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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, 1998
                                       OR
    [__]       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

                                (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 $1,187,638.

The aggregate market value of the voting stock held by non-affiliates as of June
8, 1998 was $91,286.

The number of shares outstanding of the issuer's Common Stock as of June 8, 1998
was 20,495,726.

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the  Registrant's  definitive  Proxy Statement  relating to the 1998
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, 1998

                               TABLE OF CONTENTS

                                                                         Page
PART I                                                                    1

  ITEM 1.   DESCRIPTION OF BUSINESS                                       1

  ITEM 2.   DESCRIPTION OF PROPERTY                                       4

  ITEM 3.   LEGAL PROCEEDINGS                                             4

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

PART II                                                                   5

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

  ITEM 6.   SELECTED FINANCIAL DATA                                       5

  ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
            OPERATION                                                     6

  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                                                                  27

  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 a retail  studio,  called  Out-Takes(R),
which  opened on May 24,  1993 and is  located  in MCA/  Universal's  CityWalkSM
project in Los Angeles,  California ("the CityWalk  Studio").  The Company had a
second  studio,   which  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").  As a result of management's
continuing  review of the poor  performance  of the  Irvine  Studio,  management
decided to close the Irvine Studio. The Irvine Studio ceased operations on April
22,  1998.  The  CityWalk  studio  employs  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 distinction in the
consumer  portraiture  business.  Most of the  portraits  taken in the  CityWalk
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 ("Para mount");  MCA/Universal  Merchandising,  Inc.  ("Universal");
Warner Bros.  Consumer  Products  ("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"),  Curtis
Archives ("Curtis A"), Curtis Management  ("Curtis M"), King Features  ("King"),
MTV Networks ("MTV"),  Saban  Merchandising Inc.  ("Saban"),  Innerspace Visions
("Visions"),   The  Baywatch   Production   Company   ("Baywatch")  and  others,
individually   and  collectively   referred  to  as  the  "License   Agreements"
(Paramount,  Universal, Turner, Fox, Morgan, TSW, Queen Bee, Curtis A, Curtis M,
King,  MTV,  Saban,  Visions and  Baywatch  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.


                                      1

<PAGE>



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





        Licensor            Selected Titles / Properties Territory and Usage


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

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

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

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

Jay P. Morgan Photography  Multi-property agreement    Territory:  Worldwide.
                           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
                                                       and Canada.
                           Elvira in bathtub
                           Elvira at movie theater

Curtis Archives (on       All Norman Rockwell          Territory:  United States
behalf of Norman          illustrations 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.


                                      2

<PAGE>



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

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

The Baywatch Production   Current property in use:     Territory:  United States
Company                    Baywatch                    and its territories and
                                                       possessions.

                                      3

<PAGE>



      No single License Agreement  represents  greater than 15% 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 15% of the Company's revenues.
Although  the Company has not  commenced  to market all  Licensed  Articles on a
timely basis,  as of June 8, 1998,  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 PCA sublicense agreement has not yet generated
any royalties.

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  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  has  enjoyed  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 expired on May 31,
1998,  the  landlord  would 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.  The new lease does not contain the
same  restrictive  covenant.  This  restriction  did not  apply to  photographic
products  offered  within the theme park  adjacent to the CityWalk  Studio.  The
opening of additional digital photographic  concessions within the theme park in
the spring of 1997 increased the number of photographic  opportunities available
to  visitors  to the area and has diluted  the  CityWalk  Studio's  share of the
market. As a result of the expiration of the lease restriction,  the Company may
face new competition at the CityWalk  Studio.  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.  The Company has renewed the
lease for a further seven years.

      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 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.

Employees


                                        4

<PAGE>



      As of March  31,  1998,  the  Company  had 24  employees,  18 of whom were
part-time.  The Company's  full time  employees  include a Financial  Controller
handling primarily  administrative and accounting  responsibilities.  All of the
remaining  persons were employed in retail operations at the CityWalk Studio (17
employees) and the Irvine Studio (6 employees). Due to the closure of the Irvine
Studio on April 22, 1998, the Company  reduced the number of full time personnel
from 6 people to 4 people and reduced  the number of  part-time  personnel  by 4
persons.  In  addition,  between  March 31,  1998 and June 8, 1998,  the Company
increased the number of part-time employees at its CityWalk Studio by 2 persons,
such  that as of June 8,  1998,  the  Company  had a total of 20  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 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.  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.

      In  order  to  comply  with   federal,   state  and  local   environmental
regulations,  the Company  has a per manent  filtration  system at the  CityWalk
Studio that lessens 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
procedures 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.



ITEM 2.  DESCRIPTION OF PROPERTY

      The Company  leases 1,699 square feet of retail space (plus  approximately
200 square feet of mezzanine 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
$123,250 plus a percentage  rental  payment equal to ten percent (10%) of annual
store revenues over $881,177. During the year to March 31, 1998 the Company paid
additional  rent of  $13,351  as a result  of  revenues  being in  excess of the
$881,177  threshold.  The CityWalk  Studio lease expired on May 31, 1998 and the
Company  has  exercised  its option to renew the lease for a period of seven (7)
years.  The lease may be terminated by the lessor if the Company does not meet a
minimum annual sales requirement of $587,000.

      The Company maintains computer graphics and image production facilities at
the CityWalk 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  insurance with limits and conditions that management
deems customary for the industry.



ITEM 3.  LEGAL PROCEEDINGS

      None.


                                      5

<PAGE>




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

      None.


                                   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-Bulletin BoardSM under the symbol OUTT.


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


                  Fiscal 1996          Fiscal 1997           Fiscal 1998
                 High      Low       High      Low         High       Low

First Quarter   18/100    7/100      27/100   22/100       10/100     7/100
Second Quarter  17/100   15/100      25/100   10/100      7.5/100     7/100
Third Quarter   19/100   13/100     6.5/100    6/100        7/100     4/100
Fourth Quarter  25/100   13/100       9/100    4/100    3.125/100   1.5/100


      There were  approximately  83 holders  of record of the  Company's  Common
Stock as of June 8, 1998.

      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 for the years ended March 31,
1994  through  March 31, 1998.  Refer to "Item 7.  Management's  Discussion  and
Analysis or Plan of Operation" for discussion of operations.


                             1998      1997     1996          1995       1994
                             ----      ----     ----          ----       ----
Income Statement Data

Revenue from operations $1,187,638  $2,014,788 $1,580,712 $1,274,836 $  454,395

Gross Income (Loss)       (541,246)     88,858   (635,416)   (44,276)  (531,379)

Net Loss                (1,082,306)   (753,346)(1,576,484)(1,309,459)(2,883,366)

Net loss per share          ($0.05)     ($0.05)    ($0.16)    ($0.24)    ($0.54)


Balance Sheet Data


                                      6

<PAGE>



Total Assets             $285,840   $1,011,463 $1,409,752 $1,862,279 $2,614,752

Total Liabilities       1,020,943      698,710  1,383,653    769,696    255,037

Stockholders' Equity
 (Deficit)               (735,103)     312,753     26,099  1,092,583  2,359,715



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 a photographic  portrait studio,  which was
opened on May 24, 1993 at  MCA/Universal's  CityWalkSM  project in Los  Angeles,
California  ("the  CityWalk  Studio").  The  Company  opened a second  studio 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
Irvine Studio closed on April 22, 1998.

The following table summarizes the Company's fiscal quarter results:

<TABLE>

               Fiscal Year Ended March 31, 1998     Fiscal Year Ended March 31, 1997
               --------------------------------     --------------------------------


              3 months   3 months 3 months   3 months 3 months   3 months  3 months  3 months
               ended      ended    ended      ended    ended      ended     ended     ended
               Jun 30     Sep 30    Dec 31     Mar 31   Jun 30     Sep 30    Dec 31    Mar 31
               ------     ------    ------     ------   ------     ------    ------    ------

<S>           <C>       <C>       <C>       <C>       <C>       <C>       <C>      <C>      
Revenue       $333,149  $342,616  $306,588  $205,285  $468,187  $657,643  $520,666 $ 368,292

Gross Income/ 
(Loss)         (72,279)  (72,973) (101,160) (294,834)   18,425   126,736    15,081   (71,384)

Net Loss for 
the period    (219,536) (210,151) (237,672) (414,947) (204,568) (172,582) (172,530) (203,666)

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

Closing Bid 
Price per share 
of Common
Stock         $   0.06   $  0.06   $  0.04   $ 0.015   $  0.22    $ 0.10   $ 0.065   $ 0.085
</TABLE>

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     As noted in the table presented above, the Company  continues to operate at
a net loss. The Irvine Studio incurred net losses of $1,058,283 from the date of
opening in December 1995 until closure in April 1998.  Management  believes that
the closure of the Irvine Studio will  therefore  have a positive  impact on the
Company's  operating results as no further losses will be incurred by the Irvine
Studio. The Company's short term objectives are to improve the revenues from the
CityWalk  Studio,  continue  the  reduction  of  expenses,   source  appropriate
locations and facilitate the opening of additional studios. Notwithstanding, net
losses  are  expected  to  continue  unless  and until the  Company  opens  such
additional  studios  and / or  the  revenue  stream  from  the  CityWalk  Studio
increases substantially.

     On April 22, 1998, following extensive  negotiations with the landlord, the
Company  closed the Irvine Studio and the lease was  terminated  with no further
obligations to the Company.  The costs associated with the closure of the studio
totaled $164,745 and included approximately a $135,000 non-cash loss on disposal
of leasehold improvements and write off of equipment identified as only being of
use for spare parts for the CityWalk Studio;  $3,000 in termination  payments to
staff;  $5,000 to remove  equipment  from the studio  and  vacate the  premises;
$7,000 in property tax obligations;  and estimated additional operating costs of
approximately $14,000 through to the date of closure. It is management's opinion
that as of March 31, 1998, all costs  associated  with the closure of the Irvine
Studio had been accrued.

     Pursuant to the Personnel  Consulting Agreement with the Company dated June
28, 1995, Photo  Corporation Group Pty Limited ("PCG") is entitled to charge the
Company  management  fees for  services  provided to the Company . To assist the
Company in funding its day to day  operations  and to enable the Company to make
the  payments  due to former  officers  of the  Company,  PCG  agreed  effective
December 1,

                                      7

<PAGE>



1996, not to charge the Company  management fees for a period of two years.  The
Company has recorded a capital  contribution of $31,200 for management  fees, in
recognition  of services  provided by PCG during the year ended March 31,  1998.
Management  believes that this amount  represents the  reasonable  cost of doing
business, for services provided by PCG in the year ended March 31, 1998.

     During the period April 1, 1997 to June 8, 1998, PCG has provided a further
$470,000 of cash to assist the Company in funding its day to day operations,  to
enable the Company to make the payments  due to former  officers and to meet the
expenses  associated with the closure of the Irvine Studio.  The debt due to PCG
is  disclosed  on the  balance  sheet as "Due to Related  Party".  In  addition,
certain subsidiaries of PCG have purchased, for a total of $20,000 cash, certain
equipment  with no book value and  identified  as being  surplus,  following the
closure of the Irvine Studio.

     Significant  improvements  have occurred in digital  photography  equipment
software and computers utilized in high-end computer graphics, since the opening
of the Company's  CityWalk  Studio in 1993. The Company has  incorporated  these
developments in to its CityWalk Studio where possible,  to enable the Company to
produce 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
studio's long-term earning capabilities.


Results of Operations

Year Ended March 31, 1998 Compared to Year Ended March 31, 1997

     The net loss for the year ended March 31, 1998 was $1,082,306 compared with
$753,346 for the year ended March 31, 1997. The primary reasons for the increase
in the net loss were a decrease in the gross  income  generated  by the CityWalk
Studio,  an  increase in the gross loss  incurred  by the Irvine  Studio and the
costs  associated  with the  closure of the Irvine  Studio,  partly  offset by a
reduction in general and administrative expenses.

     The  following  table shows  Revenues,  Cost of Revenues and Gross Income /
(Loss)  during the fiscal  years  ended March 31,  1998 and March 31,  1997,  by
studio.

             Fiscal Year Ended March 31, 1998   Fiscal Year Ended March 31, 1997
             --------------------------------   --------------------------------

                 CityWalk   Irvine    Traveling   CityWalk   Irvine    Traveling
                  Studio     Studio    Studio      Studio    Studio     Studio
                  ------     ------    ------      ------    ------     ------


Revenues         $909,683  $ 277,558  $    397   $1,492,024 $508,192  $ 14,572
                 --------  ---------  --------   ---------- --------  --------

Cost of Revenues:
  Compensation &
    Related 
    Benefits      333,947     188,558    1,771      429,764   277,501    5,674
  Depreciation &
    Amortization  170,155     250,010      152      137,855   220,975      293
  Rent            133,094     101,098    2,000      192,432   100,500    7,925
  Loss on closure 
   of studio            -     164,745        -            -         -        -
  Other           243,498     139,053      803      318,536   227,188    7,287
                 --------- ----------  -------    ---------  --------  -------

  Total            880,694    843,464    4,726    1,078,587   826,164   21,179
                 --------- ----------  -------   ----------  --------  -------

Gross Income / 
 (Loss)          $  28,989 $ (565,906) $(4,329)  $  413,437  $(317,972)$(6,607)
                 ========= ==========  =======   ==========  ========== ======

  The Company overall generated  $1,187,638 in revenues in the fiscal year ended
March 31,  1998,  compared to revenues  of  $2,014,788  in the fiscal year ended
March 31, 1997.  CityWalk Studio revenues  decreased by $582,341 to $909,683,  a
decrease of 39.0%.  Management  attributes  this  decline to a number of factors
including the opening of additional digital photographic  concessions within the
theme park adjacent to the CityWalk  Studio in the spring of 1997. The Company's
lease  contains a  restriction  that  prevents  the sale of  computer  generated
photographs  by any other store within  CityWalk  during the  Company's  initial
lease term (the  initial  lease term  expired  May 31,  1998).  The  Company has
renewed  the lease for a further  seven  years  however  the new lease  does not
contain the same restrictive covenant. This restriction has afforded the Company
limited  protection from competition,  however the restriction does not apply to
photographic  products  offered within the theme park. The opening of additional
digital photographic  concessions within the theme park has increased the number
of photographic  opportunities available to visitors to the area and has diluted
the

                                      8

<PAGE>



CityWalk  Studio's  share  of the  market.  Management  also  believes  that the
Studio's  performance is directly  affected by the level of foot traffic through
the theme park,  resulting  in a flow on effect into the Studio.  In May 1996, a
new "ride"  opened in the theme park,  that  management  believes  attracted  an
increased  number  of both  new and  repeat  visitors  to the  area.  Management
perceives that the absence of a significant  new  attraction  during the year to
March 31, 1998,  has resulted in a decline in the level of foot traffic  through
the Studio. Also, in the first part of calendar 1996, a travel show broadcast on
national television in Japan,  included an episode on "Hollywood"  featuring the
CityWalk  Studio.  Throughout  the nine  months  ended  December  31,  1996,  an
unusually  high  number  of  Japanese  tourists,  who had  seen the  segment  on
television in Japan,  visited the CityWalk Studio. There was no similar national
television broadcast in 1997.  Management continues to explore  opportunities to
return the Studio's  sales to previous  levels,  but there is no certainty  that
this will occur.

Irvine Studio revenues  decreased by $230,634 to $277,558,  a decrease of 45.4%.
The  demographics of the area in which the Irvine Studio was located,  indicated
that many of the  customers  to the Irvine  Spectrum  Entertainment  Center were
local or repeat customers.  While such persons utilize entertainment  facilities
on a  regular  basis,  they  viewed  photography  as a  service  to be used only
occasionally or  infrequently,  hence the Studio did not benefit from the repeat
business experienced by other vendors in the center. In August 1997, Stage II of
The Irvine  Company's  development  plan for the Irvine  Spectrum  commenced.  A
consequence of this was to dramatically  limit parking  facilities in and around
the center, which in turn led to a substantial reduction in foot traffic through
the Studio.  Despite  management's  substantial efforts to increase the Studio's
revenues,  management  concluded that the only way to stop the negative cashflow
effect  generated  by the  Irvine  Studio,  was to close the  Studio.  Following
lengthy  negotiations with the Studio's  landlord,  the landlord agreed to allow
the Company to terminate  its lease at the Irvine  Entertainment  Center and the
Company  closed the Irvine Studio on April 22, 1998. The costs  associated  with
the closure of the studio totaled $164,745 and included  approximately  $135,000
non-cash loss on disposal of leasehold  improvements  and write off of equipment
identified as only being of use for spare parts for the CityWalk Studio;  $3,000
in termination payments to staff; $5,000 to remove equipment from the studio and
vacate  the  premises;  $7,000 in  property  tax  obligations;  and  $14,000  in
operating losses for the period that the store remained open from March 31, 1998
to the date of closure.  It is  management's  opinion that as of March 31, 1998,
all costs  associated  with the closure of the Irvine  Studio have been provided
for in full.

Revenues from the Traveling  Studio were $397 in the fiscal year ended March 31,
1998 compared with $14,572 in the preceding  year. In December  1997,  for a one
month trial period,  the Company tested an event photography system at a central
meeting  venue  for  inbound   Japanese   tourists.   The  trial  proved  to  be
unsuccessful,  generating  only $397 in revenues and as a result,  the trial was
discontinued.

  Cost  of  revenues  in  the  year  to  March  31,  1998  were   $1,728,884  or
approximately  145.6% of revenues.  Excluding  the $164,745 of costs  associated
with the closure of the Irvine Studio, cost of revenues in the year to March 31,
1998 were $1,564,139 or  approximately  131.7% of revenues.  Cost of revenues in
the year to March 31, 1997 were $1,925,930 or approximately 95.6% of revenues.

  Cost of revenues  for the CityWalk  Studio  decreased by $197,893 to $880,694.
Compensation and related benefits were $95,817 lower than the previous year as a
result of tighter  controls  over the number of staff hours worked at the studio
and as a consequence of the reduction in revenues.  Depreciation was higher than
the  previous  year by  $32,300.  Rent was lower by  $59,338  as a result of the
Company paying rent based on a percentage of revenues, such revenues being lower
than in the  previous  period by $582,341.  Other cost of revenues  decreased by
23.6%.  The  percentage  decrease  in other cost of  revenues  was less than the
decrease in revenues as there are certain  costs that are not incurred in direct
proportion  to the level of revenue,  including  insurance,  taxes,  repairs and
maintenance,  utilities and cleaning. The CityWalk Studio earned gross income of
$28,989  during the fiscal year ended March 31, 1998 compared to gross income of
$413,437 for the same period last year, a decrease in gross income of $384,448.

  Cost of  revenues  for the Irvine  Studio  increased  by  $17,300 to  $843,464
compared with $826,164 for the year to March 31, 1997. Excluding the $164,745 of
costs  associated  with the  closure  of the  Irvine  Studio,  cost of  revenues
decreased by $147,445 to $678,719.  The percentage  decrease in cost of revenues
was less than the  decrease in revenues as there are certain  costs that are not
incurred  in direct  proportion  to the level of revenue,  including  insurance,
taxes, repairs and maintenance, utilities and cleaning. Compensation and related
benefits  were  $88,943  lower  than the  previous  year as a result of  tighter
controls over the number of staff hours worked at the studio. Management reduced
staffing  levels in the studio to the extent  possible within the constraints of
the number of hours the studio was required to be open, in order to minimize the
impact of the reduction in revenue.  Depreciation was higher by $29,035 than the
previous  year.  Rent  increased by $598 from  $100,500 in the year to March 31,
1997 to  $101,098  for the  year to  March  31,  1998.  Other  cost of  revenues
decreased by 38.8%,  in line with the decrease in  revenues.  The Irvine  Studio
incurred a gross loss of  $565,906  during the fiscal  year ended March 31, 1998
compared to a gross loss of $317,972 for the same period last year, an

                                      9

<PAGE>



increase in gross loss of $247,934.  Excluding  the $164,745 of costs related to
the  closure of the Irvine  Studio,  there was an $83,189  increase in the gross
loss.

  Cost of revenues for the  Traveling  Studio were $4,726,  resulting in a gross
loss of $4,329.  In the year ended March 31, 1997, the Traveling Studio incurred
a gross loss of $6,607.

  The Company  overall  incurred a gross loss of $541,246 during the fiscal year
ended March 31, 1998,  compared  with gross income for the same period last year
of  $88,858.  The  incremental  gross  loss for the year to  March  31,  1998 of
$630,104  consists of a $384,448  reduction  in gross  income  generated  by the
CityWalk  Studio,  an increase  of  $247,934  in the gross loss  incurred by the
Irvine Studio,  such increase  including  $164,745 of costs  associated with the
closure of the studio, partly offset by a decrease in the gross loss incurred by
the Traveling  Studio of $2,278.  Excluding the $164,745 of costs related to the
closure of the  Irvine  Studio,  the  Company  overall  incurred a gross loss of
$376,501  in the year to March 31,  1998,  a  $465,359  increase  in gross  loss
compared with the previous year.

  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.  After adjusting for this non-recurring item, the Company's general and
administrative  expenses  decreased from $736,836 in the fiscal year ended March
31, 1997 to $488,875  in the fiscal  year ended  March 31,  1998,  a decrease of
$247,961 or approximately  33.7%.  This decrease is consistent with management's
plan to reduce overhead costs.  Compensation and related  benefits  decreased by
approximately  51.4% to $125,571  (excluding the $51,250  termination  payments)
from $258,380 for the same period last year. This decrease was the result of the
cessation of employment of the Vice President  Operations and the Vice President
Development  on September 1, 1996,  together with the cessation of employment of
the  Operations  Manager  during  the  quarter  ended  December  31,  1997 and a
reduction in the level of administrative  and technical support staff during the
year to March 31, 1998  compared  with the year to March 31, 1997.  Professional
fees decreased by 9.5% to $91,218, compared to $100,777 for the same period last
year.  Management  fees of $31,200  have been  expensed  in  recognition  of the
services  provided during the year by PCG. The expense for the year to March 31,
1997 was $131,000.  The reduction of $99,800 in management fees is a consequence
of a greater number of responsibilities  being managed by the Company internally
and therefore a reduction in the level of services  provided by PCG.  Management
believes  that  $31,200  (1997:  $131,000)  represents  the  reasonable  cost of
services provided by PCG during the year. As PCG agreed not to charge management
fees for a period of two years from December 1, 1996, the Company has recorded a
capital contribution of $31,200. Office and storage rent expenses decreased from
$39,558 in the year to March 31, 1997 to $33,300.  Depreciation and amortization
costs were higher by $1,297. Other general and administrative expenses decreased
by $832 to  $114,626  for the fiscal  year ended  March 31,  1998,  compared  to
$115,458 for the same period last year.

  The Company earned  interest income of $224 in the fiscal year ended March 31,
1998 as compared to $484 earned during the prior year. Interest charges totaling
$52,409  were  incurred  on the loan from PCG and on the loan  payable to former
executives of the Company, compared with interest expense of $54,602 in the year
ended March 31, 1997.

  As of March 31, 1998,  the Company has net  operating  loss carry  forwards of
approximately $10,700,000.  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.


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.

               Fiscal Year Ended March 31, 1997 Fiscal Year Ended March 31, 1996
               -------------------------------- --------------------------------

                CityWalk   Irvine    Traveling   CityWalk   Irvine    Traveling
                 Studio    Studio     Studio      Studio    Studio     Studio
                                                           (Opened     (Not
                                                           12/9/95) Operational)

Revenues       $1,492,024 $  508,192 $14,572   $1,422,845 $157,867    $    -
               ---------- ---------- -------   ---------- --------    ------

                                      10

<PAGE>



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        -
  Loss on 
   impairment of
   Long-Lived 
   Assets               -          -         -     722,000         -   40,129
  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   1,843,727   332,272   40,129
                ---------  ---------    ------   ---------   -------   ------

Gross Income / 
 (Loss)        $  413,437  ($317,972) ($6,607)  ($420,882) ($174,405) $40,129
               ==========  =========   ======   =========   ========= =======

     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  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  $2,216,128  or  approximately  140.0%  of  revenues.  34.4% of the cost of
revenues  in the year to March  31,  1996  represents  a loss on  impairment  of
long-lived assets.  Excluding this amount, 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  $765,140  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  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,  and  the
recognition  of a $722,000 loss on  impairment of CityWalk  Studio assets in the
quarter ended June 30, 1995, together with the fact that certain assets have now
been  fully  depreciated.  As a result  of the  Company's  continuing  operating
losses,  the  information  obtained  during  research and the development of the
Irvine Studio and the revised total projected  future cash flows of the CityWalk
Studio,  in  June  1995  management   determined  that  an  impairment  loss  of
approximately  $722,000  should be  recognized.  This loss was calculated as the
excess of the net carrying  value of the CityWalk  Studio long lived assets over
the total  projected  future  cash flows over the  remaining  useful life of the
assets.  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 a gross loss of $420,882  for
the same period last year, an improvement  of $834,319.  Excluding the effect of
the impairment loss recognized in the year ended March 31, 1996, this represents
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.  In the year ended March 31, 1996 as a consequence  of the
adoption of SFAS No. 121, the Traveling Studio incurred a gross loss of $40,129.

     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. The gross loss for the same period last year was $635,416. The increase in
gross  income  for the  year to  March  31,  1997 is  mainly  due to the loss on
impairment of long-lived assets of $762,129 recorded in the year ended March 31,
1996 (there was no similar charge in the year to March 31, 1997),  offset by 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. Also contributing to the increase in gross

                                      11

<PAGE>



income is the $112,319  (excluding  the $722,00 loss on impairment of long-lived
assets  recorded in the year to March 31, 1996)  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.  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  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.  Management  believes  that  $131,000  (1996:  $130,000)
represents  the  reasonable  cost of  services  provided by PCG during the year.
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 $8,476,  or 8% to $115,458 for the fiscal
year ended March 31, 1997, compared to $106,982 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, 1997,  the Company had 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.



Liquidity and Capital Resources

     At March 31, 1998, the Company had a working capital deficit of $918,299 as
compared  to a working  capital  deficit  on March  31,  1997 of  $516,861.  The
increase of $401,438 is  primarily  attributable  to operating  losses  incurred
during the year to March 31,  1998.  Funds have been  provided by PCG during the
year to enable  the  Company  to meet the costs  associated  with its day to day
operations  and to fund the payments due to former  officers of the Company.  In
addition, a provision of $31,878 has been made to meet costs incurred subsequent
to year end in  connection  with the  closure of the Irvine  Studio on April 22,
1998.  The  increase  in the  working  capital  deficiency  is partly  offset by
payments  totaling  $119,990 made to former  officers of the Company  during the
year. As of March 31, 1998, the Company's cash and cash equivalents  balance was
$23,044.

     Net cash used in  operating  activities  was  $482,207  for the fiscal year
ended on March 31, 1998, compared to the utilization of $336,376 of cash for the
same period  last year.  The  increase  of  $145,831 in cash used in  operations
includes  $119,990 paid to former officers of the Company and an overall $82,630
reduction in accounts payable balances compared with the previous year. Included
in the $482,207 net cash used in operating  activities is the $151,151 cash loss
incurred  by the  Irvine  Studio  and  approximately  $29,000  of cash  expenses
associated with the closure of the Irvine Studio.

     In the period April 1 to 17, 1998 $1,347 was paid to former officers of the
Company,  thus  satisfying  all  obligations  of  the  Company  pursuant  to the
Settlement  and Mutual  Release  Agreement  dated  September 1, 1996 between the
Company, Mr Robert Shelton, Mrs Leah Peterson-Shelton and PCG.

     The Company  invested a total of $26,484 in the fiscal year ended March 31,
1998  for  equipment  in the  CityWalk  Studio  and  administrative  office.  By
comparison,  in the previous year the Company  invested $46,630 for equipment at
the CityWalk and Irvine Studios.

     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 or to raise funds through debt and/or equity financing. The
Company's recurring operating losses and net working capital deficiency raises

                                      12

<PAGE>



substantial  doubt about the  entity's  ability to continue as a going  concern.
Management's  plans include  improving  the revenues  from the CityWalk  Studio,
continuing  the  reduction  of  expenses  and  finding  suitable  locations  for
additional studios. 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.  As of June 8, 1998 PCG has not  committed to continue to
fund  the  Company  and may at any time  decide  that it will  not  advance  any
additional  funds to the Company.  In such event,  it is likely that the Company
will be  unable  to meet  its  current  obligations,  which  may  result  in the
commencement of insolvency proceedings with respect to the Company.

     In the fiscal year ended March 31, 1998, further funding of $455,000 in the
form of cash  advances  was  provided  by PCG. In  addition,  PCG paid $5,727 of
expenses on behalf of the Company.  This compares with $260,000 funding provided
by PCG in the year ended March 31, 1997, and $131,000 of management fees accrued
but unpaid in the period April 1, 1996 to November 30, 1996.

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

     Although the Company has not commenced to market all Licensed Articles on a
timely basis,  as of June 8, 1998,  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,
with a seven year option  period.  The initial lease expired on May 31, 1998 and
the Company has exercised its option to renew the lease for an additional  seven
years.

      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

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



                                      13

<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 sheets of Out-Takes,  Inc.
as of March  31,  1998 and  1997,  and the  related  statements  of  operations,
stockholders'  equity,  and cash flows for each of the three fiscal years in the
period ended March 31, 1998. 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, 1998 and 1997 and the results of its  operations and its cash flows
for each of the three  fiscal  years in the  period  ended  March 31,  1998,  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.














                                          Moore Stephens, P.C.
                                          Certified Public Accountants







Cranford, New Jersey
May 20, 1998



                                       14

<PAGE>



                                   OUT-TAKES INC.

                                   BALANCE SHEETS

                                       ASSETS                    March 31,
                                                             1998        1997
Current Assets:
  Cash and Cash Equivalents                             $    23,044 $    70,908
  Inventory                                                  10,082      22,879
  Due from Related Party                                          -       7,343
  Prepaid Insurance                                           8,949      10,796
  Prepaid Taxes                                               3,005       7,829
  Other Current Assets                                        9,564       8,132
                                                        ----------- -----------
  Total Current Assets                                  $    54,644 $   127,887

Plant & Equipment - Net                                     204,148     845,198

Other Non-Current Assets:
  Deposits                                                   27,048      38,378
                                                        ----------- -----------

     Total Assets                                       $   285,840 $ 1,011,463
                                                        =========== ===========


                        LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Accounts Payable                                      $    31,173 $   113,803
  Accrued Payroll                                            22,047      42,868
  Accrued Expenses                                          108,819     104,331
  Accrued Interest - Related Party                           56,452       7,871
  Provision for Studio closure                               31,878           -
  Compensation payable - Related Parties                      1,347     115,375
  Due to Related Party                                      721,227     260,500
                                                        ----------- -----------
  Total Current Liabilities                             $   972,943 $   644,748

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

  Commitments (Note 8)                                            -           -

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

  Common  Stock,  par  value  $.01  per  share;  
   35,000,000  shares  authorized; 20,788,122  
   shares  issued  of which  292,396  shares 
   are in  Treasury                                         207,882     207,882

  Capital in excess of par value                          9,905,430  10,014,980

  Accumulated deficit                                   (10,740,009) (9,657,703)
                                                        ----------- -----------

  Total                                                 ($  626,697)$   565,159

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

Total Stockholders' Equity (Deficit)                    ($  735,103)$   312,753
                                                         ---------- -----------

     Total Liabilities and Stockholders' Equity         $   285,840 $ 1,011,463
                                                        =========== ===========


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

                                         15

<PAGE>



                                   OUT-TAKES INC.

                              STATEMENTS OF OPERATIONS

                                                     Years ended March 31,

                                             1 9 9 8       1 9 9 7     1 9 9 6
                                             -------       -------     -------

Revenues                                $   1,187,638   $ 2,014,788 $ 1,580,712
                                        -------------   ----------- -----------

Cost of Revenues:

  Compensation and Related Benefits           524,276       712,939     548,137
  Depreciation and Amortization               420,317       359,123     249,249
  Loss on Impairment of Long-Lived 
   Assets                                           -             -     762,129
  Pre-Opening Costs - Irvine Studio                 -             -      67,007
  Rent                                        236,192       300,857     210,639
  Loss on closure of Irvine Studio            164,745             -           -
  Other Cost of Revenues                      383,354       553,011     378,967
                                        -------------   ----------- -----------

  Total Cost of Revenues                    1,728,884     1,925,930   2,216,128
                                        -------------   ----------- -----------

     Gross Income (Loss)                     (541,246)       88,858    (635,416)
                                        --------------  ----------- -----------

General and Administrative Expenses:

  Compensation and Related Benefits           125,571       309,630     313,432
  Professional Fees                            91,218       100,777     206,979
  Management Fee - Related Party               31,200       131,000     130,000
  Rent of Offices                              33,300        39,558      29,524
  Depreciation and Amortization                92,960        91,663     128,907
  Other G & A Expenses                        114,626       115,458     106,982
                                        -------------   ----------- -----------

  Total Expenses                              488,875       788,086     915,824
                                        -------------   ----------- -----------

     Loss from Operations                  (1,030,121)     (699,228) (1,551,240)

Other Income (Expense)
  Interest income                                 224           484       3,035
  Interest expense                               (210)       (3,423)         (7)
  Interest expense - Related Parties          (52,199)      (51,179)    (28,272)
                                        --------------  -----------------------

     Total Other Income (Expense)             (52,185)      (54,118)    (25,244)
                                        --------------  -----------------------

Net Loss                                ($  1,082,306)  ($  753,346)($1,576,484)
                                         ============   =========== ===========

Net Loss Per Share (Basic and
 Diluted)                               ($       0.05)  ($     0.05)($     0.16)
                                        =============   =========== ===========

Weighted Average Common Shares 
 Outstanding                               20,495,726    14,824,881   9,567,748
                                        =============   =========== ===========














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

                                         16

<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, 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           650,000     6,500     123,500             -          -         -      130,000

Stock Issued upon 
 Conversion of Debt        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

Management fee -
  Related Party                    -         -      31,200             -          -         -       31,200

Adjustment for 
 cancellation of escrow 
 shares(See note [6A])             -         -    (144,000)            -          -   144,000            -

Options issuance cost              -         -       3,250             -          -         -        3,250

Net Loss for the year
  ended March 31,1998              -         -           -    (1,082,306)         -         -   (1,082,306)
                          ----------  -------- -----------  ------------   --------  --------   ----------

Balance -  March 31, 1998 20,788,122  $207,882 $ 9,905,430  ($10,740,009) ($108,406) $      -   ($ 735,103)
                         ===========  ======== ===========  ============  =========  ========   ==========

</TABLE>

















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

                                            17

<PAGE>



                                   OUT-TAKES INC.
                               STATEMENT OF CASH FLOWS

<TABLE>
                                                         Years ended March 31,
                                                      1998       1997         1996
Operating Activities:
<S>                                            <C>          <C>         <C>         
  Net Loss                                     ($1,082,306) ($ 753,346) $(1,576,484)
                                               -----------  ----------  ------------
  Adjustments to Reconcile Net Loss to
   Net Cash Used in Operating Activities:
     Depreciation and Amortization              $ 513,277    $ 450,786  $   378,156
     Loss on Impairment of Long-Lived Assets            -            -      762,129
     Loss on closure of Irvine Studio             154,157            -            -
     Loss on Disposal of Plant and Equipment            -          504          997
     Management fee - Related Party                31,200            -            -
     Options issuance cost                          3,250            -            -
  Changes in Assets and Liabilities:
   (Increase) Decrease in:
     Prepaid Royalties                                  -            -          840
     Due from Related Party                         7,343       (7,343)           -
     Deposits                                      11,330          334      (18,290)
     Inventory                                     12,797       13,719      (10,090)
     Due from Officers                                  -            -        8,565
     Prepaid Insurance                              1,847       (2,003)           -
     Prepaid Taxes                                  4,824       (5,754)           -
     Other Current Assets                          (1,432)       1,670      (10,314)
   Increase (Decrease) in:
     Accounts Payable                             (82,630)      24,880     (196,867)
     Accrued Payroll and Other Expenses           (16,333)    (275,020)      56,453
     Notes Payable                                      -      (15,036)      15,036
     Accrued Interest - Related Party              48,581      (22,104)      20,835
     Provision for Studio closure                  31,878            -            -
     Accrued Management Fee - Related Party             -      131,000      130,000
     Compensation Payable - Related Parties      (119,990)     121,337            -
                                               -----------  ----------  -----------

   Total Adjustments                            $ 600,099    $ 416,970  $ 1,137,450
                                               ----------   ----------  -----------

  Net Cash Used in Operating Activities        ($ 482,207)  ($ 336,376) ($  439,034)
                                               ----------   ----------  ------------

Investing Activities:
  Acquisition of Equipment and Leasehold 
   Improvements                                ($  26,484)  ($  46,630) ($  652,814)
  Proceeds on Disposal of Plant and Equipment         100        2,242        1,050
                                               ----------   ----------  -----------

  Net Cash Used in Investing Activities        ($  26,384)  ($  44,388) ($  651,764)
                                               ----------   ----------  ------------

Financing Activities:
  Proceeds from the Issuance of Stock           $       -    $ 130,000  $   510,000
  Advances from Related Party                     460,727      260,000      649,500
  Proceeds from Interim Loan Financing  - 
   Related Party                                        -            -       39,000
  Payment of Interim Loan Financing - 
   Related Party                                        -            -     (100,000)
                                                -- ------   ----------  ------------

  Net Cash Provided by Financing Activities     $ 460,727    $ 390,000  $ 1,098,500
                                                ---------   ----------  -----------

Net (Decrease) Increase in Cash and Cash 
 Equivalents                                   ($  47,864)   $   9,236  $     7,702

  Cash and Cash Equivalents - Beginning of 
  Years                                            70,908       61,672       53,970
                                                ---------   ----------  -----------

  Cash and Cash Equivalents - End of Years      $  23,044    $  70,908   $   61,672
                                               ==========   ==========  ===========

Supplemental Disclosure of Cash Flow Information
  Cash paid for:
   Interest                                    $    7,650   $   66,501  $     4,401
   Income Tax                                  $        -   $        -  $         -
</TABLE>

Non-Cash Investing and Financing Activities
On May 7, 1996,  the majority  stockholder,  Photo  Corporation  Group Pty. Ltd.
("PCG"),  converted  $130,000 of its then  $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 Photo Corporation Group Pty Limited ("PCG").

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

                                         18

<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, 1997 and 1996 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
Employee  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, 1998.

Risk  Concentrations  - Financial  instruments,  which  potentially  subject the
Company to concentrations of credit risk, consist  principally of cash. At March
31, 1998, 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,  1998,  1997 and 1996 was  $21,069,
$28,552 and $13,140 respectively.

Loss per share - The Financial  Accounting  Standards  Board ("FASB") has issued
Statement of Financial  Accounting  Standard  ("SFAS")  No. 128,  "Earnings  Per
Share" which is effective for  financial  statements  issued for periods  ending
after December 15, 1997.  Accordingly,  earnings per share data in the financial
statements  for the year ended March 31, 1998 has been  calculated in accordance
with SFAS No. 128. Prior periods earnings per share data have been  recalculated
as necessary to conform prior years data to SFAS No. 128.

SFAS No. 128 supersedes  Accounting  Principles Board Opinion No. 15, "Earnings
per Share" and replaces its primary earnings per share with a new basic earnings
per share representing the amount of earnings for the period

                                       19

<PAGE>



                                 OUT-TAKES INC.

                   NOTES TO FINANCIAL STATEMENTS - (Continued)

[1] Summary of Significant Accounting Policies - (continued)

available to each share of common stock outstanding during the reporting period.
SFAS No. 128 also requires a dual presentation of basic and diluted earnings per
share in the face of the statement of operations  for all companies with complex
capital  structures.  Diluted earnings per share reflects the amount of earnings
for the period  available to each share of common stock  outstanding  during the
reporting  period,  while giving effect to all dilutive  potential common shares
that were outstanding during the period, such as common shares that could result
from the potential exercise or conversion of securities into common stock.

The  computation  of diluted  earnings  per share  does not  assume  conversion,
exercise or contingent  issuance of securities  that would have an  antidilutive
effect on earnings  per share (i.e.  increasing  earnings  per share or reducing
loss per share).  The dilutive  effect of  outstanding  options and warrants and
their   equivalents  are  reflected  in  dilutive  earnings  per  share  by  the
application  of the treasury  stock method which  recognizes the use of proceeds
that could be  obtained  upon  exercise of options  and  warrants  in  computing
diluted  earnings  per share.  It  assumes  that any  proceeds  would be used to
purchase common stock at the average market price during the period. Options and
warrants will have a dilutive  effect only when the average  market price of the
common  stock  during the period  exceeds the  exercise  price of the options or
warrants.

Potential common shares of 125,000 are not currently dilutive, but may be in the
future.

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.

[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 a retail  studio,  called  Out-Takes(R),
which  opened  on May 24,  1993 and is  located  at  MCA/Universal's  CityWalkSM
project in Los Angeles,  California ("the CityWalk  Studio").  During the period
December 1, 1995 to April 22, 1998, the Company operated a second Studio, at the
Entertainment  Center in the Bazaar at the Irvine  Spectrum,  located in Irvine,
Orange County, California ("the Irvine Studio").

[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 ("Warner"), Twentieth Century Fox
Licensing & Merchandising  ("Fox"),  Jay P. Morgan Photography  ("Morgan"),  MTV
Networks ("MTV"),  Saban Merchandising Inc.  ("Saban"),  The Baywatch Production
Company ("Baywatch") 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,
1998, 1997 and 1996 was $39,365, $66,816 and $35,622 respectively.

Although  the Company has not  commenced  to market all  Licensed  Articles on a
timely basis, as of March 31, 1998, 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), 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

                                       20

<PAGE>



                                 OUT-TAKES INC.

                   NOTES TO FINANCIAL STATEMENTS - (Continued)

[B] Sublicense Agreement - Related Party - (continued)

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,  1998,  the PCA
sublicense agreement has not yet generated any royalties.

[4]  Plant and Equipment
                                                March 31, 1998    March 31, 1997
The components of plant and equipment are:

Photographic Equipment                         $     620,750      $     622,192
Computers and Software                               659,048            679,427
Equipment and Furniture                              301,316            308,987
Leasehold Improvements                               609,494          1,011,292
Motor Vehicle                                         21,433                  -
                                               -------------      -------------

Total - At Cost                                    2,212,041          2,621,898
Less: Accumulated Depreciation                     2,007,893          1,776,700
                                               -------------      -------------

Net                                            $     204,148      $     845,198
                                               =============      =============

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
totaling  $274,373 were  consolidated on September 1, 1996, and were 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, 1998 interest expense totaled $3,618.
As of March 31, 1998, interest of $67 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, 1998.

During  the  year to March  31,  1997,  PCG  charged  the  Company  $131,000  in
management fees pursuant to the Personnel  Consulting Agreement with the Company
dated  June 28,  1995.  Effective  December  1,  1996,  PCG agreed not to charge
management fees for services  provided by it or its related parties for a period
of two years.  The Company has  recorded a capital  contribution  of $31,200 for
management  fees for the year to March 31, 1998.  Management  believes that this
represents the reasonable cost of doing business,  for services  provided by PCG
personnel in the year to March 31, 1998.

At March 31, 1998 the $721,227 "Due to Related Party"  ($260,500 as of March 31,
1997) was  advanced by PCG.  This balance  consists of $715,500  advanced to the
Company  and  $5,727 of  expenses  paid by PCA on behalf of the  Company  (1997:
$7,343 "Due from  Related  Party"  representing  monies  advanced by the Company
during  fiscal 1997 on behalf of PCA).  The funds  advanced to the Company  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 on the

                                       21

<PAGE>




                                 OUT-TAKES INC.

                   NOTES TO FINANCIAL STATEMENTS - (Continued)

[5] Related Party Transactions - (continued)

funds advanced to the Company and for the year ended March 31, 1998 was $48,581.
As of March 31, 1998, interest of $56,452 was accrued.

The weighted average interest rate on short term borrowings as of March 31, 1998
was approximately 10.0%.


[6] Capital Stock Transactions

[A] Escrow Shares

In  March,  1992,  1,900,000  shares  were  issued  to  the  Company's  founders
("Founders")  and  deferred  compensation  of  $364,800  was  recorded  for  the
1,900,000 shares.  Included in the 1,900,000 shares were 1,150,000 shares issued
to the  Founders  for  services  in  connection  with the  incorporation  of the
Company.  Accordingly,  $220,800 was amortized as compensation  expense in 1992.
The  remaining  750,000  shares of the  Company's  Common Stock were placed into
escrow for the benefit of the Founders.  As the Company's  pre-tax  earnings did
not equal or exceed the  required  threshold  level,  in May of 1998 the Company
requested  that the shares be returned to the Company to be placed in  Treasury.
The  financial  statements  reflect the  reversal of the  deferred  compensation
attributable to these shares,  however the share data will be adjusted as of the
date the shares are returned.

[B] Stock Option Plan

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.  In  September  of 1997,  options for  175,000  shares were issued to
employees and consultants of the Company.

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

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            -                      -            -
                                 
   Granted during the year       
     ended March 31, 1998          175,000                  $0.06        $0.06
                                 
   Forfeited during the year     
     ended March 31, 1998          (50,000)
                                   ------- 
                                 
Outstanding at March 31, 1998      125,000                      -        $0.06
                                 =========
                             
The exercise price for the options outstanding at March 31, 1998 is $0.06 with a
vesting period of three years and a contractual  life of ten years.  The company
estimates that approximately 100% of such options will eventually vest.

                                       22

<PAGE>



                                 OUT-TAKES INC.

                   NOTES TO FINANCIAL STATEMENTS - (Continued)


[6] Capital Stock Transactions - (continued)

[B] Stock Option Plan - (continued)

On September 15, 1997,  the Board of Directors  granted to four  individuals,  a
total of 175,000 stock options to purchase company stock at an exercise price of
$0.06 per share for past  services  performed.  The  options  are to vest over a
three year period,  50% the first year and 25% the remaining two years,  with an
expiration  date of September  15, 2007.  The company  applies APB Opinion 25 in
accounting for its fixed and performance based stock option  compensation plans.
Compensation  cost of $3,250,  $0 and $0 was charged to operations for the three
years ended March 31, 1998, 1997 and 1996  respectively.  Had compensation  cost
been  determined on the basis of fair value  pursuant to FASB Statement No. 123,
net income and earnings per share would have been recorded as follows:

                                      1998           1997           1996
                                        $              $              $
Net Income (Loss)
As reported                        (1,082,306)     (753,346)     (1,576,484)
Pro forma                          (1,089,056)     (753,346)     (1,576,484)

Earnings per Share
As reported                          (0.05)         (0.05)         (0.16)
Pro forma                            (0.05)         (0.05)         (0.16)


The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes   option   pricing  model  with  the  following   weighted-average
assumptions  used for  grants  in 1998:  dividend  yields  of $0 for each  year,
expected  volatility  of  approximately  106% for each year,  risk free interest
rates of 5.83% and an expected  life of five years.  The  weighted-average  fair
value of options granted was $0.06 for the year ended March 31, 1998.

[7] Closure of Irvine Studio

In the third quarter of the Company's  fiscal year,  management  determined that
despite its  substantial  efforts to increase the revenues of the Irvine Studio,
it would be in the best  interests of the Company to contain the  negative  cash
flow incurred by the Company, by determining an exit plan for the Irvine Studio.
In the fourth quarter of the fiscal year,  the Company  finalized its exit plan.
Following  lengthy   negotiations  with  the  landlord  of  the  Irvine  Studio,
management  reached an  agreement  with the  landlord to close the  Studio.  The
closure  was  effected  without  the  payment of any  additional  amounts to the
landlord. The Studio closed on April 22, 1998. Costs associated with the closure
of the studio totaled $164,745 and included approximately $135,000 non-cash loss
on disposal of leasehold  improvements and write off of equipment  identified as
only being of use for spare parts for the CityWalk Studio; $3,000 in termination
payments  to staff;  $5,000 to remove  equipment  from the studio and vacate the
premises; $7,000 in property tax obligations; and estimated additional operating
costs  of  approximately   $14,000  through  to  the  date  of  closure.  It  is
management's  opinion that as of March 31, 1998, all costs  associated  with the
closure of the Irvine Studio have been accrued.

[8] Commitments

Lease  Agreements - The Company leases its CityWalk Studio premises under a five
year lease,  with an option to extend the lease for a period of seven years. The
initial  lease term  expired on May 31, 1998 and the Company has  exercised  its
option to renew the lease for a further seven years.  The lease  provides for an
annual  rental  payment  of  $123,250  and the  payment  of 10% of annual  store
revenues in excess of $881,177.  In addition,  pursuant to the lease  agreement,
the Company pays annual  allocated  property  taxes for the  CityWalk  Studio of
approximately $600. 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.

                                       23

<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, 1998 are shown in the table below.

         Year ended March 31
         -------------------
              1999                                 $ 123,250
              2000                                   123,250
              2001                                   123,250
              2002                                   123,250
              2003                                   123,250
              Thereafter                             267,041
                                                   ---------

              Total                                $ 883,291
                                                   =========

In the year to March 31, 1998 the Company  paid  $101,098 in rent for the Irvine
Studio.  Following closure of the Irvine Studio on April 22, 1998, the lease was
terminated.  There is no further  obligation  on the Company with respect to the
lease.

The Company has a month to month  commitment  of $2,450 per month for  corporate
office  space and a month to month  commitment  of $650 per  month  for  storage
facilities.

Total rental  charged to  operations  for the fiscal years ended March 31, 1998,
1997 and 1996 is broken down as follows:
                                             1998         1997          1996
                                               $            $             $
              Base rental                  256,141      278,128       183,301
              Additional rent               13,351       62,287        56,862
                                          --------      -------      --------
                                          $269,492     $340,415      $240,163
                                          ========     ========      ========

The  additional  rent is a result of sales being in excess of the $881,177 sales
threshold.

Consulting   Agreement  -  the  Company  has  a  consulting  agreement  with  an
unaffiliated  entity for the maintenance of the image technology at the CityWalk
Studio.  Effective  October 1, 1997 the  agreement  provides  for the payment of
$50,000 per annum of consulting fees and a discretionary performance bonus of up
to 10% of the fees paid.  The agreement may be terminated by either party with a
minimum of one  month's  notice.  For the year ended  March 31, 1998 the Company
expensed $49,000 in payments to this unaffiliated entity.

[9] Net Loss Per Share

Net  loss  per  share  was  calculated  based  on the  weighted  average  shares
outstanding  during the year.  Potential common shares have not been included as
their inclusion would be antidilutive.

[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.

[11] Income Taxes

As of March 31,  1998,  the Company has a net  operating  loss carry  forward of
approximately  $10,700,000.  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, 1998,  the Company has deferred tax
assets of  approximately  $729,000  arising  from  these  operating  loss  carry
forwards  which will expire in March,  2011.  However,  due to uncertainty as to
whether the Company will  generate  income in the future  sufficient to fully or
partially  utilize these loss carry forwards,  an allowance of $729,000 has been
established  to offset  this  asset.  The  Company  recorded  an increase in its
valuation allowance of $66,000 over the allowance at March 31, 1997.

                                       24

<PAGE>



                                 OUT-TAKES INC.

                   NOTES TO FINANCIAL STATEMENTS - (Continued)


[12] Notes Payable

The Note  Payable  of  $48,000  is  unsecured  and 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.

The note holder has threatened to commence  litigation,  however  management has
advised the note holder that no amount is due at the present time as the Company
has not  generated  positive  cashflow.  Counsel has advised the Company that no
litigation has commenced and counsel is unable to assess a possible outcome.

[13] New Authoritative Pronouncements

The FASB has issued SFAS No. 130, "Reporting  Comprehensive  Income".  SFAS No.
130 is effective for fiscal years  beginning  after  December 15, 1997.  Earlier
application is permitted.  Reclassification of financial  statements for earlier
periods  provided  for  comparative  purposes is  required.  SFAS No. 130 is not
expected to have a material impact on the Company.

The FASB has issued SFAS No. 131,  "Disclosures About Segments of an Enterprise
and  Related  Information".  SFAS No. 131  changes how  operating  segments  are
reported in annual  financial  statements and requires the reporting of selected
information  about  operating  segments in interim  financial  reports issued to
shareholders. SFAS No. 131 is effective for periods beginning after December 15,
1997 and comparative  information for earlier years is to be restated.  SFAS No.
131 need not be applied to interim  financial  statements in the initial year of
its  application.  SFAS No. 131 is not expected to have a material impact on the
Company.

[14] Going Concern

The Company  commenced  commercial  operations on May 24, 1993 and as of May 29,
1998, 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, 1998 was $482,207.  The Company  incurred a net loss of  $1,082,306  for the
year ended March 31, 1998 and has a working capital deficit as of March 31, 1998
of $918,299.

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  improving  the revenues  from the CityWalk  Studio,
continuing  the reduction of expenses  throughout  the Company and continuing in
its efforts to find  suitable  locations  in which to open  additional  studios.
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 that such  additional  financing will be
provided.

[15] 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.

                                       25

<PAGE>



                                 OUT-TAKES INC.

                   NOTES TO FINANCIAL STATEMENTS - (Continued)


[15] Impairment of Long-Lived Assets (Continued)

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,
1998, management expects these assets to be fully recoverable.

[16] Financial Instruments

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

[17] Subsequent Events

During the  period  April 1, 1998 to May 29,  1998 PCG  provided  an  additional
$15,000 of cash to assist the Company in funding its day to day  operations,  to
enable the Company to make the required  payments due to the former  officers of
the Company and to meet the expenses  associated  with the closure of the Irvine
Studio. Certain subsidiaries of PCG have purchased, for a total of $20,000 cash,
certain equipment with no book value.



                    .   .   .   .   .   .   .   .   .   .   .

                                       26

<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





                                       27

<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)

                                       28

<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

     Current Report on Form 8-K dated April 27, 1998.



     (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.

                                       29

<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 8, 1998               By: /s/ Peter C. Watt, President
                                      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





   /s/ Peter C. Watt        Chairman of the Board, President,   June 8, 1998
   -----------------        Chief Executive Officer, Principal
       Peter C. Watt        Financial Officer and Secretary
                            (Principal Executive Officer,
                            Principal Financial Officer and
                            Principal Accounting Officer)





   /s/ Michael C. Roubicek  Director                            June 8, 1998
   ----------------------- 
       Michael C. Roubicek


                                       30

<PAGE>