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

                                  FORM 10-K/A
                                Ammendment # 2
(Mark One)
    |X|     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
             OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
                    for the fiscal year ended March 31, 1997
                                       OR
    o       TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
               SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
for the transition period from                                      to
                        Commission File Number: 0-21322
                                OUT-TAKES, INC.
                 (Name of small business issuer in its charter)

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

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

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

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

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

                                (Title of Class)

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

    Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form, and no disclosure  will be contained,  to
the best of issuer's  knowledge,  in definitive proxy or information  statements
incorporated  by  reference in Part III of this Form 10-K,  or any  amendment to
this Form 10-K. _

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

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

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

                      DOCUMENTS INCORPORATED BY REFERENCE

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

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



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<PAGE>



                                OUT-TAKES, INC.

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

                               TABLE OF CONTENTS

                                                                         Page
PART I                                                                    1

  ITEM 1.   DESCRIPTION OF BUSINESS                                       1

  ITEM 2.   DESCRIPTION OF PROPERTY                                       5

  ITEM 3.   LEGAL PROCEEDINGS                                             5

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

PART II                                                                   6

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

  ITEM 6.   SELECTED FINANCIAL DATA                                       6

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

  ITEM 8.   FINANCIAL STATEMENTS                                         13

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

PART III                                                                 26

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

  ITEM 11.  EXECUTIVE COMPENSATION                                       26

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

  ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS               26

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


Products and Services

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


License Agreements

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

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

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




                                      1

<PAGE>
<TABLE>




        Licensor                       Selected Titles/Properties                  Territory and Usage


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

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

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

Twentieth Century Fox Licensing      Current titles in use:                     Territory:  "The entire world".
& Merchandising                       Miracle on 34th St.
                                      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 Stock          International stock and as                 Territory:  Worldwide.
Agency                                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

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

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

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

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

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

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

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


                                      2






                                      

<PAGE>




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

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

Patents, Service Marks, Copyrights and Other Proprietary Technology

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

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

Competition and Seasonality

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

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

                                      3

<PAGE>





      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. Although
the  revenue  stream at the Irvine  Studio is not as  seasonal  as the  CityWalk
Studio,  the third fiscal quarter  generates the highest level of revenue,  as a
result of greeting card sales and the seasonal gift giving of portraits.

Employees

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

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

Research & Development, Regulations and Suppliers

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

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

      In  order  to  comply  with   federal,   state  and  local   environmental
regulations,  the Company has permanent  filtration  systems at the CityWalk and
Irvine  Studios  that  lessen the  discharge  of certain  chemicals  that may be
harmful to the environment by reducing the  concentration  of these chemicals to
safe  levels  before  they are  disposed.  The  Company  also  contracts  with a
hazardous waste disposal  company with respect to the residue  (primarily  trace
silver)  that the  filtration  unit  produces.  The Company  believes  that this
equipment  and these  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.




                                      4

<PAGE>




ITEM 2.  DESCRIPTION OF PROPERTY

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

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

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

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


ITEM 3.  LEGAL PROCEEDINGS

      None.


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

      None.


                                      5

<PAGE>




                                   PART II



ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

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


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

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


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

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




ITEM 6. SELECTED FINANCIAL DATA

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

                            1997        1996         1995          1994          1993
                            ----        ----         ----          ----          ----
Income Statement Data

<S>                      <C>         <C>          <C>          <C>          <C>       
Revenue from operations  $ 2,014,788 $ 1,580,712  $ 1,274,836  $   454,395   $        -

Gross Income/(Loss)           88,858    (635,416)     (44,276)    (531,379)           -

Net Loss                    (753,346) (1,576,484)  (1,309,459)  (2,883,366)  (2,875,652)

Net loss per share            ($0.05)     ($0.16)      ($0.25)      ($0.54)      ($1.18)

Balance Sheet Data

Total Assets             $ 1,011,463 $ 1,409,752  $ 1,862,279  $ 2,614,752   $5,496,643

Total Liabilities            698,710   1,383,653      769,696      255,037      253,562

Stockholders' Equity         312,753      26,099    1,092,583    2,359,715    5,243,081

</TABLE>

                                      6

<PAGE>




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

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


Overview

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

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

              3 months3 months3 months3 months 3 months3 months3 months3 months
            ended Jun  30ended  Sep  30ended Dec 31ended Mar 31ended Jun 30ended
Sep 30ended Dec 31ended Mar 31

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

Gross Income/
 (Loss)        (689,721)  138,332   15,721  (99,748)  18,425  126,736   15,081   (71,384)

Net Loss for
 the period    (949,272)  (79,278)(210,078)(337,856)(204,568)(172,582)(172,530) (203,666)

Net Loss per
 share          ($ 0.18) ($  0.01)($  0.01)($  0.04) ($ 0.02)($  0.01)($  0.02)($   0.01)

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

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

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

     On April 24, 1996 the Board of Directors authorized the issuance of up to
3 million shares of the Company's Common Stock for a price of $0.20 per share,
which represented the fair market value of the stock on April 24, 1996. On May 6
and 7, 1996, the Company received stock subscriptions from six investors
totaling $130,000 for 650,000 shares of Common Stock.  The Company received
total payment on these subscriptions as of June 6, 1996.  On May 7, 1996, Photo
Corporation Group Pty Limited ("PCG") converted $130,000 of the $649,500 loan
payable at that time to 650,000 shares of the Company's Common Stock.  This
represented a value of $0.20 per share of Common Stock, which was the fair
market value as determined by the Board of Directors, on this date and the same
price paid on such date by the six independent investors.  On November 29, 1996,
PCG converted $519,000 of the remaining $519,500 note payable, together with
$261,000 of accrued management fees payable to Photo Corporation of Australia
Pty Limited ("PCA"), which debt was assumed by PCG, into 8,320,000 shares of the
Company's Common Stock.  This represented a value of $0.09375 per share of
Common Stock, which the Board of Directors determined to be a fair price at that
time. PCG also charged the Company $131,000 of management fees for services
provided during the year ended March 31, 1997, pursuant to the Personnel
Consulting Agreement with the Company dated June 28, 1995. Management believes
that this amount represents the reasonable cost of the services provided to the
Company for the year ended March 31, 1997.


                                      7

<PAGE>



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

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


Results of Operations

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

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

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

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

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

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

Cost of Revenues:
 Compensation &
  Related Benefits   429,764    277,501   5,674    439,350   108,787         -
 Depreciation &
   Amortization      137,855    220,975     293    189,781    59,468         -
 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% 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.

                                      8

<PAGE>



     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 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 $8,969,  or 8% to $114,954 for the fiscal
year ended March 31, 1997, compared to $105,985 for the same period last year.

                                      9

<PAGE>




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


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

     The  following  table shows  Revenues,  Cost of Revenues and Gross Income /
(Loss)  during the fiscal  years  ended March 31,  1996 and March 31,  1995,  by
studio.

                          Fiscal Year Ended         Fiscal Year Ended 
                            March 31, 1996             March 31, 1995

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

Revenues         $1,422,845 $ 157,867 $      - $ 1,274,836  $    -     $    -
                 -------------------- -------- -----------  ------     ------
Cost of Revenues:
 Compensation &
  Related Benefits  439,350   108,787        -     459,217       -          -
 Depreciation &
  Amortization      189,781    59,468        -     340,423       -          -
 Loss on impairment
  of Long-Lived
  Assets            722,000         -   40,129           -       -          -
 Pre-opening Costs        -    67,007        -           -       -          -
 Rent               183,421    27,218        -     172,480       -          -
 Other              309,175    69,792        -     346,992       -          -
                 ---------- ---------  ------- -----------  ------     ------
         
  Total           1,843,727   332,272   40,129   1,319,112       -          -
                 ---------- ---------  ------- -----------  ------     ------

Gross Loss       ($420,882)($ 174,405)($40,129)($   44,276) $    -     $    -
                 =========  ========= ========  ==========  ======     ======

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

     Cost of revenues  increased by 68% to $2,216,128  overall during the fiscal
year ended March 31, 1996 compared to $1,319,112  for the same period last year.
Of this 68% increase,  58% is due to the impairment loss of $762,129.  Excluding
the impairment loss, cost of revenues increased by 10.2%.

     Cost  of  revenues  for  the  CityWalk  Studio  increased  by  $524,615  to
$1,843,727.  Compensation  and  related  benefits  were  $19,867  lower than the
previous  year as a result of tighter  controls  over the number of staff  hours
worked at the  studio.  Depreciation  was lower by  $150,642  as a result of the
adoption in June 1995 of SFAS No. 121 and the  recognition of a $722,000 loss on
impairment of CityWalk Studio assets. Rent was higher as a result of the Company
paying rent based on a percentage of revenues,  such revenues  being higher than
the previous period by $148,099.  Other cost of revenues decreased by 10.9% as a
result of cost reduction  programs at studio level. The CityWalk Studio incurred
a gross loss of $420,882 during the fiscal year ended March 31, 1996 compared to
a gross loss of $44,276 for the same period last year.  Excluding  the  $722,000
impairment loss, this represents an improvement of $345,394.

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


                                      10

<PAGE>



     The Company overall  incurred a gross loss of $635,416.  This comprises the
$420,882 gross loss incurred by the CityWalk Studio,  the gross loss of $174,405
which was incurred in the new Irvine Studio and the $40,129 loss incurred by the
Traveling  Studio.  The Company overall incurred a gross loss of $44,276 for the
year ended March 31, 1996.  Excluding the $762,129 impairment loss recognized in
the quarter ended June 30, 1995, this represents an improvement of $170,989.

     General  and  administrative  expenses  for the fiscal year ended March 31,
1996 include a non-recurring  charge of $110,000 for professional  fees relating
to the PCG. The corresponding  year ended March 31, 1995 includes  non-recurring
lease abandonment  expenses of $120,713  associated with the discontinued leases
on the 920 and 910 Colorado  Premises.  After adjusting for these  non-recurring
items,  the  Company's  general  and  administrative   expenses  decreased  from
$1,144,481  in the fiscal  year ended  March 31,  1995 to $834,103 in the fiscal
year ended  March 31,  1996,  a decrease of  approximately  28%.  This  decrease
resulted from lower expenditures  within almost every overhead expense category,
consistent  with  Management's  plan to cut  overhead  costs.  Compensation  and
related benefits  decreased by 15% to $313,432 from $369,618 for the same period
last year.  Professional  fees,  excluding the $110,000 in kind consideration on
the PCG  transaction,  decreased by almost 70% to $96,979 from  $320,047 for the
same period last year.  Approximately  $80,000 of the professional fees expended
during the fiscal year ended March 31, 1995 were  attributable  to  negotiations
with potential  financiers,  including two equity funding transactions which the
Company  announced  on  Form  8-K  current  report  filings  and  which  did not
subsequently close. Management fees of $130,000 payable to PCG have been accrued
relating to the period July 1, 1995 to March 31, 1996, pursuant to the Personnel
Consulting  Agreement dated June 28, 1995.  Office rent expenses were lower than
last year by $37,364 as a result of the closure of the Corporate  offices at 920
and 910 Colorado  Premises.  Depreciation and amortization costs were lower as a
result of  previously  non-producing  assets being put into  production  and the
consequential  charges  reported in cost of revenues.  Interest charges totaling
$28,279 were incurred on the loan from PCG and on the deferred  salaries accrual
owing to  executives  of the  Company.  There were no such  charges in the prior
year. Other general and  administrative  expenses decreased by $41,493 or 28% to
$105,985 for the fiscal year ended March 31, 1996,  compared to $147,478 for the
same period last year.

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

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

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

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


Liquidity and Capital Resources

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

                                      11

<PAGE>



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

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

     The Company's auditors rendered a going concern report. The continuation of
the Company as a going  concern is  dependent  upon its ability to generate  net
cash from  operations  and its  ability  to  continue  with debt  and/or  equity
financing.  The Company's  recurring  operating  losses and net working  capital
deficiency raises  substantial doubt about the entity's ability to continue as a
going  concern.  Management's  plans include  increasing  revenues of the Irvine
Studio, continuing the reduction of expenses, and obtaining additional equity or
debt financing.  There can be no assurance that Management will be successful in
these endeavors and if not, the Company will be dependent on the willingness and
the ability of the majority stockholder,  PCG, to continue to provide additional
financing.

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

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

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

     On November 29,1996,  PCG converted $519,000 of the remaining $519,500 note
payable,  together the $261,000 of accrued management fees payable to PCA, which
debt was assumed by PCG, into  8,320,000  shares of the Company's  Common Stock.
This represented a value of $0.09375 per share of Common Stock,  which the Board
of Director's  determined to be a fair price at that time.  Management  believes
that the $131,000 of  management  fees charged by PCG pursuant to the  Personnel
Consulting  Agreement  with the  Company  dated June 28,  1995,  represents  the
reasonable cost of the services  provided by PCG during the year ended March 31,
1997.

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

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

                                      12

<PAGE>



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

Other Matters

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

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

                                      12

<PAGE>




ITEM 8.  FINANCIAL STATEMENTS


                          INDEPENDENT AUDITOR'S REPORT



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



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

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

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

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

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






                                          Moore Stephens, P.C.
                                          Certified Public Accountants




Cranford, New Jersey
May 15, 1997



                                       13

<PAGE>
<TABLE>



                                   OUT-TAKES INC.

                                    BALANCE SHEET

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

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

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

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

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

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

  Commitments (Note 8)                                                -           -

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

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

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

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

  Total                                                     $   565,159 $   278,505

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

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

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

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



                                         14

<PAGE>



                                   OUT-TAKES INC.

                              STATEMENTS OF OPERATIONS

                                                         Years ended March 31,

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

<S>                                         <C>             <C>         <C>        
Revenues                                    $   2,014,788   $ 1,580,712 $ 1,274,836
                                            -------------   ----------- -----------

Cost of Revenues:

  Compensation and Related Benefits               712,939       548,137     459,217
  Depreciation and Amortization                   359,123       249,249     340,423
  Loss on Impairment of Long-Lived Assets               -       762,129           -
  Pre-Opening Costs - Irvine Studio                     -        67,007           -
  Rent                                            300,857       210,639     172,480
  Other Cost of Revenues                          553,011       378,967     346,992
                                            -------------   ----------- -----------

  Total Cost of Revenues                        1,925,930     2,216,128   1,319,112
                                            -------------   ----------- -----------

     Gross Income (Loss)                           88,858      (635,416)    (44,276)
                                            -------------   ------------------------

General and Administrative Expenses:

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

  Total Expenses                                  788,086       915,824   1,265,194
                                            -------------   ----------- -----------

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

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

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

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

Net Loss Per Share                          ($       0.05)  ($     0.16)($     0.25)
                                            =============   =========== ============

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










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

                                         15

<PAGE>



                                      OUT-TAKES INC.

                             STATEMENT OF STOCKHOLDERS' EQUITY


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


<S>             <C> <C>    <C>        <C>       <C>          <C>           <C>        <C>       <C>       
Balance - March 31, 1994   5,603,122  $  56,032 $ 8,573,393 ($6,018,414) ($107,296)  ($144,000  $2,359,715

Non-Cash Compensation
 Expense (Trustee Shares)          -          -      20,000           -          -           -      20,000

Non-Cash Compensation
 Expense (Christmas Bonus)   125,000      1,250      22,187           -          -           -      23,437

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

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

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

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

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

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

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

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

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

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








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



                                            16

<PAGE>



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

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

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

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

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

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

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

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

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

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

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

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

</TABLE>
                                         17

<PAGE>



                                 OUT-TAKES INC.

                          NOTES TO FINANCIAL STATEMENTS


[1] Summary of Significant Accounting Policies


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

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

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

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

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

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

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

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

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

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

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


                                       18

<PAGE>



                                 OUT-TAKES INC.

                   NOTES TO FINANCIAL STATEMENTS - (Continued)


[2] Organization and Business

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


[3] [A] License Agreements and Royalties

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

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


[B] Sublicense Agreement - Related Party

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


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

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

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

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



                                       19

<PAGE>



                                 OUT-TAKES INC.

                   NOTES TO FINANCIAL STATEMENTS - (Continued)

[4]  Plant and Equipment - (Continued)

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

[5] Related Party Transactions

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

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

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

Management  fees  of  $261,000  payable  to PCA  were  accrued  pursuant  to the
Personnel  Consulting  Agreement  with the Company  dated June 28,  1995.  These
charges cover the period from July 1, 1995 through November 30, 1996. Management
believes that these charges  represent the reasonable cost of services  provided
by PCG pursuant to the  Personnel  Consulting  Agreement  with the Company dated
June 28, 1995.  On November 29, 1996,  the accrued  management  fees of $261,000
were converted into shares of the Company's Common Stock (see note 6).

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

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

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

[6] Stockholders' Equity

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

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

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

                                       20

<PAGE>



                                 OUT-TAKES INC.

                   NOTES TO FINANCIAL STATEMENTS - (Continued)
[6] Stockholders' Equity - (Continued)

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

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

On November 29, 1996,  PCG  converted  $519,000 of the  remaining  $519,500 note
payable, together with $261,000 of accrued management fees payable to PCA, which
debt was assumed by PCG, into 8,320,000  shares of the Company's  Common Stock .
This represented a value of $0.09375 per share of Common Stock,  which the Board
of  Directors'  determined  to be a fair price at that time.  In  addition,  PCG
agreed not to charge  management fees for services provided by it or its related
parties  pursuant to the Personnel  Consulting  Agreement with the Company dated
June 28, 1995 for a period of two years commencing December 1, 1996.

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

If the above pre-tax earnings levels are achieved,  the Company will recognize a
compensation  expense equal to the  difference  between the fair market value at
the time of release of Escrow Shares to officers or employees of the Company and
the  recorded  value at the time of  issuance.  Release of the Escrow  Shares is
likely to result in  substantial  compensation  expense to the Company in future
years. In the event the above does not occur, the shares will be returned to the
Company as Treasury Shares. To date, the pre-tax earnings have not been achieved
and accordingly there has been no amortization of deferred  compensation for the
750,000 escrowed shares.

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

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

The exercise price of the Class A and Class B warrants are subject to adjustment
upon the occurrence of certain events including: the issuance of Common Stock as
a dividend  to the  holders of all  outstanding  Common  Stock or for cash in an
amount per share less than the warrant  exercise price per share;  subdivisions,
combinations, or certain

                                       21

<PAGE>



                                 OUT-TAKES INC.

                   NOTES TO FINANCIAL STATEMENTS - (Contimued)

[6] Stockholders' Equity - (Continued)

reclassifications  of Common Stock; or certain issuances of rights,  options, or
warrants to subscribe for Common Stock or securities of the Company  convertible
into Common  Stock.  At March 31, 1997,  the  exercise  price of the Class A and
Class B  warrants  had not  been  adjusted  and  none of the  warrants  had been
exercised  or redeemed by the Company.  There are  2,353,125 of Class A warrants
and 1,868,750 Class B warrants outstanding at March 31, 1997.

[7] Stock Option Plans

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

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

No compensation cost was recognized in income.

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

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

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

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

 Forfeited during the year
  ended March 31, 1996           (94,527)         -
                                --------    -------
Outstanding at March 31, 1996    154,898          -    $0.65 to $4.40     $4.00

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

[8] Commitments

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

The Company leases its Irvine Studio  premises  under a three year lease,  which
expires on November 21, 1998.  This lease is subject to renewal at the option of
the Company for an  additional  seven  years.  The lease  provides for an annual
rental payment  including  common area costs and marketing costs of $118,202 per
annum and the payment

                                       22

<PAGE>



                                 OUT-TAKES INC.

                   NOTES TO FINANCIAL STATEMENTS - (Continued)

[8] Commitments - (Continued)

 of 7% of store revenues in excess of $1,128,857 per annum. Both the base rental
amount and the percentage  rental cut-in point are adjusted annually for changes
in the consumer price index.  The option to renew the lease is available only if
sales  revenue in the  twelve  months  prior to the date of giving  notice is in
excess of $810,000 and the net worth of the Company is in excess of $600,000.

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

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

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

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

[9] Net Loss Per Share

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

[10] Trademark Registrations and Patent Applications

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

[11] Income Taxes

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

[12] Notes Payable

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

                                       23

<PAGE>



                                 OUT-TAKES INC.

                   NOTES TO FINANCIAL STATEMENTS - (Continued)

[13] New Authoritative Pronouncements

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

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

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

[14] Going Concern

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

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

Management's  plans  include  increasing   revenues  of  the  Irvine  Studio  by
developing  a  marketing  program to attract  more  customers  and by creating a
background  image  portfolio  that is more  suitable for the market in which the
Irvine  Studio is  located.  Given  that the  Company  has not met either of the
criteria  for renewal of the Irvine  Studio lease in November  1998,  management
cannot state with  certainty that the seven year option period will be exercised
and  accordingly,  no lease  commitment in respect of the option period has been
disclosed in note 8.

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

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

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

                                       24

<PAGE>



                                 OUT-TAKES, INC.

                   NOTES TO FINANCIAL STATEMENTS - (Continued)



[16] Impairment of Long-Lived Assets

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

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

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

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

[17] Financial Instruments

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

[18] Subsequent Events

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


                    .   .   .   .   .   .   .   .   .   .   .
















                                       25

<PAGE>



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

     None.


                                    PART III

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

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


ITEM 11.  EXECUTIVE COMPENSATION

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


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT

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


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     On May 7, 1996, Photo Corporation Group Pty Ltd ("PCG") converted  $130,000
of its $649,500 loan payable into 650,000 shares of the Company's  Common Stock.
On November 29, 1996, PCG converted an additional $780,000 into 8,320,000 shares
of the Company's  Common Stock.  This represented loan principal of $519,000 and
accrued  management fees of $261,000  payable to Photo  Corporation of Australia
Pay Limited ("PCA"), which debt was assumed by PCG.

     Included  in  the  above  mentioned  management  fees  of  $261,000,   were
management  fees of  $131,000  accrued  during  the year  ended  March 31,  1997
pursuant to the Personnel  Consulting  Agreement dated June 28, 1995 and payable
to PCA, a wholly owned subsidiary of PCG.

     Peter C. Watt, Chairman of the Board,  President,  Chief Executive Officer,
Chief Financial Officer and Secretary of the Company is a director of PCA.







                                       26

<PAGE>



                                    PART IV

ITEM 14.   EXHIBITS AND REPORTS ON FORM 8-K

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

     3.1   Certificate of Incorporation of the Company. (ii)

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

     3.3   Bylaws of the Company. (i)

     4.1   Form of Unit Purchase Option. (i)

     4.2   Form of Warrant Agreement. (i)

     4.3   Form of Escrow Agreement. (iv)

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

     10.1  Form of Registration Rights Agreement. (i)

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

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

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

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

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

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

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

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

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

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

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

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

     10.17 1992 Employee Stock Option Plan. (iii) +

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

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


                                       27

<PAGE>



     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)

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

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

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

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

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

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

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

     10.29 Form of Subscription Agreement. (ix)

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

(b)  Reports on Form 8-K

     None.

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

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

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

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

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

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

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

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

     (ix)  Incorporated  by reference  to the  Company's  Annual  Report on Form
10-KSB for the fiscal year ended March 31, 1995.
                                    
     (x) Incorporated by reference to the Company's Report on Form 10-QA for the
period ended September 30, 1996.

     +  Management contract or compensatory plan.

                                       28

<PAGE>


                                   SIGNATURES


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

                                                  Out-Takes, Inc.



Dated: March 6, 1998                         By:___________________________
                                                Peter C. Watt,  President








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

         Signature                       Title                     Date



__________________________  Chairman of the Board, President,   March 6, 1998
        Peter C. Watt       Chief Executive Officer, Principal
                            Financial Officer and Secretary
                            (Principal Executive Officer,
                            Principal Financial Officer and
                            Principal Accounting Officer)



__________________________  Director                            March 6, 1998
    Michael C. Roubicek



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