Secretary, is also Secretary of Image Technology
International, Inc.

     Mr. Sunny Ip, Vice President, Treasurer and Director, is also an officer,
director and stockholder of Image Technology international, Inc.

     Mr. Bruce Herstowski, Vice President, is also a stockholder of Image
Technology International, Inc.


Item 13. Exhibits and Reports on Form 8-K

     Exhibit 27 - Financial Data Schedule (for SEC use only)


     Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.

                                                  3D IMAGE TECHNOLOGY, INC.


    April 25, 1997                                        /s/ ALLEN LO
------------------------------------              ------------------------------
Date                                              ALLEN LO
                                                  Chairman and Chief Executive
                                                  Officer

    April 25, 1997                                       /s/ SUNNY IP
------------------------------------              ------------------------------
Date                                              SUNNY IP
                                                  Director and Treasurer













                                                                              14

<PAGE>   18


REPORT OF INDEPENDENT AUDITORS



Board of Directors
3D Image Technology, Inc. and subsidiary

We have audited the consolidated balance sheets of 3D Image Technology, Inc.
and subsidiary (the Company) as of December 31, 1996 and 1995 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended.  These financial statements are the responsibility of the
Company's management.  Our responsibility is to express an opinion on these
financial statements based on our 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 3D Image Technology, Inc. and
subsidiary at December 31, 1996 and 1995, and the results of its operations and
cash flows for the years then ended in conformity with generally accepted
accounting principles.

The accompanying financial statements have been prepared assuming that 3D Image
Technology, Inc.  will continue as a going concern.  As more fully described in
Note 9, the Company has incurred recurring operating losses and has a working
capital deficiency.  These conditions raise substantial doubt about the
Company's ability to continue as a going concern.  Management's plans in regard
to these matters are also described in Note 9.  The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amount and description of
liabilities that may result from the outcome of this uncertainty.

Ernst & Young LLP
April 22, 1997


                                                                             F-1

<PAGE>   19


                  3D IMAGE TECHNOLOGY, INC. AND SUBSIDIARY

                         Consolidated Balance Sheets


<TABLE>
<CAPTION>
                                                              DECEMBER 31
                                                           1996          1995
                                                      --------------------------
<S>                                                   <C>            <C>
ASSETS
Current assets:
  Cash and cash equivalents                           $   55,138     $  360,571
  Accounts receivable (net of allowance
    for doubtful accounts of $135,000 and
    $29,000 in 1996 and 1995, respectively)            1,339,228        754,623
Inventories                                            1,813,976      1,811,806
Prepaid expenses and other current assets                 72,147        146,254
                                                      -------------------------
Total current assets                                   3,280,489      3,073,254

Property and equipment, at cost:
  Machinery and equipment                              2,094,973      1,994,757
  Leasehold improvements                                  16,514         13,321
  Furniture and fixtures                                  19,807         19,047
                                                      -------------------------
                                                       2,131,294      2,027,125
 Less accumulated depreciation                           541,490        369,279
                                                      -------------------------
Net property and equipment                             1,589,804      1,657,846

Other assets                                                  --         11,451
                                                      -------------------------
Total assets                                          $4,870,293     $4,742,551
                                                      =========================



</TABLE>


                                                                             F-2


<PAGE>   20




<TABLE>
<CAPTION>


                                                                                              DECEMBER 31
                                                                                    1996                     1995
                                                                                    -----------------------------   
<S>                                                                                 <C>               <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Promissory note in default                                                          3,000,000                --
  Trade accounts payable                                                            $   816,251       $ 2,041,088
  Payable to affiliates                                                                 428,104                --
  Accrued liabilities                                                                   285,594           255,706
  Unearned revenue                                                                           --            52,057
                                                                                    -----------------------------
Total current liabilities                                                             4,529,949         2,348,851

Shareholders' equity:
  Preferred stock, par value $.001 per share:
    Authorized - 5,000,000 shares
    Issued and outstanding - none                                                            --                --
  Common stock, par value $.001 per share:
    Authorized - 35,000,000 shares Issued and outstanding - 21,117,788
    (including 1,492,538 shares of redeemable common stock) and 19,125,250
    shares, at December 31, 1996
    and 1995 respectively                                                                19,625            19,125
  Additional paid-in capital                                                          5,806,510         4,749,510
  Accumulated deficit                                                                (3,698,804)       (2,374,935)
  Less: Receivables from affiliates                                                  (1,786,987)               --
                                                                                    -----------------------------
Total shareholders' equity                                                              340,344         2,393,700
                                                                                    -----------------------------
Total liabilities and shareholders' equity                                          $ 4,870,293       $ 4,742,551
                                                                                    =============================

</TABLE>

See accompanying notes.


                                                                             F-3
<PAGE>   21



                   3D IMAGE TECHNOLOGY, INC. AND SUBSIDIARY

                    Consolidated Statements of Operations


<TABLE>
<CAPTION>

                                                 YEAR ENDED DECEMBER 31
                                            1996                       1995
                                            -------------------------------
<S>                                         <C>                <C>
Net revenues:
   Print material                           $    221,008       $  2,161,276
   Cameras                                     2,950,740          1,902,930
   Printer processors                          1,211,130            561,400
   Print development                             914,205            704,327
                                            -------------------------------
Total net revenues                             5,297,083          5,329,933
Cost of sales:
   Print material                                132,900          1,295,495
   Cameras                                     1,810,180          1,001,367
   Printer processors                            859,410            341,572
   Print development                             650,467            496,733
                                            -------------------------------
Total cost of sales                            3,452,957          3,135,167
                                            -------------------------------

Gross margin                                   1,844,126          2,194,766
Operating expenses:
   Selling expenses                              762,522            488,199
   Research and development                      314,051            283,750
   General and administrative                  1,808,127          2,648,549
                                            -------------------------------
                                               2,884,700          3,420,498
                                            -------------------------------
Operating loss                                (1,040,574)        (1,225,732)
Interest expense                                (334,025)          (162,589)
Interest and other income                         50,730             16,821
                                            -------------------------------
Net loss                                    $ (1,323,869)      $ (1,371,500)
                                            ===============================
Loss per common share                       $       (.07)      $       (.07)
                                            ===============================
Weighted average shares outstanding           19,500,250         18,625,256
                                            ===============================


</TABLE>

See accompanying notes 



                                                                             F-4
<PAGE>   22


                   3D IMAGE TECHNOLOGY, INC. AND SUBSIDIARY

               Consolidated Statements of Shareholders' Equity



<TABLE>
<CAPTION>

                                       COMMON STOCK           ADDITIONAL       STOCK                     RECEIVABLES
                                       ------------            PAID-IN     SUBSCRIPTION    ACCUMULATED      FROM
                                  SHARES         AMOUNT        CAPITAL      RECEIVABLE       DEFICIT     AFFILIATES        TOTAL
                                  ------         ------       ----------   ------------   ------------   -----------       -----   
<S>                             <C>           <C>            <C>            <C>            <C>            <C>           <C>
Balance, January 1, 1995        18,625,250    $    18,625    $ 4,750,010    $(1,000,000)   $(1,003,435)                 $ 2,765,200
  Issuance of common stock    
    subscribed                     500,000            500           (500)     1,000,000                                   1,000,000 
Net Loss                                                                                    (1,371,500)                  (1,371,500)
                              
                                ----------------------------------------------------------------------------------------------------
Balance, December 31, 1995      19,125,250         19,125      4,749,510                    (2,374,935)                   2,393,700
  Issuance of common stock         500,000            500      1,057,000                                                  1,057,500
  Issuance of redeemable      
    common stock                 1,492,538          1,492      2,998,508                                                  3,000,000
  Exercise of put right on    
    redeemable common         
    stock and conversion to   
    promissory note                                (1,492)    (2,998,508)                                                (3,000,000)
Advances to or on behalf of   
    affiliates                                                                                            (1,786,987)    (1,786,987)
Net loss                                                                                    (1,323,869)                  (1,323,869)
                                ----------------------------------------------------------------------------------------------------
                              
Balance, December 31, 1996      21,117,788    $    19,625    $ 5,806,510    $---           $(3,698,804)   (1,786,987)   $   340,344
                                ----------------------------------------------------------------------------------------------------


</TABLE>

See accompanying notes.

                                                                           

                                                                             F-5
<PAGE>   23



                   3D IMAGE TECHNOLOGY, INC. AND SUBSIDIARY

                    Consolidated Statements of Cash Flows


<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31
                                                           1996                     1995
                                                           -----------------------------
<S>                                                        <C>               <C>
OPERATING ACTIVITIES
Net loss                                                   $(1,323,869)      $(1,371,500)
Adjustment to reconcile net loss to net cash used
  in operating activities:
    Depreciation                                               237,488           212,204
    Loss on disposal of property and equipment                  66,779            19,222
    Changes in operating assets and liabilities:
      Accounts receivable                                     (584,605)         (494,157)
      Inventories                                               (2,170)           82,522
      Prepaid expenses and other assets                         85,558          (141,746)
      Accounts payable and accrued expenses                 (1,224,837)        1,648,802
      Payable to an affiliate                                  428,104                --
      Other liabilities and unearned revenue                   (22,169)         (414,064)
                                                           -----------------------------
Net cash used in operating activities                       (2,339,721)         (458,717)

INVESTING ACTIVITIES
Purchases of property and equipment                           (236,225)         (205,897)
                                                           -----------------------------
Net cash used in investing activities                         (236,225)         (205,897)

FINANCING ACTIVITIES
Net increase/decrease in receivables from affiliates        (1,786,987)          119,523
Proceeds from common stock subscribed                        1,057,500           848,917
Issuance of redeemable common stock                          3,000,000                --
                                                           -----------------------------
Net cash provided by financing activities                    2,270,513           968,440
                                                           -----------------------------
(Decrease) increase in cash                                   (305,433)          303,826
Cash, beginning of year                                        360,571            56,745
                                                           -----------------------------
Cash, end of year                                          $    55,138       $   360,571
                                                           =============================


</TABLE>

See accompanying notes 


                                                                             F-6
<PAGE>   24




                   3D IMAGE TECHNOLOGY, INC. AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

                          December 31, 1996 and 1995



1.   DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND PURPOSE

     3D Image Technology, Inc. (the "Company") is a subsidiary of Image 
Technology  International, Inc. ("ITII" or the "Parent").  ITII owns 75% of
the Company's outstanding stock at December 31, 1996.

NATURE OF OPERATIONS

     The Company is engaged in the development, production, and marketing of
amateur consumer 3D photographic systems on a worldwide basis. The Company has
an exclusive license to utilize the unique, proprietary three-dimensional
photographic technology in the amateur consumer markets.

     The 3D consumer camera (primarily the 3D Magic) currently is being
distributed in the United States through a number of outlets, including certain
specialty camera stores, national retail pharmacy and department store chains,
and television direct marketing programs. The Company has an arrangement with
Kodak's and Fuji's photofinishing networks to collect and forward the 3D Magic
camera to the Company for processing and returning the prints through its retail
outlets to its customers.

     Substantially  all  manufacturing  related to the Company's  line of 3D 
consumer cameras is carried out in the People's  Republic of China and Hong 
Kong. See Note 6.

     Until April 1, 1995, the Company manufactured 3D consumer cameras and
printer processing equipment through the Parent's Hong Kong-based subsidiary,
Image Technology (Hong Kong) Ltd., a Hong Kong corporation ("ITHK").

     On July 1, 1995, the Company entered into separate Manufacturing and
Distribution Agreements (the "Agreements") with Image Technology International
(Far East) Ltd. ("ITFE"), a Hong Kong limited company and wholly-owned
subsidiary of ITII. In conjunction with the Agreements, the Company appointed
and licensed ITFE to act as its agent in Hong Kong and the Far East, including
China, to supervise and assist in the manufacture and distribution of 3D



                                                                             F-7
<PAGE>   25



                   3D IMAGE TECHNOLOGY, INC. AND SUBSIDIARY

            Notes to Consolidated Financial Statements (continued)

1.   DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     (continued)

NATURE OF OPERATIONS (continued)

consumer products, including supervision of and technical assistance in the
manufacturing processes in China and in Hong Kong, as well as the photofinishing
facility.

     As compensation for the services rendered by ITFE under the Agreements,
ITFE receives a commission or fee equivalent to 10% of the gross sales price of
all 3D consumer products sold in Asia through the efforts of ITFE, reduced by
any commissions due on any such sale to any other authorized agent participating
in the sale. Such commissions were approximately $76,000 and $99,000 in 1996 and
1995, respectively. A fee of 4% of the manufactured cost of all 3D consumer
products manufactured in China or Hong Kong is added to cover shipping,
purchasing and distribution costs incurred for the Company.

     The Company agreed to provide initial financial and other ongoing
assistance to ITFE at the commencement of and during the term of the Agreements.
The Agreements may be terminated with written notice by either party.

     In October 1994, the Company acquired its Netherlands distributor and
photofinisher and established 3D Image Technology Europe B.V. ("3DEU") in
Amsterdam as a wholly-owned subsidiary to act as a central laboratory for the
European market. The Company utilizes this location as a marketing center and
film processing laboratory for the European market.

     The Company serves the Japanese market through a licensing agreement with
Image Technology Japan ("ITJ"), a joint venture in which the Parent owns a 40%
interest. The Parent granted licensing rights to ITJ in exchange for its
interest in the joint venture, in addition to $1,000,000 as payment of an
advance royalty and $1,000,000 for printer processing equipment. The other two
venture partners, which contributed cash and other assets, are Noritsu Koki
Company, Ltd., a manufacturer of one-hour printer processors, owning 40%, and
Photo Craft Company, Ltd., operator of a commercial photographic laboratory in
Japan, owning 20%. ITJ has licensed the sale of the 3D Magic one-time-use camera
in Japan only to Kodak Japan, Ltd. and Konica, which are distributing the 3D
Magic camera in Japan under their own packaging and trademarks. The Company is
engaged in negotiations with the other two venture partners at ITJ to reacquire
the rights to the Japanese market.



                                                                             F-8
<PAGE>   26



                   3D IMAGE TECHNOLOGY, INC. AND SUBSIDIARY


            Notes to Consolidated Financial Statements (continued)

1.   DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     (continued)

PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the accounts of the Company
and its wholly-owned Netherlands subsidiary, 3D Image Technology Europe B.V.
("3DEU"). Intercompany accounts and transactions have been eliminated in
consolidation.

USE OF ESTIMATES

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

REVENUE RECOGNITION

     Revenues are recognized when the products are shipped or services are
provided to customers.

CASH EQUIVALENTS

     The Company considers all investments purchased with a maturity of three
months or less to be cash equivalents.

INVENTORIES

     Inventories of finished goods and work-in-process are stated at the lower
of cost or market. The First-In, First-Out (FIFO) method of determining cost is
used for valuing inventories.

PROPERTY AND EQUIPMENT

     Property and equipment are stated at cost. Depreciation and amortization 
expense is



                                                                             F-9
<PAGE>   27


                   3D IMAGE TECHNOLOGY, INC. AND SUBSIDIARY

            Notes to Consolidated Financial Statements (continued)

1.   DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     (continued)

calculated over the estimated useful lives of the related assets (5 to 10 years)
using the straight line method for financial reporting purposes.

RESEARCH AND DEVELOPMENT

     Research and development expenditures are expensed when incurred.

CONCENTRATION OF CREDIT RISK

     Approximately  0% and 36% of the Company's 1996 and 1995 revenues were 
derived through related and affiliated parties, respectively.

INCOME TAXES

     Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for tax purposes. Such amounts are measured using
enacted tax rates and laws that are expected to be in effect when such amounts
reverse.

FOREIGN CURRENCY TRANSLATION

     3DEU's assets and liabilities are translated at year-end rates of exchange
and revenues and expenses are translated at the average rates of exchange during
the year. The operations of 3DEU are not significant for the years ended
December 31, 1996 and 1995.

ADVERTISING COSTS

     Advertising costs are expensed when incurred. Total advertising expense 
was $134,415 and $84,403 for the years ended December 31, 1996 and 1995,
respectively.

NET LOSS PER COMMON SHARE

     Net loss per common share is computed by dividing the net loss by the
weighted average number of common shares outstanding during the year.


                                                                            F-10

<PAGE>   28



                   3D IMAGE TECHNOLOGY, INC. AND SUBSIDIARY

            Notes to Consolidated Financial Statements (continued)

1.   DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     (continued)

RECLASSIFICATIONS

Certain 1995 amounts have been reclassified to conform to the 1996 presentation.
Such reclassifications primarily relate to packaging costs which were previously
reflected as selling expenses, approximately $100,000, considered to be camera
costs of sales.

2.   INVENTORIES

Inventories at December 31 are summarized as follows:


<TABLE>
<CAPTION>

                                                     1996                       1995
                                                     -------------------------------
         <S>                                         <C>               <C>
         Finished goods:
                Consumer cameras                     $    108,249      $     192,136
                Printer processors                        271,126            201,152
                Print material                            684,127            919,462
         Raw materials and component parts                750,474            499,056
                                                     -------------------------------
                                                     $  1,813,976      $   1,811,806
                                                     ===============================

</TABLE>

3.   SHAREHOLDERS' EQUITY

     On January 1, 1996, the Company issued warrants for the sale of 400,000
shares of $.001 par value common stock to Kaliman, Inc. (the "Warrantholder") at
a price of $2.40 per share. Such warrants have a term of one year and the
Warrantholder or its successors may sell, assign, exchange, or transfer these
warrants in accordance with applicable securities laws. If the shares underlying
the warrants are not included in an effective registration statement filed by
the Company prior to registration, the Company has agreed to register the
shares. If the warrant is exercised according to its terms, the Company also has
agreed to issue a second warrant on similar terms, for 400,000 shares at a price
equal to 10% less the average trading price for the shares plus $.15 per share.
In exchange for these warrants and in a separate agreement dated January 30,
1996, Kalimar, Inc. agreed to market and distribute consumer cameras to certain
customers on behalf of the Company up to December 31, 1998. Since the shares
underlying the initial warrants have not been included in an effective
registration statement, the one year warrant exercise period has not yet
commenced.


                                                                            F-11
<PAGE>   29


                   3D IMAGE TECHNOLOGY, INC. AND SUBSIDIARY

            Notes to Consolidated Financial Statements (continued)

3.   SHAREHOLDERS' EQUITY (CONTINUED)

     In March 1996, a subscription agreement for 500,000 shares of common stock
of the Company was executed and the shares were issued for total consideration
of $1,175,000 net of commissions of approximately $118,000. A second
subscription agreement for the same price and number of shares has also been
signed and was due June 6, 1996. Such subscription was not fulfilled. This
subscriber is not affiliated in any way with the Company or any officer,
director, or employee of the Company.

     In September 1996, the Company issued warrants for the sales of
60,000 shares of $.001 par value common stock to Legacy Investments Group, Inc.,
a contractor for the Company, at a price of $2.63 per share. The warrants expire
on September 13, 2001.

     On August 30, 1994, the Company entered into a subscription agreement with
Drummend Pal S.A. for the purchase of 500,000 shares at $2.00 per share of $.001
par value, common stock. On October 21, 1994, this agreement was amended to
provide for the stock to be purchased in installments through December 31, 1995,
at which point the stock would be issued. At December 31, 1994, $151,083 was
received and included in accrued liabilities, and no stock was issued. In 1995,
the remaining subscription amount was received and the related stock was issued.
Such shares are restricted and may not be sold for a period of two years from
the date of the subscription completion, December 31, 1997.

     On September 10, 1994, the Company issued a warrant to a third party to
purchase 50,000 shares of $.001 per value common stock. The warrant carries an
exercise price of $1.50 per share and is exercisable at any time during the five
year period following the date of issuance.

4.   INCOME TAXES

     The Company accounts for income taxes under the liability method. The
Company was included in ITII's consolidated tax return, thus, the Company's net
operating losses have been included with the net operating losses of ITII. Under
a separate return computation, there is no current provision for income taxes.

     The Company does not have a formal tax sharing agreement with the Parent.


                                                                            F-12


<PAGE>   30



                   3D IMAGE TECHNOLOGY, INC. AND SUBSIDIARY

            Notes to Consolidated Financial Statements (continued)

5.   GEOGRAPHIC INFORMATION


<TABLE>
<CAPTION>
                                                          1996                     1995
                                                          -----------------------------
         <S>                                              <C>               <C>
         Net Revenues:
              Asia                                        $ 1,695,325       $ 3,084,334
              United States                                 3,409,930         1,515,779
              Other                                           191,828           729,820
                                                          -----------------------------
         Total                                            $ 5,297,083       $ 5,329,933
                                                          =============================
         Operating Loss:
              Asia                                        $  (479,663)      $  (567,527)
              United States                                  (294,386)         (348,586)
              Other                                          (266,525)         (309,619)
                                                          -----------------------------
         Operating loss                                    (1,040,574)       (1,225,732)
         Interest expense                                    (334,025)         (162,589)
         Interest income                                       50,730            16,821
                                                          -----------------------------
         Net loss                                         $(1,323,869)      $(1,371,500)
                                                          =============================
         Identifiable Assets:
              Asia                                        $ 3,669,502       $ 1,877,043
              United States                                   820,013         2,612,379
              Other                                           380,778           253,129
                                                          -----------------------------
         Total                                            $ 4,870,293       $ 4,742,551
                                                          =============================


</TABLE>

1996

     Depreciation expense of $63,268, $147,626 and $11,074 for Asia, the United 
States and Other, respectively, is included in the 1996 net loss above.
Capital expenditures amounted to $20,740, $160,951 and $54,534 for Asia, the
United States and Other respectively.

1995
     Depreciation expense of $123,188 and $83,321, and $6,695 for Asia, the 
United States and



                                                                            F-13

<PAGE>   31



                          3D IMAGE TECHNOLOGY, INC.

            Notes to Consolidated Financial Statements (continued)

Other respectively, is included in the 1995 net loss above.  Capital 
expenditures amounted to $3,384 and $180,747 and $21,766 for Asia the United
States and Other respectively.

6.   RELATED PARTY TRANSACTIONS

     The Company had transactions with ITII, the parent company, ITII's
wholly-owned subsidiary, Image Technology, Inc. ("ITI"), and Image Technology
Japan ("ITJ"), a 40% owned joint venture of ITII. Transactions with affiliates
consist of direct sales through affiliates and collections from customers on
sales by affiliates, on the Company's behalf, in the Asian market. Such
transactions also consist of the allocation of general and administrative,
research and development, and selling expenses incurred by the Parent on the
Company's behalf. Such expenses allocated to the Company in 1996 and 1995 were
approximately $500,000 and $1,300,000, respectively. At December 31, 1996 and
1995, the net receivable from affiliates in accompanying balance sheets totaled
$1,786,987 and $0, respectively. See note 10.

     Total print material sales to ITJ were approximately $0 and $1,972,000 for
the years ended December 31, 1996 and 1995, respectively. Print material
purchases from ITJ were approximately $428,000 and $0 during the years ended
December 31, 1996 and 1995 respectively.

     The Parent allocates approximately 75% of its general and administrative
expenses, including interest on officer loans described below, to the Company.

     Several officers have advanced funds to the Parent representing cash
advances, unpaid salaries, and accrued interest thereon. These advances accrue
interest at prime rate plus 2%. The total outstanding amount due officers at
December 31, 1996 and 1995 totaled approximately $2,228,000 and $2,141,000,
respectively. The Company is not a guarantor for the payment of such advances.
However, the Company's allocable portion of interest totaled approximately
$140,000 and $163,000 for the years ended December 31, 1996 and 1995,
respectively.

7.   REDEEMABLE COMMON STOCK AND PROMISSORY NOTE IN DEFAULT

     On January 30, 1996 the Company executed a letter of intent with an Asian
investor (the "Investor"), providing for equity financing in an amount equal to
or less than $20 million. On February 6, 1996, the Company received $3 million
as part of this financing agreement, in exchange for 1,492,537 common shares at
a price of $2.01 per share. The initial funding agreement (the "Agreement")
provided for a due diligence period. In the event that the Investor determined
not to make an additional investment, the Company, pursuant to the Investor's
exercise of the Put Right provisions of Section 11 of the Agreement, agreed to
redeem such



                                                                            F-14


<PAGE>   32


                          3D IMAGE TECHNOLOGY. INC.

            Notes to Consolidated Financial Statements (continued)

7.   REDEEMABLE COMMON STOCK AND PROMISSORY NOTE IN DEFAULT

initial $3 million investment. On November 12, 1996 the Investor converted the
initial investment to a $3 million promissory note to be repaid on January 12,
1997, with interest at prime plus 2%, or 10.25% at December 31, 1996. The
promissory note was not repaid on January 12, 1997 and such indebtedness is
considered to be in default. A demand was made by the Investor on April 10, 1997
for all the amounts to be repaid. As security for the note the Company has
pledged all tangible assets. Interest incurred and paid to the Investor during
1996 and 1995 totaled approximately $118,000 and $0, respectively. As a result,
negotiations with other funding sources, suspended under the original terms of
the Agreement, have been resumed. The Company has also delayed the plan of
merger described in Note 8.

8.   COMMITMENTS AND CONTINGENCIES

     Included in accounts payable at December 31, 1996 is approximately $615,000
payable to a vendor for print material. This balance is past due and accrues
interest at the rate of 24% per annum, beginning on June 1, 1996, payable
monthly. During 1996 and 1995, interest paid and incurred on such indebtedness
totaled approximately $86,000 and $ 0 , respectively.

     On October 5, 1995, ITII and the Company approved a plan of merger of the
affiliated companies. Subsequent to the completion of this merger, the Company
will survive as the parent company of the affiliated group. Under the plan of
merger, each share of ITII common stock and Class A preferred stock will be
redeemed and canceled by ITII. Such redemption will be effected through the
issuance of common shares of the Company, the survivor, in proportion to the
pre-merger ITII ownership. This plan of merger has been postponed until a new
investment structure has been agreed to with prospective investors. It is
anticipated that the merger will be submitted to the shareholders for approval
during 1997, although the terms of the merger have not yet been determined.

     An affiliate of the Company, ITHK, is liable for unpaid legal fees totaling
approximately $600,000. Such legal fees were incurred by ITHK in connection with
an action taken as plaintiff in a Hong Kong court. ITHK ceased action against
the defendant.

     No accrual for such legal fees have been made in the accompanying financial
statements. Counsel has advised the Company that such fees are a liability
solely of ITHK and such liabilities do not extend to the Company. 

     The parent of the Company is a named defendant in various legal 
proceedings.  Management of the Company does not believe that such actions 
will result in  material adverse judgments against the Company. 



                                                                            F-15
<PAGE>   33


                          3D IMAGE TECHNOLOGY, INC.

            Notes to Consolidated Financial Statements (continued)


9.   MANAGEMENT'S PLANS

     As shown in the accompanying financial statements, the Company has incurred
recurring losses from operations which has also resulted in a working capital
deficiency. These factors raise substantial doubt about the Company's ability to
continue as a going concern.

     The Company continues to seek additional sources of equity capital in order
to improve the Company's infrastructure and increase expenditures for marketing
and distribution. Management has also instituted some cost reduction programs to
reduce camera production and photo processing costs. Management is also
considering alternatives to manufacturing cameras and photo processing equipment
through its affiliates, ITFE, in China. Management believes that such
manufacturing may be performed more efficiently by a third party. Management
believes these factors will improve liquidity and contribute towards achieving
profitability. The financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going concern.

10.  SUBSEQUENT EVENTS

     On April 8, 1997, the Board of Directors approved the repurchase of 900,000
shares of the Company's common stock from its Parent at a price of $2.00 per
share. Such purchase price was effected through exchange of a receivable from 
ITI, a subsidiary of the Parent.



                                                                            F-16