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                             UNITED STATES
                  SECURITIES AND EXCHANGE COMMISSION
                       Washington, D.C.  20549

                              FORM 10-K
(Mark One)
    |X|    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
        OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
               for the fiscal year ended March 31, 1997
                                  OR
    o      TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
          SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
for the transition period from                                      to
                   Commission File Number: 0-21322
                           OUT-TAKES, INC.
            (Name of small business issuer in its charter)

            Delaware                        95-4363944
           (State or other jurisdiction of (I.R.S.  Employer Identification No.)
           incorporation or organization)

           1419 Peerless Place, Suite 116      90035
           Los Angeles, California          (Zip Code)
           (Address of principal executive offices)

              Issuer's telephone number: (310) 788-9440

        Securities registered under Section 12(b) of the Act:

                                 None
        Securities registered under Section 12(g) of the Act:
                     Common Stock, $.01 par value
      Class A Warrants to purchase Common Stock, $.01 par value Class B Warrants
      to purchase Common Stock, $.01 par value

                           (Title of Class)

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

    Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form, and no disclosure  will be contained,  to
the best of issuer'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. _

The issuer's revenues for the most recent fiscal year were $2,014,788.

The aggregate market value of the voting stock held by  non-affiliates as of 
June 10, 1997 was $456,429.

The number of shares outstanding of the issuer's Common Stock as of 
June 10, 1997 was 20,495,726.

                 DOCUMENTS INCORPORATED BY REFERENCE

    Portions of the Registrant's definitive Proxy Statement relating to the 1997
Annual Meeting of Stockholders are incorporated herein by reference into Part II
and Part III.

    Transitional Small Business Disclosure Format (Check One):  Yes       No  X



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<PAGE>



                          OUT-TAKES, INC.

   FORM 10-K ANNUAL REPORT FOR FISCAL YEAR ENDING MARCH 31, 1997

                         TABLE OF CONTENTS

                                                              Page
PART I                                                          1

  ITEM 1. DESCRIPTION OF BUSINESS                               1

  ITEM 2. DESCRIPTION OF PROPERTY                               5

  ITEM 3. LEGAL PROCEEDINGS                                     5

  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS   5

PART II                                                         6

  ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
          MATTERS                                               6

  ITEM 6. SELECTED FINANCIAL DATA                               6

  ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
          OPERATION                                             7

  ITEM 8. FINANCIAL STATEMENTS                                 13

  ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
          ACCOUNTING AND FINANCIAL DISCLOSURE                  26

PART III                                                       26

  ITEM 10.DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
          CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE
          EXCHANGE ACT                                         26

  ITEM 11.EXECUTIVE COMPENSATION                               26

  ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
          OWNERS AND MANAGEMENT                                26

  ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS       26

PART IV

  ITEM 14.EXHIBITS AND REPORTS ON FORM 8-K                     27


<PAGE>





                              PART I


ITEM 1.  DESCRIPTION OF BUSINESS


General

     Out-Takes,  Inc., a corporation  incorporated in Delaware on March 18, 1992
("the Company"),  is engaged in the sale of photographic  portraits of children,
adults  and  family  groups.   The  Company   currently   operates  and  derives
substantially all of its revenues from two retail studios,  called Out-Takes(R),
the first of which  opened on May 24,  1993 and is located  in MCA/  Universal's
CityWalkSM  project in Los Angeles,  California  ("the  CityWalk  Studio").  The
second studio commenced  operations,  on December 1, 1995, at the  Entertainment
Center in the Bazaar at the Irvine  Spectrum  located in Irvine,  Orange County,
California ("the Irvine Studio").  The studios employ  proprietary  hardware and
software  developed by, or specifically  for, the Company which includes digital
imaging technology and automated motion control equipment to position the studio
camera  and  set  subject   lighting  to  the  proper   levels  for  each  scene
(collectively,  the "Proprietary  System").  Using the Proprietary  System,  the
Company  is  able to  place  pictures  it  takes  of its  clients  "into"  still
photographs  prepared in advance from popular movie scenes and other backgrounds
licensed by the Company.


Products and Services

     The technological capabilities of the Proprietary System and the variety of
backgrounds  that the Company  has  developed  pursuant  to various  merchandise
licenses in effect (see "- License Agreements")  represent a dis tinction in the
consumer  portraiture  business.  Most of the  portraits  taken in the  CityWalk
Studio and the Irvine  Studio are  presented to the customer as framed 8" x 10",
5" x 7" and  wallet-sized  photographs  within  about thirty  minutes  after the
portrait  session  is  completed.  The  remainder  (primarily  enlargements  and
greeting cards based on these photographic images) are produced and delivered to
clients within several weeks using the Company's order fulfillment  capabilities
as well as processing arranged through independent service bureaus.


License Agreements

     The Company has merchandise  licensing  agreements with Paramount  Pictures
Corporation  ("Paramount");  MCA/Universal  Merchandising,  Inc.  ("Universal");
Warner  Bros.  Consumer  Products - formerly  Turner  Home  Entertainment,  Inc.
("Warner")  with respect to several  properties from the  Hanna-Barbera  and MGM
libraries;  Twentieth  Century Fox  Licensing &  Merchandising  ("Fox");  Jay P.
Morgan Photography ("Morgan");  Tony Stone Worldwide Stock Agency ("TSW"), Queen
Bee  Productions  ("Queen Bee"),  Simon Kornblit  ("Kornblit"),  Curtis Archives
("Curtis A"),  Curtis  Management  ("Curtis M"),  King  Features  ("King"),  MTV
Networks  ("MTV"),  Saban  Merchandising  Inc.  ("Saban"),   Innerspace  Visions
("Visions")  and  others,  individually  and  collectively  referred  to as  the
"License Agreements" (Paramount, Universal, Turner, Fox, Morgan, TSW, Queen Bee,
Kornblit,  Curtis A, Curtis M, King, MTV, Saban and Visions are individually and
collectively referred to herein as "Licensors").

     The  License   Agreements   generally   grant  the  Company  the  right  to
manufacture,  sell  and  distribute  in  a  defined  geographic  area,  computer
generated  photographs  incorporating a customer's image into a still photograph
("Licensed Products") with the characters, designs and/or visual representations
("Licensed  Articles")  as they  appear in  television  productions  and  motion
pictures.  The  Licensed  Products  may be sold  separately  or affixed to items
approved by the Licensor,  including photographic enlargements,  greeting cards,
posters,   books,   t-shirts,   mugs,   buttons  and  other  novelty  items,  in
consideration  of payment to the  Licensor  of a  specified  royalty  based on a
percentage  of gross  retail sales  revenue from each of the Licensed  Products.
Many of the License Agreements require a non-refundable  advance payment against
future royalties and stipulate a guaranteed minimum level of royalties that must
be paid during each year of their term. The License Agreements also provide that
the Licensor retains approval rights over the use of the Licensed Articles.

     A summary of the License  Agreements  and the  Titles/Properties  available
thereunder is presented in the table on the following page.





                                 1

<PAGE>




       Licensor         Selected Titles / Properties      Territory and Usage

Paramount  Pictures Corp  Current titles in use:         Territory:  Worldwide.
                          Star Trek (Original Series)
                          Trek Wrath of Khan
                          Deep Space Nine
                          Cool World
                          Friday the 13th

MCA/Universal Merchandise Current titles in use:     Territory:  United States,
                          Back to the Future,        United Kingdom, Holland,
                          Jaws                       New Zealand and Australia.
                          Jurassic Park
                          Harry & Hendersons
                          Dracula

Warner Bros. Consumer     Current titles in use:    Territory: United States and
Products-formerly Turner  Gone with the Wind        its territories and   
Home Entertainment(For    Tom & Jerry Movie         possessions 
MGM and Hanna-Barbera     Wizard of Oz
film libraries)           The Flintstones
                          Cave Kids 
                           

Twentieth Century Fox     Current titles in use:  Territory: "The entire world".
Licensing &               Miracle on 34th St.
Merchandising             The Simpsons  
                          The Pagemaster

Jay P. Morgan             Multi-property agreement Territory:  Worldwide.
Photography               covering 25 original 
                          Jay P. Morgan images.  
                          Out-Takes has the right 
                          of substitution from 
                          time-to-time.

Tony Stone World-wide    International stock and    Territory:  Worldwide.
Stock Agency             assignment photography, 
                         including access to a
                         library of photographs 
                         contributed by over 
                         1,000 photographers 
                         worldwide.

Queen B Productions     Current titles in use:      Territory:  United States 
                        Elvira in bathtub           and Canada
                        Elvira at movie theater

Simon Kornblit          Approved photographs        Territory:  Worldwide.
                        supplied by the 
                        photographer.

Curtis Archives         All Norman Rockwell         Territory:  United States
on behalf of Norman     illustraations, including 
Rockwell's estate       artwork and logo art
                        associated with his
                        extensive collection of 
                        Saturday Evening Post 
                        magazine covers.

Curtis Management       Approved photographs        Territory:  United States
                        supplied by licensor.
                        Current property in use:
                        Hollywood  Sign

King Features           Current titles in use:      Territory:  United States,
                        Betty Boop                  Canada and Mexico.
                        Popeye

Innerspace Visions      Approved photographs        Territory: Worldwide
                        supplied by the 
                        photographer.

MTV Networks            Current property in use     Territory:  United States 
                        Beavis & Butt-head          and its territories and 
                                                    possessions, Canada

Saban Merchandising,    Current property in use     Territory:  United States 
Inc.                    Mighty Morphin Power        and its territories and
                        Rangers.                    possessions.
                              


                                 2

<PAGE>





     No single License  Agreement  represents  greater than 20% of the Company's
aggregate sales revenues.  The Company is materially  dependent upon the License
Agreements with Paramount,  Universal, Warner, Fox and Morgan, and the appeal of
Licensed Articles from these Licensors in the retail marketplace. Three of these
License Agreements each represents  approximately 10% of the Company's revenues.
Although  the Company has not  commenced  to market all  Licensed  Articles on a
timely basis, as of June 10, 1997,  the Company has not received any notice that
any Licensor intends,  by virtue of this matter, to exercise any of the remedies
provided for in its respective License  Agreements.  The Company is current with
respect to all payments and required  reports to all Licensors and believes that
its relationship with all Licensors is satisfactory.

     On March 1, 1995,  the Company  entered  into a sublicense  agreement  with
Photo  Corporation  of Australia  Pty Limited  ("PCA"),  a  subsidiary  of Photo
Corporation Group Pty. Ltd. ("PCG"),  that, subject to the prior approval of the
Licensors,  grants PCA a non-exclusive  license to utilize the Licensed Articles
on  substantially  the same terms as  provided in the  License  Agreements.  The
sublicense  also  provides that PCA will pay the Company an amount equal to 120%
of the royalties the Company pays to Licensors for such images.  The Company has
received  consent  from  Morgan,  Fox and  Paramount  and other  Licensors  have
indicated their  willingness to support  utilization of the licensed Articles in
countries where PCA operates. The Company has not yet become entitled to receive
any royalties from PCA.


Patents, Service Marks, Copyrights and Other Proprietary Technology

     The Company has  registered  the marks  Out-Takes(R),  So You Want to be in
Pictures(R),  Photomation(R)  and Create the Moment(R) with the U.S.  Patent and
Trademark Office and has registered the  Out-Takes(R)  service mark in Japan, in
both  Japanese and English.  The Company has filed a document  (the  "Disclosure
Document") with the U.S. Patent and Trademark Office  concerning  aspects of its
technology  that it considers may be  patentable.  The Company has also filed an
application with the U.S. Patent and Trademark Office seeking patent  protection
for certain  aspects of the  Company's  technology  described in the  Disclosure
Document and has supplemented  this with a "Continuation in Part" filing,  which
is presently  pending.  While the issue of the patent would provide an advantage
to the  Company,  it is not  material to the value of the Company or its ongoing
viability.

     The Company  actively  manages the protection of its trademarks,  know-how,
trade secrets and other intellectual property by requiring all its employees and
those  contractors where applicable,  to execute  confidentiality  agreements in
relation to the Company's intellectual property. The Company is not aware of any
instance where there has been a breach of such confidentiality obligations.


Competition and Seasonality

     Competition  in  the  traditional   portrait  photography   industry,   the
merchandise  licensing  business  and with  respect  to the  development  of new
technology is intense. The Company enjoys limited protection from competition at
its CityWalk Studio because of a restriction contained in its lease which states
that during the  initial  lease term (which  runs  through  May 31,  1998),  the
landlord  will not lease to third  parties  nor  operate  for its own  account a
retail store engaged in selling computer-generated  photographs similar to those
produced and sold by the Company. Such a restriction does not apply to the lease
of premises at the Irvine Spectrum,  however,  it is considered  unlikely that a
competitive  business  will be opened at the Irvine  Spectrum.  The  Company has
identified three potential kinds of competition - traditional  photographers who
are  likely  to  compete  for  retail  customers  as well as  future  locations;
photographers  who employ  digital  technologies  who are likely to compete  for
retail customers, future locations and merchandise licensing agreements; and new
technologies  which may render the  Proprietary  System  obsolete or require the
Company to incur a substantial  expense in order to remain  competitive in terms
of product quality, selection, pricing and customer service.

     Many of the firms with which the Company  competes,  or can  reasonably  be
anticipated  to compete in the  future,  have far greater  financial  resources,
experience  and  industry  relationships  than the Company.  In  addition,  such
organizations  have proven  operating  histories,  which may afford  these firms
significant  advantages in negotiating and obtaining future merchandise licenses
and  retail  leases,  arranging  financing,  attracting  skilled  personnel  and
developing technology and products.  Many of these firms offer their products at
substantially  lower  prices than the Company  sells its  products.  The Company
believes  that its portrait  photography  products are  competitive  in terms of
product  quality,  service quality and the selection and  attractiveness  of the
Licensed Products.

     The professional  photography business is seasonal, with the largest volume
of sales  generally  occurring in the Company's  third fiscal quarter during the
period preceding the Christmas season. The CityWalk location

                                 3

<PAGE>




is one of the major tourist  attractions in Southern California and therefore is
also  highly  seasonal,  with its  largest  number  of visits  occurring  in the
Company's  second and third fiscal quarters,  particularly  between July 4th and
Labor Day.  Although the revenue  stream at the Irvine Studio is not as seasonal
as the CityWalk Studio,  the third fiscal quarter generates the highest level of
revenue,  as a result of  greeting  card sales and the  seasonal  gift giving of
portraits.


Employees

     As of March  31,  1997,  the  Company  had 34  employees,  25 of whom  were
part-time.  The  Company's  full  time  employees  include  a Retail  Operations
Manager,  responsible  for the overall  performance of the Studios,  a Financial
Controller handling primarily administrative and accounting responsibilities and
two persons coord inating image production and technical support activities. All
of the  remaining  persons were  employed in retail  operations  at the CityWalk
Studio (17  employees) and the Irvine Studio (13  employees).  Between March 31,
1997 and June 10, 1997,  the Company  reduced the image  production and 
technical support  function  from two  persons  to one person  and  reduced  the
number of part-time  personnel employed in its retail operations by 1 person, 
such that as of June 10, 1997,  the Company had a total of 32  employees.  In 
addition to the above personnel, the Company also engages the services of 
independent consultants and third-party  contractors from time to time and 
continues to rely heavily on the personnel  and outside  support of PCA pursuant
to the terms of a Personnel  Consulting  Agreement  entered  into and  approved 
by the  Company's stockholders  on June 28, 1995.  Management  fees were 
suspended for a period of two years from December 1, 1996. None of the Company's
employees is covered by a collective bargaining agreement.

     All employees have executed employment and confidentiality  agreements with
the Company. The Company considers its labor relations to be good.


Research & Development, Regulations and Suppliers

     Between inception and December 31, 1994, the Company incurred $6,990,000 of
losses during the development  stage where it devoted  substantially  all of its
efforts to designing and building the Proprietary System, including writing four
custom software  applications that operate it, approximately 100 images that can
be produced  with it and the retail  business  systems in which this  equipment,
software and images are employed.

     The  opening  of the  Irvine  Studio  on  December  1,  1995,  provided  an
opportunity for the Company to upgrade its photographic,  image manipulation and
compositing  hardware  and  software  to  take  advantage  of the  technological
advances  that  have  been  made  since  the  opening  of the  CityWalk  Studio.
Consequently the Irvine Studio  incorporates the second  generation of equipment
and software which provides  substantially higher resolution photographs and the
opportunity  to  provide  a  broader  product  line  than the  CityWalk  Studio.
Approximately  $12,000 was expended  during the fiscal year ended March 31, 1997
(in  addition to the  $240,000  expended  during the fiscal year ended March 31,
1996) on  technological  advancement for computer  hardware and software and the
re-production  of CityWalk  Studio images for the Irvine  Studio.  The marketing
focus of the Irvine  Studio  recognizes  the need for  additional  "traditional"
style  backgrounds  and these are  continuing to be developed as part of ongoing
operations.  The costs associated with this effort are included in the Statement
of Operations.

     In order to comply with federal, state and local environmental regulations,
the Company has permanent  filtration systems at the CityWalk and Irvine Studios
that  lessen  the  discharge  of  certain  chemicals  that may be harmful to the
environment  by reducing  the  concentration  of these  chemicals to safe levels
before they are  disposed.  The Company also  contracts  with a hazardous  waste
disposal  company with respect to the residue  (primarily trace silver) that the
filtration unit produces. The Company believes that this equipment and these pro
cedures are sufficient to address any environmental problems associated with its
business and it has not received any  indication  that it is not complying  with
all applicable regulations.

     The principal  materials  used in the Company's  business are  photographic
paper,  chemicals,  mattes  and  frames,  all of  which  are  readily  available
throughout the region from a number of wholesale suppliers.







                                 4

<PAGE>




ITEM 2.  DESCRIPTION OF PROPERTY

     The Company  leases 1,699  square feet of retail space (plus  approximately
200 square feet of mezzanine  space and an additional 300 square feet of storage
space) from MCA  Recreation  Services,  a division of MCA Inc., for the CityWalk
Studio.  (see  "Description  of Business - General")  This lease  provides for a
minimum  annual rental  obligation of  approximately  $130,599 plus a percentage
rental  payment  equal  to ten  percent  (10%) of  annual  store  revenues  over
$867,383.  During the year to March 31, 1997 the Company paid additional rent of
$62,287 as a result of revenues being in excess of the $867,383  threshold.  The
CityWalk  Studio  lease  expires on May 31, 1998 and is subject to one seven (7)
year renewal period at the option of the Company. The lease may be terminated by
the lessor if the Company does not meet a minimum  annual sales  requirement  of
$587,000.

     The Company leases 2,634 square feet of retail space from the Irvine Retail
Properties  Company  for the  Irvine  Studio  (see  "Description  of  Business -
General").  The  lease  provides  for a  minimum  annual  rental  obligation  of
approximately $118,202 per annum plus a percentage rental payment equal to seven
percent (7%) of store  revenues  over  $1,128,857  per annum.  The Irvine Studio
lease  expires on November 21, 1998 and is subject to one seven (7) year renewal
period at the option of the Company.  The option to renew the lease is available
only if sales revenue in the twelve months prior to the date of giving notice is
in excess of $810,000 and the net worth of the Company is in excess of $600,000.

     The Company maintains computer graphics and image production  facilities at
both the  CityWalk  Studio and the  Irvine  Studio,  and has its  administrative
offices at 1419  Peerless  Place,  Suite 116 in Los  Angeles,  California  ("the
Peerless Premises"). Certain of the Company's equipment, furniture and materials
are temporarily stored at 101 E. Alameda Ave., Burbank, California ("the Storage
Facility").  The Company  has a month to month  rental  obligation  for both the
Peerless Premises and the Storage Facility.

     All of the Company's leasehold premises are covered by casualty,  liability
and business  interruption insur ance with limits and conditions that management
deems customary for the industry.


ITEM 3.  LEGAL PROCEEDINGS

     None.


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

     None.


                                 5

<PAGE>



                             PART II


ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The  Company's  Common Stock began trading on the Nasdaq Small Cap MarketSM
("NASDAQ")  on March 9, 1993 under the symbol OUTT (also OUTTC during the period
from  October 28, 1994  through  December  30,  1994).  On January 3, 1995,  the
Company's securities were delisted from NASDAQ as a consequence of the Company's
not fulfilling the minimum bid price requirements set forth in Paragraph 1(c)(4)
of Schedule D of the NASDAQ  By-Laws.  On January 4, 1995, the Company's  Common
Stock began to be quoted on the OTC-Bulleting BoardSM under the symbol OUTT.

     The following table sets forth, for the periods indicated, the high and low
prices for the Common Stock as reported by Nasdaq Stock Market Inc.


                 Fiscal 1995                   Fiscal 1996          Fiscal 1997
                 High    Low                   High    Low          High   Low

First Quarter    16/32   6/32                  18/100  7/100      27/100  22/100
Second  Quarter  22/32   6/32                  17/100 15/100      25/100  10/100
Third Quarter    14/32   6/32                  19/100 13/100     6.5/100   6/100
Fourth Quarter   14/32   6/32                  25/100 13/100       9/100   4/100


     There were approximately 72 holders of record of the Company's Common Stock
as of June 10, 1997.

     The  Company  has  not  paid  any  dividends  on  its  Common  Stock  since
incorporation  in March 1992 and does not  anticipate  paying  dividends  in the
forseeable future. There are no restrictions on the Company's present ability to
pay dividends on its Common Stock, other than those prescribed by Delaware law.



ITEM 6. SELECTED FINANCIAL DATA

     The  following  table sets forth certain data the the years ended March 31,
1993  through  March 31, 1997.  Refer to "Item 7.  Management's  Discussion  and
Analysis or Plan of Operation" for discussion of operations.

                             1997       1996       1995       1994       1993
                             ----       ----       ----       ----       ---- 
Income Statement Data
Revenue from operations 2,014,788  1,580,712   1,274,836    454,395          -
Gross Income / (Loss)      88,858    126,713     (44,276)  (531,379)         -
Adjusted net Loss
 (see notes)             (702,096)  (704,355) (1,188,746)(2,987,219) (2,875,652)
Adjusted net loss 
 per share                 ($0.05)    ($0.07)     ($0.22)    ($0.56)     ($1.18)

Balance Sheet Data
Total Assets           $1,011,463  1,409,752   1,862,279   2,614,752 $5,496,643
Total Liabilities         698,710  1,383,653     769,696     255,037    253,562
Stockholders' Equity      312,753     26,099   1,092,583   2,359,715  5,243,081
--------------------------------------------------------------------------------

The above figures have been adjusted as follows, to facilitate comparison:

1. The net loss for the year ended March 31, 1997 excludes  termination payments
totaling $51,250 paid to former officers of the Company.

2.  The net  loss  for the  year  ended  March  31,  1996  excludes  a  $762,129
non-recurring  loss on impairment of long-lived  assets,  a non-cash  accounting
adjustment  to adopt SFAS No. 121 and  $110,000  of  non-recurring  professional
costs associated with the transaction with Photo Corporation Group Pty Limited.

3.  The net  loss for the  year  ended  March  31,  1995  excludes  $120,713  in
non-recurring  expenses  associated with the Company having terminated leases at
the 920 and 910 Colorado Premises.

4. The net loss for the year ended March 31, 1994 excludes $103,853 in 
miscellaneous income.



                                 6

<PAGE>




ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

     The following  discussion should be read in conjunction with the historical
financial  statements  of  Out-Takes,  Inc.  ("the  Company")  and notes thereto
included elsewhere in this Form 10-K.


Overview

     The Company currently operates two photographic portrait studios, the first
of which was opened on May 24, 1993 at MCA/Universal's CityWalkSM project in Los
Angeles,  California ("the CityWalk  Studio"),  the second opened on December 1,
1995 at the Entertainment Center in the Bazaar at the Irvine Spectrum located in
Irvine,  Orange County,  California  ("the Irvine  Studio").  During the quarter
ended  December 31,  1996,  the Company  engaged a  consultant  to work with its
technical  staff,  to  determine  whether  the  Traveling  Studio  could be made
operational.  After some effort and  expenditure,  the Traveling Studio has been
used  in  five  promotions,  over a  total  of ten  days.  The  following  table
summarizes the Company's fiscal quarter results which have been adjusted for the
matters set forth in the notes below:
<TABLE>
                    Fiscal Year Ended March 31, 1996             Fiscal Year Ended March 31, 1997

                    3 months    3 months    3 months        3 months   3 months     3 months    3 months      3 months
                  ended Jun30 ended Sep30 ended Dec31      ended Mar31 ended Jun30  ended Sep30 ended Dec31  ended Mar 31
<S>                 <C>         <C>         <C>            <C>        <C>          <C>        <C>          <C>     

Revenue             $ 357,226   $ 444,838   $ 375,711      $ 402,937  $ 468,187     $ 657,643  $ 520,666    $ 368,292

Gross Income/(Loss)    32,279     138,332      15,721        (59,619)    18,425       126,736     15,081      (71,384)

Adjusted Net Loss 
for the period 
(see notes below)   (117,272)1    (79,278)   (210,078)      (297,727)2 (204,568)     (121,332)3 (172,530)    (203,666)

Adjusted Net Loss 
per share            ($ 0.02)    ($  0.01)   ($  0.01)       ($ 0.03)   ($ 0.02)      ($ 0.01)   ($ 0.02)     ($ 0.01)

Closing Bid Price
per share of Common
Stock                 $0.125       $ 0.15      $ 0.13         $ 0.22     $ 0.22       $ 0.10     $0.065      $0.085


------------------------------------------------------------------------------------------------------------
</TABLE>

As indicated in the following notes, the quarterly figures have been adjusted in
order to facilitate comparison.:

1 The net loss for the three month period ended June 30, 1995 excludes  $110,000
  of non-recurring professional costs associated with the transaction with Photo
  Corporation Group Pty Limited and a $722,000  non-recurring loss on impairment
  of long-lived assets, a non-cash accounting adjustment to adopt SFAS No. 121.

2 The net loss for the three  month  period  ended  March 31,  1996  excludes  a
  $40,129  non-recurring  loss on impairment of  long-lived  assets,  a non-cash
  accounting adjustment to adopt SFAS No. 121.

3 The net loss for the three month  period  ended  September  30, 1996  excludes
  termination payments totaling $51,250 paid to former officers of the Company.

    As noted in the table presented above, the Company continues to operate at a
net loss. Management is focusing on improving revenues from the Irvine Studio by
developing  a  marketing  program  to  attract  more  customers  and  creating a
background  image  portfolio  that is more  suitable for the market in which the
Irvine  Studio is located.  There can be no assurance  that this program for the
Irvine Studio will be successful and  accordingly,  the Company will continue to
implement  overhead  reductions to improve the Company's  operating  margins and
reduce the cash outflow from operations. The Company's short term objectives are
to increase the revenues of the Irvine Studio,  source additional  opportunities
and venues for the utilization of the Traveling  Studio,  continue the reduction
of expenses and raise capital for opening additional  studios.  Notwithstanding,
net losses (which include  depreciation  expenses of approximately  $100,000 per
quarter)  are  expected  to  continue  unless and until the  Company  opens such
additional  studios  or the  revenue  stream  from  the  two  existing  studios,
especially the Irvine studio, increases substantially.

    On April 24, 1996 the Board of Directors  authorized the issuance of up to 3
million  shares of the  Company's  Common  Stock for a price of $0.20 per share,
which represented the fair market value of the stock on April 24, 1996. On May 6
and 7,  1996,  the  Company  received  stock  subscriptions  from six  investors
totaling $130,000 for 650,000 shares of Common Stock. The Company received total
payment  on  these  subscriptions  as of June 6,  1996.  On May 7,  1996,  Photo
Corporation  Group Pty Limited ("PCG")  converted  $130,000 of the $649,500 loan
payable at that time to  650,000  shares of the  Company's  Common  Stock.  This
represented  a value of $0.20  per  share of  Common  Stock,  which was the fair
market value as determined by the Board of Directors,  on this date and the same
price paid on such date by the six independent investors.  On November 29, 1996,
PCG  converted  $519,000 of the remaining  $519,500 note payable,  together with
$261,000 of accrued management

                                 7

<PAGE>



fees payable to Photo  Corporation of Australia Pty Limited ("PCA"),  which debt
was assumed by PCG, into 8,320,000  shares of the Company's  Common Stock.  This
represented  a value of $0.09375 per share of Common  Stock,  which the Board of
Directors determined to be a fair price at that time. In addition, PCG suspended
management  fees  to it  or  its  related  parties  pursuant  to  the  Personnel
Consulting  Agreement  with the Company  dated June 28, 1995 for a period of two
years commencing December 1, 1996.

    During the  period  December  1, 1996 to June 10, 1997,  PCG has  provided a
further  $305,000  of cash to  assist  the  Company  in  funding  its day to day
operations  and to  enable  the  Company  to make  the  payments  due to  former
officers.  The  debt due to PCG is  disclosed  on the  balance  sheet as "Due to
Related Party".

    The  Company  opened  the  Irvine  Studio on  December  1,  1995,  commenced
operations on December 9, 1995 and at the same time completed the integration of
an  improved  version of the  Company's  proprietary  technology.  The  original
technology  incorporated  in the  CityWalk  Studio  was placed  into  service in
mid-1993.  Since that time,  significant  improvements  have occurred in digital
photography  equipment  software  and  computers  utilized in high-end  computer
graphics.   The  Company's  new  technology   incorporates  these  newer  system
components and is designed to produce  significantly higher resolution and hence
better quality  photographs across a broader product line.  Notwithstanding  the
quality  improvements that have been achieved to date, digital camera technology
is still not able to produce  photographs  which, when enlarged beyond 11" x 14"
sizes,  are of the same quality as traditional  silver halide film, and this may
have a negative effect on the studios' long-term earning capabilities.


Results of Operations

Year Ended March 31, 1997 Compared to Year Ended March 31, 1996

    The net loss for the year ended March 31, 1997 was  $753,346  compared  with
$1,576,484  for the year  ended  March 31,  1996.  The  primary  reason  for the
reduction  in the net loss between the two years is that in the year ended March
31, 1996 there was a loss on impairment of long-lived assets of $762,129.  There
was no such loss in the year ended March 31, 1997.

    The  following  table shows  Revenues,  Cost of Revenues  and Gross Income /
(Loss)  during the fiscal  years  ended March 31,  1997 and March 31,  1996,  by
studio.

<TABLE>
                       Fiscal Year Ended March 31, 1997Fiscal Year Ended March 31, 1996

                       CityWalk    Irvine   Travelling  CityWalk    Irvine    Traveling
                        Studio     Studio     Studio     Studio     Studio     Studio
                                                                    (Opened   (Not
                                                                    12/9/95)  operatonal)     
                         <C>         <C>        <C>        <C>        <C>        <C> 
      
Revenues                $1,492,02   $ 508,192  $  14,572  $1,422,845 $ 157,867  $   -
                         --------    --------    -------   ---------  --------   --------

Cost of Revenues:

  Compensation  &
    Related Benefits       429,764    277,501      5,674     439,350   108,787      -

  Depreciation &
    Amortization           137,855    220,975        293     189,781    59,468      -

  Pre-opening Costs             -          -          -           -     67,007      -

  Rent                     192,432   100,500       7,925     183,421    27,218      -

  Other                    318,536   227,188       7,287     309,175    69,792      -
                         ---------  --------     -------   ---------  --------   --------

  Total                  1,078,587   826,164      21,179   1,121,727   332,272      -

Gross Income /(Loss)       413,437 ($317,972)    ($6,607)   $301,118 ($174,405)     -
                         =========  ========      ========  ========  ========   ========

</TABLE>

    The  Company  overall  generated  $2,014,788  in revenues in the fiscal year
ended March 31,  1997,  compared to  revenues of  $1,580,712  in the fiscal year
ended March 31,  1996.  The  increase in revenues of  approximately  $434,076 is
primarily a result of the Irvine Studio  trading for a full twelve months in the
year to March 31, 1997

                                 8

<PAGE>



compared  with only four months in the year to March 31, 1996 (the Irvine Studio
commenced  trading on December 9, 1995).  CityWalk Studio revenues  increased by
$69,179 to $1,492,024,  an increase of 4.9%. Revenues from the Irvine Studio and
the Traveling Studio were $508,192 and $14,572 respectively.

    Cost  of  revenues  in the  year  to  March  31,  1997  were  $1,925,930  or
approximately 95.6% of revenues.  Cost of revenues in the year to March 31, 1996
were $1,453,999 or approximately 92.0% of revenues.

    Cost of revenues for the CityWalk Studio  decreased by $43,140 to $1,078,587
despite the $69,179 increase in revenues. Compensation and related benefits were
$9,586 lower than the  previous  year as a result of tighter  controls  over the
number of staff hours worked at the studio. Depreciation was lower by $51,926 as
a result of the adoption in June 1995 of SFAS No. 121 and the  recognition  of a
$722,000 loss on impairment of CityWalk  Studio  assets,  together with the fact
that certain assets have now been fully depreciated. Rent was higher as a result
of the Company  paying rent based on a  percentage  of revenues,  such  revenues
being  higher than in the  previous  period by  $69,179.  Other cost of revenues
increased  by 3.0%,  in line with the 4.9%  increase  in revenue.  The  CityWalk
Studio  earned gross  income of $413,437  during the fiscal year ended March 31,
1997  compared  to gross  income of $301,118  for the same period last year,  an
improvement of $112,319.

    Costs of revenues for the Irvine Studio were $826,164,  resulting in a gross
loss of $317,972.  Included in cost of revenues was $220,975 of depreciation,  a
non-cash  expense.  Cost of revenues for the prior year of $322,272  represented
the four month period from opening to March 31,  1996,  and included  $67,007 of
non-recurring  pre-opening  costs.  The Irvine Studio is still  performing below
expectation  and the Company is  continuing to develop the portfolio of products
available at the Irvine  Studio in an endeavor to improve the revenues  from the
Irvine Studio.

    Cost of revenues for the Traveling Studio were $21,179, resulting in a gross
loss of $6,607.

    Despite the gross loss of $317,972  which was incurred in the Irvine Studio,
and the gross loss of $6,607  incurred  by the  Traveling  Studio,  the  Company
overall  earned a gross income of $88,858 during the fiscal year ended March 31,
1997.  Gross income for the same period last year was $126,713.  The decrease in
gross  income  for the year to March 31,  1997 is mainly  due to the gross  loss
incurred in the Irvine  Studio which traded for a full twelve months in the year
to March 31, 1997 compared with only four months  trading in the prior year. The
decrease in gross income is partly offset by a $112,319 improvement in the gross
income generated by the CityWalk Studio.

    General and administrative expenses for the fiscal year ended March 31, 1997
includes  termination  payments  totaling $51,250 paid to former officers of the
Company.  The  corresponding  year ended March 31, 1996 includes a non-recurring
charge of $110,000 for  professional  fees relating to the PCG transaction and a
$762,129 non-cash loss on impairment of long-lived  assets.  After adjusting for
these  non-recurring  items, the Company's general and  administrative  expenses
decreased  from  $805,824 in the fiscal year ended March 31, 1996 to $736,836 in
the fiscal  year ended March 31,  1997,  a decrease  of  approximately  9%. This
decrease  is  consistent  with  Management's  plan  to  reduce  overhead  costs.
Compensation  and related benefits  decreased by  approximately  18% to $258,380
(excluding the $51,250  termination  payments) from $313,432 for the same period
last year, as a consequence  of the cessation of employment on September 1, 1996
of  the  Vice  President   Operations   and  the  Vice  President   Development.
Professional  fees,  excluding  the  $110,000 in kind  consideration  on the PCG
transaction  in the year ended  March 31,  1996,  increased  by 4% to  $100,777,
compared to $96,979 for the same period last year.  Management  fees of $131,000
payable to PCG were  accrued,  relating to the period  April 1, 1996 to November
29, 1996,  pursuant to the Personnel  Consulting  Agreement dated June 28, 1995.
The Personnel  Consulting Agreement was suspended for two years from December 1,
1996. The expense for the year to March 31, 1997 of $131,000 is comparable  with
the $130,000  accrued in the previous  year for the period July 1, 1995 to March
31, 1996. Office and storage rent expenses increased from $29,524 in the year to
March 31, 1996 to $39,558.  Depreciation  and  amortization  costs were lower by
$37,244 as a result of previously non-producing assets being put into production
and the  consequential  charges reported in cost of revenues.  Other general and
administrative  expenses  increased by $8,969,  or 8% to $114,954 for the fiscal
year ended March 31, 1997, compared to $105,985 for the same period last year.

    The Company  earned  interest  income of $484 in the fiscal year ended March
31, 1997 as compared to $3,035  earned during the prior year.  Interest  charges
totaling  $54,602 were  incurred on the loan from PCG and on the loan payable to
former  executives of the Company  compared with interest  expense of $28,279 in
the year ended March 31, 1996.

    As of March 31, 1996,  the Company has net operating  loss carry forwards of
approximately  $9,650,000.  The ability to utilize $8,275,000 of these losses to
be offset  against future taxable income is restricted as a result of the change
in control  arising from the PCG  transaction.  The losses will expire in March,
2011.


                                 9

<PAGE>



Year Ended March 31, 1996 Compared to Year Ended March 31, 1995

    The  following  table shows  Revenues,  Cost of Revenues  and Gross Income /
(Loss)  during the fiscal  years  ended March 31,  1996 and March 31,  1995,  by
studio.
<TABLE>
                   Fiscal Year Ended March 31, 1996        Fiscal Year Ended March 31, 1995
                    CityWalk         Irvine                 CityWalk               Irvine
                     Studio          Studio                  Studio                Studio
                                (Opened 12/9/95)                                  (Not Open)
<S>                <C>           <C>                       <C>                   <C>    

Revenues           $1,422,845   $   157,867                $1,274,836            $       -
                   ----------   -----------                ----------            ---------

Cost of Revenues:

  Compensation  &
  Related Benefits    439,350       108,787                   459,217                   -

  Depreciation &
  Amortization        189,781        59,468                   340,423                   -

  Pre-opening Costs        -         67,007                        -                    -

  Rent                183,421        27,218                   172,480                   -

  Other               309,175        69,792                   346,992                   -
                   ----------     ---------                  --------            ---------

  Total             1,121,727       332,272                 1,319,112                   -
                    ---------     ---------                 ---------            ---------

Gross Income/(Loss)   301,118   ($  174,405)                 ($44,276)           $    -
                    =========    ==========                 =========            =========
</TABLE>

    The Company overall generated  $1,580,712 in revenues,  compared to revenues
of $1,274,836  during the same period last year, for a net increase of $305,876.
CityWalk  Studio  revenues  increased by $148,009 to $1,422,845,  an increase of
11.6%.  Revenues  from the Irvine  Studio from the date of opening,  December 1,
1995 to March 31, 1996 were $157,867.

    Cost of revenues  increased by 10.2% to $1,453,999 overall during the fiscal
year ended March 31, 1996 compared to $1,319,112 for the same period last year.

    Cost of revenues for the CityWalk Studio decreased by $197,385 to $1,121,727
despite the $148,009  increase in revenues.  Compensation  and related  benefits
were $19,867 lower than the previous  year as a result of tighter  controls over
the  number of staff  hours  worked  at the  studio.  Depreciation  was lower by
$150,642  as a result  of the  adoption  in June  1995 of SFAS  No.  121 and the
recognition of a $722,000 loss on impairment of CityWalk Studio assets. Rent was
higher as a result of the Company paying rent based on a percentage of revenues,
such revenues being higher than the previous  period by $148,099.  Other cost of
revenues  decreased  by 10.9% as a result of cost  reduction  programs at studio
level.  The CityWalk  Studio  earned gross income of $301,118  during the fiscal
year ended  March 31,  1996  compared  to a gross  loss of $44,276  for the same
period last year, an improvement of $345,394.

    Cost of revenues for the Irvine Studio were  $332,272,  resulting in a gross
loss of $174,405.  Included in cost of revenues  were  $67,007 of  non-recurring
pre-opening costs and $59,468 of depreciation,  a non-cash  expense.  All of the
Company's  previously  idle  equipment  has been placed into  production  in the
Irvine Studio.  The Irvine Studio is performing  well below  expectation and the
Company is  proceeding  to develop its  portfolio  of products  available at the
Irvine Studio in an endeavor to improve the revenues from the Irvine Studio.

    Despite  the gross loss of  $174,405  which was  incurred  in the new Irvine
Studio,  the Company overall earned a gross income of $126,713 during the fiscal
year ended  March 31,  1996  compared  to a gross  loss of $44,276  for the same
period last year, an improvement of $170,989.

    General and administrative expenses for the fiscal year ended March 31, 1996
include a non-recurring charge of $110,000 for professional fees relating to the
PCG transaction and a $762,129 non-cash loss on impairment of long-lived assets.
The  corresponding  year  ended  March 31,  1995  includes  non-recurring  lease
abandonment  expenses of $120,713 associated with the discontinued leases on the
920 and 910 Colorado Premises.  After adjusting for these  non-recurring  items,
the Company's general and  administrative  expenses decreased from $1,144,481 in
the fiscal  year ended March 31, 1995 to $834,103 in the fiscal year ended March
31, 1996, a decrease of  approximately  28%. This  decrease  resulted from lower
expenditures within almost every

                                10

<PAGE>



overhead expense  category,  consistent with  Management's  plan to cut overhead
costs.  Compensation  and related  benefits  decreased  by 15% to $313,432  from
$369,618  for the same  period  last  year.  Professional  fees,  excluding  the
$110,000 in kind  consideration on the PCG transaction,  decreased by almost 70%
to $96,979 from $320,047 for the same period last year. Approximately $80,000 of
the professional  fees expended during the fiscal year ended March 31, 1995 were
attributable to  negotiations  with potential  financiers,  including two equity
funding  transactions  which the Company  announced  on Form 8-K current  report
filings  and which  did not  subsequently  close.  Management  fees of  $130,000
payable to PCG have been  accrued  relating  to the period July 1, 1995 to March
31, 1996,  pursuant to the Personnel  Consulting  Agreement dated June 28, 1995.
Office  rent  expenses  were  lower than last year by $37,364 as a result of the
closure of the Corporate offices at 920 and 910 Colorado Premises.  Depreciation
and amortization costs were lower as a result of previously non-producing assets
being put into  production  and the  consequential  charges  reported in cost of
revenues.  Interest  charges totaling $28,279 were incurred on the loan from PCG
and on the deferred  salaries accrual owing to executives of the Company.  There
were no such  charges  in the  prior  year.  Other  general  and  administrative
expenses decreased by $41,493 or 28% to $105,985 for the fiscal year ended March
31, 1996, compared to $147,478 for the same period last year.

    The Company earned  interest income of $3,035 in the fiscal year ended March
31, 1996 as compared to $11 earned during the prior year.

    During the months of July  through  November  1995 the Company  designed and
constructed  the  Irvine  Studio.  As a result of this  work and the  continuing
operating  losses,  the  Company  adopted  SFAS  No.  121,  Accounting  for  the
Impairment  of  Long-Lived  Assets.  In this  regard,  the Company  reviewed the
carrying value of its CityWalk  Studio assets for impairment and determined that
an impairment  loss of $722,000  should be recognized in June 1995. This loss is
reflected in the Company's  statement of operations.  The loss was calculated as
the excess of carrying value over fair value, the latter determined by reference
to prices for similar assets for the Irvine  Studio.  This  adjustment  does not
affect the Company's working capital.

    In the quarter  ended March 31, 1996,  the Company  recognized an impairment
loss of $40,129 in respect of its Traveling  Studio,  a studio developed in 1992
but used on only one  occasion  because of  significant  operating  difficulties
which have not been addressed  because of the Company's  decision to pursue cost
reductions and focus efforts exclusively on the two permanent studios.  The fair
value of the Traveling Studio has been determined to be zero.

    As of March 31, 1996 the Company has net  operating  loss carry  forwards of
approximately  $8,900,000.  The ability to utilize $8,275,000 of these losses to
be offset  against future taxable income is restricted as a result of the change
in control  arising  from the PCG  transaction.  The losses will expire in March
2011.

Liquidity and Capital Resources

    At March 31, 1997, the Company had a working  capital deficit of $516,861 as
compared  to a working  capital  deficit on March 31,  1996 of  $1,216,713.  The
decrease of $699,852 is  primarily  attributable  to the cash  proceeds of stock
subscriptions  received  in the  fiscal  quarter  ended  June 30,  1996 from six
investors  totaling  $130,000 for 650,000 shares of Common Stock,  together with
the  conversion of a $649,000  loan from PCG and $261,000 of accrued  management
fees payable to PCA,  which debt was assumed by PCG,  into  8,970,000  shares of
Common Stock.  This decrease is partly offset by payments to former  officers of
the Company of approximately  $153,000. As of March 31, 1997, the Company's cash
and cash equivalents balance was $70,908.

    Net cash used in operating activities was $336,376 for the fiscal year ended
on March 31, 1997,  compared to the utilization of $439,034 of cash for the same
period last year.  Approximately  $133,000  less cash was required for operating
activitites and there were no payments for long outstanding trade creditors made
in the fiscal year ended March 31, 1997 whereas $196,867 of cash was required in
the  previous  year.  These  reductions  in cash  requirements  were  offset  by
approximately  $153,000 paid to former officers of the Company during the fiscal
year ended March 31, 1997.

    The  Company  invested a total of $46,630 in the fiscal year ended March 31,
1997 for equipment in the Irvine and CityWalk  Studios.  By  comparison,  in the
previous year the Company invested $652,814 for the acquisition of Irvine Studio
leasehold improvements and equipment,  computer hardware and software associated
with the technological  advancement of the Proprietary  System and for equipment
for the CityWalk Studio.

    The Company's  auditors rendered a going concern report. The continuation of
the Company as a going  concern is  dependent  upon its ability to generate  net
cash from  operations  and its  ability  to  continue  with debt  and/or  equity
financing.  The Company's  recurring  operating  losses and net working  capital
deficiency raises  substantial doubt about the entity's ability to continue as a
going  concern.  Management's  plans include  increasing  revenues of the Irvine
Studio, continuing the reduction of expenses, and obtaining additional equity or
debt

                                11

<PAGE>



financing. There can be no assurance that Management will be successful in these
endeavors and if not, the Company will be dependent on the  willingness  and the
ability of the  majority  stockholder,  PCG, to  continue to provide  additional
financing.

    In the fiscal year ended March 31, 1997,  further funding of $260,000 in the
form of cash was provided by PCG.  $131,000 of management  fees were accrued but
unpaid  during the period April 1996 to November  1996,  pursuant to a Personnel
Consulting  Agreement entered into by the Company with PCA. This compares with a
total of  $1,098,500  funding in the form of debt and equity  provided by PCG in
the year ended March 31, 1996,  and $130,000 of  management  fees accrued in the
period July 1, 1995 to March 31, 1996.

    Despite its working capital deficiency, the Company has maintained generally
good relations with its vendors.

    On April 24, 1996 the Board of Directors  authorized the issuance of up to 3
million  shares of the  Company's  Common  Stock for a price of $0.20 per share,
which represented the fair market value of the stock on April 24, 1996. On May 6
and 7,  1996,  the  Company  received  stock  subscriptions  from six  investors
totaling $130,000 for 650,000 shares of Common Stock. The Company received total
payment on these subscriptions as of June 6, 1996. On May 7, 1996, PCG converted
$130,000 of the $649,500 loan payable to 650,000 shares of the Company's  Common
Stock.  This  represented a value of $0.20 per share of Common Stock,  which was
the fair value on this date,  as  determined  by the Board of Directors  and the
same price paid on such date by the six independent investors.

    On November 29,1996,  PCG converted  $519,000 of the remaining $519,500 note
payable,  together the $261,000 of accrued management fees payable to PCA, which
debt was assumed by PCG, into  8,320,000  shares of the Company's  Common Stock.
This represented a value of $0.09375 per share of Common Stock,  which the Board
of  Director's  determined  to be a fair price at that time.  In  addition,  PCG
suspended management fees to it or its related parties pursuant to the Personnel
Consulting  Agreement  with the Company  dated June 28, 1995 for a period of two
years commencing December 1, 1996.

    Although the Company has not commenced to market all Licensed  Articles on a
timely basis,  as of June 10, 1997, the Company has not received any notice that
any Licensor intends,  by virtue of this matter, to exercise any of the remedies
provided for in its respective License  Agreements.  The Company is current with
respect to all payments and required  reports to all Licensors and believes that
its relationship with all Licensors is satisfactory.

    The Company  leases its CityWalk  Studio  premises  under a five year lease,
which expires on May 31, 1998. This lease is subject to renewal at the option of
the Company for an additional  seven years. The Company leases its Irvine Studio
premises under a three year lease which expires on November 21, 1998. This lease
is  subject to renewal at the  option of the  Company  for an  additional  seven
years,  provided  sales revenue in the twelve months prior to the date of giving
notice is in excess of $810,000 and the net worth of the Company is in excess of
$600,000.  Given that the Company has not met either of the criteria for renewal
of the Irvine  Studio lease,  management  cannot state with  certainty  that the
seven year option period will be exercised and accordingly,  no lease commitment
in respect of the option  period has been  disclosed in note 8 to the  financial
statements.

     The Company does not  anticipate  that it will have any problems in meeting
its  obligations  for  continuing  fixed  expenses,   materials  procurement  or
operating  labor.  Management  believes the managerial  assistance that is being
provided to the Company through its association with PCG and the willingness and
ability of PCG to continue to fund the cash flow deficiencies of the Company are
necessary  to ensure the  continued  operating  viability  of the  Company.  The
Company is  continuing to identify and evaluate  opportunities  for the building
and bringing into operation of additional  studios,  which would require funding
from sources  external to the Company.  Having  regard to the current  financial
position of the  Company,  the most likely  source of funding for such growth is
through  additional equity or a loan from PCG. There is no ongoing commitment by
PCG to supply such funds and there can be no  assurance  that such funds will be
made available by PCG. The Company is continuing to explore other  opportunities
for  funding  its  studio  expansion,  however  no  assurance  can be given that
appropriate sources of finance will be found.


Other Matters

    On August 31, 1996, Michael C. Roubicek,  Vice President of the Company, was
elected to the Board of Directors of the Company to fill the vacancy  created by
Mr Robert Shelton's cessation as a director of the Company.

    The  Company's  securities  are quoted on the  OTC-Bulletin  Board under the
trading symbol OUTT.

                                12

<PAGE>





ITEM 8.  FINANCIAL STATEMENTS


                     INDEPENDENT AUDITOR'S REPORT



The Stockholders and Board of Directors of
    Out-Takes, Inc.
    Los Angeles, California



           We have audited the accompanying balance sheet of Out-Takes,  Inc. as
of  March  31,  1997  and  1996,  and  the  related  statements  of  operations,
stockholders'  equity,  and cash flows for each of the three fiscal years in the
period ended March 31, 1997. These financial  statements are the  responsibility
of the  Company's  management.  Our  responsibility  is to express an opinion on
these financial statements based on our audits.

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

           In our opinion,  the financial  statements  referred to above present
fairly, in all material respects,  the financial position of Out-Takes,  Inc. as
of March 31, 1997 and 1996 and the results of its  operations and its cash flows
for each of the three  fiscal  years in the  period  ended  March 31,  1997,  in
conformity with generally accepted accounting principles.

           The  accompanying  financial  statements have been prepared  assuming
that the Company will  continue as a going  concern.  As discussed in Note 14 to
the  financial  statements,  the  Company  has  suffered  recurring  losses from
operations and has a net working capital deficiency that raise substantial doubt
about its ability to continue as a going concern.  Management's  plans in regard
to these matters are also described in Note 14. The financial  statements do not
include any adjustments that might result from the outcome of this uncertainty.

           As discussed in Note 16 to the  financial  statements,  effective for
the year ended  March 31,  1996,  the Company  adopted  Statement  of  Financial
Accounting Standard No. 121, (Accounting for the Impairment of Long-Lived Assets
and for Long-Lived  Assets to be Disposed Of),  resulting in a write down of its
plant and equipment of $762,129.






                                    Moore Stephens, P.C.
                                    Certified Public Accountants




Cranford, New Jersey
May 15, 1997



                                  13

<PAGE>



                             OUT-TAKES INC.

                              BALANCE SHEET

                                 ASSETS                   March 31,
Current Assets:                                          1997           1996
                                                         ----           ----
  Cash and Cash Equivalents                         $  70,908      $   61,672
  Inventory                                            22,879          36,598
  Due from Related Party                                7,343               -
  Prepaid Insurance                                    10,796           8,793
  Prepaid Taxes                                         7,829           2,075
  Other Current Assets                                  8,132           9,802
                                                    ---------       ---------
  Total Current Assets                              $ 127,887      $  118,940

Plant & Equipment - Net                               845,198       1,252,100

Other Non-Current Assets:
  Deposits                                             38,378          38,712
                                                    ---------       ---------

    Total Assets                                   $1,011,463      $1,409,752

                  LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Accounts Payable                                  $ 113,803       $  88,923
  Accrued Payroll                                      42,868         218,291
  Accrued Expenses                                    104,331         203,928
  Accrued Interest - Related Party                      7,871          29,975
  Compensation payable - Related Parties              115,375               -
  Notes Payable                                             -          15,036
  Accrued Management Fee - Related Party                    -         130,000
  Due to Related Party                                260,500         649,500
                                                    ---------       ---------
  Total Current Liabilities                         $ 644,748      $1,335,653

Non-Current Liabilities:
  Notes Payable                                     $  48,000      $   48,000
  Compensation payable - Related Parties                5,962              -
                                                    ---------       ---------
  Total Non-Current Liabilities                     $  53,962      $   48,000

  Commitments (Note 8)                                      -               -

Stockholders' Equity:
  Preferred Stock, par value $.01 per share; 
  5,000,000 share  authorized, none issued          $       -      $        -

  Common Stock, par value $.01 per share; 
  35,000,000 shares authorized; (March 31, 1996:
  25,000,000). 20,788,122 and 11,168,122 shares 
  issued March 31, 1997 and March 31, 1996 
  respectively, (of which 292,396shares are in 
  Treasury)                                                 207,882    111,682

  Capital in excess of par value                         10,014,980  9,071,180

  Accumulated   deficit  (includes  
  $6,990,000  in  accumulated  losses  during
   development    stage    and   a    $762,129 
   loss    on    impairment    of assets)                (9,657,703)(8,904,357)

  Total                                                   $ 565,159  $ 278,505

  Less: Treasury Stock, at cost                            (108,406)  (108,406)
      Deferred Compensation                                (144,000)  (144,000)
                                                            -------    -------

Total Stockholders' Equity                                $ 312,753  $  26,099
                                                          ---------  ---------

    Total Liabilities and Stockholders' Equity           $1,011,463 $1,409,752

The Accompanying Notes are an Integral Part of These Financial Statements.

                                   14

<PAGE>



                             OUT-TAKES INC.

                        STATEMENTS OF OPERATIONS

                                                 Years ended March 31,

                                          1 9 9 7     1 9 9 6        1995
                                          -------     -------        ----

Revenues                              $ 2,014,788   $1,580,712    $1,274,836
                                      -----------   ------------   ----------

Cost of Revenues:

  Compensation and Related Benefits       712,939     548,137        459,217
  Depreciation and Amortization           359,123     249,249        340,423
  Pre-Opening Costs - Irvine Studio             -      67,007              -
  Rent                                    300,857     210,639        172,480
  Other Cost of Revenues                  553,011     378,967        346,992
                                      -----------   ---------      ---------

  Total Cost of Revenues                1,925,930   1,453,999      1,319,112
                                      -----------   ---------      ---------

    Gross Income (Loss)                    88,858     126,713        (44,276)
                                      -----------   ---------      ----------

General and Administrative Expenses:

  Compensation and Related Benefits       309,630     313,432        369,618
  Professional Fees                       100,777     206,979        320,047
  Management Fee - Related Party          131,000     130,000              -
  Rent of Offices                          39,558      29,524         66,888
  Loss on Disposal of Plant and Equipment     504         997              -
  Depreciation and Amortization            91,663     128,907        228,838
  Loss on Impairment of Long-Lived Assets       -     762,129              -
  Lease Abandonment                             -           -        120,713
  Amortization of Organization Costs            -           -          8,712
  Rent - Related Parties                        -           -          2,900
  Other G & A Expenses                    114,954     105,985        147,478
                                      -----------   ---------      ---------

  Total Expenses                          788,086   1,677,953      1,265,194
                                      -----------   ---------      ---------

    Loss from Operations                 (699,228)  (1,551,240)   (1,309,470)

Other Income (Expense)
  Interest income                             484       3,035             11
  Interest expense                         (3,423)         (7)             -
  Interest expense - Related Parties      (51,179)    (28,272)             -
                                      ------------  -----------    ----------

    Total Other Income (Expense)          (54,118)    (25,244)            11
                                      ------------  ------------   ----------

Net Loss                              ($  753,346)  ($1,576,484)  ($1,309,459)
                                       ==========   ============  ============

Net Loss Per Share                    ($     0.05)    ($   0.16)    ($   0.24)
                                      ============    ==========    ==========

Weighted Average Common Shares 
 Outstanding                            14,824,881   9,567,748      5,341,547












The Accompanying Notes are an Integral Part of These Financial Statements.

                                   15

<PAGE>



                                         OUT-TAKES INC.

                                STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>

                                    Common Stock           Capital
                               Number of                 in Excess of     Accumulated   Treasury    Deferred
                                Shares         Amount      Par Value        Deficit      Stock    Compensation    Total


<S>                            <C>           <C>        <C>             <C>            <C>         <C>          <C>


Balance - March 31, 1994        5,603,122    $  56,032   $8,573,393     ($6,018,414)   ($107,296)  ($144,000)   $2,359,715
 
Non-Cash Compensation
  Expense (Trustee Shares)             -            -        20,000              -            -           -         20,000
Non-Cash Compensation
  Expense (Christmas Bonus)       125,000        1,250       22,187              -            -           -         23,437

Repurchase of Treasury 
  Stock                                -            -            -               -        (1,110)         -         (1,110)

Net Loss for the year
  ended March 31,1995                  -            -            -       (1,309,459)          -           -     (1,309,459)
                                    -----       ------      -------       ---------      --------   --------     ---------

Balance - March 31,1995         5,728,122      $57,282   $8,615,580     ($7,327,873)   ($108,406)  ($144,000)   $1,092,583

Proceeds from Issuance of
  Stock                         5,440,000       54,400      455,600              -             -           -       510,000

Net Loss for the year
  ended March 31,1996                  -          -              -       (1,576,484)           -           -    (1,576,484)
                                ---------     ------        -------       ---------     --------    --------     ---------

Balance - March 31, 1996       11,168,122    $ 111,682   $9,071,180     ($8,904,357)   ($108,406)  ($144,000) $     26,099

Cash Proceeds from Issuance
  of Stock (see note 6)           650,000        6,500      123,500              -            -           -        130,000

Stock Issued upon Conversion
  of Debt (see note 6)          8,970,000       89,700      820,300              -            -           -        910,000

Net Loss for the year
  ended March 31, 1997                 -            -            -         (753,346)          -           -       (753,346)
                                ---------      -------      -------       ---------     --------    --------      --------


Balance -  March 31, 1997      20,788,122    $207,882   $10,014,980     ($9,657,703)   ($108,406)  ($144,000)    $ 312,753


</TABLE>


















 The Accompanying Notes are an Integral Part of These Financial Statements.

                                     16

<PAGE>



                             OUT-TAKES INC.
                         STATEMENT OF CASH FLOWS
                                                  Years ended March 31,
                                           1997        1996             1995
Operating Activities:
  Net Loss                              ($753,346) ($1,576,484)   $  (1,309,459)
                                        ---------  -----------     ------------
  Adjustments to Reconcile Net Loss to
   Net Cash Used in Operating Activities:
    Depreciation and Amortization        $450,786     $378,156    $     569,261
    Loss on Impairment of Long-Lived Assets    -       762,129               -
    Loss on Disposal of Plant and Equipment   504          997               -
    Amortization of Organization Costs         -            -             8,712
    Non-Cash Compensation Expense              -            -            43,437
    Loss from Discontinued Lease               -            -           107,968
  Changes in Assets and Liabilities:
   (Increase) Decrease in:
    Prepaid Royalties                          -           840           25,272
    Due from Related Party                 (7,343)          -                -
    Deposits                                  334      (18,290)          19,770
    Inventory                              13,719      (10,090)          30,628
    Due from Officers                          -         8,565           (8,565)
    Prepaid Insurance                      (2,003)          -                -
    Prepaid Taxes                          (5,754)          -                -
    Other Current Assets                    1,670      (10,314)          27,534
   Increase (Decrease) in:
    Accounts Payable                       24,880     (196,867)          66,887
    Accrued Payroll and Other Expenses   (275,020)      56,453          338,772
    Notes Payable                         (15,036)      15,036               -
    Accrued Interest - Related Party      (22,104)      20,835               -
    Accrued Management Fee-Related Party  131,000      130,000               -
    Compensation Payable-Related Parties  121,337           -                -
                                          -------    ---------        ---------

   Total Adjustments                     $416,970   $1,137,450       $1,229,676
                                        ---------   ----------       ----------

  Net Cash Used in Operating Activities ($336,376)   ($439,034)       ($ 79,783)

Investing Activities:
  Acquisition of Equipment and Leasehold
   Improvements                          ($46,630)  ($ 652,814)        ($53,037)
  Proceeds on Disposal of Plant and 
   Equipment                                2,242        1,050               -

  Net Cash Used in Investing Activities ($ 44,388)   ($651,764)       ($ 53,037)

Financing Activities:
  Proceeds from the Issuance of Stock    $130,000     $510,000         $     -
  Due to Related Party                    260,000      649,500               -
  Proceeds from Note Payable                   -            -            48,000
  Proceeds from Interim Loan Financing  -
   Related Party                               -        39,000           61,000
  Repurchase of Treasury Stock                 -            -            (1,110)
  Payment of Interim Loan Financing - 
   Related Party                               -      (100,000)              -

  Net Cash Provided by Financing 
   Activities                           $ 390,000   $1,098,500        $ 107,890

Net Increase in Cash and Cash Equivalent $  9,236     $  7,702        ($ 24,930)
  Cash and Cash Equivalents - Beginning
   of Years                                61,672       53,970           78,900

  Cash and Cash Equivalents - End of 
   Year                                  $ 70,908     $ 61,672         $ 53,970
                                         ========     ========         ========

Supplemental Disclosure of Cash Flow Information
  Cash paid for:
   Interest                             $  66,501    $   4,401         $     -
   Income Tax                           $      -     $      -          $     -

Non-Cash Investing and Financing Activities
On May 7, 1996,  the majority  stockholder,  Photo  Corporation  Group Pty. Ltd.
("PCG"),  converted $130,000 of its $649,500 loan payable into 650,000 shares of
the Company's  Common Stock.  On November 29, 1996,  PCG converted an additional
$780,000 into 8,320,000 shares of the Company's  Common Stock.  This represented
loan principal of $519,000 and accrued  management  fees of $261,000  payable to
Photo  Corporation  of Australia  Pty Limited  ("PCA") which debt was assumed by
PCG. The Accompanying Notes are an Integral Part of These Financial Statements.

                                   17

<PAGE>



                            OUT-TAKES INC.

                     NOTES TO FINANCIAL STATEMENTS


[1] Summary of Significant Accounting Policies


Basis of Presentation - The accompanying  financial  statements are presented on
an accrual basis.  Revenues are recognized when merchandise is sold and expenses
are recognized when incurred. Where applicable,  the figures for the years ended
March 31, 1996 and 1995 have been reclassified in order to facilitate comparison
with the figures for the current year.

Plant and Equipment and Depreciation - Plant and equipment consists primarily of
computers,  photography equipment and leasehold improvements,  and are stated at
cost.  Depreciation is provided over the estimated  useful asset lives using the
straight-line  method over 5 years for all  equipment and  furniture.  Leasehold
improvements  are  amortized  on a  straight-line  basis over the shorter of the
useful life of the improvement or the term of the lease.
Maintenance, repairs and minor purchases are expensed as incurred.

Royalties - Royalties  are  calculated  as a percentage of sales as specified in
each License  Agreement and are expensed  over the life of the agreement  except
where this amount is less than the minimum guarantee  provided by the agreement.
In the latter  situation,  royalty  expense is equal to the  minimum  guarantee,
amortized  on a  straight-line  basis  over the period of the  guarantee.  Where
royalties have been paid in advance, such amounts are disclosed on the Company's
balance sheet as prepaid royalties, net of amounts expensed.

Stock  Options - The  difference  between the fair market value and the exercise
price, if below fair market value, of a stock option granted under the Company's
Stock  Option  Plan is  charged  to expense in the period in which the option is
granted.  All  transactions  in which  goods or services  are the  consideration
received for the issuance of equity  instruments  are accounted for based on the
fair value of the consideration  received or the fair market value of the equity
instruments issued, whichever is more reliably measurable.

Inventories  -  Inventories  consisting  principally  of frames,  bags,  mattes,
chemicals, paper products and other supplies are priced at cost determined using
the FIFO method.

Cash and Cash  Equivalents  - The  Company  classifies  all highly  liquid  debt
instruments,  readily convertible to cash and purchased with a maturity of three
months or less at date of purchase, as cash equivalents. The Company had no cash
equivalents at March 31, 1997.

Risk  Concentrations  - Financial  instruments,  which  potentially  subject the
Company to concentrations of credit risk, consist  principally of cash. At March
31, 1997, the Company had no deposits in financial  institutions  which exceeded
the $100,000  federally insured limit. The excess of the  institution's  deposit
liability to the Company over the federally insured limit was therefore zero.

A significant part of the Company's ability to generate revenues is dependent on
the continuation of the License Agreements with the various Licensors.  Three of
the  License  Agreements  provide  a  portfolio  of images  that each  result in
approximately 15% of the revenues of the Company.  While the Company has License
Agreements  relating to the use of the images there can be no assurance that the
License  Agreements will be renewed or renewed on commercially  acceptable terms
after their current  expiry dates.  In such event,  unless  alternative  License
Agreements  can be  obtained,  the loss of the License  Agreements  would have a
material adverse affect on the Company (see note 3[A]).

Use of Estimates - The  preparation of financial  statements in conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions that affect certain reported amounts.
Accordingly, actual amounts could differ from those estimates.

Advertising   -  Advertising   costs  are  expensed  as  incurred.   Advertising
expenditure  for the years  ended  March 31,  1997,  1996 and 1995 was  $28,552,
$13,140 and $ 9,841 respectively.

Deferred  Taxes - There  are no  material  differences  between  the  accounting
methods used for financial and tax purposes. The Company has sustained losses in
recent years and has a large net operating loss carryforward.  No deferred taxes
are reflected in these financial statements.



                                  18

<PAGE>



                            OUT-TAKES INC.

              NOTES TO FINANCIAL STATEMENTS - (Continued)


[2] Organization and Business

The Company was  incorporated on March 18, 1992,  under the laws of the State of
Delaware.  The  Company is engaged in the  production  and sale of  photographic
portraits of children,  adults and family groups using proprietary  hardware and
digital  imaging   software.   The  Company   currently   operates  and  derives
substantially all of its revenues from two retail studios,  called Out-Takes(R),
one of which opened on May 24, 1993 and is located at MCA/Universal's CityWalkSM
project in Los Angeles,  California  ("the CityWalk  Studio").  The other studio
opened on  December  1, 1995 at the  Entertainment  Center in the  Bazaar at the
Irvine  Spectrum,  located in Irvine,  Orange  County,  California  ("the Irvine
Studio").  During the quarter  ended  December 31, 1996,  the Company  engaged a
consultant, to work with its technical staff, to determine whether the Traveling
Studio could be made operational.


[3] [A] License Agreements and Royalties

The Company has merchandise  licensing  agreements  ("License  Agreements") with
Paramount Pictures Corporation ("Paramount"),  MCA/Universal Merchandising, Inc.
("Universal"),   Warner  Bros.   Consumer   Products  -  formerly   Turner  Home
Entertainment,  Inc. ("Warner"), Twentieth Century Fox Licensing & Merchandising
("Fox"),  Jay P. Morgan  Photography  ("Morgan"),  MTV Netowrks  ("MTV"),  Saban
Merchandising  Inc.  ("Saban") and various other agencies and photographers that
grant the Company the right to  manufacture,  sell and  distribute  in a defined
geographic area, still photographs  which combine a digital  photograph taken of
the customer in the studio with a licensed  background from one of the Licensors
which may be sold  separately or affixed to items  approved by these  licensors,
including photographic  enlargements,  greeting cards, posters, books, t-shirts,
mugs,  buttons and other novelty  items.  Royalties  expense for the year ending
March 31, 1997, 1996 and 1995 was $66,816, $35,622 and $48,245 respectively.

Although  the Company has not  commenced  to market all  Licensed  Articles on a
timely basis, as of March 31, 1997, the Company has not received any notice that
any Licensor intends,  by virtue of this matter, to exercise any of the remedies
provided for in its respective License  Agreements.  The Company is current with
respect to all payments and required reports to all Licensors.


[B] Sublicense Agreement - Related Party

On March 1, 1995,  the Company  entered into a sublicense  agreement  with Photo
Corporation of Australia Pty Limited ("PCA"),  a subsidiary of Photo Corporation
Group Pty.  Ltd.  ("PCG") (see note 5 and note 15),  that,  subject to the prior
approval of the  Licensors,  grants PCA a  non-exclusive  license to utilize the
Licensed  Articles  on  substantially  the same terms as provided in the License
Agreements. The sublicense also provides that PCA will pay the Company an amount
equal to 120% of the  royalties  the Company pays to Licensors  for such images.
The Company has  received  consent  from  Morgan,  Fox and  Paramount  and other
Licensors  indicating their  willingness to support  utilization of the Licensed
Articles in countries where PCA operates.  As of March 31, 1997, the Company had
not yet become entitled to receive any royalties from PCA.


[4]  Plant and Equipment
                                        March 31, 1997  March 31, 1996
The components of plant and equipment are:

Photographic Equipment                  $    622,192    $    689,238
Computers and Software                       679,427         653,753
Equipment and Furniture                      308,987         309,835
Leasehold Improvements                     1,011,292         930,375
                                        ------------    ------------

Total - At Cost                            2,621,898       2,583,201
Less: Accumulated Depreciation             1,776,700       1,331,101
                                        ------------    ------------

Net                                     $    845,198    $  1,252,100
                                        ============    ============




                                  19

<PAGE>



                            OUT-TAKES INC.

              NOTES TO FINANCIAL STATEMENTS - (Continued)


[4]  Plant and Equipment - (Continued)

Depreciation  is  provided  over the  estimated  useful  asset  lives  using the
straight-line method over five years for all equipment and furniture.  Leasehold
improvements  are  amortized  on a  straight-line  basis over the shorter of the
useful life of the  improvement or the term of the lease.  Maintenance,  repairs
and minor purchases are expensed as incurred.

[5] Related Party Transactions

Mr Robert Shelton,  Vice President  Development  and Mrs Leah  Peterson-Shelton,
Vice President Operations, ceased employment with the Company from and effective
September 1, 1996.  Mr Shelton also ceased as a Director of the Company from and
effective September 1, 1996.

Deferred salaries owing to Mr Shelton and Mrs Peterson-Shelton, accrued interest
on deferred  salaries,  accrued  vacation pay and amounts payable on termination
totalling  $274,373 were consolidated on September 1, 1996, and are being repaid
over the period to April 17,  1998.  This  liability is presented on the balance
sheet as "Compensation payable - Related Party". The liability is secured by the
assets of the Company pursuant to the Settlement and Mutual Release Agreement as
of September 1, 1996, between the Company, Mr Shelton,  Mrs Peterson-Shelton and
Photo Corporation Group Pty Limited ("PCG"), the majority stockholder.  Interest
expense is incurred at the prime rate of  interest  (approximately  8.5%) and in
the period to March 31, 1997 interest expense totalled $10,604.  As of March 31,
1997, interest of $676 was accrued and unpaid.

The Settlement and Mutual Release  Agreement  inter alia provides for Mr Shelton
and Mrs  Peterson-Shelton  to act as  consultants to the Company as requested by
the Company and as agreed to by them. No  consulting  fees were incurred or paid
during the year ended March 31, 1997.

Management  fees  of  $261,000  payable  to PCA  were  accrued  pursuant  to the
Personnel  Consulting  Agreement  with the Company  dated June 28,  1995.  These
charges  cover the  period  from July 1, 1995  through  November  30,  1996.  On
November 29, 1996 PCG  suspended  management  fees to it or its related  parties
pursuant to the Personnel  Consulting  Agreement with the Company dated June 28,
1995 for a period of two years from December 1, 1996. On November 29, 1996,  the
accrued  management fees of $261,000 were converted into shares of the Company's
Common Stock (see note 6).

At March 31, 1997 the $260,500 "Due to Related Party"  ($649,500 as of March 31,
1996) was  advanced by PCG.  The  proceeds  of the  $649,500  advance  were used
predominantly  to fund the  construction of the Irvine Studio and to upgrade the
technology  in  relation  to the  studio's  operation.  Of the  $649,500  total,
$649,000 was converted into shares of the Company's Common Stock on November 29,
1996 (see note 6). A further  $260,000  in cash was  advanced  by PCG during the
period to March 31, 1997. The funds have been used predominantly to fund the day
to day operation of the business and to fund the payments due to former officers
of the Company.  The amount Due to Related  Party is unsecured and is payable on
demand. Interest expense is incurred at a rate of 10% per annum and for the year
ended March 31, 1997 was $40,575.  As of March 31, 1997,  interest of $7,871 was
accrued.

The amount "Due from  Related  Party" of $7,343 as of March 31, 1997  represents
monies advanced by the Company during fiscal 1997 on behalf of PCA.

The weighted average interest rate on short term borrowings as of March 31, 1997
was approximately 10.0%.

[6] Stockholders' Equity

Authorization  for Issuance of Additional  Shares - On April 24, 1996, the Board
of Directors  authorized the issuance of up to 3 million shares of the Company's
Common  Stock for a price of $0.20 per  share,  which  represented  the Board of
Directors' determination of the fair market value for restricted shares of stock
on April 24, 1996.

On November 29, 1996 the Board of  Directors  agreed to reduce the price for any
additional issuance of shares of Common Stock to $0.09375, which represented the
fair market value at that time.

Increase  in  Authorized  Number of  Shares - On July 24,  1996,  at the  Annual
Meeting of Stockholders of the Company,  the stockholders  approved an amendment
to the Company's  certificate of incorporation to increase the authorized number
of shares of Common Stock of the Company from 25,000,000 to 35,000,000.


                                  20

<PAGE>



                            OUT-TAKES INC.

              NOTES TO FINANCIAL STATEMENTS - (Continued)


[6] Stockholders' Equity - (Continued)

Stock  Subscription  -  On  May  6  and  7,  1996  the  Company  received  stock
subscriptions  from six investors totaling $130,000 for 650,000 shares of Common
Stock. The Company  received total payment on these  subscriptions as of June 6,
1996.

Debt to Equity  Conversion  - On May 7, 1996,  the  majority  stockholder,  PCG,
converted  $130,000 of its $649,500  loan  payable  into  650,000  shares of the
Company's  Common Stock.  This  represented a value of $0.20 per share of Common
Stock which represented the Board of Directors' determination of the fair market
value on this date and the same price also paid by the six independent investors
in May 1996.

On November 29, 1996,  PCG  converted  $519,000 of the  remaining  $519,500 note
payable, together with $261,000 of accrued management fees payable to PCA, which
debt was assumed by PCG, into 8,320,000  shares of the Company's  Common Stock .
This represented a value of $0.09375 per share of Common Stock,  which the Board
of  Directors'  determined  to be a fair price at that time.  In  addition,  PCG
suspended management fees to it or its related parties pursuant to the Personnel
Consulting  Agreement  with the Company  dated June 28, 1995 for a period of two
years commencing December 1, 1996.

Escrow Shares - In March,  1992, an aggregate of 750,000 shares of the Company's
Common  Stock was placed into escrow for the benefit of the  Company's  founders
("Founders").  The Founders are permitted to vote their respective Escrow Shares
while  they are in escrow,  however,  the Escrow  Shares are not  assignable  or
transferable,  except  through  the  laws of  inheritance,  guardianship,  legal
representation  or  trusteeship  for the  benefits of the holder or the holder's
immediate  family.  In the event the Company's  pre-tax earnings first equals or
exceeds  an  amount  listed  below  for any  fiscal  year  ending on or prior to
November  30,  1998,  the Escrow  Shares  will be  released  to the  Founders as
follows:
                                  Escrow Shares
                Pre-Tax Earnings to be Released
                    $1,500,000       250,000
                    $1,750,000       250,000
                    $2,500,000       250,000

If the above pre-tax earnings levels are achieved,  the Company will recognize a
compensation  expense equal to the  difference  between the fair market value at
the time of release of Escrow Shares to officers or employees of the Company and
the  recorded  value at the time of  issuance.  Release of the Escrow  Shares is
likely to result in  substantial  compensation  expense to the Company in future
years. In the event the above does not occur, the shares will be returned to the
Company as Treasury Shares.

During the 1993 fiscal year, a  stockholder  contributed  137,500  shares to the
Company in exchange for  registering  630,728 shares and granting the Company an
irrevocable  proxy to vote the shares.  For the period of four years  commencing
September 10, 1994,  the holders of at least 51% of the shares sold in a private
placement  completed  in June and July of 1992  have the  right to  require  the
Company to register  these  shares for public sale under the  Securities  Act of
1933.

Warrants - The Company issued a total of 2,353,125  redeemable  Class A Warrants
and  1,868,750  redeemable  Class B Warrants in  connection  with the  Company's
initial public offering  ("IPO") on March 9, 1993. Each Class A Warrant provides
the holder  with the right to  purchase  one share of Common  Stock at $4.80 and
each Class B Warrant provides the holder with the right to purchase one share of
Common Stock at $6.75 per share. The warrants expire at the close of business on
March 9, 1998 and are  subject to  redemption  at $0.05 per warrant in the event
that the average  closing bid price per share of the Common Stock  exceeds $8.00
per share with  respect to the Class A Warrant and $11.75 per share with respect
to the Class B Warrant for any 20 consecutive  trading days ending not more than
15 days prior to the date of the notice of redemption.

The exercise price of the Class A and Class B warrants are subject to adjustment
upon the occurrence of certain events including: the issuance of Common Stock as
a dividend  to the  holders of all  outstanding  Common  Stock or for cash in an
amount per share less than the warrant  exercise price per share;  subdivisions,
combinations, or certain reclassifications of Common Stock; or certain issuances
of rights,  options,  or warrants to subscribe for Common Stock or securities of
the Company convertible into Common Stock. At March 31, 1997, the exercise price
of the  Class A and  Class B  warrants  had not  been  adjusted  and none of the
warrants had been  exercised or redeemed by the Company.  There are 2,353,125 of
Class A warrants and 1,868,750 Class B warrants outstanding at March 31, 1997.

                                  21

<PAGE>



                            OUT-TAKES INC.

              NOTES TO FINANCIAL STATEMENTS - (Contimued)


[7] Stock Option Plans

Under the Company's Amended and Restated 1992 Stock Option Plan, incentive stock
options may be granted to purchase  shares of the Company's stock at a price not
less than the fair  market  value of the Common  Stock at the date of the grant.
Non-qualified  stock  options may be granted at a price not less than 85% of the
fair market value.  No option may be exercised  after ten years from the date of
the grant. At March 31, 1997, 462,000 shares were reserved for future grants.

Effective  March 20 1997,  the Company's  1992  Directors  Stock Option Plan for
Non-employee Directors was terminated.

No compensation cost was recognized in income.

Information is summarized as follows:
<TABLE>
                                  Shares Under Options and Warrants
                                 Amended            1992                        Weighted
                               And Restated       Directors        Price         Average
                               1992 Stock          Stock            per         Exercise
                               Option Plan       Option Plan       Share          Price

<S>                              <C>                <C>       <C>                <C>   

Outstanding at March 31,1994     249,245             -        $0.65 to $4.40      $3.44

  Granted/forfeited during the
    year ended March 31, 1995         -              -

Outstanding at March 31, 1995    249,245             -        $0.65 to $4.40      $3.44

  Forfeited during the year
    ended March 31, 1996         (94,527)            -

Outstanding at March 31, 1996    154,898             -        $0.65 to $4.40      $4.00

  Forfeited during the year
    ended March 31, 1997        (154,898)            -


Outstanding at March 31, 1997         -              -              -                -
                               ============
</TABLE>


[8] Commitments

Lease  Agreements - The Company leases its CityWalk Studio premises under a five
year lease,  which expires on May 31, 1998.  This lease is subject to renewal at
the option of the Company for an additional  seven years. The lease provides for
an annual  rental  payment of $130,599  and the  payment of 10% of annual  store
revenues in excess of $867,383.  The Company paid $62,287 additional rent during
the year to March 31, 1997 (1996:  $56,862;  1995: $36,184) as a result of sales
being in excess of the threshold. Both the base rental amount and the percentage
rental  cut-in  point are adjusted  annually  for changes in the consumer  price
index.  The lease may be terminated by the lessor if the Company does not meet a
minimum annual sales requirement of $587,000.

The Company leases its Irvine Studio  premises  under a three year lease,  which
expires on November 21, 1998.  This lease is subject to renewal at the option of
the Company for an  additional  seven  years.  The lease  provides for an annual
rental payment  including  common area costs and marketing costs of $118,202 per
annum and the payment of 7% of store revenues in excess of $1,128,857 per annum.
Both the base rental amount and the percentage  rental cut-in point are adjusted
annually for changes in the consumer price index.  The option to renew the lease
is  available  only if sales  revenue in the twelve  months prior to the date of
giving  notice is in excess of  $810,000  and the net worth of the Company is in
excess of $600,000.


                                  22

<PAGE>



                            OUT-TAKES INC.

              NOTES TO FINANCIAL STATEMENTS - (Continued)

[8] Commitments - (Continued)

Future minimum lease payments under non-cancelable  operating leases as of March
31, 1997 are shown in the table below.  The table includes the option period for
the CityWalk Studio but does not include the option period for the Irvine Studio
(see note 14).

                  Year ended March 31
                  -------------------
            1998                       $    248,801
            1999                            209,400
            2000                            130,599
            2001                            130,599
            2002                            130,599
            Thereafter                      413,562
                                            -------

            Total                      $  1,263,560
                                          =========

The Company has a month to month  commitment  of $2,300 per month for  temporary
corporate  office  space and a month to month  commitment  of $600 per month for
storage  facilities.  Total rental  expense for the fiscal years ended March 31,
1997, 1996 and 1995 was $340,717, $240,163 and $239,368 respectively.


[9] Net Loss Per Share

Net  loss  per  share  was  calculated  based  on the  weighted  average  shares
outstanding during the year. Neither the 292,396 shares held in Treasury nor the
750,000  shares  held in escrow  pursuant  to an escrow  agreement  between  the
Founders  and the Company  have been  included in the  weighted  average  shares
outstanding  during the year as their inclusion would be anti-dilutive (see note
6). The effect of outstanding stock warrants and options was not included in the
calculations as their effect would also be anti-dilutive.


[10] Trademark Registrations and Patent Applications

The  Company  has  registered  the  marks  Out-Takes(R),  So You  Want  to be in
Pictures(R) ,  Photomation(R)  and Create the Moment(R) with the U.S. Patent and
Trademark Office and has registered the  Out-Takes(R)  service mark in Japan, in
both Japanese and English.  The Company has filed two applications with the U.S.
Patent and Trademark Office seeking patent protection for certain aspects of the
Company's technology.


[11] Income Taxes

As of March 31,  1997,  the Company has a net  operating  loss carry  forward of
approximately  $9,650,000.  The  ability to offset  $8,275,000  of these  losses
against future  taxable income has been  restricted as a result of the change in
control  which  occurred  on June 28, 1995 when a majority  shareholding  in the
Company was acquired by PCG. As of March 31, 1997,  the Company has deferred tax
assets of  approximately  $663,000  arising  from  these  operating  loss  carry
forwards which will expire in March, 2011.  However,  due to uncertainty whether
the Company will generate income in the future  sufficient to fully or partially
utilize these loss carry forwards, an allowance of $663,000 has been established
to offset this asset.


[12] Notes Payable

The Note  Payable  of  $48,000 is due to a former  financial  consultant  to the
Company  pursuant to a settlement  agreement dated August  17,1994.  The note is
non-interest bearing and payment is subject to availability of future cash flows
from the Company's operations.







                                  23

<PAGE>



                            OUT-TAKES INC.

              NOTES TO FINANCIAL STATEMENTS - (Continued)



[13] New Authoritative Pronouncements

The  Financial  Accounting  Standards  Board  ("FASB")  has issued  Statement of
Financial  Accounting  Standards  ("SFAS") No. 125 "Accounting for Transfers and
Servicing of Financial Assets and  Extinguishment of Liabilities".  SFAS No. 125
is effective for transfers and servicing of financial assets and  extinguishment
of liabilities occurring after December 31, 1996. The provisions of SFAS No. 125
must be applied prospectively;  retroactive application is prohibited.  Adoption
of this  Standard  on  January  1,  1997 did not have a  material  impact on the
Company.  The FASB  deferred  some  provisions  of SFAS No.  125  which  are not
expected to be relevant to the Company.

The FASB issued SFAS No. 128,  "Earnings Per Share" and SFAS No. 129 "Disclosure
of  Information  about  Capital  Structure"  in  February  1997.  SFAS  No.  128
simplifies  the earnings per share ("EPS")  calculations  required by Accounting
Principles  Board  ("APB")  Opinion  No. 15,  and  related  interpretations,  by
replacing the presentation of primary EPS with a presentation of basic EPS. SFAS
No. 128 requires  dual  presentation  of basic and diluted EPS by entities  with
complex  capital  structures.  Basic EPS includes no dilution and is computed by
dividing income available to common stockholders by the weighted-average  number
of common shares outstanding for the period.  Diluted EPS reflects the potential
dilution of securities that could share in the earnings of an entity, similar to
the fully  diluted  EPS of APB Opinion  No. 15.  SFAS No. 128 is  effective  for
financial statements issued for periods ending after December 15, 1997 including
interim periods;  earlier application is not permitted.  When adopted,  SFAS No.
128 will require  restatement of all prior-period  EPS data presented;  however,
the Company has not sufficiently  analyzed SFAS No. 128 to determine what effect
SFAS No. 128 will have on its historically reported EPS amounts.

SFAS No. 129 does not change any previous  disclosure  requirements,  but rather
consolidates existing disclosure requirements for ease of retrieval.


[14] Going Concern

The Company  commenced  commercial  operations on May 24, 1993 and as of May 15,
1997, the Company has been  unsuccessful in generating net cash from operations.
The net cash used by the Company in operating activities in the year ended March
31, 1997 was $336,376.  The Company incurred a net loss of $753,346 for the year
ended March 31, 1997 and has a working  capital  deficit as of March 31, 1997 of
$516,861.

The  accompanying  financial  statements  have been  prepared on a going concern
basis which  contemplates  the  realization  of assets and the  satisfaction  of
liabilities and commitments in the normal course of business.  The  continuation
of the Company as a going concern is dependent  upon its ability to generate net
cash from operations.  The Company's  recurring operating losses and net working
capital  deficiency  raises  substantial  doubt  about the  entity's  ability to
continue as a going concern.

Management's plans include increasing revenues of the Irvine Studio.  Given that
the Company has not met either of the criteria for renewal of the Irvine  Studio
lease,  management cannot state with certainty that the seven year option period
will be exercised and accordingly,  no lease commitment in respect of the option
period has been disclosed in note 8.

Management is also  continuing the reduction of expenses  throughout the Company
and is seeking to obtain  additional  equity or debt financing.  There can be no
assurance  that  management  will be successful in these  endeavors and if it is
not, the Company will be  dependent  on the  willingness  and the ability of the
major  stockholder,  PCG,  to continue to provide  additional  financing  and no
assurance can be given the such additional financing will be provided.


[15] Change of Control - Photo Corporation Group Pty. Ltd. ("PCG")

On June 28,  1995,  the Company  closed a  transaction  with PCG whereby PCG was
issued 5,440,000 shares of Common Stock of the Company,  representing 50.001% of
its total  issued  and  outstanding  shares at that time,  at an issue  price of
$0.09375 per share. As part of this  transaction,  PCG also acquired  options to
purchase  4,560,001  shares of Common Stock at an exercise  price of $0.1875 per
share,  together with the entering into of various  agreements,  particulars  of
which were fully disclosed in the Proxy Statement  forwarded to all stockholders
in connection with the Annual Meeting of Stockholders held on June 28, 1995 (see
note 3B and note 5).


                                  24

<PAGE>



                            OUT-TAKES, INC.

              NOTES TO FINANCIAL STATEMENTS - (Continued)



[16] Impairment of Long-Lived Assets

The Company had adopted Statement of Financial Accounting Standard ("SFAS") 
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived 
Assets to be Disposed Of.

As a result of the Company's  continuing  operating  losses and the  information
obtained during  research and the development of the Irvine Studio,  the Company
reviewed the carrying value of the assets at its CityWalk  studio for impairment
in the June 1995  quarter.  Management  determined  that an  impairment  loss of
approximately  $722,000  should be  recognized.  This loss was determined as the
excess of carrying value over fair value. Fair value was determined by reference
to costs for similar assets for the Irvine Studio.

As a  result  of the  significant  operating  difficulties  associated  with the
Traveling  Studio,  the Company  reviewed  the  carrying  value of the asset for
impairment in the March 1996 quarter.  Management  determined that an impairment
loss of $40,129  should be recognized to reduce the carrying  value of the asset
to its fair value of zero. Fair value was determined to be zero as the asset was
not able to be placed into production in its present form.

Long term  assets of the Company  are  reviewed at least  annually as to whether
their carrying value has become  impaired,  pursuant to guidance  established in
Statement of Financial Standards ("SFAS") No. 121.  Management  considers assets
to be impaired if the carrying  value  exceeds the future  projected  cash flows
from  related  operations   (undiscounted  and  without  interest  charges).  If
impairment is deemed to exist,  the assets will be written down to fair value or
projected  discounted  cash  flows  from  related  operations.  Management  also
re-evaluates the periods of amortization to determine whether  subsequent events
and  circumstances  warrant  revised  estimates of useful lives. As of March 31,
1997, management expects these assets to be fully recoverable.



[17] Financial Instruments

The carrying amount of cash and notes payable approximates fair value.



[18] Subsequent Events

During the  period  April 1, 1997 to May 15,  1997 PCG  provided  an  additional
$45,000 of cash to assist the Company in funding its day to day  operations  and
to enable the Company to make the required  payments due to the former  officers
of the Company.


               .   .   .   .   .   .   .   .   .   .   .















                                  25

<PAGE>



ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
         AND FINANCIAL DISCLOSURE

    None.


                               PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

    The information  required herein is hereby  incorporated by reference to the
information appearing under the caption "Election of Directors" in the Company's
Proxy Statement, to be filed with the Securities and Exchange Commission.


ITEM 11. EXECUTIVE COMPENSATION

    The information  required herein is hereby  incorporated by reference to the
information  appearing  under  the  caption  "Executive   Compensation"  in  the
Company's  Proxy  Statement,  to be  filed  with  the  Securities  and  Exchange
Commission.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT

    The information  required herein is hereby  incorporated by reference to the
information   appearing  under  the  caption  "Security   Ownership  of  Certain
Beneficial Owners and Management" in the Company's Proxy Statement,  to be filed
with the Securities and Exchange Commission.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    The information  required herein is hereby  incorporated by reference to the
information  appearing  under the  caption  "Certain  Relationships  and Related
Transactions" in the Company's Proxy Statement,  to be filed with the Securities
and Exchange Commission.


                                  26

<PAGE>



                               PART IV

ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K

(a) The following  exhibits are filed as part of this report as required by Item
601 of Regulation S-B:

    3.1  Certificate of Incorporation of the Company. (ii)

    3.2  Certificate of Amendment of Certificate of Incorporation. (ix)

    3.3  Bylaws of the Company. (i)

    4.1  Form of Unit Purchase Option. (i)

    4.2  Form of Warrant Agreement. (i)

    4.3  Form of Escrow Agreement. (iv)

    4.4  Section 203 of the Delaware General Corporation Law. (ix)

    10.1 Form of Registration Rights Agreement. (i)

    10.5 Form of Standard Employment Agreement for hourly wage employee. (vi)

    10.6 Form of Standard Employment Agreement for hourly wage employee eligible
         to earn commissions. (vi)

    10.7 Form of Standard Employment Agreement for salaried employee. (vi)

    10.8 Form of Standard Employment Agreement for salaried employee eligible 
         to earn commissions. (vi)

    10.9 Form of Standard Employment Agreement for salaried employee eligible 
         for bonus in the form of incentive compensation. (vi)

   10.10 Agreement dated March 16, 1992 between the Placement Agent and Shelton 
         on behalf of "Founders" specified therein, as amended. (i) +

   10.11 Founders Agreement dated March 25, 1992 among Robert H. Shelton 
         ("Shelton"), Ellen Korval ("Korval"), Robert A. Small ("Small"), Leah
         R. Shelton ("Shelton")and John L. Sigalos ("Sigalos"), as supplemented
         by letter agreement dated as of March 25, 1992 among Shelton, Shelton, 
         Sigalos, Korval and Small. (i) +

   10.12 Merchandising License Agreement dated February 25, 1992 between
         MCA/Universal Merchandising, Inc. and the Company. (i)

   10.13 Merchandising License Agreement dated April 24, 1992 between
         Turner Home Entertainment, Inc. and the Company. (i)

   10.14 Merchandising License Agreement dated as of April 16, 1992 between
         Paramount Pictures Corporation and the Company. (i)

   10.15 Letter Agreement between the Image Bank West and the Company dated as 
         of August 5, 1992. (i)

   10.16 Letter Agreement between the Company and Tony Stone Worldwide dated as 
         of August 31, 1992. (i)

   10.17 1992 Employee Stock Option Plan. (iii) +

   10.18 1992 Non-Employee Directors Stock Option Plan. (iii)

   10.19 Metrum Imaging Products VAR Agreement dated September 11, 1992 between 
         Metrum Information Storage and the Company. (i)

   10.20 Lease dated November 13, 1992 between the Company and MCA Development 
         Company. (ii)

   10.21 Lease dated October 13, 1992 between the Company and Midis Properties,
         Ltd. (ii)

                                  27

<PAGE>



   10.22 Lease dated March 28, 1993 between the Company and Midis Properties, 
         Ltd. (vi)

   10.23 Letter Agreement between the Company and Jay P. Morgan Photography 
         dated September 28, 1992. (iii)

   10.24 Settlement Agreement and Mutual Release dated as of August 11, 1994 
         between the Company, on the one hand, and Richard T. Eckhouse, B&E 
         Financial Express, Business & Executives Financial Group, Innovative
         Business Management Inc., and R. T. Eckhouse & Assoc., on the other
         hand. (vii)

   10.25 Promissory Note in favor of Photo Corporation of Australia Pty Limited,
         dated March 23, 1995. (viii)

   10.26 Security Agreement between the Company and Photo Corporation of 
         Australia Pty Limited, dated as of March 23, 1995. (viii)

   10.27 Subscription Agreement between the Company and Oakrusk Pty Limited, 
         dated May 26, 1995. (viii)

   10.28 Stock Option Agreement between the Company and Oakrusk Pty Limited,
         dated May 26, 1995. (viii)

   10.29 Form of Subscription Agreement. (ix)

   10.30 Settlement and Mutual Release Agreement between the Company, Shelton, 
         Shelton and Photo Corporation Group Pty Limited, dated August 31, 
         1996.(x)

(b) Reports on Form 8-K

    None.





    (i)  Incorporated by reference to the Company's Registration Statement on 
Form S-1 (Registration No.  33- 52904) filed on October 5, 1992 (the 
"Registration Statement").

    (ii)  Incorporated by reference to Pre-Effective Amendment No. 1 to the 
Registration Statement filed on December 21, 1992.

    (iii)  Incorporated by reference to Pre-Effective Amendment No. 2 to the 
Registration Statement filed on January 15, 1993.

    (iv)  Incorporated by reference to Pre-Effective Amendment No. 3 to the
Registration Statement filed on February 3, 1993.

    (v)  Incorporated by reference to the Company's Registration Statement on 
Form 8-A (No. 0-21322) filed on March 5, 1993 and effective on March 19, 1993.

    (vi) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended March 31, 1993.

    (vii)  Incorporated by reference to the Company's  Quarterly  Report on Form
10-QSB for the quarterly period ended June 30, 1994.

    (viii)  Incorporated  by reference to the  Company's  Annual  Report on Form
10-KSB for the fiscal year ended March 31, 1995.

    (ix) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended March 31, 1995.

    (x)  Incorporated by reference to the Company's Report on Form 10-QA for the
period ended September 30, 1996.

    +  Management contract or compensatory plan.

                                  28

<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 authorized.

                                                    Out-Takes, Inc.



Dated: June 10, 1997                            By:
                                                     Peter C. Watt,  President








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

        Signature                  Title                            Date



                        Chairman of the Board, President        June 10, 1997
       Peter C. Watt    Chief Executive Officer, Principal
                        Financial Officer and Secretary
                        (Principal Executive Officer,
                        Principal Financial Officer and
                        Principal Accounting Officer)



                        Director                                 June 10, 1997
       Michael C. Roubicek

                                  29