<PAGE>




                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K/A

         ---     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
         |X|     SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
         ---
                   For the fiscal year ended December 31, 1996

(Mark One)                              OR
         ---
         | |     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
         ---     SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

         For the transition period from _____________ to _______________

                        Commission File Number: 34-19218
                                                --------

                              PROJECTAVISION, INC.
             ------------------------------------------------------
             (Exact Name of Registrant as Specified in its Charter)

           Delaware                                         13-3499909
---------------------------------              ---------------------------------
(State or other jurisdiction                   (IRS Employer Identification No.)
of incorporation or organization)

Two Penn Plaza, Suite 640
New York, New York                                            10121
-------------------------                                    --------
 (Address of principal                                       Zip Code
  executive offices)
                                 (212) 971-3000
                                 --------------
              (Registrant's telephone number, including area code)

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

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

                               Title of each class
                               -------------------
                    Common Stock, Par Value $.0001 Per Share
                               Redeemable Warrants
                            Series B Preferred Stock


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

                                  ---              ---
                            YES   |X|         NO   | |
                                  ---              ---



<PAGE>




         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]

         On March 13, 1997, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was $ 34,098,839 based upon the average of
the closing bid and asked prices of $ 2.065 as of March 13, 1997.

         As of March 13, 1997, 16,512,755 shares of the Registrant's Common
Stock were outstanding.

                       Documents Incorporated By Reference

Document                                                      Where Incorporated
--------                                                      ------------------
 None.                                                               N/A



<PAGE>




                                     PART I

Item 1. BUSINESS.

General

         The Company was formed to capitalize on, and generate revenues and
profits primarily from a) the licensing of its proprietary patents, inventions,
systems and technologies to manufacturers and b) the manufacture and sale of
products based on its technology. The Company's first commercial video
production system, its Digital Home Theater(TM), is currently in production. The
Company is in the business of identifying, developing, patenting, supporting,
manufacturing and marketing technical innovations in the electronic display and
information industry.

Video Projector

         The Company's technologies utilize liquid crystal displays (LCDs) and
the new Texas Instruments Digital Light Processing (DLP) light engines as image
sources in concert with the Company's proprietary dual-use projection system.
This new generation technology differs significantly from conventional cathode
ray tube ("CRT") technology, which has been used for the past fifty years in
virtually all television and video systems. The Company anticipates that its
technologies will be capable of producing giant screen displays that are bright
and sharp, have rich color saturation and high contrast. The Company is the
owner of five (5) United States patents, covering its technologies, and
twenty-two (22) foreign patents around the world. Additional patent applications
were filed by the Company in the United States in 1995 with respect to the
Company's proprietary technologies. In addition, the Company has also filed for
further patent protection in various foreign countries for improvement to its
technologies and for protection of related technologies.

         The Company's patented technologies utilize LCDs and the Digital
Micromirror Device ("DmD") developed by Texas Instruments as image sources in
concert with the Company's dual-use proprietary projection system. These new
generation solid state technologies differ significantly from conventional CRT
technology, which has been used for the past fifty years in virtually all
television and video systems.

         The Company has produced production prototypes of its Texas
Instruments-based DMD projector and demonstration prototypes of its patented
small, lightweight, solid state LCD television projector (the "Projectors"). The
Company has also produced production prototypes of its patented dual-use
front/rear screen projection television, which incorporates the Projector, known
as

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<PAGE>




the "Digital Home Theater (formerly the "Chameleon(TM)"). The Projector (either
incorporated in the Digital Home Theater or standing alone) is capable of
producing bright, full-color, high-quality television images. The Company has
formed a non-exclusive strategic corporate alliance and entered into an OEM
Agreement with Texas Instruments with respect to the Digital Home Theater.
Specifically, this strategic alliance relates to the manufacture and
distribution of the Digital Home Theater that will incorporate the DMD, which is
a component of the DLP that has been developed by Texas Instruments. The Company
has also entered into arrangements with third parties for the manufacture and
production of its video projection systems which currently include the Projector
and the proprietary Digital Home Theater mechanical and electronics designs.

     The Company intends to enter into arrangements with third parties for the
marketing and distribution of its video projection systems. The Company has
licensed, on a non-exclusive basis, its patented "depixelization" micro-optics
which are applicable to a wide range of video projection systems, to Matsushita
Electric Industrial Co., a Japanese company that distributes consumer electronic
products in the U.S. under the Panasonic brand name, and to Samsung Electronics
Co., a Korean company that distributes products under the Samsung brand name.
These non-exclusive licenses offer consumer electronics manufacturers the right
to use certain of the Company's patented technologies. The Company is seeking to
enter into similar, non-exclusive patent license agreements for its
depixelization and other technologies with other parties in a variety of
markets. In addition to licensing its technologies for potential application in
the television market, the Company also intends to offer licenses of its video
projection technologies to commercial and military users. Other potential
markets for the Company's technologies include medical imaging, CAD/CAE
workstations, large format computer monitors, arcade games, video interactives,
home shopping, video teleconferencing, sports entertainment viewing, education,
training and advertising.

The Home Television Market

         The Company believes that one of the fastest growing segments of the
color television market is Big and Giant screen televisions, which are defined
as having a diagonal measurement greater than 27 inches and 32 inches,
respectively. The size of the home consumer television market in the U.S. in
1996 exceeded 25 million televisions. Sales of large screen televisions
increased approximately 29% in 1995 and 8% in 1996. It is this growing market
segment of large screen televisions that the Company is targeting. Almost all
existing big screen color television screens rely on CRT-based technology. Big
and giant

                                        2

<PAGE>




screen televisions produce images in either direct-view, front projection or
rear projection formats. In front projection, the projector is placed in front
of the screen or surface on which the images are to be displayed, as is
typically done with a slide or movie projector. In rear projection, the
projector is placed in an enclosed cabinet and its video projection illuminates
the back of a translucent screen. Direct-view CRT television currently can
produce up to a 40" picture. Rear projection CRT televisions are capable of
producing 80" diagonally measured pictures. Front projection LCD and DLP
projectors can produce giant screen images up to 20 feet in size measured
diagonally. The LCD and DLP solid state, tubeless projectors are smaller, and
lighter weight than either direct-view, or rear projection models, and do not
require a large dedicated space in the home. Direct-view televisions are capable
of producing superior images than most existing front and rear projections
systems. The Company believes that its technologies will be capable of producing
giant screen images in both front and rear projection formats that will match or
exceed the brightness of those produced in current screen projection systemsy.
The Company's Digital Home Theater, driven by Texas Instruments' DMD/DLP
technology, provides SVGA resolution and performs as a giant screen computer
monitor.

CRT Technology

         Most existing color televisions up to 35 inch screen size use CRT
systems, the basis of virtually all televisions produced since the 1940s. CRT
technology has certain inherent limitations for production of big screen picture
displays, including size, weight and vacuum. As a practical matter, CRT
television is not manufacturable in sizes exceeding 40 inches.

         The cost of producing cathode ray tubes and other aspects of the CRT
technology used for big screen display is high. As a result, CRT-based big
screen television generally is disproportionately more expensive than small
screen size television.

The Company's Technologies

         The Company's LCD and DLP projection technologies combine the Company's
patented optical and electronic processing systems with high brightness light
sources and solid-state LCD panels, which serve as light valves. Use of LCDs and
DLPs eliminate the cathode ray tube, which in big screen televisions is large,
bulky, heavy and fragile. LCD panels and DMD semiconductors do not pose the
health hazards of CRTs and are smaller, more

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compact, lighter and less fragile than cathode ray tubes. In reproducing images
in color, CRTs generate X-ray radiation that may be harmful to persons who view
the images at close range over long periods of time. Further, CRTs generate
electro-magnetic fields of considerable magnitude. The physiological effects of
these fields on persons who view the screens at close range is still under
study. The use of LCDs or DMDs in the Company's projection systems will not
result in the generation of X-rays or intense electro-magnetic fields.

         LCD television technology was first developed approximately 19 years
ago. Unlike CRT technology, which is a mature technology that has been used for
approximately the past 50 years in virtually all television and video projection
systems, LCD technology is still being significantly refined and improved. The
Company's management expects that additional significant advances in LCD
technology will be made in the near future that will be beneficial to the
Company's products. Management anticipates that LCDs, like other solid-state
devices, ultimately will be made more compact, durable, efficient and
inexpensive. Like CRT-based color televisions, LCD-based color televisions are
capable of displaying 525 scanning lines and 330 lines of resolution using
standard NTSC broadcast signals. Since the Company's Projector will utilize
commercially available LCD's, the resolution of its picture will be comparable
to the resolution of other standard systems. LCD projection technologies
presently contain certain inherent image quality limitations. The Company's
patented technologies are designed to overcome these limitations and produce an
image offering continuous tone photographic effect enabling substantially
increased viewer perception of image quality when compared with LCD televisions
that do not utilize the Company's depixalization system. The Company believes
that its technologies overcome limitations in current LCDs that might otherwise
limit the use of LCDs for standard NTSC and high definition television ("HDTV")
displays and will improve the ability to display images comparable in quality to
those currently produced by CRT-based projectors. A DLP projector combines DMD
microchips with digital signal processing, memory, software, optical components,
and an illumination source to create extremely bright, high resolution (SVGA)
display systems.

         The Company is aware of the development by other companies of
innovative flat panel and television systems. These technologies do not use CRT
or projection to produce an image, but instead rely on other technologies
including plasma, thin film electro-luminescence, solid-state lasers, light pipe
systems, vibrating mirror systems, cold cathode screens, PLZT, FED (field
emission display) and others.


                                        4

<PAGE>






The Projector

         The Company's Projector, which can be used in front and rear projection
configurations and employs the Company's patented technologies, has the
additional features described below:

         Picture Size - The picture size produced by an LCD and DLP television
Projector using a front projection format can be varied continuously to exceed a
20 foot diagonal picture by changing the projection distance or adjusting the
Projector's built-in zoom lens which allows 100% image size magnification.

         No Misconvergence - As a result of its single point iamge source,
neither the LCD or DLP Projector requires alignment or convergence adjustment,
which are required in CRT three lens projection television systems.
Misconvergence is a common problem encountered in present video projectors that
use CRTs, and can occur during shipping or moving of a projection system.

         Picture Quality - The Projector is capable of displaying large size
images that have rich color and high contrast and that are visible on a screen
or white painted surface. Images displayed by the Company's demonstration
prototype LCD Projector produces a continuous tone photographic effect enabling
substantially improved image quality, which is the result of the virtual
elimination of visible pixel structure.

         Size - The LCD Projector is intended to be small and light-weight,
self-contained and portable, slightly larger than an ordinary shoe box and
weighs less than fifteen (15) pounds. The Company expects that, when produced
for sale, the Projector will be similar in size and weight, thus enabling the
consumer to purchase only one Projector which may be carried easily from room to
room or placed into multiple Digital Home Theater-type systems in different
rooms or homes.

         Other Features - The Company's prototype Projector has a built-in
television receiver and audio system, UHF and VHF tuning, and will be
connectable to cable television or to an external antenna and may be operated by
remote control. The Projector will be connectable to video games, video cassette
recorders (VCRs), video disc players, home computers and the new DSS satellite
systems.

The Digital Home Theater

         As noted above, the Company's first commercial video projection system
will be the Digital Home Theater (formerly "The

                                        5

<PAGE>




Chameleon"), a Giant Screen consumer product that will incorporate the Company's
Projector and the DLP technology development by Texas Instruments. The Digital
Home Theater, which is currently in production, will be 60" diagonal television
that is a rear screen projection system that can also be used in a front
projection configuration. Specifically, the Digital Home Theater's picture will
be generated by the Company's lightweight, portable Projector, which can easily
be removed by the consumer so that the Projector itself can be carried to a
different location and be used to project an image on a wall, screen, or
ceiling. The Digital Home Theater itself, which includes the Projector, is a
relatively lightweight, easily assembled cabinet with a screen that is 60" in
diagonal and 23" thick (front-to-rear measurement), and is a patented design of
the Company.

Markets

         As noted above, the Company believes that one of the fastest growing
segments of the color television market is big and giant screen televisions,
which are defined as having a diagonal measurement greater than 27 inches and 32
inches, respectively. The size of the home consumer color television market in
the U.S. in 1996 exceeded 25 million televisions.

         It is this fast growing market segment of large screen televisions that
the Company is targeting. In addition to the large screen home consumer market,
the Company will seek to develop its projection technology for application in a
variety of other markets. Described below, in no particular order, are some of
the other video display markets to which the Company believes its projection
technologies may be particularly suited. However, there can be no assurance that
the Company will be able to successfully develop products for use in these or
any other areas.

         o Military/Federal - including land and ship command and control
centers; in field briefing; cockpit instrumentation for aircraft, ships and land
vehicles; intelligence community uses; archival storage and retrieval systems.

         o Commercial/Office - product and sales demonstrations; seminars;
replacement of CRT computer monitors.

         o Computer Monitors - replace CRT's for large screen use by groups of
people.

         o CAD/CAM - computer assisted design and computer assisted
manufacturing, including large image computer work stations.


                                        6

<PAGE>




         o Medical Imaging - on site and offsite diagnostic functions; large
screen surgical demonstration.

         o Video Teleconferencing - business meetings and product
demonstrations.

         o Education and Training - classroom and large audience presentations.

         o Movie Theater and Sports Bars - sports and other entertainment
viewing.

Research and Development

         From the Company's inception in September, 1988 through December 31,
1996, the Company has invested approximately $5,800,000 for research and
development of its technology. The Company has constructed production prototypes
and completed substantially all research and development activities in
connection with the Projector and the Digital Home Theater, although certain
refinements are still ongoing, including optimizing picture brightness. The
Company has and continues to explore the feasibility of using light valves other
than LCDs in its projection technologies.





         Manufacturing, Marketing, Licensing and Other Activities

         With respect to the Digital Home Theater, the Company is engaged in
discussions with national audio-video retailers who have expressed an interest
in distributing the Company's product. The Company intends to market its
patented technologies to major consumer electronics manufacturers/marketers.

         Texas Instruments Memorandum of Understanding

   
         In September, 1995 the Company entered into an OEM agreement between
the Company and Texas Instruments to incorporate Texas Instruments' DLP
projection technology for use in the Company's consumer projection television
system, the Digital Home Theater. The Digital Home Theater, which will feature
projection technologies from both the Company and Texas Instruments, is a single
system that has both front and rear projection capabilities as well as offering
standard or wall-sized images for television and Super VGA computer displays.
    



                                        7

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         Samsung License

         In November, 1994, the Company entered into a non-exclusive license
agreement with Samsung Electronics Co. of South Korea, providing Samsung the
right to use the Company's patented depixelization and brightness video
projection technology. Samsung Group is one of Korea's largest industrial
companies. The disclosure of the terms and conditions of the Samsung License are
expressly subject to strict confidentiality provisions set forth in such
license.

         Matsushita License

         In March, 1993, the Company entered into a patent license agreement
with Matsushita Electric Industrial Co., Ltd. ("Matsushita") which granted
Matsushita the right to use the Company's patented depixelization video
projection technology in connection with the manufacturing and marketing of an
advanced tubeless consumer television system in the United States (the
"Matsushita License"). Matsushita distributes consumer electronics products in
the United States under the brand names "Panasonic," "Quasar" and "Technics."
The disclosure of the specific terms and conditions of the Matsushita License,
are expressly subject to strict confidentiality provisions set forth in the
Matsushita License.




         Tamarack Investment

         In April, 1993, the Company entered into an agreement with Tamarack
Storage Devices, Inc. ("Tamarack"), a spin-off development stage company of the
Microelectronics and Computer Technology Corporation, a research consortium of
leading U.S. technology companies of which the Company is a member. Tamarack
which was established to commercialize holographic storage technology for
various uses such as for the personal computer workstation, commercial storage
and the consumer electronics market. Pursuant to the April 1993 agreement, the
Company acquired approximately 37% of Tamarack's issued and outstanding voting
securities. In addition, since Tamarack did not achieve certain revenue
benchmarks by the end of the first calendar quarter of 1995, the Company
exercised its right in March, 1996 to purchase, for minimal consideration,
additional shares of Tamarack's Common Stock such that upon effecting such
purchase, the Company assumed ownership of approximately 52% of Tamarack's
issued and outstanding voting securities.


                                        8

<PAGE>




         In May, 1994, the Company loaned Tamarack an additional $1,500,000 and
in connection therewith also received warrants to purchase additional shares of
Tamarack's common stock, the precise amount of which is dependent upon the
timing and pricing of a future equity offering by Tamarack. From August through
December of 1995, the Company advanced an aggregate of an additional $97,339
either directly to or for the benefit of Tamarack for general working capital
purposes. Due to Tamarack's inability, to date, to commercialize its holographic
storage technology and Tamarack's current lack of prospects, the Company has
recorded a reserve against its entire investment in Tamarack, including the loan
of $1,500,000. In November, 1996, the Company loaned Tamarack an additional $
100,000 which has not been reserved, since repayment is to be made in 1997 out
of funds coming from the United States Government's Advanced Research Projects
Agency ("ARPA"). Presently Tamarack is participating in a Dept. Of Energy Crada
Award with the Los Alamos National Laboratory in Los Alamos, New Mexico to
develop the recording media necessary to produce holographic recordings.



Proprietary Rights

          Projectavision is the owner of five (5) United States patents and
twenty-two (22) foreign patents in a number of countries and has patent
applications pending in numerous industrialized nations around the world. The
Company has filed for further patent protection in the United States and in
various foreign countries for improvements in its technologies. Specifically in
1995, the Company filed separate patent applications covering its thin screen
system, collimation increasing means, light splitting means, input lens arrays
on opposite sides of the image forming element, double input lens array, real
illumination polarized screen and brightness enhancing technologies.
Applications covering such technologies have also been filed in Canada, China
(People's Republic), Europe (E.P.O.), India, Japan, Mexico, South Korea and
Taiwan. Also in 1995, three additional "design" patent applications were filed
in the United States covering Projectavision's rear screen technology systems.
Rear screen technology utility applications were also filed in Canada, China
(People's Republic), Europe (E.P.O.), India, Japan, Mexico, South Korea and
Taiwan. Notwithstanding the Company's patent or pending patent applications,
there can be no assurance that others have not developed such technologies
without the Company's knowledge, or that such pending applications will be
allowed or that others will not independently develop similar technologies,
duplicate the Company's technologies or design around the patented aspects of
the Company's technologies. Even though the Company has been

                                        9

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issued patents, challenges may be instituted by third parties as to the
validity, enforceability and infringement of the patents. In the event that if
others are able to design around the Company's patents, the Company's business
could be materially and adversely affected. In addition, in the event the
Company's products are based upon the DLP developed by Texas Instruments, the
Company will also be dependent to a certain extent on the efficacy of Texas
Instruments' patents relative to the DLP, of which there can be no assurance.
The Company has not conducted any independent analysis of the patents owned by
Texas Instruments relating to the DLP.

         The cost of the litigation to uphold the validity and enforceability
and prevent infringement of the Company's patents can be substantial. The
Company's patent counsel, Anderson Kill & Olick, PC, has conducted a study to
determine whether the manufacture, use or sale in the United States of the
projector would infringe patents of others. The study reviewed patents covering
active matrix LCDs, optics and LCDs and various electronic and optical
components used in conjunction with such combinations. Counsel has determined
that the combination of features disclosed in the Company's patent application
would not constitute literal infringement of the patents reviewed.

         Counsel also has reviewed certain of the patents covered by the literal
infringement study to determine whether the combination of features described in
the Company's application would infringe such patents under the doctrine of
equivalents. Under this doctrine, a product which does not literally infringe a
patent because it does not have all features of any of the patent claims might,
nevertheless, be deemed to infringe such patent, if and only if the difference
between the patented product and accused products are insubstantial. Counsel has
concluded that the combination of features described in the Company's patent
application would not infringe any of the patents included in counsel's doctrine
of equivalents study under the doctrine of equivalents. With respect to those
patents which were not included in the doctrine of equivalents study, counsel
has advised the Company that even if the combination of features described in
the Company's application would infringe such patents under the doctrine of
equivalents it is likely that either (i) suitable non-infringing alternative
components would be available, or (ii) the Company will be able to obtain a
license from the owner of such patent. In order for the Company to obtain such a
license it may be necessary for the Company to grant a cross license of the
Company's patent-pending technology to a potential licensor.

         Counsel also has reviewed the patents to determine whether the
components of the Projector set forth in the Company's

                                       10

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patents constitute literal infringement of the other patents reviewed. Counsel
has concluded that the manufacture, use or sale in the United States of the
Projector including such components would not constitute literal infringement of
the patents reviewed; however, Counsel will not be able to determine whether the
components of the Projector would infringe the remaining patents reviewed until
certain components to be used in the Projector are definitively selected.
Counsel has not reviewed the patents to determine whether the components of the
Projector disclosed in the Company's patent application would constitute
infringement of the patents directed to such components under the doctrine of
equivalents. However, counsel has advised the Company that, as a matter of law,
any component purchased from a seller in the normal course of business ("off the
shelf") is purchased with a warranty from the seller that such component does
not constitute literal or equivalents infringement of patents of others. In
addition, counsel has advised that if the Company arranges to have certain
components manufactured to its specifications and, therefore, is not deemed to
have purchased such components off the shelf it is likely that either (i) the
seller of such component will indemnify the Company from patent infringement
claims, or (ii) the Company will be able to obtain a license from the owner of
the patent which is infringed. However, there can be no assurance that the
Company will enter into any such arrangements and if the Company is unable to
enter into such arrangements, its business may be adversely affected.

         In some cases, the Company may rely on trade secrets to protect its
innovations. There can be no assurance that trade secrets will be established or
that others will not independently develop similar or superior technologies. The
Company routinely requires employees, Directors, consultants and other third
parties to whom confidential information has been or will be disclosed, to agree
to keep the Company's proprietary information confidential and to refrain from
using such information in any manner that is adverse to the Company's interest.
However, there can no assurance that such agreements will be complied with or
will be enforceable.

         The Company is the owner of the trade name Projectavision, Inc. This
mark was registered by the United States Patent and Trademark Office on February
4, 1997.



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         The following Trademark applications have been filed:


TRADEMARK                 COUNTRIES                                STATUS
---------                 ---------                                ------
DHT and DIGITAL           U.S.A., Europe, Japan, Korea,             Pending
 HOME THEATER             Taiwan, India, China, Canada
                          Mexico, Brazil, Chile, Peru
                          and Argentina

COMPUTER THEATER          U.S.A.                                   Pending

KANGAROO                  U.S.A.                                   Pending

CHT                       U.S.A., and Taiwan                       Pending

COMPUTER HOME THEATER     U.S.A., and Taiwan                       Pending

         Generally, pending trademark applications significantly inhibit the
ability of a third party to obtain registration for identical or similar marks
to those of the Company's during the pendency of application. However, the
specific trademark laws in each of the countries vary.

         The Company also registered the trademark PROJECTAVISION in Japan on
October 31, 1995. Intent-to-Use applications for this mark have also been filed
in European Countries, Korea, Taiwan, India, China, Canada, Mexico, Chile, Peru,
Argentina and Brazil. In addition to the trademark PROJECTAVISION, the Company
has applied for registration of several Intend-to-Use trademark applications
various countries.




         On April 7, 1995, Eugene Dolgoff, a founder of the Company and its
former Chief Scientist, filed suit against the Company alleging, among other
things, certain ownership rights with respect to the Company's technologies. See
Item 3 "Legal Proceedings."


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Competition

         The television and video display industry is highly competitive,
although its patents and technologies are additive, the Company believes that in
many instances it will be directly competitive with consumer electronics
manufacturers. To the extent the Company does encounter competition, most of the
Company's competitors and potential competitors have and will have far greater
financial resources, research and development facilities, manufacturing and
marketing experience, distribution and sales networks, established customer
bases, and greater brand name recognition than the Company currently has.
Although there can be no assurances, the Company expects that it will be able to
compete successfully against its competitors on the basis of its proprietary
projection technologies and patent portfolio, product size and weight, price and
picture quality. The Company plans to enter into arrangements for the
manufacture, marketing and distribution of the television Projector with third
parties which have established capabilities in those areas. However, there can
no assurance that the Company will be able to compete successfully or enter into
or maintain such arrangements on acceptable terms or at all.

         The Company is aware of other companies who have developed projection
technologies that may function without the Company's principal technologies, and
may become competitive, including Everex(R), Comtech/RAF/Flask(R), Kopin(R),
Kuraray(R), Microsharp/Nashua(R), and others. In addition, other companies are
developing variations of video projectors which may not necessarily rely on the
Company's technologies for image improvement. These include Sharp
Corporation(R), GE(R), Telex(R), Epson(R), Toshiba(R), Hitachi(R), Sanyo(R),
JVC(R), Philips(R), Eiki(R), Infocus(R), In-View(R), Proxima(R), 3M(R) and
others. Although the Company believes that its projection technologies (and
those technologies of Texas Instruments to be employed with the Digital Home
Theater) have distinct advantages over the technologies developed by these
companies, there can be no assurance that the Company's competitors have not or
in the future will not develop technologies, projectors and other products that
are of the same or better quality than those developed and produced by the
Company. There can be no assurance that the Company will be able to overcome the
far greater financial resources, manufacturing, distributing, marketing, sales
and other resources of these competitors.

         In addition to development of the Digital Home Theater and the
television Projector as a consumer item, the Company intends to pursue other
applications of its projection technologies in a variety of other commercial
industries and markets. Many of these areas are highly competitive. Most of the
Company's

                                       13

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competitors and potential competitors in these areas have and will have far
greater financial resources, research and development facilities, manufacturing
and marketing experience, distribution and sales networks, established customer
networks, and greater name recognition than the Company currently has. There can
be no assurance that the Company will be able to overcome these factors.




Government Regulations

         The Food and Drug Administration ("FDA") of the U.S. Department of
Health and Human Services regulates television radiation emissions. State and
local governments also may regulate television radiation emissions. Compliance
with these regulations, or exemptions therefrom, will be necessary prior to
commencement of marketing of the Projector and the Digital Home Theater. The
Company believes that the Projector and the Digital Home Theater will comply
with applicable regulations. Current FDA regulations do not require FDA review
or approval prior to the manufacturing or marketing of the Projector or the
Digital Home Theater. If the Company's technology is used in the medical imaging
market, it may have to comply with FDA requirements pertaining to medical
devices, including possible extensive premarketing approval requirements. If the
Company is required to obtain premarketing approval from the FDA, use of the
technology in the medical imaging market could be significantly delayed and the
cost of obtaining such approval could be substantial.

         The Company will not be permitted to sell the Projector and the Digital
Home Theater in certain states without obtaining UL listing, which the Company
will seek to obtain.

         The Company is unable to predict the extent of any governmental
regulation which might arise from future United States or foreign legislative or
administrative action.





Personnel

         As of March 13, 1997, the Company employed twelve (12) persons, all of
whom provide management and administrative services on a full-time basis. The
Company also has consulting arrangements with a number of engineers who assist
the Company in

                                       14

<PAGE>




research and development. The Company also employs its Chief Financial Officer
pursuant to a consulting agreement. See "Employment Agreements."

Change in Officers

         In February of 1995, Mr. Eugene Dolgoff was terminated as an employee
of the Company and in March of 1995 Mr. Dolgoff was terminated as an officer of
the Company for cause. Subsequently, on April 7, 1995, Mr. Dolgoff filed suit in
the Supreme Court of the State of New York against the Company, certain
directors and employees of the Company alleging, among other things, wrongful
termination and breach of his employment contract. See Item 3 "Legal
Proceedings."

         In September, 1996, Martin Holleran, the President and Chief Operating
Officer of the Company since November of 1993, became Chief Executive Officer of
the Company. Upon becoming Chief Executive Officer, Mr. Holleran retained the
title of President, but did not keep the title of Chief Operating Officer. Prior
to September, 1996, Marvin Maslow had been the Chief Executive Officer of the
Company since inception of the Company. Mr. Maslow remains as Chairman of the
Board of the Company. In connection with these executive changes, the Company
entered into new six (6) year employment agreement with each of Mr. Holleran and
Mr. Maslow effective March 1, 1997. See Item 10, "Directors and Executive
Officers of the Registrant."

         The Company believes that its employee relations are satisfactory,
notwithstanding a charge of discrimination that was filed against the Company
and settled and which was related solely to the actions of Mr. Dolgoff. See Item
3, "Legal Proceedings."

Item 2. PROPERTIES

         The Company presently leases approximately 12,000 square feet of office
space for executive and research facilities at Two Penn Plaza, Suite 640, New
York, NY 10121. These facilities were originally subleased from an unaffiliated
party at a rate of approximately $17,000 per month. The sublease expired on
January 30, 1996, at which time, the Company entered into a direct lease with
the landlord for the same premises until January 31, 1998 at a rent of
approximately $21,500 per month. The Company is presently seeking to extend the
term of its current lease.

Item 3. LEGAL PROCEEDINGS

         In January 1996, Mr. and Mrs. Eugene Dolgoff sued the Company and
certain members of the Board of Directors in the

                                       15

<PAGE>




Chancery Court in the State of Delaware, and in connection therewith moved to
preliminarily enjoin the Company's annual stockholders' meeting scheduled for
February 29, 1996. The Dolgoffs alleged, among other things, manipulation of the
election process and breaches of the Company's charter documents. The Dolgoffs'
request to preliminarily enjoin the meeting was denied. A settlement agreement
has been entered into between the Company and the Dolgoffs, which includes,
among other things, the Company taking steps to move one of its Directors from
one class to another class so as to align the terms of its three (3) classes of
directors. A hearing with respect to the settlement agreement has been scheduled
before the Delaware Chancery Court for May 23, 1997.

         In May 1996, two of the eleven purchasers of the convertible debt
issued by the Company in the first quarter of 1996 commenced a lawsuit against
the Company in New York State Supreme Court seeking an order to require the
Company to convert their debt into common stock. After the plaintiff's motion
for summary judgement was dismissed, one of the two purchasers settled their
lawsuit with the Company in October, 1996. The litigation with the other debt
holder remains outstanding. The Company believes that it has meritorious
defenses with respect of all of the remaining debt holder's claims and intends
to vigorously defend the litigation. A motion to discussion for lack of
jurisdiction is currently pending before the U.S. District Court in Florida.

   
         In June 1996, a suit was filed by an individual investor against the
Company and Marvin Maslow alleging fraudulent inducement in connection with the
plaintiff's purchase of the Company's securities. The Company believes that it
has meritorious defenses with respect to all of the plaintiff's claims and
intends to vigorously defend the litigation.     

         In April 1995, the Company and Jules Zimmerman, Richard Hickok, Dr.
Craig Fields, Marvin Maslow, Martin Holleran, and Sherman Langer (in his
capacity as an employee of the Company) were sued by Eugene Dolgoff, a former
officer, Director and employee of the Company in New York State Supreme Court.
Mr. Dolgoff alleged claims for breaches of his employment agreement, wrongful
discharge, tortious interference, libel and slander, declaratory relief with
respect to the ownership of certain of the Company's technologies, claiming that
he has certain rights with respect to the Company's technologies, breach of
contract with regard to a patent assignment agreement, a constructive trust or
unjust enrichment, replevin, conversion, to obtain access to corporate records,
and for a declaration regarding his status as an officer, and seeks damages,
punitive damages and

                                       16

<PAGE>




equitable relief aggregating in excess of $100 million. In April of 1996, the
New York State Supreme Court issued an order and opinion which (I) idsqualified
the compnay's litigation counsel, Anderson, Kill & Olick, P.C. ("Anderson,
Kill") on the basis that Anderson, Kill had a conflict of interest vis-a-vis Mr.
Dolgoff, (ii) substantially denied the Company's motion to dismiss Mr. Dolgoff's
entire complaint, and (iii)denied Mr. Dolgoff's motion to have a receiver
appointed.

    The Company appealed the New York Supreme Court's decision regarding the
disqualification of Anderson, Kill and the denial of its motion to dismiss Mr.
Dolgoff's complaint. Mr. Dolgoff applealed the New York Supreme Court's denial
of his motion to have a receiver appointed. In January of 1997, the Supreme
Court of the State of New York Appellate Division First Department (the "First
Department") affirmed the lower court's disqualification of Anderson, Kill , and
the lower court's denial of the Company's motion to dismiss, but also ordered
that a receiver be appointed to protect whatever interest, if any, Mr. Dolgoff
may ultimately be able to prove that he has in any of the inventions that Mr.
Dolgoff assigned to the Company. At the present time, neither the nature, nor
scope, nor authority, nor term of the receivership has been determined, all of
which will be decided by the New York State Supreme Court which initially denied
Mr. Dolgoff's motion for a receivership. In addition, at this time, neither the
Appellate Court nor any other court, has determined that Mr. Dolgoff has any
proof to support his claims; the Appellate Court has merely reaffirmed the lower
court's decision that, at this preliminary stage of the litigation, Mr.
Dolgoff's complaint has satisfied procedural pleading requirements. The Company,
which vigorously denies all of Mr. Dolgoff's allegations, believes taht it has
meritorious defenses with respect to all of Mr. Dolgoff's claims and intends to
vigorously defend the litigation. Moreover, since the institution of the
litigation by Mr. Dolgoff, new facts have come to the attention of the Company.
As a consequence, the Company intends, in the near futre, to seek leave fromt he
Court to amend its pleadings and file counter-claims against Mr. Dolgoff's, his
affiliated companies, Breakthrough Enterprises, Inc. And Floating Images, Inc.,
and members of the board of directors of those entities, for fraud, breach of
fiduciary duty, misappropriation of trade secrets, conversion, breach of
contract, diversion of corporate assets and opportunities, unjust enrichment,
and tortious interference with contractual relations. The Company also intends,
in connection with amending its pleadings, to seek injunctive relief and a
constructive trust, in addition to monetary damages in excess of $200 million
from Mr. Dolgoff and others.


                                       17

<PAGE>




         In June of 1995 and August of 1995, two class action suits were filed
against the Company as well as certain of its officers and directors by
stockholders of the Company. In October of 1995, the plaintiffs in the first
action and the second action was dismissed without prejudice. In July, 1996 the
class action suit was dismissed without prejudice and the plaintiffs were given
an opportunity to replead. New pleadings have now been submitted to the Court by
the plaintiffs. The class action suit now alleges numerous violations of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), including, but
not limited to, violations of Section 10(b) of the Exchange Act. The suit also
alleges claims for common law fraud and deceit. In response, the Company and the
individual defendants have submitted motions to dismiss the action. These
motions are pending before the Court.


         Except as set forth above, the Company is not presently a party to any
litigation nor, to the knowledge of management, is any material litigation
threatened against the Company.

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

         Not applicable.


                                       18

<PAGE>




                                     PART II

Item 5. MARKET FOR REGISTRANT'S COMMON
        EQUITY AND RELATED STOCKHOLDER MATTERS

         The Company's Common Stock, Redeemable Warrants and Series B Preferred
Stock are quoted on NASDAQ under the following symbols:

        Common Stock:                           PJTV
        Redeemable Warrants:                    PJTVW
        Series B Preferred Stock:               PJTVP

         The Common Stock and Redeemable Warrants were initially registered and
traded as Units and were not separately transferrable until August 24, 1991. The
Units commenced trading in the over-the-counter market on the closing of the
Company's initial public offering on August 1, 1990.

         On February 27, 1992 the Company announced a two-for-one stock split,
effective March 2, 1992. Accordingly, all quoted prices for the Company's
securities commencing with the first quarter of 1992 are adjusted to reflect the
March 1992 two-for-one stock split.

         The Series B Preferred Stock was initially registered on September 9,
1992 in connection with the Company's Redeemable Warrant incentive program (the
"Warrant Incentive Program"). Prior to that time, there was no public market for
the Series B Preferred Stock. Pursuant to the Warrant Incentive Program, holders
of the Company's Redeemable Warrants who exercised their Redeemable Warrants
within 65 days after September 9, 1992 received one (1) share of Series B
Preferred Stock for every three (3) Redeemable Warrants exercised. In connection
with the Warrant Incentive Program, the Company issued 246,452 shares of Series
B Preferred Stock.

         The Common Stock, Redeemable Warrants and Series B Preferred Stock of
the Company are traded in the over-the-counter market and are quoted on the
NASDAQ inter-dealer automated quotations system. There is no public trading
market for the Company's Series A Preferred Stock (of which there is only one
(1) holder), Series C Preferred Stock (of which there is only one (1) holder),
or Series D Preferred Stock (of which there are only two (2) holders). The high
and low bid quotations for the Common Stock, Redeemable Warrants and Series B
Preferred Stock for each full quarterly period for the fiscal years ending
December 31, 1995 and December 31, 1996 and for the first quarter of 1997
through March 13, 1997 are listed below:


                                       19

<PAGE>




                          COMMON STOCK       WARRANTS          PREFERRED STOCK
1995 Calendar Quarter     Quoted Bid Price   Quoted Bid Price  Quoted Bid Price
---------------------     ----------------   ----------------  ----------------
                          High     Low       High     Low      High      Low
                          ----     ---       ----     ---      ----      ---
First Quarter              3.67    2.50       4.17    2.67      4.00     3.04
Second Quarter             3.30    1.81       3.17    1.33      3.58     2.29
Third Quarter              3.90    2.54       4.38    2.50      4.13     2.92
Fourth Quarter             5.52    3.44       7.83    5.33      5.83     4.25

                          COMMON STOCK       WARRANTS          PREFERRED STOCK
1996 Calendar Quarter     Quoted Bid Price   Quoted Bid Price  Quoted Bid Price
---------------------     ----------------   ----------------  ----------------
                          High     Low       High     Low      High      Low
                          ----     ---       ----     ---      ----      ---
First Quarter             4.56     4.00       5.25    5.00     6.00      5.00
Second Quarter            3.56     2.19       4.00    3.25     4.00      3.00
Third Quarter             4.00     2.81       6.13    4.25     4.50      4.00
Fourth Quarter            3.69     2.56       6.50    5.50     3.50      2.75


                          COMMON STOCK       WARRANTS          PREFERRED STOCK
1997 Calendar Quarter     Quoted Bid Price   Quoted Bid Price  Quoted Bid Price
---------------------     ----------------   ----------------  ----------------
                          High     Low       High     Low      High      Low
                          ----     ---       ----     ---      ----      ---
First Quarter (through
March 13, 1997)           3.47     2.00      5.50     2.00     3.75      2.25


         On March 13, 1997 the closing bid and asked prices of Common Stock as
reported on the NASDAQ system were $2.00 and $2.13 per share, respectively. On
March 13, 1997, the closing bid and asked prices of Warrants as reported on the
NASDAQ system were $2.00 and $4.00 per Warrant, respectively. On March 13, 1997,
the closing bid and asked prices of Series B Preferred Stock on the NASDAQ
system were $2.25 and $2.63, respectively.

         On March 13, 1997 there were 408 holders of record of Common Stock and
16,512,755 shares of Common Stock issued and outstanding; 4 holders of record of
Redeemable Warrants and 36,133 Warrants issued and outstanding; and 7 holders of
record of Series B Preferred Stock and 351,258 shares of Series B Preferred
Stock issued and outstanding.

         No cash dividends have been paid by the Company and management does not
anticipate paying cash dividends in the foreseeable future.

                                       20

<PAGE>




Item 6. SELECTED FINANCIAL DATA

         The selected financial information set forth below is derived from the
more detailed financial statements and related notes thereto included elsewhere
in this Annual Report on Form 10-K/A. This information should be read in
conjunction with such financial statements and related notes.

Statements of Operations Data
<TABLE>
<CAPTION>
                                                                                                 For the Period
                                                                                                   September 9,
                                                                                                  1988 (Date of
                                                                                                  Incorporation)
                                                     For the Years Ended December 31,            to December 31,
                              1992           1993         1994          1995          1996            1996
                           -----------   ------------  -----------   -----------   -----------   ------------
<S>                        <C>               <C>           <C>         <C>           <C>           <C>
Revenues                   $     -0-     $   105,000   $   -0-       $   200,000  $    150,000   $  1,455,000
 
Research and
Development                $   346,797   $   276,215   $   827,660   $   608,651  $  2,389,329   $  5,811,252

Net Loss                   $(2,002,795)  $(2,730,242)  $(5,632,283)  $(6,471,638) $(10,880,893)  $(31,201,763)

Net Loss per Share
 Attributable to
 Common Shareholders       $      (.27)  $      (.26)  $      (.47)  $      (.51) $       (.99)

Average Number of
 Shares Outstanding          7,324,332    10,449,499    11,895,648    12,606,678    13,586,705

</TABLE>

                                       21

<PAGE>




Balance Sheet Data

<TABLE>
<CAPTION>
                                                                   December 31,
                         -------------------------------------------------------------------------------------------
                            1992                1993               1994                 1995                1996
                            ----                ----               ----                 ----                ----
<S>                      <C>                 <C>                <C>                 <C>                 <C>
Working capital          $ 4,346,665         $ 5,181,003        $  6,659,132        $  3,341,425        $  3,421,387

Total assets             $ 4,508,374         $ 8,300,501        $  9,850,523        $  4,168,415        $ 10,132,488

Long-Term Debt           $        -          $        -         $         -         $         -         $  1,762,963

Total liabilities        $   162,620         $   390,580        $    236,473        $    485,710        $  3,690,443

Accumulated deficit      $(5,486,707)        $(8,216,949)       $(14,015,013)       $(20,641,044)       $(34,157,268)

Stockholders'            $ 4,345,754         $ 7,909,921        $  9,614,050        $  3,682,705        $  6,442,045
 equity

</TABLE>

 Computation of Per Share Loss

<TABLE>
<CAPTION>
                                   For the Years Ended December 31,
                         1992          1993        1994         1995         1996
                      ----------   -----------  -----------  -----------  ----------
<S>                      <C>           <C>          <C>          <C>          <C>
 Weighted average
  shares outstand-
  ing                 7,108,616    10,233,783   11,679,932   12,390,962    13,586,705

 Common Stock
  equivalents           215,716       215,716      215,716      215,716
                      ---------    ----------   ----------   ----------  ------------
 Total                7,324,332    10,449,499   11,895,648   12,606,678    13,586,705

 Net Loss           $(2,002,795)  $(2,730,242) $(5,632,283) $(6,471,638) $(10,880,893)

 Dividends on
  Preferred Stock             -             -            -            -  $ (2,635,331)

 Net Loss per
  Share Attributable
  to Common
  Shareholders      $      (.27)  $      (.26) $      (.47)  $     (.51) $       (.99)

</TABLE>
                                       22

<PAGE>




Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
        FINANCIAL CONDITION AND RESULTS OF OPERATIONS

         The following management discussion and analysis should be read in
conjunction with the financial statements and notes thereto in Item 14 hereof.

Liquidity and Capital Resources

         As of December 31, 1996, the Company had working capital of $3,421,387.
To date, the Company has funded its operations primarily from sales of capital
stock. The net loss for the year ended 1996 was $(10,880,893) versus a net loss 
of $ 6,471,638 for the year ended 1995. The increase in the loss in 1996 versus
1995 is principally due to higher research and development expense and to higher
salary expense for engineering staff associated with the development of the
Digital Home Theater, as well as to interest expense and amortization of debt
expense associated with financing the development effort. In addition, higher
G&S expense is associated with increased participation in trade shows and with
travel in connection with marketing efforts and with starting up production of
the Digital Home Theater at the Company's third-party manufacturers. Legal fees
were incurred principally in connection with the Dolgoff Litigation.

  In February, 1996, the Company completed a private placement of convertible
debt of $10.0 million which resulted in $9.5 million in net proceeds to the
Company after paying a 5% investment banking fee. The unsecured debt requires
quarterly interest payments in cash based upon an annual interest rate of 8%.
The debt matures in three (3) years, at which time any convertible debt then
outstanding is to be repaid by the Company in cash or common stock, at the sole
option of the Company.

         The Company intended to use the proceeds from this offering principally
in connection with the commencement of the production and introduction of its
Digital Home Theater.

      In June, 1996, the Company completed a private placement of 7,500 shares
of a newly created Series C Convertible Preferred stock for $ 7.5 million which
resulted in net proceeds to the Company of $7 million after paying investment
banking fees. The proceeds of this private placement were used primarily to
retire unconverted portions of the convertible debt which the Company issued in
February of 1996. There currently remains $1.5 million of convertible debt as of
March 13, 1997, all of which is held by one entity with whom the Company is
currently in litigation. See Item 3 "Legal Proceedings." At the present time,
5,625 shares of this Series C Preferred Stock are eligible for conversion (4,210
of which have been converted into an aggregate of 2,226,186 shares of the
Company's Common Stock) and the remaining 1,750 shares of Series C Preferred
Stock will be eligible for conversion on May 1, 1997. All shares of Series C
Preferred Stock are convertible at a 25% discount to the then current market
price of the Company's Common Stock at the time of

                                       23

<PAGE>




conversion (the "Series C Conversion Price"); provided, however, that in the
event that the Series C Conversion Price is less than $1.50 per share, then
under no circumstances can shares of Series C Preferred Stock be converted into
the Company's Common Stock until such time as the Series C Conversion Price
exceeds $1.50 per share, subject to the following: (i) in the event that the
Company fails to either ship 2,500 projectors or generate $12,500,000 in
projector revenues during the period January 1, 1997 through June 30, 1997, then
the Series C Conversion Price shall be reduced by $.50, or (ii) in the event
that the Company fails to ship 2,500 projectors and generate $12,500,000 of
projector revenues during the period July 1, 1997 through December 31, 1997,
then the Series C Conversion Price shall be reduced by $.50.

         In January of 1997, the Company issued an aggregate of 35,000 shares of
6% Series D convertible preferred stock to two foreign institutional investors
for an aggregate purchase price of $3,500,000, resulting in net proceeds to the
Company of $3,500,000. Each share of Series D Preferred Stock is convertible, at
the option of the holder, into shares of the Company's Common Stock as follows:
8,750 shares on or after May 1, 1997; 8,750 shares on or after July 1, 1997;
8,750 shares on or after September 1, 1997; and 8,750 shares on or after
November 1, 1997. The Series D Preferred Stock is convertible into Common Stock
at a 25% discount to the then current market price of the Company's Common Stock
at the time of conversion (the "Series D Conversion Price"); provided, however,
that in the event that the Series D Conversion Price is less than $2.00 per
share, then under no circumstances can shares of Series D Preferred Stock be
converted into the Company's Common Stock until such time as the Series D
Conversion Price exceeds $2.00 per share, subject to the following: (i) in the
event that the Company fails to either ship 2,500 projectors or generate
$12,500,000 of projector revenues during the period January 1, 1997 through June
30, 1997, then the Series D Conversion Price shall be reduced by $.50, or (ii)
in the event that the Company fails to ship 2,500 projectors and generate
$12,500,000 of projector revenues during the period July 1, 1997 through
December 31, 1997, then the Series D Conversion Price shall be reduced by $.50.

         The Company intends to use the proceeds from this offering principally
in connection with the commencement of the production and introduction of its
Digital Home Theater.

         The Company also intends to rely on arrangements with retailers and
contract manufacturers in connection with meeting the balance of the capital
requirements necessary for the Company to manufacture, market and distribute the
Digital Home Theater.


                                       24

<PAGE>




         The Company is in the development stage and, to date, its sole revenues
have been $1,455,000. Of such revenues, $1,000,000 were derived from a
government agency to develop certain projection technology for use in a high
definition television projector and the balance, $455,000, from licensing
agreements. The Company has substantially completed research and development
with respect to the Digital Home Theater and the Projector, and, consequently,
the Company does not presently anticipate that any significant expenditure of
funds for research and development is necessary in order to complete the Digital
Home Theater and the Projector, although certain engineering refinements are
still ongoing, including optimizing picture brightness for a new rear projection
system. The Company is also expending research efforts in connection with
testing the feasibility of the Company's thin screen. In addition, due to the
inability of the Company's affiliate, Tamarack Storage Devices, Inc., to
commercialize its holographic storage technology and Tamarack's current lack of
prospects, the Company determined in the fourth quarter of 1996 to record a
reserve of approximately $2,100,000 against its entire interest in Tamarack. The
Company loaned Tamarack and additional $ 100,000 in November, 1996 which has not
been written off, since the funds are to repaid in March 1997 following receipt
of funds from DARPA.

         Primarily as a result of work performed in developing its technology,
the Company has sustained losses aggregating approximately $29,368,430 from its
inception to December 31, 1996. The Company has continued to incur losses since
December 31, 1996.

         As of December 31, 1996, the Company had available for Federal income
tax purposes net operating and capital loss carryforwards of approximately
$21,000,000. The Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code"), may impose certain restrictions on the amount of net operating
loss carryforwards which may be used in any year by the Company.

Results of Operations

         January 1, 1993 to December 31, 1993

         The Company had revenues of $105,000 for the twelve month period ended
December 31, 1993, all of which was from licensing agreements. During this
period, the Company incurred cash expenses of $2,111,933. The Company also
incurred non-cash expenses of $380,494 during this period relating to the
issuance of stock for services incurred for salaries paid or payable to officers
and employees of, and consultants to, the Company as compensation for services
rendered to the Company.


                                       25

<PAGE>




         January 1, 1994 to December 31, 1994

         The Company has no revenue for the twelve months ended December 31,
1994. The Company incurred cash expenses of $3,843,063. The Company also
incurred non-cash expenses of $257,250 during this period relating to the
issuance of stock for services incurred for salaries paid or payable to officers
and employees of, and consultants to, the Company as compensation for services
rendered to the Company. The Company also recorded its proportional share of the
loss of Tamarack of $1,691,697.

         January 1, 1995 to December 31, 1995

         The Company had revenues of $200,000 for the twelve month period ended
December 31, 1995, all of which was from licensing agreements. During this
period, the Company incurred cash expenses of $3,873,607. The Company also
incurred non-cash expenses of $3,160,138 during this period relating to the
issuance of stock for services incurred for salaries paid or payable to officers
and employees of, and consultants to, the Company as compensation for services
rendered to the Company, and the aforementioned reserve of the Company's
interest in its affiliate, Tamarack Storage Devices, Inc.

         January 1, 1996 to December 31, 1996

         The Company had revenues of $150,000 for the twelve month period ended
December 31, 1996, all of which was from licensing agreements. During this
period, the Company incurred cash expenses of $6,884,343. The Company also
incurred non-cash expenses of $ 2,071,933 during the period relating to the
issuance of warrants and options as compensation for services rendered to the
Company and for the early retirement of debt. The Company also recorded $
2,357,188 in dividends on the Series C Convertible Preferred Stock in connection
with recognizing the discount on the conversion feature.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         See Financial Statements following Item 14 of this Annual Report on
Form 10-K/A.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS OR
        ACCOUNTING AND FINANCIAL DISCLOSURE

         None.

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

                                       26

<PAGE>




         The directors and executive officers of the Company are listed below,
followed by a brief description of their business experience during the past
five years.
                                                                           Term
Name                        Age         Position                         Expires
----                        ---         --------                         -------
Marvin Maslow                59         Chairman of the Board              1999
                                         of Directors

Martin Holleran(1)           54         President, Chief Executive
                                         Officer and Director              1997

Martin D. Fife(1)            69         Director                           1997

Craig I. Fields(2)           50         Director                           1997

Richard S. Hickok(1)         71         Director                           1997

Arthur Lipper, III           65         Director                           1998

Jules Zimmerman              62         Chief Financial Officer,           1999
                                         Secretary and Director

Sherman Langer               50         Director                           1999

--------------
(1) Director is being nominated for re-election for a three (3) year term at the
    1997 stockholders' meeting.

(2) Director is being nominated for re-election for a one (1) year term at the
    1997 stockholders' meeting.

         Marvin Maslow, a co-founder of the Company, has served as Chairman of
the Board of Directors of the Company since its inception. Mr. Maslow also
served as the Company's Chief Executive Officer from inception through September
30, 1996, when he voluntarily resigned as Chief Executive Officer of the
Company, endorsing the appointment by the Board of Mr. Martin Holleran as Chief
Executive Officer of the Company. Mr. Maslow also served as an officer and a
director of DKY, Inc. ("DKY"), the Company's predecessor in interest from
October 1988 until June 12, 1990, when DKY was merged into the Company. Mr.
Maslow also served as Chief Financial Officer of the Company from its inception
until the consummation of its initial public offering in August, 1990.

         Martin J. Holleran, has served as President of the Company since
November, 1993. On September 30, 1996, Mr. Holleran became Chief Executive
Officer of the Company, at which time, he retained the title of President but
resigned as the Chief Operating Officer of the Company, a position which he had
also

                                       27

<PAGE>




held since November, 1993. Prior to 1993, Mr. Holleran served as President and
Chief Executive Officer of Thomson Consumer Electronics Marketing and Sales
Company ("Thomson") from 1988 to 1992. At Thomson, Mr. Holleran had overall
responsibility for the marketing, sales and distribution of the RCA and GE
brands of consumer electronic products sold in North and South America. From
1992 until 1993, Mr. Holleran was President and Chief Operating Officer of
Emerson Radio.

         Martin D. Fife, a founder of the Company, has served on the Board of
Directors since its inception. In addition, Mr. Fife was the Secretary of the
Company from its inception until January 1993. Mr. Fife served as an officer and
a director of DKY from August 1988 until July 12, 1990 when DKY was merged into
the Company. Mr. Fife has been the Chairman of the Board of Directors of Skysat
Communication Network Corporation, a public company, since its inception in July
1992. Since 1987, Mr. Fife has been Chairman of the Board of Magar Inc., a
company of which he is a founder specializing in financial products and the
development of early stage companies. From 1985 to 1989, Mr. Fife was President
of Intergold USA, Inc., a Company involved in the sale and processing of
precious metals. From 1986 to 1989, Mr. Fife was President of Agremp Holdings
Incorporated, an operator of storage elevators. Since April 1992, Mr. Fife has
been a director of the Nova Group, a company engaged in the recycling of
industrial plastics. Since 1974, Mr. Fife has served as a director or trustee of
several investment companies advised by the Dreyfus Corporation, a registered
investment adviser, and currently serves as a director or trustee of the
following thirteen investment companies: The Dreyfus Fund Incorporated, Dreyfus
Liquid Assets, Inc., Dreyfus Municipal Income, Inc., Dreyfus New York Municipal
Income, Inc., Dreyfus California Municipal Income, Inc., Dreyfus Worldwide
Dollar Money Market Fund, Inc., Dreyfus Short-Term Fund, Inc., Dreyfus
Short-Term Income Fund, Inc., Dreyfus Asset Allocation Fund, Inc., Dreyfus
Growth Allocation Fund, Inc., Dreyfus Institutional Short-Term Treasury Fund,
Dreyfus Short-Intermediate Government Fund and Dreyfus Short-Intermediate
Municipal Bond Fund.

         Dr. Craig I. Fields has served as a Director since September 1994 and
has been Chairman of the Company's Business and Technical Advisory Board since
January 1, 1993. From April 1989 to April 1990, Dr. Fields was the Director of
the United States Government's Defense Advanced Research Projects Agency
(DARPA). From July 1990 to June 1994, Dr. Fields was the Chairman and Chief
Executive Officer of the Microelectronics and Computer Technology Corporation
(MCC). Since September 1994, Dr. Fields has served as Vice Chairman of Alliance
Gaming Corporation (formerly known as United Gaming, Incorporated), a
diversified entertainment company in the gaming industry. Dr. Fields

                                       28

<PAGE>




currently serves as the Chairman of the Defense Science Board, an advisory board
to the Secretary of Defense. Dr. Fields also serves on the Science and
Technology Advisory Panel supporting the Director of Central Intelligence; on
the United States Advisory Council on the National Information Infrastructure;
and on the US-Israel Science and Technology Commission. Dr. Fields is also a
member of the Board of ENSCO, Perot Systems Corporation and Intertech. Dr.
Fields is on the Advisory Boards of SRI International, United Technologies
Corporation and the Economic Strategy Institute. Dr. Fields is also an advisor
to SAIC. In 1988, Dr. Fields was awarded the President's Distinguished Executive
Rank Award for outstanding service, and in 1990 the President's Meritorious
Executive Rank Award.

         Richard S. Hickok, a certified public accountant, served as a Director
of the Company from December 1988 to March 1989. Mr. Hickok has continuously
served as a Director of the Company since February 1990. From October 1989 to
December 31, 1996, Mr. Hickok has served as an officer, director and stockholder
of Hickok Associates, Inc., a company that provides financial consulting
services ("Hickok Associates"). From 1948 to 1983, Mr. Hickok was associated
with KMG Main Hurdman, Certified Public Accountants in various capacities. Mr.
Hickok served as Chairman of the Board of KMG Main Hurdman from 1981 to 1983,
and in 1983 he retired and was elected Chairman Emeritus. Since 1983 Mr. Hickok
has been a financial consultant. During the past five years Mr. Hickok also has
served as a director of Marsh McLennan Companies, Inc., Comstock Resources,
Inc., Marcam, Inc. and Alpine Lace Brands, Inc.

         Arthur Lipper III, is an experienced, independent investment banker and
corporate advisor, and has served as a Director of the Company since March,
1996. He has a particular interest in assisting early stage, growing
enterprises. He is also an established author and lecturer on subjects relating
to investing in and financing businesses. His most recent book is entitled The
Guide for Venture Investing Angels - Financing and Investing in Private
Companies. He is also a strong advocate of independent members of boards of
directors taking an active role in representing the interests of the owners of
the companies in the management of the business. He has been a member of the New
York Stock Exchange and many other stock and commodity exchanges. Mr. Lipper has
been an advisor to the Company and has served on its Business and Technical
Advisory Committee since 1993.

         Jules Zimmerman has served as a Director since January 1993, as
Secretary of the Company since February 1994 and as the Chief Financial Officer
of the Company since 1990. From October 1989 to December 31, 1996, Mr. Zimmerman
served as President and Chief Executive Officer of Hickok Associates, Inc., a
company that

                                       29

<PAGE>




provides financial consulting services ("Hickok Associates"). Mr. Zimmerman was
employed by Avon Products Inc. for 12 years and served as Avon's Senior Vice
President and Chief Financial Officer from 1984 to 1988. From 1992 through 1995,
Mr. Zimmerman was a member of the Board of Directors of Winners All
International, as well as its predecessor-in-interest, National Child Care
Company. He is a Director of the GP Financial and was the President of the New
York Chapter of the National Association of Corporate Directors from September
1990 through December 1992.

         Sherman Langer has been the Company's Senior Vice President of
Marketing and Sales since October 1994 and has served as a member of the Board
since February, 1996. Mr. Langer was a consultant to the Company from February
1994 until October 1994. From June 1988 through January 1994, Mr. Langer was the
General Manager of the Consumer LCD Products Division of the Sharp Electronics
Corporation.




Broad Classification and Committees and Advisory Board

         The Company adopted a classified Board of Directors in February, 1990.
The Board of Directors presently consists of eight members divided into three
classes. In order to realign the classes such that the term of office of each
Director in a given class expires at the third annual meeting of stockholders
following his election, Dr. Fields is being nominated for re-election for a
one(1) year term at the Company's 1997 Annual Meeting. Subsequent to the 1997
annual meeting, the Company will have three (3) Directors whose term expires in
1999, three (3) Directors whose term expires in 2000 and two (2) Directors whose
term expires in 1998. Having a classified Board of Directors may be viewed as
inhibiting a change in control of the Company and having possible anti-takeover
effects. Officers of the Company serve at the discretion of the Board of
Directors.

         The Company has an Audit Committee, a Compensation Committee and an
Executive Committee. The Audit Committee reviews the engagement of the
independent accountants, reviews and approves the scope of the annual audit
undertaken by the independent accountants and reviews the independence of the
accounting firm. The Audit Committee also reviews the audit and non-audit fees
of the independent accountants and the adequacy of the Company's internal
control procedures. The Audit Committee is presently comprised of Richard S.
Hickok, Jules Zimmerman and Martin D. Fife. The Audit Committee held one (1)
meeting during 1996. The Compensation Committee reviews compensation issues
relating to executive management and makes recommendations with respect

                                       30

<PAGE>




thereto to the Board of Directors. The Compensation Committee is presently
comprised of Jules Zimmerman, Richard Hickok, Martin Fife and Craig Fields. The
Executive Committee exercises all the powers and authority of the Board of
Directors in the management and affairs of the Company between meetings of the
Board of Directors, to the extent permitted by law. However, the Executive
Committee may not take any action unless a meeting of the Board of Directors
cannot be convened within three days after notice thereof. The current members
of the Executive Committee are Martin D. Fife, Martin Holleran and Marvin
Maslow. The Company formed a Special Executive Committee in 1995 to deal with
all matters relative to certain litigations in which the Company is a defendant.
The Special Executive Committee is not empowered to make any decisions on behalf
of the Board of Directors. The Special Executive Committee is comprised of
Marvin Maslow, Martin Holleran, Martin Fife, Jules Zimmerman, Richard Hickok and
Craig Fields. The Special Executive Committee held one (1) meeting in 1996. The
Board also held four (4) regular and six (6) special meetings in 1996.

         Except for Mssrs. Fields and Lipper, each member of the Board of
Directors who is not an officer or employee of the Company receives $8,000 per
year, plus $1,000 for each Board of Directors or committee meetings attended for
serving as Director. In 1996, Dr. Craigs Fields received an aggregate $ 24,000
from the Company, and Mr. Arther Lipper, and his affiliated entities, received
an aggregate of $ 50,000 from the Company. These sums include payments to Mssrs.
Fields and Lipper by the Company for various consulting services provided by
each of them to the Company in 1996, which services were in addition to their
duties as an outside director. The Company reimburses its Directors for
out-of-pocket expenses incurred in connection with meetings of the Board of
Directors or committee meetings attended. There are no family relationships
among any Directors or officers.



Compliance with Section 16(a) of the Exchange Act

         Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of
its Common Stock, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission (the "Commission") and the National
Association of Securities Dealers, Inc. Officers, directors and greater than ten
percent stockholders are required by the Commission to furnish the Company with
copies of all Section 16(a) forms that they file.


                                       31

<PAGE>




         Based solely on its review of the copies of such forms received by it,
or written representations from certain reporting persons that no reports on
Form 5 were required for those persons, the Company believes that during 1993
all filing requirements applicable to its officers, directors and greater than
ten percent stockholders were complied with.


                                       32

<PAGE>




 Executive Compensation

     The following table sets forth the cash compensation paid by the Company to
executive officers of the Company for the year ended December 31, 1996 whose
total annual salary and bonus exceeded $100,000:

     SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                                                                            Long Term Compensation
                                                                          --------------------------------------------------
                                     Annual Compensation                                               Awards        Payouts
                           -------------------------------------------------------------------------------------------------
 (a)                       (b)      (c)           (d)         (e)         (f)         (g)              (h)           (i)
<S>                         <C>     <C>           <C>         <C>         <C>         <C>               <C>         <C>
                                                              Other       Re-                                        All
                                                              Annual      stricted                                   other
                                                              Compen-     Stock                         LTIP         Compen-
Name and                                                      sation      Awards      Options/          Payouts      sation
Principal Position         Year     Salary($)     Bonus($)       $           $        SARs(#)              $             $
------------------         ----     --------      -------    ---------   ---------   ---------          --------     --------
 Marvin Maslow,(1)         1996     $150,000      $ -0-       $ -0-       $ -0-      1,000,000(1)      $ -0-        $100,000(2)
  Chief Executive          1995     $150,000      $ -0-       $ -0-       $ -0-           -0-          $ -0-        $ -0-
  Officer, Chairman        1994     $150,000      $ -0-       $ -0-       $ -0-        375,000         $ -0-        $ -0-
  of the Board of
  Directors

 Martin Holleran,          1996     $180,000      $ -0-       $ -0-       $ -0-      1,000,000(4)      $ -0-        $100,000(5)
  President, Chief         1995     $180,000      $ -0-       $ -0-       $ -0-         50,000(3)      $ -0-        $ -0-
  Operating Officer        1994     $180,000      $ -0-       $ -0-       $ -0-(3)     250,000         $ -0-        $ -0-
  and Director

 Sherman Langer            1996     $130,000      $30,000     $ -0-       $ -0-        100,000         $ -0-        $ -0-
  Senior Vice
  President of
  Marketing and
  Sales and Director
</TABLE>


                                       33

<PAGE>

------------------

(1) On March 12, 1996, the Company cancelled 187,500 unvested stock options
    granted in 1994 having an exercise price of $5.375 per share and granted Mr.
    Maslow 1,000,000 non-qualified stock options having an exercise price of
    $4.375 per share, which exercise price was subsequently reduced to $3.00 on
    January 9, 1997. To date, 333,333 of these options have vested, and the
    balance vest upon the Company achieving certain milestones.

(2) Represents a one-time cost-of-living adjustment made to Mr. Maslow's July
    1990 employment agreement with the Company. Mr. Maslow also has (i) a $2,000
    per month non-accountable expense allowance for business and entertaining;
    and (ii) a car allowance with respect to monthly lease and garage payments
    for one (1) automobile. In addition, in accordance with Mr. Maslow's new
    executive employment agreement entered into with the Company as of March 1,
    1997, Mr. Maslow is entitled to other expense reimbursements. Also pursuant
    to Mr. Maslow's new employment agreement, the Company has agreed to
    maintain, at its expense, a $1,000,000 life insurance policy on Mr. Maslow's
    life for the benefit of his wife.

(3) Mr. Holleran had a restricted stock award of 50,000 shares of common stock
    pursuant to his Employment Agreement with the Company dated November 1,
    1993. The vesting schedule relative to all 50,000 shares of restricted
    common stock was amended by the Board of Directors on October 21, 1994.
    Fifty percent (50%) of such 50,000 shares previously vested in annual
    increments of 1/3 each commencing November 1, 1994, and the other fifty
    percent (50%) of such shares vested in annual increments of 1/3 each,
    commencing November 1, 1994, provided that certain performance criteria were
    met. All such 50,000 shares vested on January 1, 1995. In December 1995, Mr.
    Holleran's Employment Agreement with the Company was amended to cancel the
    restricted stock award and replace it with 50,000 non-qualified stock
    options exercisable at the then current market price of $4.375 per share.

(4) On March 12, 1996, the Company cancelled 125,000 unvested stock options
    granted in 1994 having an exercise price of $5.375 per share and granted Mr.
    Holleran 1,000,000 non-qualified stock options having an exercise price of
    $4.375 per share, which exercise price was subsequently reduced to $3.00 on
    January 9, 1997. To date, 333,333 of these options have vested, and the
    balance vest upon the Company achieving certain milestones.

                                       34

<PAGE>




(5) Represents a one-time cost-of-living adjustment made to Mr. Holleran's 1993
    employment agreement with the Company. In addition, in accordance with Mr.
    Holleran's new executive employment agreement entered into with the Company
    as of March 1, 1997, Mr. Holleran is entitled to other expense
    reimbursements. Also pursuant to his new employment agreement, the Company
    has agreed with Mr. Holleran to maintain, at its expense, a $1,000,000 life
    insurance policy on Mr. Holleran's life, for the benefit of his wife.

                                       35

<PAGE>




               AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                      AND FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
 (a)                        (b)                (c)                    (d)                           (e)

                                                                                                    Value of
                                                                      Number of                     Unexercised
                                                                      Unexercised                   In-the-Money
                                                                      Options/SARs                  Options/SARs
                                                                      at Fiscal                     at Fiscal
                                                                      Year End (#)                  Year End ($)
                            Shares
 Name and                   Acquired on         Value                 Exercisable/                  Exercisable/
 Principal Position         Exercise (#)        Realized ($)          Unexercisable                 Unexercisable
-------------------         ------------        ------------          -------------                 -------------
<S>                            <C>              <C>                      <C>                           <C>
 Marvin Maslow                 -0-              N/A                   708,333 Exercisable/          0/0
  Chief Executive                                                     666,664 Unexercisable
  Officer, Chairman
  of the Board of
  Directors

 Martin Holleran,              -0-              N/A                   583,333 Exercisable/          0/0
  President and Chief                                                 666,664 Unexercisable
  Operating Officer

 Martin Fife,                  -0-              N/A                   100,000 Exercisable/          0/0
  Vice Chairman of the                                                50,000 Unexercisable
  Board of Directors

 Jules Zimmerman,              -0-              N/A                    70,000 Exercisable/          0/0
  Chief Financial                                                      50,000 Unexercisable
  Officer and Director
</TABLE>

                                       36

<PAGE>



               AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                      AND FISCAL YEAR END OPTION/SAR VALUES

<TABLE>
<CAPTION>
 (a)                        (b)                (c)                    (d)                           (e)

                                                                                                    Value of
                                                                      Number of                     Unexercised
                                                                      Unexercised                   In-the-Money
                                                                      Options/SARs                  Options/SARs
                                                                      at Fiscal                     at Fiscal
                                                                      Year End (#)                  Year End ($)
                            Shares
 Name and                   Acquired on         Value                 Exercisable/                  Exercisable/
 Principal Position         Exercise (#)        Realized ($)          Unexercisable                 Unexercisable
-------------------         ------------        ------------          -------------                 -------------
<S>                            <C>              <C>                      <C>                           <C>
 (cont'd)

 Sherman Langer,               -0-              N/A                   152,000 Exercisable           $7,875/0
  Senior Vice President
  of Marketing and
  Sales and Director

 Craig Fields,                 -0-              N/A                    83,332 Exercisable/          0/0
  Director                                                             66,668 Unexercisable

 Richard Hickok,               -0-              N/A                    50,000 Exercisable/          0/0
  Director                                                             50,000 Unexercisable

 Arthur Lipper,                -0-              N/A                    0      Exercisable/          0/0
  Director                                                             0      Unexercisable

</TABLE>


                                       37

<PAGE>




Executive Employment Agreements

      The Company entered into an employment agreement in July 1990 with Marvin
Maslow to serve as Chief Executive Officer of the Company. Mr. Maslow's
employment agreement, which was to initially expire in July, 1995, was
automatically extended in January 1995 by its terms for an additional 30 months.
That employment agreement was terminated and replaced with a new executive
employment agreement effective March 1, 1997. Under the terms of his new
employment agreement, Mr. Maslow receives the same salary and benefits that he
received under his old employment agreement which were a salary of $150,000 per
year, a $2,000 per month non-accountable expenses allowance, and a car
allowance. In addition, pursuant to his new employment agreement, Mr. Maslow is
entitled to other expense reimbursements. Finally, the Company is providing a
$1,000,000 life insurance policy on Mr. Maslow's life for the benefit of his
wife. Mr. Maslow is required to devote substantially all of his time to the
business of the Company. The term of Mr. Maslow's new employment agreement is
six (6) years with a two-year extension, and it contains change in control
provisions. The Company provides for a $ 500,000 life insurance policy for the
benefit of the Company.

     The Company entered into a three (3) year employment agreement with Mr.
Martin Holleran in November 1993 to serve as the Company's President and Chief
Operating Officer at a salary of $180,000 per year. Upon the expiration of this
agreement (which was orally extended by the parties subsequent to its term), the
Company entered into a new executive employment agreement with Mr. Holleran
effective March 1, 1997. Under his new executive employment agreement, Mr.
Holleran receives a salary of $220,000 per year and is required to devote all of
his time to the business of the Company. Mr. Holleran also is entitled to other
expense reimbursements. In addition, the Company provides to Mr. Holleran a
$1,000,000 life insurance policy for the benefit of his wife. The term of Mr.
Holleran's new executive employment agreement is six (6) years with a two-year
extension, and it contains change in control provisions. The Company provides
for a $ 1,000,000 life insurance policy for the benefit of the COmpany.

     Effective January 1, 1997, the Company entered into an executive employment
agreement with Mr. Sherman Langer. The term of Mr. Langer's employment agreement
is three (3) years and provides for a salary of $165,000 per year and also
contains certain change in control provisions.

         Each of Messrs. Maslow, Holleran and Langer have agreed not to compete
with the Company during the term of his respective

                                       38

<PAGE>




employment agreement or for a period of two years after the termination thereof.
All of the executive employment agreements contain termination for cause
provisions.

     Subsequent to the closing of the Company's initial public offering in 1990,
the Company retained Jules Zimmerman as Chief Financial Officer of the Company.
In connection therewith, the Company entered into a consulting agreement with
Mr. Zimmerman and Hickok Associates whereby the Company is billed on an hourly
basis for the work performed by Mr. Zimmerman. Hickok Associates discontinued
operations as of December 31, 1996. Since that time Mr. Zimmerman has continued
to provide his services to the Company as Chief Financial Officer on an hourly
basis.

Indemnification Agreements

     The Company has entered into an Indemnification Agreement with each of its
Directors and any officer, employee, agent or fiduciary designated by the Board
of Directors which provides that the Company indemnify the Director or other
party thereto to the fullest extent permitted by applicable law. The agreement
includes indemnification, to the extent permitted by applicable law, against
expenses, including reasonable attorneys' fees, judgments, penalties, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with any civil or criminal action or administrative proceeding arising out of
the indemnitee's performance of his duties as a Director or officer of the
Company. Such indemnification is available if the indemnitee acted in good faith
and in a manner he reasonably believed to be in, or not opposed to, the best
interests of the Company, and, with respect to any criminal action, had no
reasonable cause to believe his conduct was unlawful.

     Under the Indemnification Agreement, the entitlement of a Director or
officer to indemnification will be determined by a majority vote of a quorum of
disinterested Directors, or if such quorum either is not obtainable or so
directs, by independent counsel or by the stockholders of the Company, as
determined by such disinterested Directors. If a change of control of the
Company has occurred, the entitlement of such Director or officer to
indemnification shall be determined by independent counsel selected by such
Director or officer, unless such Director or officer requests that either the
Board or the stockholders make such determination.

     Each Indemnification Agreement will require the Company to advance
litigation expenses at the request of the Director or officer who is a party
thereto whether prior to or after final resolution of a proceeding, provided
that he undertakes to repay such advances if it is ultimately determined that he
is not

                                       39

<PAGE>




entitled to indemnification for his expense. The advance of litigation expenses
will thereby be mandatory upon satisfaction of certain conditions by such
Director or officer.

     The Company has entered into an Indemnification Agreement with all of its
Directors and officers. In addition, upon Dr. Fields' joining the Company's
Board of Directors, the Company also agreed to indemnify Dr. Fields with respect
to the aforementioned litigation relating to Tamarack during the period prior to
Dr. Fields' joining the Company's Board of Directors. The Company has obtained
officers' and directors' liability insurance which provides a maximum of
$4,000,000 of coverage, subject to a $100,000 deductible payable by the Company
except under certain circumstances for securities related matters in which case
the deductible is $200,000. Any payments made by the Company under an
Indemnification Agreement which are not covered by the insurance policy may have
an adverse impact on the Company's earnings.

Stock Option Plans and Agreements

     Incentive Option Plan - In February 1990, the Directors of the Company
adopted and the stockholders of the Company approved the adoption of the
Company's 1990 Incentive Stock Option and Appreciation Plan which was amended in
June and July 1990. The purpose of the Incentive Option Plan is to enable the
Company to encourage key employees and Directors to contribute to the success of
the Company by granting such employees and Directors incentive stock options
("ISOs"), as well as non-qualified options and options and stock appreciation
rights ("SARs"). In November of 1993, a majority of the stockholders of the
issued and outstanding shares of common stock voted in favor of increasing the
number of shares with respect to which options and SARs may be granted under the
Incentive Option Plan from 400,000 to 1,000,000.

     The Incentive Option Plan will be administered by the Board of Directors
which will determine, in its discretion, among other things, the recipients of
grants, whether a grant will consist of ISOs, non-qualified options or SARs (in
tandem with an option or freestanding) or a combination thereof, and the number
of shares to be subject to such options and SARs.

     The Incentive Option Plan provides for the granting of ISOs to purchase
Common Stock at an exercise price not less than the fair market value of the
Common Stock on the date the option is granted. Non-qualified options and
freestanding SARs may be granted with any exercise price. SARs granted in tandem
with an option have the same exercise price as the related option.


                                       40

<PAGE>




     The total number of shares with respect to which options and SARs may be
granted under the Incentive Option Plan is 1,000,000. ISOs may not be granted to
an individual to the extent that in the calendar year in which such ISOs first
become exercisable the shares subject to such ISOs have a fair market value on
the date of grant in excess of $100,000. No option or SAR may be granted under
the incentive Option Plan after February 20, 2000 and no option or SAR may be
outstanding for more than ten years after its grant.

     Upon the exercise of an option, the holder must make payment of the full
exercise price. Such payment may be made in cash or in shares of Common Stock
(based on the fair market value of the Common Stock on the date prior to
exercise), or in a combination of both. The Company may lend to the holder of an
option funds sufficient to pay the exercise price, subject to certain
limitations. SARs may be settled, in the Board of Directors' discretion, in
cash, Common Stock, or in a combination of cash and Stock. The exercise of SARs
cancels the corresponding number of shares subject to the related option, if
any, and the exercise of an option cancels any associated SARs. Subject to
certain exceptions, options and SARs may be exercised any time up to three
months after termination of the holder's employment.

     The Incentive Option Plan may be terminated or amended at any time by the
Board of Directors, except that, without stockholder approval, the Incentive
Option Plan may not be amended to increase the number of shares subject to the
Incentive Option Plan, change the class of persons eligible to receive options
or SARs under the Incentive Option Plan or materially increase the benefits of
participants.

     To date no options or SARs have been granted under the Incentive Option
Plan. No determinations have been made regarding the persons to whom options or
SARs will be granted in the future, the number of shares which will be subject
to such options or SARs or the exercise prices to be fixed with respect to any
option or SAR.

     Non-Qualified Option Plan - In February 1990, the Directors and
stockholders of the Company adopted the 1990 Non-Qualified Stock Option Plan
which was amended in June and July 1990. The purpose of the Non-Qualified Option
Plan is to enable the Company to encourage key employees, Directors and
consultants to contribute to the success of the Company by granting such
employees, Directors and consultants non-qualified options. The Non-Qualified
Option Plan will be administered by the Board of Directors in the same manner as
the Incentive Option Plan.


                                       41

<PAGE>




     The Non-Qualified Option Plan provides for the granting of non-qualified
options at such exercise price as may be determined by the Board of Directors,
in its discretion. In November of 1993, a majority of the stockholders of the
issued and outstanding shares of common stock voted in favor of increasing the
number of shares with respect to which options and SARs may be granted under the
Incentive Option Plan from 400,000 to 1,000,000 and with respect to which
options may be granted under the Non-Qualified Plan from 1,500,000 to 5,000,000.

     Upon the exercise of an option, the holder must make payment of the full
exercise price. Such payment may be made in cash or in shares of Common Stock
(based on the fair market value of the Common Stock on the date prior to
exercise), or in a combination of both. The Company may lend to the holder of an
option funds sufficient to pay the exercise price, subject to certain
limitations. Subject to certain exceptions, options may be exercised any time up
to three months after termination of the holder's employment.

     The Non-Qualified Option Plan may be terminated or amended at any time by
the Board of Directors, except that, without stockholder approval, the
Non-Qualified Option Plan may not be amended to increase the number of shares
subject to the Non-Qualified Option Plan, change the class of persons eligible
to receive options under the Non-Qualified Option Plan or materially increase
the benefits of participants.

     As of December 31, 1996, an aggregate of 4,208,833 options have been
granted under the Non-Qualified Option Plan. As of December 31, 1996, 230,000
non-qualified options have been exercised.

                                       42

<PAGE>




Performance Graph

     [To be inserted]

                                       43

<PAGE>




Item 12. SECURITY OWNERSHIP OF CERTAIN
         BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information, as of March 13, 1997,
known to the Company regarding beneficial ownership of the Company's Common
Stock by: (i) any holder of more than five percent of the outstanding shares;
(ii) the Company's directors; and (iii) the directors and officers of the
Company as a group: <TABLE> <CAPTION>
                                Shares             Percentage         Shares           Percentage
                                of                 (%) of             of               (%) of
                                Common             Total              Preferred        Total
                                Stock              Common             Stock            Preferred
Name                            Owned(1)(2)        Stock(3)           Owned            Stock
----                            -----------        ----------         ---------        ----------
<S>            <C>                <C>               <C>                 <C>               <C>
Martin D. Fife (4)                261,668           1.6%              - 0 -             - 0 -
 405 Lexington Avenue
 New York, NY 10174

Richard S. Hickok (5)             105,000            .6%              - 0 -             - 0 -
 11 Deep Pond Circle
 South Orleans, MA 02662

Marvin Maslow (6)               1,398,323           8.5%             25,000            7.1%
 Projectavision, Inc.
 Two Penn Plaza
 Suite 640
 New York, NY  10121

Jules Zimmerman (7)               120,000            .7%              - 0 -             - 0 -
 20 West 64th Street
 New York, NY 10023

Martin Holleran (8)             1,300,000           7.9%              - 0 -             - 0 -
 Projectavision, Inc.
 Two Penn Plaza
 Suite 640
 New York, NY  10121

Dr. Craig I. Fields (9)           150,000            .9%              - 0 -             - 0 -
 1101 30th Street, N.W.
 Suite 500
 Washington, D.C.  20007

Sherman Langer (10)               152,000            .9%              - 0 -             - 0 -
 Projectavision, Inc.
 Two Penn Plaza
 Suite 640
 New York, NY  10121
</TABLE>

                                       44

<PAGE>


<TABLE>
<CAPTION>

<S>                               <C>                       <C>         <C>               <C>
Arthur Lipper, III (11)           100,000                  -0-        - 0 -             - 0 -
 14911 Carninito Ledera
 Del Mar, CA 92014

All Directors, Nominees
  and Officers Group
  (consisting of
  7 persons)(4)(5)(6)(7)
  (8)(9)(10)(11)                3,486,991          17.6%             25,000            7.1%
</TABLE>

------------

(1)  Except as otherwise indicated, all shares of Common Stock are beneficially
     owned, and sole investment and voting power is held, by the persons named.

(2)  Gives effect to the reverse stock split of one-for-11.3467611 shares of
     Common Stock in February, 1990, two-for-three shares of Common Stock in
     July, 1990, and two-for-one stock split in March, 1992.

(3)  Outstanding Common Stock does not include any shares of Common Stock
     issuable upon the exercise of any outstanding options or warrants.

(4)  Includes 150,000 non-qualified options granted to and beneficially owned by
     Mr. Fife to acquire 150,000 shares of Common Stock. Does not include (i)
     100 shares of non-voting Series A Preferred Stock issued to Mr. Fife in
     connection with the Merger.

(5)  Includes 100,000 non-qualified options granted to and beneficially owned by
     Mr. Hickok to acquire an aggregate of 100,000 shares of Common Stock of the
     Company.

(6)  Includes (i) 1,375,000 shares of Common Stock subject to 1,375,000
     non-qualified stock options. Does not include 4,038 shares of Common Stock
     owned by Mr. Maslow's adult child. Mr. Maslow disclaims beneficial
     ownership of the shares of Common Stock owned by his adult child. Mr.
     Maslow received 25,000 shares of Series B Preferred Stock on May 15, 1992
     for services rendered in the second quarter of 1992. Mr. Maslow has agreed
     with the Company that he shall not sell any of the shares of Series B
     Preferred Stock until the earlier of (i) the Company having entered into a
     definitive revenue generating agreement with a major manufacturer, licensor
     or distributor with respect to the licensing of the company's technology,
     or (ii) the company has effected an acquisition of another company, license
     or technology that will result in the immediate realization of revenues on
     the Company's behalf. In the event that neither

                                       45

<PAGE>




     (i) or (ii) shall have occurred on or before May 15, 1997, Mr. Maslow has
     agreed to return all of their shares of Series B Preferred Stock to the
     Company.

(7)  Includes 120,000 non-qualified options granted to and beneficially owned by
     Mr. Zimmerman to acquire 120,000 shares of the Company's Common Stock.

(8)  Includes 1,250,000 non-qualified options granted to and beneficially owned
     by Mr. Holleran to acquire 1,250,000 shares of the Company's Common Stock.

(9)  Includes 150,000 non-qualified options granted to and beneficially owned by
     Dr. Fields to acquire 150,000 shares of the Company's Common Stock.

(10) Includes 152,000 non-qualified options granted to and beneficially owned by
     Mr. Langer to acquire 152,000 shares of the Company's Common Stock.

(11) Includes 100,000 non-qualified options granted to Mr. Lipper (or his
     affiliated entities) and beneficially owned by Mr. Lipper (or his
     affiliated companies) to acquire 100,000 shares of the Company's Common
     Stock.



                                       46

<PAGE>




Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Through July 31, 1995 the Company made advances of approximately $218,000
to another entity, whose president is the brother of Martin Holleran, the
Company's President and Chief Operating Officer, in contemplation of making an
investment in such other entity. The Company ultimately did not make such an
investment and the advance was fully reserved for on the Company's financial
statements as of December 31, 1995. In November, 1996, $109,166 of the advance
was repaid to the Company as a final settlement of amounts advanced.


                                       47

<PAGE>




                                     PART IV

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

(a) (1)  Financial Statements

     The following financial statements of the Company are incorporated herein
by reference to Part II, Item 8:

Independent Auditors' Report                                               F - 1

Balance Sheets at December 31, 1995 and 1996                               F - 2

Statements of Operations for the Years Ended December 31, 1994, December 31,
 1995 and December 31, 1996 and the Period September 9, 1988 (Date of
 Incorporation)
 to December 31, 1996                                                      F - 3

Statements of Stockholders' Equity                                         F - 4

Statements of Cash Flows for the Years Ended December 31, 1994, December 31,
 1995 and December 31, 1996 and for the Period September 9, 1988 (Date of
 Incorporation)
 to December 31, 1996                                                      F - 6

Notes to Financial Statements                                              F - 7

(a) (2)       Financial Statement Schedules

     All schedules are omitted because they are not applicable or the
information required is included in the financial statements and notes thereto.

(a) (3)       Exhibits

     The following is a list of exhibits filed as part of the Annual Report on
Form 10-K for the fiscal year ended December 31, 1996.

Exhibit No.

3.2.1         Certificate of Designation of Convertible Series C
              Preferred Stock

3.2.2         Certificate of Designation of Convertible Series D
              Preferred Stock


                                       48

<PAGE>




10.50         Executive Employment Agreement of Sherman Langer dated
              January 1, 1997

10.51         Executive Employment Agreement of Martin Holleran dated
              March 1, 1997

10.52         Executive Employment Agreement of Marvin Maslow dated
              March 1, 1997

27            Financial Data Schedule



                                       49


<PAGE>

                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors of Projectavision, Inc.:
   
We have audited the accompanying balance sheets of Projectavision, Inc. (a
development stage company) (the "Company") as of December 31, 1995 and 1996, and
the related statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1996, and for the
period September 9, 1988 (date of incorporation) to December 31, 1996. 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 did not audit the financial statements of Tamarack Storage
Devices, Inc. for the year ended December 31, 1994, the Company's investment in
which was accounted for by use of the equity method. The Company's equity of
$843,750 in the net loss of Tamarack Storage Devices, Inc. for the year then
ended is included in the accompanying financial statements. The financial
statements of Tamarack Storaage Devices, Inc. as of December 31, 1994 were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for such company, is
based solely on the report of such other auditors.

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, based on our audits and the report of the other auditors, such
financial statements present fairly, in all material respects, the financial
position of Projectavision, Inc. as of December 31, 1995 and 1996 and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996 and for the period September 9, 1988 (date of
incorporation) to December 31, 1996 in conformity with generally accepted
accounting principles.

As discussed in Note 14 to the financial statements, the Company is a defendant
in several lawsuits alleging, among other complaints, breaches of employment,
patent assignment agreements and wrongful termination, claiming actual and
punitive damages. In January 1997, the Court in one of these suits ordered that
a receiver be appointed to protect whatever interest, if, any, the plaintiff 
may be able to prove in inventions assigned to the Company.
    

The Company is in the development stage as of December 31, 1996. As discussed in
Note 1 to the financial statements, the attainment of profitable operations is
dependent upon future events, including achieving a level of revenue adequate to
support the Company's then cost structure.

   
As discussed in Note 15 to the financial statements, the Company is restating
its 1996 financial statements.



/s/ Deloitte & Touche LLP
--------------------------------
New York, New York
March 25, 1997 (February 6, 1998
  as to Note 15)
    


                                       F-1

<PAGE>


PROJECTAVISION, INC
(A Development Stage Company)

<TABLE>
<CAPTION>
BALANCE SHEETS
------------------------------------------------------------------------------------------------------------------

                                                                                          December 31,
                                                                            --------------------------------------
A S S E T S                                                                         1995                 1996
<S>                                                                             <C>                   <C>
CURRENT ASSETS:
     Cash and cash equivalents                                                   $ 3,491,982          $ 1,060,283
     Investments                                                                           -            3,437,386
     Other current assets                                                            335,153              851,198
                                                                            -----------------   ------------------

        Total Current Assets                                                       3,827,135            5,348,867

PROPERTY AND EQUIPMENT
     Furniture, fixtures and equipment                                                68,422               68,422
     Tooling                                                                               0            4,208,005
     Computers and software                                                          116,155              226,019
     Leasehold improvements                                                          180,795              185,030
                                                                            -----------------   ------------------
                                                                                     365,371            4,687,476
     Less:  Accumulated depreciation                                                 151,612              242,896
                                                                            -----------------   ------------------
        Property and equipment, net                                                  213,759            4,444,580


OTHER ASSETS                                                                         127,521              339,041
                                                                            -----------------   ------------------

        TOTAL ASSETS                                                              $4,168,415          $10,132,488
                                                                            =================   ==================

L I A B I L I T I E S   A N D   S T O C K H O L D E R S'   E Q U I T Y

CURRENT LIABILITIES:
     Accounts payable                                                             $  485,710          $ 1,718,004
     Accrued accounts payable                                                              -              209,476
                                                                            -----------------   ------------------
        Total Current Liabilities                                                    485,710            1,927,480
                                                                            -----------------   ------------------


LONG-TERM CONVERTIBLE DEBT - NET                                                           -            1,762,963

COMMITMENTS AND CONTINGENCIES                                                              -                    -

STOCKHOLDERS' EQUITY
     Preferred stocks
       Series A Preferred Stock, $.01 par value 1,000,000 shares authorized, 100
          shares issued
          ($100,000 liquidation preference)                                                -                    -
       Series B Preferred Stock, $.01 par value 1,000,000 shares authorized,
          385,982 shares outstanding
          ($ 1,929,910 liquidation preference)                                         3,859                3,859
       Series C Preferred Stock, $.001 par value
          1,000,000 shares authorized; 7,500 shares issued;                                -                    8
          ($100,000 liquidation preference)
     Common stock $.0001 par value - 30,000,000 shares
       authorized; 12,388,790 and 14,229,401 issued and
       outstanding in 1995 and 1996 respectively                                       1,239                1,423
     Additional paid-in capital                                                   24,318,651           40,594,023
     Deficit accumulated during the development stage                            (20,641,044)         (34,157,268)
                                                                            -----------------   ------------------
        Total Stockholders' Equity                                                 3,682,705            6,442,045
                                                                            -----------------   ------------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                        $4,168,415          $10,132,488
                                                                            =================   ==================
</TABLE>
See notes to financial statements

                                       F-2

<PAGE>

PROJECTAVISION, INC
(A Development Stage Company)
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
------------------------------------------------------------------------------------------------------------------------------------

                                                                                                              For the Period
                                                                                                                September 9,
                                                                                                               1988 (Date of
                                                                      Years Ended December 31,                 Incorporation)
                                                         ------------------------------------------------      to December 31,
                                                             1994               1995              1996               1996
<S>                                                       <C>              <C>               <C>                <C>
REVENUE                                                    $-              $     200,000     $    150,000       $  1,455,000
                                                         ------------      -------------     ------------       ------------
OPERATING EXPENSES
      General and administrative                            2,132,222          1,562,746        2,179,132          9,368,762
      Salaries                                                804,111            778,279        1,266,287          4,825,856
      Legal fees                                              152,000          1,001,737        1,017,909          3,038,058
      Depreciation                                             62,050             73,739           91,284            298,334
      Research and development                                827,660            608,651        2,389,329          5,811,252
      Patent and license expense                              122,280            243,229          362,967          1,488,052
                                                         ------------      -------------     ------------       ------------
Total Operating Expenses                                    4,100,323          4,268,381        7,306,908         24,830,314
                                                         ------------      -------------     ------------       ------------
LOSS FROM OPERATIONS                                       (4,100,323)        (4,068,381)      (7,156,908)       (23,375,314)
                                                         ------------      -------------     ------------       ------------
OTHER INCOME (EXPENSE)
      (Provision for)/recovery of
               allowances on advances                        (173,409)          (125,017)         109,166           (189,260)
      Interest income                                         333,146            362,107          458,979          1,506,860
      Interest expense - 8% Debentures                                                           (352,049)          (378,719)
      Interest expense - Amortization of debt expense               -                  -       (3,868,016)        (3,868,016)
                                                         ------------      -------------     ------------       ------------
Other income/(expense) - Net                                  159,737            237,090       (3,651,920)        (2,929,135)
                                                         ------------      -------------     ------------       ------------
Loss before Equity in Loss of
   Unconsolidated Affiliate                                (3,940,586)        (3,831,291)     (10,808,828)       (26,304,447)

Equity in Loss of Unconsolidated Affiliate                 (1,691,697)        (2,640,347)         (72,065)        (4,897,314)
                                                         ------------      -------------     ------------       ------------
Net Loss                                                   (5,632,283)        (6,471,638)     (10,880,893)       (31,201,763)

Dividends on Preferred Stock                                        -                  -       (2,635,331)        (2,635,331)
                                                         ------------      -------------     ------------       ------------
Net Loss Attributable to Common Shareholders             $ (5,632,283)       $(6,471,638)    $(13,516,224)      $(33,837,094)
                                                         ============      =============     ============       ============

Net Loss per  Share Attributable to Common Shareholders         $(.48)             $(.52)           $(.99)
                                                         ============      =============     ============

Average Number of Shares                                   11,679,932         12,390,962       13,586,705
                                                         ============      =============     ============
</TABLE>
See Notes to Financial Statements

                                       F-3

<PAGE>


PROJECTAVISION, INC.
(A Developed Stage Company)
<TABLE>
<CAPTION>
STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------------------------------


                                                   Series A              Series B
                                                Preferred Stock       Preferred Stock            Common Stock Proceeds
                                             -------------------    -----------------      ----------------------------------
                                             Shares       Amount     Shares    Amount       Shares      Per Share      Amount
<S>                                          <C>          <C>        <C>       <C>          <C>         <C>             <C>
ISSUANCE OF COMMON STOCK
    TO FOUNDERS FOR CASH                                                                   3,849,544    $ .00002       $ 106
ISSUANCE OF COMMON STOCK
    TO INVESTORS FOR CASH                                                                     98,706        1.01         289
MERGER WITH DKY, INC.
    Issuance of preferred stock               100          NIL
    Distribution to DKY stockholders
NET LOSS
                                             ------       ------                          ----------                 -------
BALANCE, DECEMBER 31, 1988                    100          NIL                             3,948,250        1.32         395

ISSUANCE OF COMMON STOCK
    TO INVESTORS FOR CASH
    (Net of private placement costs)                                                         518,416        1.32          52
NET LOSS
                                             ------       ------                          ----------                 -------
BALANCE, DECEMBER 31, 1989                    100          NIL                             4,466,666                     447

REVERSAL OF ACCRUAL FOR
    PRIVATE PLACEMENT COSTS
INITIAL PUBLIC OFFERING
     (Net of Public offering costs)                                                        1,600,000        1.86         160
NET LOSS
                                             ------       ------                          ----------                 -------
BALANCE, DECEMBER 31, 1990                    100          NIL                             6,066,666                     607

ISSUANCE OF COMMON STOCK FOR
    SERVICES                                                                                 281,251     .83 - 1.24       27
NET LOSS
                                             ------       ------                          ----------                 -------
BALANCE DECEMBER 31, 1991                     100          NIL                             6,347,917                     634

ISSUANCE OF COMMON
    STOCK FOR CONSULTING FEES                                                                200,000         1.4          20
SSUANCE OF COMMON
    STOCK FOR CASH                                                                           463,793       2.14-2.70      47
ISSUANCE OF SERIES B PREFERRED
    STOCK FOR SALARIES                                               80,000    $  800
ISSUANCE OF SERIES B PREFERRED
    STOCK FOR SERVICES                                               88,000       880
ISSUANCE OF COMMON STOCK FOR
    CASH INCLUDING 28,064 SHARES
    ISSUED FOR COMMISSION                                                                    391,700        2.55          39
ISSUANCE OF COMMON STOCK
    FOR WARRANTS AND CASH                                                                    500,000                      50
ISSUANCE OF COMMON AND
    PREFERRED STOCK FOR WARRANTS                                    246,452     2,464      1,483,200                     148
ISSUANCE OF COMMON STOCK
    FOR PATENT COSTS                                                                          37,065                       3
AMORTIZATION OF UNEARNED
    COMPENSATION
NET LOSS
                                             ------       ------    -------    ------     ----------                 -------
 BALANCE, DECEMBER 31, 1992                   100          NIL      414,452     4,144      9,423,675                     942

ISSUANCE OF COMMON STOCK
   FOR BONUS                                                                                   2,000        3.41
ISSUANCE OF COMMON STOCK
   FOR SERVICES                                                                              109,500        3.41          11
ISSUANCE OF COMMON STOCK
FOR STOCK OPTIONS EXERCISED                                                                  230,000                      23
ISSUANCE OF COMMON STOCK FOR CASH                                                            880,230                      89
ISSUANCE OF COMMON STOCK
FOR WARRANTS                                                                                  18,743                       1
AMORTIZATION OF UNEARNED
COMPENSATION
NET LOSS
                                             ------       ------    -------    ------     ----------                 -------
BALANCE, DECEMBER 31, 1993                    100         $NIL      414,452    $4,144     10,664,148                 $ 1,066
                                             ------       ------    -------    ------     ----------                 -------
</TABLE>
See notes to financial statements

                                      F-4


<PAGE>

PROJECTAVISION, INC.
(A Developed Stage Company)
<TABLE>
<CAPTION>
STATEMENTS OF STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------------------------------------------
                                                               Deficit Accumulated
                                                  Additional       During the
                                                   Paid-in         Development         Unearned            Total
                                                   Capital            Stage          Compensation
<S>                                               <C>              <C>               <C>                <C>
ISSUANCE OF COMMON STOCK
    TO FOUNDERS FOR CASH                        $                  $                  $                $       106
ISSUANCE OF COMMON STOCK
    TO INVESTORS FOR CASH                            99,711                                                100,000
MERGER WITH DKY, INC.
    Issuance of preferred stock                    (300,000)                                              (300,000)
    Distribution to DKY stockholders                100,900                                                100,900
NET LOSS                                                             (257,443)                            (257,443)
                                                -----------       -----------         ---------        -----------
BALANCE, DECEMBER 31, 1988                          (99,389)         (257,443)                0           (356,437)

ISSUANCE OF COMMON STOCK
    TO INVESTORS FOR CASH
    (Net of private placement costs)                681,443                                                681,495
NET LOSS                                                             (589,653)                            (589,653)
                                                -----------       -----------         ---------        -----------
BALANCE, DECEMBER 31, 1989                          582,054          (847,096)                0           (264,595)

REVERSAL OF ACCRUAL FOR
    PRIVATE PLACEMENT COSTS                          50,000                                                 50,000
INITIAL PUBLIC OFFERING
     (Net of Public offering costs)               2,977,472                                              2,977,632
NET LOSS                                                           (1,019,315)                          (1,019,315)
                                                -----------       -----------         ---------        -----------
BALANCE, DECEMBER 31, 1990                        3,609,526        (1,866,411)                0          1,743,722

ISSUANCE OF COMMON STOCK FOR
    SERVICES                                        311,223                                                311,251
NET LOSS                                                           (1,617,501)                          (1,617,501)
                                                -----------       -----------         ---------        -----------
BALANCE DECEMBER 31, 1991                         3,920,749        (3,483,912)                0            437,472

ISSUANCE OF COMMON
    STOCK FOR CONSULTING FEES                       287,481                            (287,501)                 0
ISSUANCE OF COMMON
    STOCK FOR CASH                                1,295,053                                              1,295,100
ISSUANCE OF SERIES B PREFERRED
    STOCK FOR SALARIES                              359,200                                                360,000
ISSUANCE OF SERIES B PREFERRED
    STOCK FOR SERVICES                              395,120                             (49,659)           346,341
ISSUANCE OF COMMON STOCK FOR
    CASH INCLUDING 28,064 SHARES
    ISSUED FOR COMMISSION                           999,961                                              1,000,000
ISSUANCE OF COMMON STOCK
    FOR WARRANTS AND CASH                           499,950                                                500,000
ISSUANCE OF COMMON AND
    PREFERRED STOCK FOR WARRANTS                  2,222,188                                              2,224,800
ISSUANCE OF COMMON STOCK
    FOR PATENT COSTS                                 37,062                                                 37,065
AMORTIZATION OF UNEARNED
    COMPENSATION                                                                        147,771            147,771
NET LOSS                                                           (2,002,795)                          (2,002,795)
                                                -----------       -----------         ---------        -----------
 BALANCE, DECEMBER 31, 1992                      10,016,764        (5,486,707)         (189,389)         4,345,754

ISSUANCE OF COMMON STOCK
   FOR BONUS                                          6,825                                                  6,825
ISSUANCE OF COMMON STOCK
   FOR SERVICES                                     373,658                                                373,669
ISSUANCE OF COMMON STOCK
FOR STOCK OPTIONS EXERCISED                         332,977                                                333,000
ISSUANCE OF COMMON STOCK FOR CASH                 5,363,995                                              5,364,084
ISSUANCE OF COMMON STOCK
FOR WARRANTS                                         33,411                                                 33,412
AMORTIZATION OF UNEARNED
COMPENSATION                                                                            183,419            183,419
NET LOSS                                                           (2,730,242)                          (2,730,242)
                                                -----------       -----------         ---------        -----------
BALANCE, DECEMBER 31, 1993                      $16,127,630       $(8,216,949)        $  (5,970)       $ 7,909,921
                                                -----------       -----------         ---------        -----------
</TABLE>


<PAGE>


PROJECTAVISION, INC
(A Development Stage Company)
<TABLE>
<CAPTION>
STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------------------------------------


                                                    SERIES A            SERIES B              SERIES C
                                                PREFERRED STOCK      PREFERRED STOCK       PREFERRED STOCK          COMMON STOCK
                                               SHARES     AMOUNT    SHARES      AMOUNT    SHARES      AMOUNT      SHARES    AMOUNT

<S>                                            <C>        <C>       <C>         <C>        <C>        <C>        <C>         <C>
BALANCE, DECEMBER 31, 1993                       100       NIL      414,452     $4,144        0         NIL     10,664,148   $1,066

ISSUANCE OF COMMON STOCK FOR CASH                                                                                1,370,860      137
ISSUANCE OF COMMON STOCK FOR SERVICES                                                                               52,500        5
EXERCISE OF STOCK OPTIONS                                                                                          103,500       10
ISSUANCE OF COMMON STOCK FOR BONUS                                                                                   4,000        1
ISSUANCE OF COMMON STOCK FOR PREFERRED STOCK DIVIDENDS                                                              27,887        3
EXERCISE OF STOCK WARRANTS                                                                                           1,600        0
PREFERRED STOCK CONVERTED TO COMMON STOCK                            (4,308)       (43)                              4,308        1
UNEARNED COMPENSATION
NET LOSS
                                                -----    ------     -------     ------    -----        ------  ----------    ------
BALANCE, DECEMBER 31, 1994                       100       NIL      410,144      4,101        0         NIL     12,228,803    1,223

ISSUANCE OF COMMON STOCK
    FOR PREFERRED STOCK DIVIDENDS                                                                                   52,795        6
ISSUANCE OF COMMON STOCK
    FOR PREFERRED STOCK                                             (24,162)      (242)                             24,162        2
ISSUANCE OF COMMON STOCK
    FOR PROFESSIONAL SERVICES                                                                                       83,030        8
NET LOSS
                                                -----    ------     -------     ------    -----        ------  ----------    ------
BALANCE, DECEMBER 31, 1995                       100       NIL      385,982      3,859        0         NIL     12,388,790    1,239

ISSUANCE OF COMMON STOCK
    FOR PREFERRED STOCK DIVIDENDS                                                                                   37,666        4
CONVERSION OF 8% DEBENTURES INTO
    COMMON STOCK                                                                                                 1,772,945      177
ISSUANCE OF SERIES C PREFERRED STOCK                                                      7,500           8
SERIES C PREFERRED STOCK PLACEMENT FEE
CASH DIVIDEND ON SERIES C PREFERRED STOCK
EXERCISE OF STOCK OPTIONS                                                                                           30,000        3
AMORTIZATION OF DISCOUNT ON 8% DEBENTURES
AMORTIZATION OF DISCOUNT (DIVIDEND) ON SERIES C PREFERRED STOCK
ISSUE WARRANTS AND OPTIONS FOR SERVICES
NET LOSS
                                                -----    ------     -------     ------    -----        ------  ----------    ------
BALANCE,  DECEMBER 31, 1996                      100       NIL      385,982     $3,859    7,500          $8    14,229,401    $1,423
                                                =====    ======     =======     ======    =====        ======  ==========    ======
</TABLE>

<PAGE>

   
PROJECTAVISION, INC
(A Development Stage Company)
<TABLE>
<CAPTION>
STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                   ACCUMULATED
                                                                   ADDITIONAL     DEFICIT DURING
                                                                    PAID IN        DEVELOPMENT
                                                                    CAPITAL          STAGE              TOTAL
<S>                                                               <C>             <C>               <C>
BALANCE, DECEMBER 31, 1993                                        $16,127,630     $(8,216,949)       $ 7,909,921

ISSUANCE OF COMMON STOCK FOR CASH                                   6,696,280                          6,696,417
ISSUANCE OF COMMON STOCK FOR SERVICES                                 229,245                            229,250
EXERCISE OF STOCK OPTIONS                                             374,365                            374,375
ISSUANCE OF COMMON STOCK FOR BONUS                                     27,999                             28,000
ISSUANCE OF COMMON STOCK FOR PREFERRED STOCK DIVIDENDS                165,778        (165,781)                 0
EXERCISE OF STOCK WARRANTS                                              2,400                              2,400
PREFERRED STOCK CONVERTED TO COMMON STOCK                                  42                                  0
UNEARNED COMPENSATION                                                                                      5,970
NET LOSS                                                                           (5,632,283)        (5,632,283
                                                                  -----------    ------------         ----------
BALANCE, DECEMBER 31, 1994                                         23,623,739     (14,015,013)         9,614,050

ISSUANCE OF COMMON STOCK
    FOR PREFERRED STOCK DIVIDENDS                                     154,388        (154,393)               NIL
ISSUANCE OF COMMON STOCK
    FOR PREFERRED STOCK                                                   240                                  -
ISSUANCE OF COMMON STOCK
    FOR PROFESSIONAL SERVICES                                         540,284                            540,292
NET  LOSS                                                                          (6,471,638)        (6,471,638)
                                                                  -----------    ------------         ----------
BALANCE, DECEMBER 31, 1995                                         24,318,651     (20,641,044)         3,682,705

ISSUANCE OF COMMON STOCK
    FOR PREFERRED STOCK DIVIDENDS                                     154,389        (154,393)                 0
CONVERSION OF 8% DEBENTURES INTO
    COMMON STOCK                                                    3,020,298                          3,020,475
ISSUANCE OF SERIES C PREFERRED STOCK                                7,499,992                          7,500,000
SERIES C PREFERRED STOCK PLACEMENT FEE                               (500,000)                          (500,000)
CASH DIVIDEND ON SERIES C PREFERRED STOCK                                            (123,750)          (123,750)
EXERCISE OF STOCK OPTIONS                                              24,372                             24,375
AMORTIZATION OF DISCOUNT ON 8% DEBENTURES                           3,333,333                          3,333,333
AMORTIZATION OF DISCOUNT (DIVIDEND) ON SERIES C PREFERRED STOCK     2,357,188     ( 2,357,188)                 0
ISSUE WARRANTS AND OPTIONS FOR SERVICES                               385,800                            385,800
NET LOSS                                                                          (10,880,893)       (10,880,893)
                                                                  -----------    ------------        -----------
BALANCE,  DECEMBER 31, 1996                                       $40,594,023    $(34,157,268)       $ 6,442,045
                                                                  ===========    ============        ===========
</TABLE>
    
See notes to financial statements

                                       F-5



<PAGE>


PROJECTAVISION, INC
(A Development Stage Company)
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                   For the Period
                                                                                                                     September 9,
                                                                                                                    1988 (Date of
                                                                              Years Ended December 31,              Incorporation)
                                                                   -------------------------------------------      to December 31,
                                                                       1994            1995           1996                 1996
<S>                                                               <C>              <C>            <C>               <C>
OPERATING ACTIVITIES
     Net loss                                                     $ (5,632,283)   $ (6,471,638)  $(10,880,893)      $ (31,201,763)
     Adjustments to reconcile net loss to net cash used
         in operating activities:
      Amortization and depreciation                                     62,050          73,739      3,959,300           4,166,352
      Issuance of common stock for services                            257,258         540,292              -           1,664,131
      Other noncash operating expenses                                   5,970               -              -             288,216
      Settlement of legal fees                                               -               -              -             (97,287)
      Provision for allowances on advances                             173,409         125,017       (109,166)            189,260
      Allowance taken on investment in unconsolidated affiliate              -       2,129,252              -           2,129,252
      Equity in loss of unconsolidated affiliate                     1,691,697         511,094         72,065           2,768,061
     Asset and liability management
       Changes in operating assets                                    (305,757)       (179,370)      (597,659)         (1,459,699)
       Accounts payable                                               (131,410)        249,237      1,441,770           2,074,137
                                                                  ------------    ------------   ------------       -------------
      Net cash used in operating activities                         (3,879,066)     (3,022,377)    (6,114,583)        (19,479,340)
                                                                  ------------    ------------   ------------       -------------
INVESTING ACTIVITIES
     Capital expenditures                                             (288,312)        (30,397)    (4,322,105)         (4,687,475)
     Investment in and advances to unconsolidated affiliate         (1,500,000)        (94,240)             0          (4,703,440)
     Interest accrued on loan to unconsolidated affiliate              (54,494)        (67,314)             -            (121,808)
     Licenses                                                                -               -              -             (30,000)
     Purchases and redemption of government securities              (2,993,320)      2,993,320     (3,437,386)         (3,437,386)
                                                                  ------------    ------------   ------------       -------------
      Net cash (used in)/provided by investing activities           (4,836,126)      2,801,369     (7,759,491)        (12,980,109)
                                                                  ------------    ------------   ------------       -------------
FINANCING ACTIVITIES
     Proceeds from notes payable                                             -               -     10,000,000          10,800,000
     Private placement costs                                                 -               -       (500,000)           (518,505)
     Repayment of notes payable                                        (22,705)              -     (4,958,250)         (6,080,955)
     Issuance of preferred stock                                             -               -      7,500,000           8,216,341
     Issuance Fees                                                           -               -       (500,000)           (500,000)
     Series C Preferred Stock Dividend                                       -               -       (123,750)           (123,750)
     Proceeds from Issuance of common stock                          6,696,417               -              -          18,617,239
     Proceeds from warrants excercised                                   2,400               -              -           2,760,612
     Proceeds from stock options excercised                            374,375               -         24,375             398,750
     Deferred public offering costs                                          -               -              -             (50,000)
                                                                  ------------    ------------   ------------       -------------
      Net cash provided by financing activities                      7,050,487               0     11,442,375          33,519,732
                                                                  ------------    ------------   ------------       -------------
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS                    (1,664,705)       (221,008)    (2,431,699)          1,060,283

CASH AND CASH EQUIVALENTS-BEGINING OF PERIOD                         5,377,695       3,712,990      3,491,982                   -
                                                                  ------------    ------------   ------------       -------------
CASH AND CASH EQUIVALENTS-END OF PERIOD                           $  3,712,990    $  3,491,982   $  1,060,283       $   1,060,283
                                                                  ============    ============   ============       =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
     Cash paid during the period for interest                     $      2,295    $          -   $    352,049       $     354,344
                                                                  ============    ============   ============       =============
</TABLE>
See notes to financial statements

                                      F-6





<PAGE>

PROJECTAVISION, INC.
(A Development Stage Company)

SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
-------------------------------------------------------------------------------

In 1994, the Company issued 1,500 shares of its common stock for services
rendered. In addition, the Company issued 27,887 shares of its common stock with
a value of $165,781 as payment for the dividend on its series B convertible
preferred stock, 4,000 shares of its common stock for bonuses, and 31,000 shares
of its common stock for services rendered in connection with its private
placements. Also, the Company issued 20,000 shares of its common stock for fees
regarding the exercise of the Company's stock warrants. Finally, the Company
issued 4,308 shares of its common stock for 4,308 shares of its series B
convertible preferred stock.

In 1995, the Company issued 52,782 of its common stock as payment with a value
of $154,393 for the dividend on its series B convertible stock. In addition, the
Company issued 50,000 shares of its common stock for services rendered by an
officer and director of the Company. These shares were canceled by the Company
in December 1995. Also, the Company issued 24,162 shares of its common stock for
24,162 shares of its series B convertible preferred stock, and 83,030 shares of
its common stock for professional services rendered and to be rendered.

In 1996, the Company issued 37,666 shares of its common stock with a value of
$154,393 as payment for the dividend on its series B convertible stock. In
addition, the Company issued 1,772,945 shares of its common stock and paid
$4,958,250 in cash in exchange for retiring $8.4 million of convertible debt.



                                       F-7




<PAGE>

PROJECTAVISION, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

   Organization - Projectavision, Inc. (the "Company"), a Delaware corporation,
   was incorporated on September 9, 1988. The Company has been formed to
   complete development of a unique proprietary solid state projection
   television and related video display technology. In addition, the company
   will seek to identify new high technology and electronic products for
   consumers and commercial customers. The Company is a development stage
   enterprise and has generated no significant revenue from its planned
   principal operations. Management of the Company believes that it has
   sufficient funds to successfully complete its development program and to
   sustain its operations. However, the attainment of profitable operations is
   dependent upon future events including achieving a level of revenue adequate
   to support the Company's then cost structure.

   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.

   Cash Equivalents - The company considers all highly liquid investments with a
   maturity of three months or less when purchased to be cash equivalents.

   Property and Equipment - Property and equipment are stated at cost and
   depreciated on the straight-line basis over the estimated useful lives of the
   respective assets, with the exception of the plastic injection mold design
   and tooling costs for the Digital Home Theater. These latter costs are
   currently being capitalized, since the benefits to be derived from these
   expenditures relate to future revenues, with depreciation to be based on
   units-of-production, but using a minimum straight-line floor, and to begin at
   the commencement of production. The estimated useful service lives of the
   assets are as follows:

        Tooling                                   100,000 units/10 years minimum
  ------------------------------------------------------------------------------
        Furniture, fixtures and equipment         7 years
        Computers and software                    5 years
        Leasehold improvements                    3 years

   Property and equipment are carried at cost. Depreciation and amortization are
   computed based economic useful lives using the straight-line method.

   Investments - The Company places its temporary cash with high credit quality
   financial institutions and by policy, limits the amount of credit exposure
   with any one financial institution, and invests in zero coupon treasury bills
   to be held to maturity and which are stated at amortized cost which
   approximates fair value. Changes in the market value of these investments
   during the period are recognized as interest income. The maturities of these
   investments range from January 1997 to January 1998, with face values between
   $100,000 and $400,000.

   Research and Development - Costs are expensed as incurred.

   Net Loss Per Share - Net loss per share is computed based on the number of
   shares outstanding during the period after deducting dividends on preferred
   stock. The effect of other potentially dilutive securities is not included 
   because their effect is anti-dilutive.

   Income Taxes - The Company's accounting for income taxes is such that
   deferred taxes, determined based on the difference between the financial
   statement and tax basis of assets and liabilities, using enacted tax rates,
   as well as any net operating or capital loss or tax credit carry forwards are
   expected to reduce taxes payable in future years.

   Stock-Based Compensation - In October 1995, the FASB issued SFAS No. 123,
   "Accounting for Stock-Based Compensation," which requires adoption of the
   disclosure provisions no later than fiscal years beginning after December 15,
   1995 and adoption of the measurement and recognition provisions for
   non-employee transactions no later than after December 15, 1995. The standard
   defines a fair value method, compensation cost is measured at the grant date
   based on the fair value of the award and is recognized over the service
   period, which is usually the vesting period. Pursuant to SFAS No. 123,
   companies are encouraged, but are not required, to adopt the fair value
   method of accounting for employee stock-based transactions. The Company will
   continue to account for such transactions under Accounting Principles Board
   Opinion No. 25, "Accounting for Stock Issued to Employees," but will disclose
   in a note to the financial statements pro forma net income and per share
   amounts as if the company had applied the new method of accounting.

                                       F-8


<PAGE>
PROJECTAVISION, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

2. REVENUE

   Revenue for the period consisted of royalty income from licensing agreements
   which is recognized when earned. Included in cumulative revenues is
   $1,000,000 for engineering reports rendered to a government agency.
   
3. FAIR VALUE OF FINANCIAL INSTRUMENTS

   At December 31, 1996, the fair values of cash, cash equivalents, investments,
   and accounts payable and accrued liabilities approximated their carrying
   values because of the short-term nature of these accounts. Convertible debt
   has a carrying value of $1,762,983 and a fair value of $2,130,000. The fair
   value of the convertible debt has been deemed to be equivalent to the value 
   of stock into which such debt is expected to be converted.
    

4. INVESTMENT IN UNCONSOLIDATED AFFILIATE

   In 1993, the Company entered into an agreement with Tamarack Storage Devices,
   Inc. ("Tamarack") pursuant to which The Company had the right to acquire up
   to 50 percent of Tamarack's common stock representing 37.2 percent of the
   issued and outstanding voting securities of Tamarack. Under the terms of the
   agreement, the Company invested $3,000,000 in the aggregate in Tamarack and
   had accounted for this investment under the equity method. The goodwill
   recorded with this investment, which represented the excess of the Company's
   investment over the underlying net assets of Tamarack, was $1,883,995. Such
   amount was being amortized over ten years and is reported in the statement of
   operations as Equity in Loss from Unconsolidated Affiliate. Amortization
   expense related to such goodwill for the fiscal years ended December 31, 1994
   and 1995 was $197,884 and $148,413, respectively. The Company issued 32,000
   shares of common stock (valued at $109,120) for advisory services received in
   connection with the acquisition. In 1994 the Company loaned Tamarack
   $1,500,000 with interest payable at 6 percent.

      The following represents summarized financial information of Tamarack at
      December 31, 1994:

         9 months ended December 31, 1994:
             Other income                              $   895,000
             Costs and expenses                          3,145,000
                                                         ---------

             Net loss                                  $(2,250,000)
                                                         ---------           
         Balance Sheet at December 31, 1994:

             Current assets                            $   812,000
             Noncurrent assets                             226,000
                                                         ---------

             Total assets                              $ 1,038,000
                                                         =========

             Current liabilities                       $   338,000
             Other liabilities                           1,508,000
             Shareholders' deficit                        (808,000)
                                                         ---------

             Total liabilities and
               shareholders deficit                    $ 1,038,000
                                                         =========
<PAGE>

      The following presents the Company's proportional interest in the
      summarized financial information of Tamarack:

         9 months ended December 31, 1994:

             Other income                               $  335,625
             Costs and expenses                          1,179,375
                                                         ---------

             Net loss                                   $  843,750
                                                         =========
         Balance Sheet at December 31, 1994:

             Current assets                             $  304,500
             Non-current assets                             84,750
                                                         ---------

             Total assets                               $  389,250
                                                         =========
             Current liabilities                        $  126,750
             Other liabilities                             565,500
             Shareholders' deficit                         303,000
                                                         ---------

             Total liabilities and
               shareholders' deficit                    $  389,250
                                                         =========

      Tamarack has changed its year-end to conform to that of Projectavision.
      The following presents unaudited summarized financial information of
      Tamarack at March 31, 1994:

         3 months ended March 31, 1994:                       Unaudited
                                                              ---------

             Other income                                    $  572,000
             Costs and expenses                               1,505,501
                                                              ---------
             Net loss                                        $  933,501
                                                              =========

      The following presents the Company's proportional interest in the
      unaudited summarized financial information of Tamarack:

         3 months ended March 31, 1994:                       Unaudited
                                                              ---------

             Other income                                    $ 214,500
             Costs and expenses                                564,563
                                                              --------
             Net Loss                                        $ 350,063
                                                              ========

<PAGE>

   In 1995, Tamarack received a commitment from Projectavision to fund its cash
   needs through December 31, 1995 to continue its operations as then
   constituted. Pursuant to this $94,240 was advanced to Tamarack.
   
   The Company recorded a reserve against its investment in Tamarack of $300,000
   in 1994 and at December 31, 1995 the Company reduced its investment in and
   advances to Tamarack as well as the goodwill associated with this investment
   to zero recording an additional reserve of $2,129,252, which is included in
   Equity in Loss of Unconsolidated Affiliate, due to Tamarack's inability, to
   date, to commercialize its holographic storage technology and its current
   lack of prospects. The remaining components of Equity in Loss of
   Unconsolidated Affiliate in 1995 are amortization of goodwill of $148,413 and
   $362,652 representing the Company's proportionate share of Tamarack's 1995
   net loss. In addition, Tamarack continues to incur losses, and its viability
   to achieve profitable operations is doubtful.

   As of November 15, 1996, the Company classified its investment in Tamarack as
   available for sale, and, in order to maximize the recovery of its investment,
   loaned $100,000 to Tamarack. Also, in 1996 the Company's investment in
   Tamarack increased to 52%. This amount is included in other current assets 
   and is to be repaid in March 1997 following receipt of funds from a
   government agency. After eliminating the intercompany accounts and,
   reflecting previous write-offs, Tamarack's financial statements are not
   material to the Company and have not been consolidated. As Tamarack is
   currently in the process of ceasing its operations, Tamarack's financial
   statements are not expected to be material in the future.
    
5. PROVISION FOR ALLOWANCE ON ADVANCES

   The Company has made advances through July 31, 1995 in contemplation of an
   investment in a high technology company. The president of the Company is
   related to an individual who is an executive officer and director of
   Projectavision. Such advances aggregated $298,426 and had been fully reserved
   for at December 31, 1995. In 1996 $109,166 of these funds were paid to the
   Company as a final settlement of the amounts advanced.

6. ASSIGNMENT AGREEMENT

   On March 19, 1990, an officer/stockholder of the Company entered into an
   assignment agreement with the Company whereby all rights, title and interest
   to the projection technology were assigned to the Company. The rights, title
   and interest to the United States patent and foreign patents relating to the
   projector technology under development by the Company were originally applied
   for by this officer/stockholder.

7. EMPLOYMENT AGREEMENTS

   The Company has entered into employment agreements with two of its officers
   and directors. Aggregated minimum compensation under these agreements will be
   $360,000 per year through 1997. For 1994, 1995, and 1996 salary expense was
   approximately $330,000, $527,000, and $577,453 respectively.

                                      F-9
<PAGE>
PROJECTAVISION, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

8. COMMON STOCK

   In 1994, the Company received gross proceeds of $1,575,000 in connection with
   the sale of 200,000 shares of its common stock in a private placement
   effected pursuant to Regulation S of the Securities Act of 1933, as amended
   (Registration S). In addition, the Company received an additional $1,381,250
   of gross proceeds in connection with the sale of 250,000 shares of its common
   stock pursuant to a private placement effected under Regulation S. In
   connection with this private placement, the Company also issued an additional
   31,000 shares of its common stock in payment of private placements costs.
   Finally, the Company received gross proceeds of $3,740,167 in connection with
   the sale of 920,860 shares of common stock in a series of private placements
   effected pursuant to Regulation S of the Securities Act of 1933, as amended
   (Registration S).

   In April 1995 the Company issued 83,030 shares of common stock for legal,
   financial, and design services. These shares were accounted for as an expense
   equal to the fair market value of the stock, with a corresponding increase to
   capital stock and additional paid in capital.

9. PREFERRED STOCK

   The Series B Convertible Preferred Stock provides for cumulative annual stock
   dividends (payable in common shares) of 8 percent of the liquidation value of
   $5 per share (for a total of $2,173,335 including shares issued on May 15,
   1992 as discussed below) to be paid semiannually and is convertible to one
   share of common stock, subject to adjustment. In 1994, 27,887 shares of
   common stock were paid as stock dividends on Series B Convertible Preferred
   Stock. This stock may be redeemed by the Company if certain conditions are
   met for $1.00 per share.

   In 1996, the Company issued 7,500 shares of Series C Preferred Stock for
   $7,500,000, resulting in net proceeds to The Company of $7,000,000 after
   fees. The Series C Preferred Stock converts into shares of Common Stock at a
   25% discount of the average closing bid price of the Common Stock for the
   five (5) trading days immediately preceding the date of conversion. The
   holder of the Series C Preferred Stock has the right to convert into Common
   Stock as follows: 25% can be converted on or after November 1, 1996; 25% may
   be converted on or after January 1, 1997; 25% may be converted on or after
   March 1, 1997; and 25% may be converted on or after May 1, 1997. The Company,
   in accordance with the terms and conditions of the sale of the Series C
   Preferred Stock, registered the shares of Common Stock into which the Series
   C Preferred Stock is convertible in the third quarter of 1996. The Series C
   Preferred Stock pays dividends semi-annually, seven (7) business days after
   each of December 31st and June 30th of each year, which may be in cash or
   shares of Common Stock at the election of The Company. The dividend rate is
   3% per annum of the liquidation value of $1,000.00 per share until and
   through June 30, 1997; 6% per annum from July 1, 1997 through June 30, 1998;
   and 8% per annum from July 1, 1998 and thereafter. The Company recognized a
   dividend on the Series C Preferred Stock based on the amortization of the 25%
   discount on the conversion into common stock over its earliest conversion
   period and on the increase in the dividend rate. In January 1997, 3,750 of
   the Company's Series C Preferred Stock have been converted into 1,948,188
   shares of Common Stock.

<PAGE>

   In January of 1997, the Company issued an aggregate of 35,000 shares of 6%
   Series D convertible preferred stock to two foreign institutional investors
   for an aggregate purchase price of $3,500,000, resulting in net proceeds to
   the Company of $3,500,000. Each share of Series D Preferred Stock is
   convertible, at the option of the holder, into shares of the Company's Common
   Stock as follows: 8,750 shares on or after May 1, 1997; 8,750 shares on or
   after July 1, 1997; 8,750 shares on or after September 1, 1997; and 8,750
   shares on or after November 1, 1997. The Series D Preferred Stock is
   convertible into Common Stock at a 25% discount to the then current market
   price of the Company's Common Stock at the time of conversion (the "Series D
   Conversion Price"); provided, however, that in the event that the Series D
   Conversion price is less than $2.00 per share, then under no circumstances
   can shares of Series D Preferred Stock be converted into the Company's Common
   Stock until such time as the Series D Conversion Price exceeds $2.00 per
   share, subject to the following: (i) in the event that the Company fails to
   either ship 2,500 projectors or generate $12,500,000 projector revenues
   during the period January 1, 1997 through June 30, 1997, then the minimum
   Series D Conversion Price shall be reduced by $0.50, or (ii) in the event
   that the Company fails to ship 2,500 projectors and generate $12,500,000 of
   projector revenues during the period July 1, 1997 through December 31, 1997,
   then the minimum Series D Conversion Price shall be reduced by $0.50. In no
   event would any converting shareholder receive any more than a 25% discount
   to the purchase price of the common stock in the Company.
<TABLE>
<CAPTION>
                                                                                                        Total
                                                                      Year Ended December 31, 1996     to Vest
                                                                      ----------------------------     -------
<S>                                                                             <C>                  <C>
       Dividend accretion on Series C Preferred Stock                           $  177,356           $  492,650
       Amortization of Warrants on Series C Preferred Stock                         57,619              290,000
       Amortization of Discount on Series C Preferred Stock                      2,122,213            2,500,000
 
</TABLE>
                                      F-10



<PAGE>

PROJECTAVISION, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

10. CONVERTIBLE DEBT

    In February 1996, the Company completed an offshore private placement of
    $10,000,000 of convertible debt resulting in net proceeds to the Company of
    $9,500,000. The convertible debt bears interest at the rate of 8% per annum
    and pays interest quarterly in arrears on any unpaid or unconverted debt. To
    the extent not previously converted, the convertible debt is due in January
    1999, and may be repaid in cash or common stock of the Company at the sole
    option of the Company. All conversions of convertible debt into common stock
    are based upon a 25% discount of the price of the Company's common stock for
    five consecutive trading days immediately prior to the date of conversion.
    In April 1996, the Company issued 1,456,329 shares of its common stock and
    paid $4,357,000 in cash in exchange for retiring $7.2 million in convertible
    debt. In July 1996, the Company issued 161,616 shares of its common stock
    and paid $250,000 in cash in exchange for retiring $0.5 million of
    convertible debt. In October 1996, the Company issued 155,000 shares of its
    common stock and paid $351,250 in cash in exchange for retiring $0.7 million
    of convertible debt. The Company recognized interest expense based on the
    annualized pro-rata amount of the 25% discount on the conversion into common
    stock and on the annualized pro-rata share of the placement costs. In
    January 1997, the Company retired $100,000 of convertible debt for cash.
    There currently remains $1.5 million in convertible debt outstanding.

11. STOCK OPTION PLANS

    Non-qualified Option Plan - The Company has reserved 5,000,000 shares of
    common stock for issuance upon exercise of options under a non-qualified
    stock option plan adopted in February 1990 and amended in June 1990, July
    1990, and November 1993. All options granted under this plan have been
    granted at fair market value at the date of grant.

    The following is a summary of non-qualified option plan activity for the
    three years ended December 31, 1996:
<TABLE>
<CAPTION>
                                                     1994                 1995              1996
<S>                           <C>                 <C>                  <C>                <C>
       Outstanding at January 1                   1,298,333            2,455,333          2,210,133
                                                  ---------            ---------          ---------
       Granted                                    1,260,500               68,000          2,682,500
       Expired                                        -                     -                 -
       Canceled                                       -                 (312,500)          (660,125)
       Exercised                                   (103,500)                -               (24,375)
                                                  ---------            ---------          ---------
       Outstanding at December 31                 2,455,333            2,210,833          4,208,833
                                                  =========            =========          =========
       Available for grant at December 31         2,544,667            2,789,167            791,167
                                                  =========            =========          =========
</TABLE>
    Weighted average option exercise price information for the years 1996, 1995,
    and 1994 follows:
<TABLE>
<CAPTION>
                                                   1994                   1995              1996
<S>                           <C>                  <C>                    <C>               <C>
       Outstanding at January 1                    3.61                   3.63              3.56
       Granted                                     3.63                   2.70              4.34
       Expired                                        -                      -                 -
       Canceled                                       -                   2.50              3.56
       Exercised                                   3.62                      -              0.81
       Outstanding at December 31                  3.63                   3.56              4.06
       Exercisable at December 31                  3.57                   3.56              3.95
</TABLE>
    Significant option groups outstanding at December 31, 1996 and related
    weighted average price and life information follows:
<TABLE>
<CAPTION>
   
Exercise Price         Number of                 Weighted Average             Weighted Average        Number of Options
   Range               Options                       Price                      Remaining Life           Exercised
   -----               -------                       -----                      --------------           ---------
<S>                      <C>                          <C>                            <C>                    <C>
$ .00-$0.99               none                        n/a                         n/a                   24,375 @ $0.81
$1.00-$2.99             18,000                     $1.875                         2 years               none
$3.00-$3.99          1,324,000                     $3.3125                        4 years               none
$4.00-$4.99          2,128,500                     $4.375                         7 years               none
$5.00-$7.99            737,833                     $5.375                         3 years               none
    
</TABLE>

                                      F-11

<PAGE>

PROJECTAVISION, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
11. STOCK OPTION PLANS (Continued)

    The weighted fair value at date of grant for options granted in 1996 and
    1995 was $2.59 and $3.03 per option, respectively. The fair value of options
    at date of grant was estimated based on the opinion of such fair value
    attributed by recipients of two of the grants with the following weighted
    average assumptions:   
                                                  1995                  1996
                                                  ----                  ----
             Expected life (Years)               5                     5
             Interest Rate                       6.25%                 6.25%
             Volatility                            89%                   89%
             Dividend Yield                         0%                    0%

    Stock-based compensation costs did not impact pretax income or earnings per
    share in 1996 and 1995. These costs would have been increased by $4.9
    million or ($0.35) per share, in 1996 and $0.2 million, or ($.02) per share,
    in 1995 had the fair values of the options been recognized as compensation
    expense on a straight line basis over the vesting period of the grant.

    Incentive Option Plan - In February 1990, the 1988 Incentive Stock Option
    and Appreciation Plan was terminated and a new plan, as amended in June
    1990, July 1990, and November 1993 was adopted under which options to
    purchase l,000,000 shares of common stock have been reserved. The incentive
    option plan provides for the granting of incentive stock options (ISOS) at
    an exercise price not less than the fair market value of the common stock on
    the date the option is granted. ISOS may not be granted to an individual to
    the extent that, in the calendar year in which such ISOS first become
    exercisable, the shares subject such ISOS have a fair market value on the
    date of grant in excess of $100,000. No option may be granted after February
    20, 2000, and no option may be outstanding for more than ten years after its
    grant. As of December 31, 1996, no options have been granted under the Plan.

12. RELATED PARTY TRANSACTIONS

    In 1989 advances totaling $10,833 were made to a principal stockholder of
    DKY and were outstanding at December 31, 1996.

13. INCOME TAXES

    As of December 31, 1995 and 1996, the composition of the Company's net
    deferred taxes was as follows:

                                                1995                 1996
                                                ----                 ----
    Deferred tax assets                    $ 6,801,000          $ 9,800,000
    Less valuation allowance                (6,801,000)          (9,800,000)
                                           -----------          -----------
    Net                                    $         -          $         -
                                           ===========          ===========

    Deferred tax assets principally result from the availability of net
    operating and capital loss carry-forwards to offset income earned in future
    years. The offsetting valuation allowance reduces total deferred tax assets
    to an amount management believes will likely be realized.

    At December 31, 1996, the Company had tax net operating and capital loss
    carry-forwards of approximately $21,100,000, which expire in the years 2003
    through 2010. The utilization of tax net operating and capital losses may be
    subject to certain limitations.

14. COMMITMENTS AND CONTINGENCIES

    On November 18, 1994 the Company entered into a non exclusive,
    non-transferable license without a right to sub-license, except to related
    companies, with Samsung Electronics Co. pursuant to which the Company gave
    to Samsung the right to use the Company's patented depixelization technology
    (as defined) in connection with the manufacturing and marketing of LCD
    projectors. The license is co-terminus with the life of the patents and
    patent applications relating to the proprietary rights underlying the
    license.

                                      F-12

<PAGE>

PROJECTAVISION, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

14. COMMITMENTS AND CONTINGENCIES (Continued)

    The future minimum rental commitments as of December 31, 1996 are as
    follows:

       Year                                     Amount
       ----                                     ------

       1997                                    $257,554
       1998                                      21,462
                                               --------
                                               $279,016
                                               ========

    Rent expense for the years ended December 31, 1995 and 1996 was $204,832 and
    $209,695, respectively.

    In 1994 a legal action was brought against the Company and various other
    parties by several former employees and a former consultant of Tamarack. The
    complaint alleged wrongful termination of employment and related charges.
    This complaint was settled in February, 1996 at no cost to the Company.

    In 1995 a legal action was brought against the Company, certain members of
    the Board of Directors, and an employee of the Company by a former officer
    and employee of the Company. The complaint alleges, among other actions,
    breach of employment and patent assignment agreements. In January 1997, the
    Supreme Court of the State of New York Appellate Division First Department
    (the "First Department") ordered that a receiver be appointed to protect
    whatever interest, if any, this former officer and employee of the Company
    may ultimately be able to prove that he has in any of the inventions that
    were assigned to the Company. At the present time, neither the nature, nor
    scope, nor authority, nor term of the receivership has been determined, all
    of which will be decided by the New York State Supreme Court, which
    initially denied the motion for a receivership. The Company intends, in the
    near future, to seek leave from the Court to amend its pleadings and file
    counterclaims for fraud, breach of fiduciary duty, misappropriation of trade
    secrets, conversion, breach of contract, diversion of corporate assets and
    opportunities, unjust enrichment, and tortious interference with contractual
    relations. The Company also intends, in connection with amending its
    pleadings, to seek injunctive relief and a constructive trust, in addition
    to monetary damages in excess of $200 million from this former officer and
    employee and others.

    In 1995 the Company was served with class action law suits, which have now
    been consolidated, alleging various federal securities laws violations
    primarily in connection with the Company's public disclosures. In July, 1996
    the consolidated class action lawsuit was denied by the court.

    In 1996 two of the eleven purchasers of the convertible debt commenced a
    lawsuit against the Company seeking an order to have their debt converted
    into common stock. One of the two purchasers settled their lawsuit with the
    Company in October, 1996. The litigation with the other debt holder remains
    outstanding.

    In 1996, a suit was filed by a individual investor against the Company and
    Marvin Maslow alleging fraudulent inducement in connection with the
    plaintiff's purchase of the Company's securities. A motion to dismiss for
    lack of Jurisdiction is currently pending before the U.S. District Court in
    Florida.

    In all of the above actions, the Company's management, based upon
    discussions with counsel, believe that they have a meritorious defense
    against these claims and intend a vigorous defense against these claims. The
    Company's management believes that the outcome of these matters will not
    have a material adverse effect on its financial position or results of
    operations.
<PAGE>


   

15. RESTATEMENT OF 1996 FINANCIAL RESULTS

    In accordance with the SEC Staff's pronouncements relating to Emerging
    Issues Task Force Discussion D-60, the Company is restating its financial
    statements on Form 10-K for the year ended December 31, 1996. The 
    restatement relates to the calculation of the discount for debt issued in 
    the first quarter of 1996 which was convertible into common stock at a 
    price below fair market value. The effect of this adjustment is to amortize
    the full amount of this discount to interest expense over the earliest
    conversion period. The adjustments made in the restatement of 1996 financial
    information have no impact on the Company's stockholders' equity or total
    assets.

    The impact of the restatement on the Company's statement of operations is
    summarized as follows:
<TABLE>
<CAPTION>
                                                                   As Originally      
                                                                      Reported         As Restated
<S>                                                                <C>                <C>
    Interest expense-amortization of debt expense                  $  2,034,683       $  3,868,016
                                                                   ============       ============
    Net loss                                                       $ (9,047,560)      $(10,880,893)
    Dividend on preferred stock                                       2,635,331          2,635,331
                                                                   ------------       ------------
    Net loss attributable to common stockholders                   $(11,682,891)      $(13,516,224)
                                                                   ------------       ------------
    Net loss per share attributable to common stockholders         $      (0.86)      $      (0.99)
                                                                   ------------       ------------
</TABLE>



    
                                      F-13



<PAGE>


                                   SIGNATURES


     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
executed on this th day of March, 1997.

                              PROJECTAVISION, INC.


                             By:/s/ Martin Holleran
                            ------------------------
                           Martin Holleran, President
                           Chief Executive Officer and
                                                     Director

     Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature                            Title                                    Date
---------                            -----                                    ----
<S>                                  <C>                                      <C>
/s/ Marvin Maslow                    Chairman of the Board                March 26, 1997
-------------------------            of Directors
Marvin Maslow

/s/ Martin Holleran                  President, Chief                     March 26, 1997
-------------------------
Martin Holleran                      Executive Officer and
                                     Director

/s/ Jules Zimmerman                  Chief Financial                      March 26, 1997
-------------------------            Officer, Secretary and
Jules Zimmerman                      Director


/s/ Martin D. Fife                   Director                             March 26, 1997
-------------------------
Martin D. Fife

/s/ Richard S. Hickok                Director                             March 26, 1997
-------------------------
Richard S. Hickok

/s/ Dr. Craig I. Fields              Director                             March 26, 1997
-------------------------
Dr. Craig I. Fields

/s/ Arthur Lipper III                Director                             March 26, 1997
-------------------------
Arthur Lipper III

/s/ Sherman Langer                   Director                             March 26, 1997
-------------------------
Sherman Langer

</TABLE>