SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

[X]   ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934

      For the fiscal year ended December 31, 1998

[  ]  TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
      OF 1934
                         COMMISSION FILE NUMBER 0-29802

                              PSI INDUSTRIES, INC.
                 (Name of Small Business Issuer in Its Charter)

          FLORIDA                                              59-2736501
(State or Other Jurisdiction of                               (I.R.S. Employer
Incorporation or Organization)                               Identification No.)

                                1160 B SOUTH ROGERS CIRCLE
                                 BOCA RATON, FLORIDA 33487  
                    (Address of Principal Executive Offices)(Zip Code)

                                      (561) 997-1133
                     (Issuer's Telephone Number, Including Area Code)

Securities registered under Section 12(b) of the Securities Exchange Act of
1934:

      TITLE OF EACH CLASS              NAME OF EACH EXCHANGE ON WHICH REGISTERED
            NONE                                       NONE

Securities registered under Section 12(g) of the Securities Exchange Act of
1934:
                         COMMON STOCK, PAR VALUE $.0001 PER SHARE
                                     (Title of Class)

Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [ ]  No [X]

Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10- KSB. [X]

State registrant's revenues for the year ended December 31, 1998.  $28,278,852.

State the aggregate market value of the voting stock held by non-affiliates of
the registrant on March 31, 1999 computed by reference to the closing bid price
of the PSI Industries, Inc. Common Stock as reported by the OTC Bulletin Board
on that date ($1.625): $8,141,942.25.

                      APPLICABLE ONLY TO CORPORATE ISSUERS

The number of shares outstanding of the registrant's Common Stock, par value
$.0001 per share (the "Common Stock"), as of March 31, 1999, was 11,600,577

Transitional Small Business Disclosure Format (check one): Yes [ ]  No [X]

                       DOCUMENTS INCORPORATED BY REFERENCE
<PAGE>
                                     PART 1

ITEM 1.     DESCRIPTION OF BUSINESS

GENERAL

      PSI Industries, Inc. (the "Company") is engaged in the wholesale
distribution and manufacture of cameras, photographic film, certain
internationally branded cameras and ancillary photographic equipment nationwide
to wholesale and retail businesses. Since its formation in 1986, the Company has
evolved into a major national wholesale distribution company to over 20,000
specialty retail and mass market merchandise outlets and wholesalers.

      The Company estimates that the market for cameras, film, and ancillary
photographic equipment is in excess of $75 billion annually and is projected to
enjoy steady growth as reported in the 1997 PMA Consumer Photographic Survey.
The Company markets and distributes its products to a market comprised of
photographic retailers, independent gift boutiques, sundry shops, convenience
stores, pharmacies, mass marketers, and other similar retailers and wholesalers.
The Company's product lines represent distinct market segments for these
customers, and often represent a potential one-stop source for the Company's
customers of the products that the Company distributes.

      The Company's camera products consist of five segments of the single-use
disposable and 35mm camera industry: (1) the Message CameraTM which allows for
the application of full-color messages and graphics to pre-exposed film offering
the consumer occasion-specific messages on each print, utilizing the Company's
own patent pending proprietary technical process; (2) SmiletimeTM camera, a
proprietary line of high quality 35mm and single-use cameras competitively
priced to meet the standards of wholesalers and the camera retailer; (3) private
label cameras, which contain customized camera identities for private label
retail customers; (4) Logo and Message-type cameras serving corporate America
for incentive and promotional and premium events; and (5) international branded
cameras, such as Kodak and Fuji.

      The single-use camera photographic market continues to be one of the
fastest growing segments within the film-imaging sector. Since its introduction,
there has been dramatic growth in the sales of the cameras, from sales of less
than 1 million units in 1988 to in excess of 270 million units worldwide in 1997
with 84 million units sold in the United States. In 1996, 1997, and through
December 31, 1998, the Company has sold approximately 500,000, 1,500,000, and
2,300,000 units, including single-use cameras, respectively.

      In January 1996 the Company became the worldwide licensee, distributor and
manufacturer of the Message CameraTM under a licensing agreement with Keepsake,
Inc. With the establishment of a nationwide sales force of independent
manufacturer's representatives, independent distributors and appointment of
international distributors, the Company began to create a demand for the Message
CameraTM as well as its other camera products. It subsequently became evident
that Polaroid Corporation of Cambridge, Massachusetts, held a patent for
photographic technology encompassing pre-exposed film. Effective November 1,
1997, due to a dispute that arose over the validity of Keepsake's patents, the
Company discontinued the royalty payments to Keepsake and entered into a

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license agreement with Polaroid Corporation, precipitating the termination of
the Keepsake agreement in February 1998. In April 1999, the Company reached a
settlement with Keepsake. See "LEGAL PROCEEDINGS".

      Under the terms of the agreement with Polaroid, the Company has a
non-exclusive license to manufacture and sell single-use cameras containing
pre-exposed film worldwide. To the best of the Company's knowledge, Concord
Camera Corporation is the only other company that has been issued a
non-exclusive license from Polaroid for the use of the same technology. See
"Licenses, Patents and Trademarks".

PRODUCTS

      ANCILLARY IMAGING DIVISION - the Company's Ancillary Imaging Division is
the distribution of branded cameras, photographic film, ancillary photographic
equipment and other proprietary photographic products. Among the products sold
are amateur film, cameras, batteries, travel supplies, albums, photo
accessories, mini-lab supplies and camera accessories. Among the brand names
sold by the Company are Kodak, Fuji, Konica, Keystone, Agfa, Polaroid, Duracell,
Sony, Canon, Olympus, Ricoh and Minolta, to name a few.

      CAMERA DIVISION

      The Camera division is divided into four profit centers:

      o  MESSAGE CAMERATM/RETAIL - the Message CameraTM is a small, compact and
         contoured single-use camera, which incorporates the Company's
         patent-pending technological process, through which a color-latent
         image is pre-exposed onto color negative film and placed into a
         technologically proprietary single-use camera. The Message CameraTM is
         pre-loaded and ready to use with high quality 400 ISO high definition
         film and may contain 12, 15, 18 or 24 exposures.

         The retail occasion-specific line of Message CameraTM includes the
         following: The "Happy Birthday" Message CameraTM, the "Wedding" Message
         CameraTM, the "Anniversary" Message CameraTM, the "It's a Boy" Message
         CameraTM, the "It's a Girl" Message CameraTM, the "Party" Message
         CameraTM, the "Vacation" Message CameraTM, the "Bible" Message
         CameraTM, the "Graduation" Message CameraTM, the "Pet Dog" Message
         CameraTM, the "Pet Cat" Message CameraTM, the "Season's Greetings"
         Message CameraTM, "Baby's First Birthday" Message CameraTM, the
         "Halloween" Message CameraTM, the "Baby Shower" Message CameraTM", the
         "Bridal Shower Message CameraTM" and the "Hawaii Message CameraTM".
         Certain cameras consist of 18 exposures and others contain 24
         exposures. Each occasion-specific camera has a different
         occasion-related message and/or colorful art on each frame and/or
         photographic print. Printed on the top of each camera is the list of
         messages pre-exposed and the frame on which it will appear.

      o  SMILETIMETM CAMERAS - the Company's SmiletimeTM cameras are a line of
         35mm single-use cameras that are currently comprised of five different
         colorful models, available with or without flash. The product line
         includes an underwater use model and a panoramic model

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         which produces broader and larger snapshots. The SmiletimeTM single-use
         cameras are pre-loaded with 400 ISO high definition 15 or 27 exposure
         color film. Certain models are produced using newly constructed
         proprietary cameras and other models are made using recycled camera
         casings.

      o  MESSAGE/LOGO PREMIUM INCENTIVE CAMERAS - Message/Logo Premium Incentive
         Cameras are a unique promotional tool for event marketing and product
         promotions that enables corporate America to incorporate its name,
         logo, company slogan or personalized message on the film itself or on
         the outer camera packaging. Each standard premium camera may consist of
         15 or 24 exposures. A significant feature of the camera is the
         capability of including an advertisement, rebate, coupon or free offer
         photograph on a 16th or 25th exposure, which the user unexpectedly
         receives with their developed film. Examples of this promotional tool
         may include an autographed photograph, a free gift coupon, a discount
         on the next purchase, an announcement of an upcoming event, promotion
         or an informative advertisement.

      o  PRIVATE LABEL - Private Label cameras consist of single-use cameras or
         35mm cameras prepared and designed specifically for the mass-market
         retailers requiring a competitively priced high-quality product under
         their own corporate image.

      The Camera Division currently has cameras manufactured on a sub-contract
basis in the People's Republic of China and Hong Kong using its camera
requirements. These manufacturers are some of the world's foremost single-use
and 35mm camera manufacturers. Currently most of the product line of 35mm
cameras manufactured by the Company are newly constructed. There is, however, an
on-going supply of our recycled camera casings, which, from time to time, the
Company remanufactures and recycles for its own proprietary single-use camera
line. The advantage to the use of our recycled casings enables the Company to
competitively sell a single-use camera in the marketplace at increased profits.

      SHARP COLOR FILM - the Company has a wholly-owned subsidiary, Sharp Film
Corporation, and is currently using the name "Sharp Color FilmTM" imprinted on
each canister of film and loaded into The Message CamerasTM and the SmiletimeTM
and Logo cameras. It is the Company's intention to introduce a line of color
negative film to the consumer marketplace known as Sharp Film to its own niche
market as sales of the Camera Division grow and brand awareness is achieved.

SALES AND MARKETING

      ANCILLARY IMAGING DIVISION - the Company distributes its ancillary imaging
products to independent specialty retailers and regional chains, which include
camera stores, film labs, gift shops, convenience stores, pharmacies and
one-hour photo retailers and wholesalers. The products are sold to an aggregate
of 20,000 individual customers. Sales of the ancillary imaging products are
primarily accomplished through the Company's in-house telemarketing sales
organization and mass catalog mailings. In its sales of ancillary imaging
products there are no order requirements for the retailer and orders are usually
processed the same day received.
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      MESSAGE CAMERATM - the occasion-specific line of Message CamerasTM is
marketed domestically by a group of 23 independent manufacturer's representative
organizations with a combined sales force of approximately 275 sales
representatives. The sales organizations have been assigned to specific market
segments within their territory. The Company has currently divided the segments
into mass merchandise retailers and independent gift retailers. The mass
merchandise retailers include all drug, grocery and convenience store chains,
discount stores and wholesale clubs. The Company focuses its marketing in this
segment on the top 141 retailers and has selected experienced sales
representative organizations to market this product. Several mass market
merchandisers including Walgreens, Toys-R-Us, K-Mart, American Stores, CVS and
Party City already carry The Message CameraTM line. The Message CameraTM is also
marketed to a wide range of independent retail stores such as gift and card
stores, party stores, airport hotel and motel gift shops, flower shops, baby
stores, religious book stores and military post exchanges. According to the 1996
Gift and Decorative Accessories Trade Publication, there are in excess of
170,000 independent retailers to whom the product line may be sold.

      The Company believes that the Message CameraTM concept has a potential in
the world marketplace. Accordingly, it intends to market the products
internationally through the identification of overseas distributors throughout
Europe, Mid-East and Asia, each of which would be granted exclusive distribution
rights within a specified territory under negotiated sales and distribution
agreements.

      PREMIUM/INCENTIVE MESSAGE/LOGO CAMERAS - the Premium/Incentive
Message/Logo camera is currently marketed by a combination of independent sales
representative organizations that focus on promotional activities for corporate
clients and by the Company's own product premium sales department. Some of the
companies that have utilized the message camera incentive program for
promotional purposes are: Coca Cola, IBM, NationsBank, John Hancock Insurance,
Club Med and Sprint. The Company also targets the private label promotional
market by utilizing the approximately 10,000 ad specialty distributors who are
members of the Ad Specialty Institute Association and offer the Message CameraTM
to their corporate clients throughout the world.

      SMILETIMETM CAMERAS - the Company markets its SmiletimeTM camera line both
as part of its ancillary imaging business through mass catalog distribution and
telemarketing sales as well as through numerous sales representative
organizations that may include the same representative organizations that market
the Message CameraTM. Most of the SmiletimeTM sales are to independent specialty
retailers, tobacco, sundry, and health and beauty aid wholesalers.

      PRIVATE LABEL/LOGO CAMERAS - the Private Label/Logo camera line is
currently marketed by a number of the independent sales representative
organizations. This line of cameras is overseen by the Company's Vice President
of Sales who is responsible for marketing the line to mass retailers and
regional chains. Among these retailers and wholesalers are K-Mart, Family Dollar
Stores and Bergen Brunswig Company (distributors to approximately 2,200
independent drug stores). The Company has recently been appointed the exclusive
vendor for private label/logo cameras for Cardinal Health, Inc., which services
2,500 retail pharmacies nationwide.

      In February 1999, the Company formed an internet alliance with Party City
Corp. ("Party City"). Under the terms of such alliance the Company will place a
hyperlink within its web page for
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the consumer to directly jump to the web page of Party City. The Party City web
page will direct the consumer to the closest Party City store location where the
Message Camera(TM) is offered for sale.

SIGNIFICANT CUSTOMERS

      During 1997 and 1998, no customer accounted for more than 10% of net
sales.

MANUFACTURING AND SUPPLIES

      ANCILLARY IMAGING AND CAMERA DIVISION - management believes that astute
purchasing is one of the key ingredients of the profitability of the Company's
ancillary imaging division business. Brand name film and photographic supplies
are purchased from what management perceives to be the best available sources
based on price and availability. Certain sources represent brand name, high
quality film and supplies manufactured domestically and abroad and purchased by
the Company at competitive prices. The Company is also a distributor for Eastman
Kodak Company, Agfa Corporation, Polaroid Corporation and Imation Corp.
products.

      The Company maintains an inventory of its product in its 18,000 sq. ft.
facility at its corporate headquarters in Boca Raton, Florida. The Company also
maintains inventory in the People's Republic of China and Hong Kong at its
manufacturing sources.

      MESSAGE CAMERASTM - the Company has recently developed its own proprietary
manufacturing method of imprinting messages and creative images on color film.
The imprinting process on the Message CameraTM is performed at the Company's
facility in Boca Raton, Florida. To date, the product has been marketed under a
license with Polaroid utilizing Polaroid's patent (see "Licenses, Patents and
Trademarks").

      Currently, the Company purchases film from two major sources of film
manufacturers for use in its single-use cameras. Agfa Corporation and Imation
Corp. serve as the sources of supply for bulk color negative film.

      The Company currently has its cameras manufactured by three separate
sources located in The Peoples Republic of China and Hong Kong, Achieva
Industries, Inc., Vast Frame, Inc. and Mass Chance Electronics, Inc. ("Mass
Chance"). On March 1, 1999 the Company entered into a three (3) year
Manufacturing and Sales Agreement with Mass Chance. Each of these manufacturers
have been qualified for quality control and dependability. The Company believes
it has several other choices of manufacturers but has chosen the current three
for their reliable history of performance with the Company.

      The Company believes its relationships with Eastman Kodak, Agfa, Imation
and its other suppliers are satisfactory and that alternative suppliers are
available if relationships falter or existing suppliers are unable to maintain
standards meeting the Company's requirements. However, there can be no assurance
that the Company's current or future suppliers will be able to meet the
Company's requirements on commercially reasonable terms or within scheduled
delivery times. Any interruption of the Company's arrangements with suppliers
could cause a delay in the acquisition of the Company's

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products for timely delivery to its customer base.

      The Company is and will be dependent upon foreign contract manufacturers
for the manufacture and assembly of its single-use cameras. By being dependent
upon foreign contract manufacturers, the Company will be subject to the risks of
doing business abroad, such as import duties, trade restrictions, work
stoppages, foreign currency fluctuations, political instability, difficulties in
enforcing the manufacturer's obligations to the Company and other factors which
could have an adverse impact on the business of the Company. The three
manufacturers currently supplying the Company all have the capability of
supplying new casings as opposed to recycled.

      See "LEGAL PROCEEDINGS" for information with regard to an action
instituted in February 1998 before the International Trade Commission by Fuji
Film in which the Company is one of 28 respondents. The action seeks an import
exclusion order against all defendants based upon claimed patent infringement.
In February 1999 an Administrative Law Judge ruled in favor of Fuji and the
matter is currently subject to review by the International Trade Commission.

COMPETITION

      There are a number of distributors and wholesalers of photographic
supplies and equipment that actively compete with the Company. In some areas,
competition is directly with the manufacturers of these products. Many of these
companies have substantially greater financial, technical and other resources
than the Company and have established reputations for success in the
development, licensing and sale of their products and technology. Some of the
Company's direct competitors in its ancillary imaging and camera business
include Unique Photo ("Unique"), Concord Camera Corporation ("Concord") and Jazz
Photo Corp. ("Jazz"). Unique is a reseller of photo supplies and single-use
cameras. Concord and Jazz market cameras only and not other ancillary imaging
products, as is the case with the Company. Although select areas of price
competition are intense in the Company's ancillary imaging and camera business,
the Company believes that it has certain competitive advantages by virtue of its
proprietary product lines, its well-developed relationships with vendors and
broad customer base allowing it to provide a one-stop source of products for its
customers.

      There are two known competitors, DCC Compact Classics and Fairway
Performance, which have begun to market a camera similar to the Message
CameraTM. However, due to the Company's marketing and product positioning over
the past three years the Company believes it has taken a leadership position in
the marketplace. The Company has also recently become aware that there may be
one or more foreign manufacturers that have employed pre-imaging messages into
single-use cameras. These cameras, to the best of the Company's knowledge, are
not a threat to the Company's future performance levels and the Company is
unaware of any cameras being marketed domestically or internationally.

      Other companies including Eastman Kodak, Fuji, Agfa and Polaroid currently
market single- use cameras. Although these companies have substantially greater
financial resources than the Company, none have marketed any camera containing
pre-imprinted messages onto color negative film.

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LICENSES, PATENTS AND TRADEMARKS

      POLAROID LICENSE - effective November 1, 1997 the Company entered into a
license agreement with the Polaroid Corporation ("Polaroid") under which the
Company received a non-exclusive license to manufacture and sell single-use
cameras containing pre-exposed film worldwide under Polaroid's patent for a
single-use camera containing pre-exposed film. The license, which continues
until the Polaroid patent expires, is terminable upon 60 days' notice by the
Company at any time and calls for the payment of a royalty to Polaroid of the
greater of $.30 per camera or 5% of the net selling price.

      PSI PATENT APPLICATIONS - in July 1998 the Company filed a patent
application with the U.S. Patent and Trademark Office relating to new and unique
methods for pre-burning a color latent image onto color negative film. In
addition, in November 1998 the Company filed another patent application with the
U.S. Patent and Trademark Office relating to an invention regarding an
alternative method utilizing the single-use camera system to be loaded with film
outside of a dark room. Although the Company believes that if these patents are
issued they may be of considerable value and importance to its business, there
can be no assurance that the applications will result in the issuance of a
patent or patents, or that if patents are issued, whether they will provide
significant proprietary protection or will be circumvented or invalidated.

      The Company has also applied for trademark registrations for the Message
CameraTM, SmiletimeTM and Sharp Color FilmTM.

EMPLOYEES 

      At March 31, 1999, the Company had 35 employees, 11 of whom are engaged in
marketing and sales, 9 in assembly, warehousing and shipping, and 15 in
management and administration. The Company's employees are not represented by a
collective bargaining unit. The Company considers relations with its employees
to be good.

ITEM 2.     DESCRIPTION OF PROPERTIES

      The Company currently owns an industrial building of approximately 18,000
square feet in Boca Raton, Florida. The Company maintains its principal
executive and administrative offices and warehouse space at this facility. The
Company financed the acquisition of the facility in January 1997 by a bank
mortgage, which was refinanced in December 1998 with a new bank mortgage in the
principal sum of $570,000 payable over a term of five years and bearing interest
at the rate of approximately 8% per annum. The mortgage has been guaranteed by
Dominick Seminara and his wife. See "CERTAIN TRANSACTIONS".

      The Company believes that existing facilities are adequate for its needs
through at least the end of 1999. Should the Company require additional space at
that time, or prior thereto, it believes that such space can be secured on
commercially reasonable terms and without undue operational disruption.

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ITEM 3.     LEGAL PROCEEDINGS

      The Company is a defendant in an action filed in the Circuit Court of
Orange County, Florida in February 1998 by Keepsake, Inc. The action is for,
among other things, breach of contract (failure to make royalty payments). The
Company has asserted counterclaims against the plaintiff for tortious
interference with contractual and advantageous business relationships,
misappropriation of trade secrets, defamation, conversion and fraud and
negligent misrepresentation. The Company seeks damages and injunctive relief.

      The action is at the discovery stage. No trial has been set. The Company
intends to vigorously contest the plaintiff's claims and prosecute its
counterclaims. While the Company believes it has a strong case, given the
complexity of the issues involved, it is unable to evaluate the likelihood of a
favorable or unfavorable outcome at this time. An estimate of the amount or
range of potential loss or gain cannot be made at this time.

      The Company is a defendant in an action filed in the U.S. District Court
for the Middle District of Florida (Orlando Division) in November 1998 by
Keepsake, Inc. and Loura Dobbs. The other defendants are Walgreen Company, Party
City Corp. and K-Mart Corp. The action is for, among other things, unfair
competition and patent infringement. The Company intends to vigorously contest
the complainants' claims.

      In December, 1998, the Company commenced an action in the Circuit Court of
Palm Beach County, Florida against Keepsake, Inc., The Edge Sports, Promotional
Designs, Inc., Playboy Enterprises, Inc. and Custom Camera Design. In the
action, the Company is seeking damages and injunctive relief for claims of
trademark infringement, tradename infringement, trade dress infringement and
unfair competition arising out of the defendants' manufacture, marketing,
distribution and sale of a disposable, single-use camera containing, among other
things, the Company's trademark, Message CameraTM, as well as the Company's
tradename, PSI Industries, Inc. Defendants' responses to the complaint have not
yet been served.

      On April 6, 1999, the Company and Keepsake, Inc. entered into a Mediated
Settlement Agreement whereby the Company agreed to pay Keepsake $850,000 within
90 days, subject to, and conditioned upon the funding of the Company's private
placement in an amount not less than $4,000,000. Such payment shall be in full
and final settlement of all claims arising in actions filed in the Circuit Court
of Orange County, Florida, the U.S. District Court for the Middle District of
Florida (Orlando Division) and the Circuit Court of Palm Beach County, Florida.
In the event the Company does not make payment within 48 hours of receipt of the
funding, Keepsake shall be entitled to a judgment in the amount of $850,000 upon
the filing of an affidavit of nonpayment with notice to defendants.

      In June of 1998, the Company commenced an action in the Circuit Court of
Palm Beach County, Florida, against Jonathan Barash, a former employee. In the
action, the Company seeks injunctive relief and damages for breach of a
confidentiality agreement and misappropriation of trade secrets. As of October
30, 1998, the Company had succeeded in obtaining a temporary injunction against
Mr. Barash, his agents and/or any other persons acting with him, enjoining them
from using,
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communicating (either orally or in writing), disclosing, disseminating and
misappropriating any documents, information or computer records of the Company
as well as any trade secret information. Mr. Barash, his agents and/or any other
persons acting with him are also enjoined from soliciting and contacting the
Company's customers, distributors and sales representatives and from competing
with the Company through and including May 19, 1999 and must return to the
Company forthwith all originals and copies of the Company's documents and
computer records.

      The Company is one of 28 respondents in an action instituted in February
1998 before the International Trade Commission by Fuji Film. The action in which
Fuji alleges violation of a number of its patents seeks an import exclusion
order against all of the respondents. The Company has asserted defenses of
non-infringement, patent invalidity and estoppel. In November 1998 a hearing was
conducted before the International Trade Commission and on February 26, 1999 the
Administrative Law Judge ruled in favor of Fuji potentially eliminating the
Company's use of recycled cameras. Although such ruling is not the final
decision of the International Trade Commission, nor is it binding or
enforceable, there can be no assurance the International Trade Commission will
change such ruling. However, the Company has completed the design and
development of a new 35mm camera which management believes should eliminate any
potential conflict or infringement with any of the Fuji patents. Therefore, even
if Fuji Film prevails, the Company believes that this will not have a material
effect on the Company's business.

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

      Not Applicable.

                                   PART II

ITEM 5.     MARKET FOR COMMON EQUITY AND RELATED  SHAREHOLDER
            MATTERS

      The Company's shares of Common Stock are traded over-the-counter and
quoted on the OTC Electronic Bulletin Board under the symbol "PSII." The
following sets forth the range of high and low bid prices for the Common Stock
during each of the periods presented. The quotations set forth below are
inter-dealer quotations, without retail mark-ups, markdowns or commissions, and
may not necessarily represent actual transactions.

               PERIOD                          HIGH BID     LOW BID
               ------                          --------     -------
1997
First Quarter                                   $6.56        $4.50
Second Quarter                                  $7.00        $5.25
Third Quarter                                   $7.50        $6.00
Fourth Quarter                                  $7.50        $5.25
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1998
First Quarter                                   $7.00        $4.25
Second Quarter                                  $5.125       $3.875
Third Quarter                                   $5.125       $2.75
Fourth Quarter                                  $3.4375      $1.375

1999
First Quarter                                   $2.063        $.875

      The closing bid and asked prices of the Company's Common Stock on March
31, 1999 were $1.625 and $1.812, respectively, as quoted on the OTC Electronic
Bulletin Board. As of March 31, 1999, there were 71 stockholders of record of
the Company's Common Stock, and approximately 425 beneficial holders of the
Common Stock.

      Except for periods prior to March of 1996 when the Company was a
Subchapter S corporation, the Company has never paid cash dividends on its
Common Stock. The Company presently intends to retain future earnings, if any,
to finance the expansion of its business and does not anticipate that any cash
dividends will be paid in the foreseeable future. The future dividend policy
will depend on the Company's earnings, capital requirements, expansion plans,
financial condition and other relevant factors.

      The Company does not anticipate the declaration or payment of any
dividends in the foreseeable future. There can be no assurance that cash
dividends of any kind will ever be paid.

ITEM 6.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATIONS


GENERAL

      The Company was organized in 1986 to engage in the wholesale distribution
of branded cameras, photographic film, ancillary photographic equipment and
other proprietary photographic products. Since its formation, the Company has
evolved into a major national wholesaler distribution company to over 20,000
specialty retailers, mass market merchandisers and wholesalers. Since 1987, the
Company's revenues have increased on an annual basis from $1,000,000 to
approximately $34,000,000 in 1994 and $19,000,000 in 1995. The Company has been
profitable throughout these years. The decline in revenues in 1995 reflected
primarily a strategic decision by management to focus its distribution efforts
on higher margin products such as branded cameras and ancillary photographic
equipment.

      Beginning in the latter part of 1995, the Company embarked on a program of
identifying, acquiring and developing a proprietary line of cameras. In 1996,
through the acquisition of exclusive distribution and manufacturing rights to
The Message Camera(TM), an innovative, single-use disposable camera which allows
for the application of full-color messages and graphics to pre-exposed film, and
the development of its Smiletime(TM) camera, a proprietary line of high-quality
35mm single-use cameras, the Company added a Camera Division as an independent
profit center. The development of the Camera Division enabled the Company not
only to add products with significantly higher profit margins but also allowed
the Company to expand its marketing to other channels of distribution. Due
primarily to the
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market penetration of its Camera Division which achieved sales of approximately
$13,000,000 in 1998 the Company's revenues for 1998 increased to approximately
$28,000,000 compared with approximately $24,000,000 in 1997.

RESULTS OF OPERATIONS

      The following table sets for the periods indicated the percentage of
revenues represented by certain items reflected in the Company's Consolidated
Statements of Operations.
                            PERCENTAGE OF REVENUES
                                               Year Ended December 31
                                             --------------------------
                                              1998                1997
                                             ------              ------

Net Sales                                       100%                100%

Cost of Sales                                 77.80%              79.99%


Gross Profit                                  22.20%              20.01%

Selling, General and
Administrative Expenses                       17.27%              17.73%

Product Development Costs                       .11%               1.71%
                                             ------              ------
Operating Income                               4.82%               0.57%

Other Expenses:

Interest Expense, Net of
Interest Income                                2.24%               2.43%

Income (Loss) before
Income Taxes                                   2.58%              (1.86)%

Income Tax Provision
(Benefit)                                         0%              (0.07)%
                                             ------              ------

Net income (Loss)                              2.58%              (1.79)%

                                      12
<PAGE>
YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997

NET SALES

      The Company's net sales for 1998 were $28,278,852 compared to $23,976,069
for 1997, an increase of $4,302,783 or 17.9%. The increase in net sales was
primarily attributable to an increase in the volume from existing customers,
securing new mass merchandise and independent gift retailers for the Company's
Camera Division products, and penetration of the international markets.

GROSS PROFIT

      Gross profit for 1998 was $6,277,409 compared to $4,797,064 for 1997, an
increase of $1,480,345 or 30.9%. As a percentage of sales, gross profit
increased to 22.2% in 1998 from 20% in 1997. The increase in gross profit as a
percentage of sales is due to several factors. In 1997 there were additional
production start-up costs for The Message Camera(TM) and increased freight
charges reflecting the Company's need to employ air freight to acquire adequate
camera inventory to meet the demand for The Message Camera(TM). In 1998,
production costs were reduced by changing camera manufacturers.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

      Selling, general and administrative expenses for 1998 were $4,883,568
compared to $4,251,152 for 1997, an increase of $632,416 or 15%. As a percentage
of sales, these expenses decreased to 17.3% in 1998 from 17.7% in 1997. Of the
dollar increase, $874,969 represented increased payroll costs in connection with
the hiring of additional personnel to support the growth in sales, offset by a
decrease of $246,542 in reduced royalties to Polaroid Corporation compared to
royalties paid the previous licensor. The remaining dollar increase was
attributable to various selling, general and administrative expenses.

PRODUCT DEVELOPMENT COSTS

      Product development costs for 1998 were $31,165 compared to $408,486 for
1997, a decrease of $377,321 or 92.4%. As a percentage of sales, these costs
decreased to .11% in 1998 from 1.7% in 1997.

INTEREST EXPENSE NET OF INTEREST INCOME

      Interest expense net of interest income for 1998 was $633,205 compared to
$582,809 for 1997, an increase of $50,396 or 8.6%. As a percentage of sales,
these expenses decreased to 2.2% in 1998 from 2.4% in 1997. The dollar increase
in interest expense was attributable to increased borrowings on the line of
credit required to finance the Company's growth.

PROVISION FOR INCOME TAXES

      For 1998, the Company did not record a provision for income tax due to the
utilization of the 1997 net operating loss carry forward.

                                      13
<PAGE>
NET INCOME (LOSS)

      As a result of the foregoing, net income for 1998 was $729,471 compared to
a loss of $429,509 for 1997 an increase of $1,158,980.

TURNOVER RATIOS

      For the year ended 1998, inventory turned two times compared to six times
for the year ended 1997. The decrease in turnover was due primarily to the
acquisition of cameras being held in Hong Kong in anticipation of 1999 camera
division sales. Accounts Receivable turned seven times or about every 50 days
for the years ended 1998 and 1997.

LIQUIDITY AND CAPITAL RESOURCES

      The Company has financed its cash requirements primarily through
operations, borrowings on its bank credit line and sales of its securities. The
Company also issued shares of Preferred Stock in order to finance an acquisition
of inventory during 1998.

      The Company's bank credit facility currently permits borrowings of up to
$12,000,000 against a fixed percentage of eligible accounts receivable and
inventory. The interest rate on the line is at the financial institutions prime
rate or the LIBOR rate plus 225 basis points. The amount borrowed under the
credit facility varies based on the Company's cash requirements. The credit
facility is collateralized by substantially all of the assets of the Company. As
of December 31, 1998 the interest rate that was in effect was 7.75% and
$6,425,413 was outstanding and classified as a short term liability. The loan is
due on demand. The credit facility terminates on September 15, 2001 and shall
automatically renew itself from year to year.

      As of December 31, 1998, the Company had working capital of $4,927,171.
Operating activities provided cash of $52,185 primarily due to increases of
inventories and prepaid expenses and other current assets of $4,994,348 and
$662,978 respectively, which were partially offset by decreases in accounts
receivable of $1,229,202 and net income of $729,471. Net cash used in investing
activities was $143,332, reflecting the purchase of certain fixed assets and
advances to stockholders. Financing activities provided cash of $142,454
primarily due to the sale of common stock to private investors of $874,512 which
were partially offset by payments to the Company's bank credit facility.

      The Company is not currently generating sufficient working capital to fund
its projected expansion of operations. The Company believes that to create a
substantial increase in sales of The Message Camera(TM) product line, it will be
necessary to commence a national advertising campaign. In addition, expansion of
operations will require capital infusions to fund purchase of inventory and to
meet the Company's working capital needs. Accordingly, the Company is actively
exploring several possibilities of raising additional capital through the
issuance of its securities. In this regard, in October 1998, the Company entered
into an agreement with an investment banking firm to assist the Company in
obtaining up to $10,000,000 of senior subordinated debt. The specific terms of
the debt securities will be subject to negotiation with potential investors. In
March, 1999, the Company submitted to the Securities and Exchange Commission a
registration statement for the purpose of raising $4,800,000 through the sale to
private investors of 800,000 shares of its Series C Preferred stock along

                                       14
<PAGE>
with 800,000 Series II common stock purchase warrants. There can be no
assurances that the Company will be successful in obtaining additional financing
in connection with these or any other financing possibility on terms acceptable
to the Company, or at all.

YEAR 2000

      Until recently, many computer programs were written using two digits
rather than four digits to define the applicable year in the twentieth century.
Such software may recognize the date using "00" as the year 1900 rather than the
year 2000. Utilizing both internal and external resources, the Company has
converted or replaced various programs, hardware and instrumentation systems to
make them Year 2000 compatible. The Company's Year 2000 project is comprised of
two components - business applications and equipment. The business applications
component consists of the Company's business computer systems, as well as the
computer systems of third-party suppliers or customers, whose Year 2000 problems
could potentially impact the Company. Equipment exposures consist of personal
computers, system servers and telephone equipment whose Year 2000 problems could
also impact the Company. Management believes that the cost of its Year 2000
initiatives is not expected to be material to the Company's results of
operations or financial position.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

      Certain statements contained in this Section and elsewhere in this
Registration Statement regarding matters that are not historical facts are
forward-looking statements. Because such forward-looking statements include
risks and uncertainties, actual results may differ materially from those
expressed or implied by such forward-looking statements. All statements which
address operating performance, events or developments that management expects or
anticipates to incur in the future, including statements relating to sales and
earnings growth or statements expressing general optimism about future operating
results, are forward-looking statements. The forward-looking statements are
based on management's current views and assumptions regarding future events and
operating performance. Many factors could cause actual results to differ
materially from estimates contained in management's forward-looking statements.
The differences may be caused by a variety of factors, including but not limited
to adverse economic conditions, competitive pressures, inadequate capital,
unexpected costs, lower revenues, net income and forecasts, the possibility of
fluctuation and volatility of the Company's operating results and financial
condition, inability to carry out marketing and sales plans and loss of key
executives, among other things.

ITEM 7.     FINANCIAL STATEMENTS

      See "Index to Financial Statements" for the financial statements included
in this Form 10-KSB.

ITEM 8.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
             ACCOUNTING AND FINANCIAL DISCLOSURE
      None.
                                      15
<PAGE>
                                    PART III

ITEM 9.     MANAGEMENT

      The following table sets forth the names, positions with the Company and
ages of the executive officers and directors of the Company. All directors serve
until the next annual meeting of the Company's shareholders or until their
successors are elected and qualify. Officers are elected by the Board and their
terms of office are, except to the extent governed by employment contract, at
the discretion of the Board.

NAME                         AGE      POSITION

Dominick M. Seminara (1)(2)  60       Chief Executive Officer and
                                      Chairman of the Board of Directors

Benjamin Cohen (1)           61       President, Chief Operating Officer
                                      and Director

Mirco Vietti                 40       Executive Vice President and
                                      Director

Martin D. Epstein            47       Vice President of Finance and
                                      Administration, Chief Financial
                                      Officer, Treasurer, Secretary
                                      and Director

George A. Erfurt             54       Vice President of Sales

Richard Proodian             59       Vice President of Operations

Lisa A. Davidson             33       Director

Nico B.M. Letschert (2)      44       Director

Cornelis F. Wit (1)          52       Director
-------------------------

(1) Member of the Compensation Committee of the Board of Directors.

(2) Member of the Audit Committee of the Board of Directors.

      DOMINICK M. SEMINARA was a co-founder of the Company in 1986. He has
served as the Company's Chief Executive Officer and Chairman of the Board from
the Company's formation. From inception to January 1997, he had also served as
the Company's President. Mr. Seminara's prior business experience includes over
35 years of experience in photographic wholesale distribution, and retail and
photo processing.
                                       16
<PAGE>
      BENJAMIN COHEN has served as the Company's President and Chief Operating
Officer and a Director since January 1997. From 1986 through January 1997, he
was the President, Chief Executive Officer and founder of Marketing Dynamics
Group, a consulting company which specialized in marketing, sales enhancement
programs, product development and creative services for consumer product
manufacturers with a particular emphasis on the toy and gift industries. Through
his consulting firm, commencing from August 1996 through December 1996, he
provided consulting services to the Company. From 1985 to 1986, he was the
Corporate Vice President of Marketing for Viewmaster/Ideal. From 1983 to 1985,
he was the Divisional President and Senior Vice President and member of the
Executive Committee of Mattel Toys. Prior to that, commencing in 1979, he was
the Executive Vice President and Senior Vice President of Knickerbocker Toy
Company, a division of Warner Communications.

      MIRCO VIETTI was a co-founder of the Company in 1986. He has served as the
Company's Executive Vice President and a Director since its formation. He
currently oversees the Company's purchasing operations for its ancillary imaging
division.

      MARTIN D. EPSTEIN joined the Company in July 1998 as Vice President of
Finance and Administration and Chief Financial Officer. He was also elected to
the Board of Directors on July 31, 1998. Prior to that he was a Financial
Officer of Technical Chemicals and Products, Inc., a manufacturer and
distributor of medical diagnostic products from 1995 to 1998. From 1988 to 1995
he was Controller with Furniture Consultants, Inc., a distributor of office
furniture. From 1985 to 1988 he served as Controller of FTC Communications,
Inc., an international telecommunications company. Mr. Epstein is a CPA and
obtained his undergraduate degree from Brooklyn College and received his MBA in
Business Administration from Dowling College.

      GEORGE A. ERFURT joined the Company in July 1997 as Vice President of
Sales. Prior to that he was the President of Sunset Sales Company, a consulting
company he organized which specialized in sales and marketing services. From
1991 through 1997 he served in various positions at Concord Camera Corp., most
recently as Vice President of Sales and National Accounts. From 1986 to 1991 he
was the Executive Vice President of Sales and Marketing of Keystone Camera
Products in Clifton, New Jersey.

      RICHARD PROODIAN has been the Company's Vice President of Operations since
July 1998. Prior to that he had been the Company's Chief Financial Officer since
July 1997. In August 1997, he also became a member of the Board of Directors.
Prior to July 1997, he served as the Company's Vice President of Finance and
Operations, a position he assumed in March 1997. From 1986 through December
1996, he was a partner of American Financial Consultants, a financial and
business consulting firm he co-founded, which provides business consulting
services. Through his consulting firm, commencing in August 1996, he provided
consulting services to the Company. From 1983 to 1986, he served as President of
Sun Dazzlers, Inc., a company he founded, which was a manufacturer of imitation
stained glass products for the hobby craft market. From 1977 to 1983, he was the
Vice President and General Manager of Makit & Bakit Division of Fundementions, a
toy division of General Mills, which manufactured imitation stained glass
products sold to the hobby, craft and toy markets. In 1995, Mr. Proodian filed a
petition under Chapter 13 of the Federal Bankruptcy Laws, which proceeding is
still pending.
                                       17
<PAGE>
      LISA A. DAVIDSON, a 1987 graduate of Maryland University, has served as
Director of the Company since July 1987. From that date until September, 1998,
she served as Senior Vice President of the Company.

      NICO B.M. LETSCHERT, a director of the Company since September 1997, is
the Chief Executive Officer of Noesis Capital Corp. ("Noesis"), which
specializes in corporate finance and money management. He previously served as
President of Noble Investment Co. of Palm Beach, Florida, an investment banking
firm. He was educated at the Dutch Institute for Banking and Finance, and is a
certified financial planner and a director of Futuremedia PLC.

      CORNELIS F. WIT, a director of the Company since September 1997, is the
President-Corporate Finance of Noesis. He was formerly President and CEO of DMV,
Inc., the North American subsidiary of Campina Melkunie. Prior to this
involvement with DMV, Mr. Wit was Vice President-International Operations with
Duphar, where he was responsible for worldwide operations of its pharmaceutical
division. Prior to joining Duphar, Mr. Wit was with Organon (Akzo-Pharma) as
president of several different subsidiaries over a 12-year period. Mr. Wit has
spent his entire career working with international companies and has extensive
experience with crisis management and cross cultural negotiations. Mr. Wit has
lived in eight different countries during his career and is fluent in Dutch,
Spanish, Italian, English and German. He has a degree in business administration
from the University of Nijenrode in the Netherlands.

      Dominick M. Seminara is Mirco Vietti's father-in-law and Lisa Davidson's
father.

      During the year ended December 31, 1998, the Company's Board of Directors
held 7 meetings and took action by unanimous written consent a total of 17
times.

BOARD COMMITTEES AND RELATED INFORMATION

      The Compensation Committee will administer the Company's stock option plan
and make recommendations to the full Board of Directors concerning compensation,
including bonuses and incentive arrangements, of the Company's officers and key
employees. The Audit Committee will review the engagement of the independent
accountants and review the independence of the accounting firm, as well as
review the audit and non-audit fees of the independent accountants and the
adequacy of the Company's internal accounting controls.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

      Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent of the Company's outstanding Common Stock to file with the Securities
and Exchange Commission (the "SEC") initial reports of ownership and reports of
changes in ownership of Common Stock. Such persons are required by SEC
regulation to furnish the Company with copies of all such reports they file.

      To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, all Section 16(a) filing requirements applicable to its
officers, directors and greater than ten percent beneficial owners have been

                                       18
<PAGE>
complied with for the period which this proxy relates.

ITEM 10.    SUMMARY COMPENSATION TABLE

      The following table sets forth information relating to the compensation
paid by the Company during the past three fiscal years to: (i) the Company's
President and Chief Executive Officers; and (ii) each of the Company's executive
officers who earned more than $100,000 during the fiscal year ended December 31,
1998 (collectively, the "Named Executive Officers"):

NAME AND                                                       OTHER ANNUAL
PRINCIPAL POSITION           YEAR       SALARY      BONUS      COMPENSATION

Dominick M. Seminara,        1998     $198,683       $0         $16,160(1)
Chief Executive Officer      1997     $154,356       $0           $0
                             1996     $126,226       $0         $41,216(2)

Benjamin Cohen,              1998     $160,119       $0         $23,695(3)
President and Chief          1997     $136,462       $0        $111,594(4)
Operating Officer

Mirco Vietti,                1998     $177,742       $0         $15,161(5)
Executive Vice President     1997     $129,320       $0           $0
                             1996     $119,846       $0         $44,979(6)

George Erfurt,               1998     $100,000       $0         $50,461(7)
Vice President of Sales      1997     $ 48,461       $0         $10,620(8)

(1)   Includes $16,160 paid for Mr. Seminara for an automobile lease and related
      costs in 1998.

(2)   Includes $29,228 in 1996 representing dividends distributed while the
      Company was a Subchapter S corporation. Also includes $11,988 paid for Mr.
      Seminara for an automobile lease and related costs in 1996.

(3)   Includes $23,695 paid for Mr. Cohen for an automobile lease and related
      costs in 1998.

(4)   Represents the amount of deferred compensation of shares of restricted
      stock received by Mr. Cohen that vested during 1997.

(5)   Includes $15,161 paid for Mr. Vietti for an automobile lease and related
      costs in 1998.

(6)   Includes $29,228 in 1996 representing dividends distributed while the
      Company was a Subchapter S corporation. Also includes $15,751 paid for Mr.
      Vietti for an automobile lease and related costs in 1996.

(7)   Includes $10,580 paid for Mr. Erfurt for an automobile lease and $39,881
      in commissions.

(8)   Includes $2,938 paid for Mr. Erfurt for an automobile lease and $7,682 
      in commissions.

EMPLOYMENT AGREEMENTS

      Effective January 1, 1997, the Company entered into an Employment
Agreement with Benjamin Cohen, whereby Mr. Cohen was employed as President and
Chief Operating Officer of the Company. The Agreement is for a term of five
years and provides for an initial annual base salary of $180,000, to be

                                       19
<PAGE>
increased to $250,000 upon completion of this Offering of its securities. Mr.
Cohen agreed to a reduction in his salary for 1997. In connection with the
Agreement, Mr. Cohen received a grant of 1,164,470 shares of restricted stock.
388,156 shares vested as of January 1, 1997, and the remaining shares vested
pro-rata on a monthly basis over the period from February 1, 1997, through
January 1, 1999.

      Effective July 1, 1997, the Company entered into a three-year Employment
Agreement with George Erfurt. Under such agreement, Mr. Erfurt serves as the
Company's Vice President of Sales and receives an annual base salary in the
amount of $100,000. In addition, he is entitled to receive a sales commission of
1 1/2% on certain sales he makes of the Company's one-time-use cameras as well
as a 1% override commission on all sales of one-time-use cameras. At the time of
signing of the Agreement, Mr. Erfurt received 15,000 vested stock options
exercisable at a price of $.15 per share, which he subsequently exercised in
1997. He is also entitled to additional options based upon certain performance
standards of the Company's sales of one-time-use cameras.

OPTION GRANTS IN LAST FISCAL YEAR

      The following table sets forth information with respect to the grant of
options to purchase shares of common stock during the fiscal year ended December
31, 1998, to the named executive officers.

                         NUMBER OF     %OF TOTAL
                         SECURITIES    OPTIONS/SARS
                         UNDERLYING    GRANTED TO     EXERCISE OR
                         OPTIONS/SARS  EMPLOYEES IN   BASE PRICE  EXPIRATION
NAME                     GRANTED (#)   FISCAL YEAR    ($/SHARES)     DATE
----                     ------------  ------------   ----------- -----------
Dominick M. Seminara         0             0              0            0

Benjamin Cohen               0             0              0            0

Mirco Vietti                 0             0              0            0

1996 STOCK OPTION PLAN

      In March of 1996, as amended in January 1999 and February 1999, the Board
of Directors adopted and the stockholders approved the 1996 Stock Option Plan
(the "Plan"). The Plan will work to increase the employees', board of advisors,
consultants' and non-employee directors' proprietary interest in the Company and
to align more closely their interests with the interests of the Company's
stockholders. The Plan will also maintain the Company's ability to attract and
retain the services of experienced and highly qualified employees and
non-employee directors.

      Under the Plan, the Company has reserved an aggregate of 3,500,000 shares
of Common Stock for issuance pursuant to options granted under the Plan ("Plan
Options"). The Board of Directors or a Committee of the Board of Directors (the
"Committee") of the Company will administer the Plan, including, without
limitation, the selection of the persons who will be granted Plan Options, the
type of Plan Options to be granted, the number of shares subject to each Plan
Option and the Plan Option price.
                                      20
<PAGE>
      Plan Options may either be options qualifying as incentive stock options
("Incentive Options") under Section 422 of the Internal Revenue Code of 1986, as
amended, or options that do not so qualify ("Non-Qualified Options"). In
addition, the Plan also allows for the inclusion of a reload option provision
("Reload Option"), which permits an eligible person to pay the exercise price of
the Plan Option with shares of Common Stock owned by the eligible person and
receive a new Plan Option to purchase shares of Common Stock equal in number to
the tendered shares. Any Incentive Option granted under the Plan must provide
for an exercise price of not less than 100% of the fair market value of the
underlying shares on the date of such grant, but the exercise price of any
Incentive Option granted to an eligible employee owning more than 10% of the
Company's Common Stock must be at least 110% of such fair market value as
determined on the date of the grant. The term of each Plan Option and the manner
in which it may be exercised is determined by the Board of Directors or the
Committee, provided that no Plan Option may be exercisable more than 10 years
after the date of its grant and, in the case of an Incentive Option granted to
an eligible employee owning more than 10% of the Company's Common Stock, no more
than five years after the date of the grant. The exercise price of Non-Qualified
Options shall be determined by the Board of Directors or the Committee.

      The per share purchase price of shares subject to Plan Options granted
under the Plan may be adjusted in the event of certain changes in the Company's
capitalization, but any such adjustment shall not change the total purchase
price payable upon the exercise in full of Plan Options granted under the Plan.

      Officers, directors, key employees and consultants of the Company and its
subsidiaries (if applicable in the future) will be eligible to receive
Non-Qualified Options under the Plan. Only employees of the Company who are
employed by the Company or by any subsidiary thereof are eligible to receive
Incentive Options.

      All Plan Options are non-assignable and non-transferable, except by will
or by the laws of descent and distribution, and during the lifetime of the
optionee, may be exercised only by such optionee. If an optionee's employment is
terminated for any reason, other than his death or disability or termination for
cause, or if an optionee is not an employee of the Company but is a member of
the Company's Board of Directors and his service as a Director is terminated for
any reason, other than death or disability, the Plan Option granted to him shall
lapse to the extent unexercised on the earlier of the expiration date or 30 days
following the date of termination. If the optionee dies during the term of his
employment, the Plan Option granted to him shall lapse to the extent unexercised
on the earlier of the expiration date of the Plan Option or the date one year
following the date of the optionee's death. If the optionee is disabled, the
Plan Option granted to him lapses to the extent unexercised on the earlier of
the expiration date of the option or one year following the date of such
disability.

      The Board of Directors or the Committee may amend, suspend or terminate
the Plan at any time, except that no amendment shall be made which (i) increases
the total number of shares subject to the Plan, or (ii) changes the definition
of an Eligible Person under the Plan.

      As of March 31, 1999, 1,431,883 Plan Options have been granted pursuant to
the Plan, all of which were vested as of the date of grant and of which 10,900
Plan Options have been forfeited by the optionee's termination from employment
with the Company. As of the same date, 1,379,833 options

                                       21
<PAGE>
had been exercised.

OPTION EXERCISES AND HOLDINGS

      The following table sets forth information with respect to the exercise of
options to purchase shares of Common Stock during the fiscal year ended December
31, 1998 to the named executive officers and the unexercised options held as of
the end of the 1998 fiscal year.

              Aggregated Option/SAR Exercises in Last Fiscal Year
                  and 1998 Fiscal Year-End Option/SAR Values
<TABLE>
<CAPTION>
                                                               NUMBER OF SECURITIES  VALUE OF UNEXERCISED
                                                                     UNDERLYING      IN-THE-MONEY OPTIONS/
                             SHARES                              UNEXERCISED OPTION   SARS AT 1998 FISCAL
                            ACQUIRED           VALUE            AT 1998 FISCAL YEAR       YEAR END ($)
                          ON EXERCISE         REALIZED(1)        END(#)EXERCISABLE/       EXERCISABLE/
                              (#)                 ($)              UNEXERCISABLE          UNEXERCISABLE          
                          -----------         ----------       --------------------  ----------------------
<S>                            <C>                  <C>                  <C>                     <C>
Dominick M. Seminara           0                    0                    None                    0

Benjamin Cohen                 0                    0                    None                    0

Mirco Vietti                   0                    0                    None                    0
</TABLE>
(1) Based on the Company's determination of fair market value of the purchased
    shares on the option exercise date less the exercise price paid for the
    shares.

LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
                                                                     ESTIMATED FUTURE PAYOUTS UNDER
                      NUMBER OF SHARES    PERFORMANCE OR              NON-STOCK PRICE-BASED PLANS
                        UNITS OR OTHER  OTHER PERIOD UNTIL
                            RIGHTS         MATURATION OR      THRESHOLD          TARGET             MAXIMUM
                             (#)              PAYOUT           ($OR #)           ($OR #)           ($OR #)    
<S>                           <C>               <C>               <C>               <C>               <C>
Dominick M. Seminara          0                 0                 0                 0                 0

Benjamin Cohen                0                 0                 0                 0                 0

Mirco Vietti                  0                 0                 0                 0                 0
</TABLE>
ITEM 11.
                   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                             OWNERS AND MANAGEMENT

      The following table sets forth, as of March 31, 1999, certain information
with respect to the beneficial ownership of the Company's Common Stock by (i)
each person known by the Company to own beneficially five percent (5%) or more
of the outstanding Common Stock, (ii) each director of the Company, (iii) the
executive officers of the Company, and (iv) all directors and officers as a
group.
                                      22
<PAGE>
                                NUMBER OF SHARES         PERCENTAGE OF
NAME AND ADDRESS OF             OF COMMON STOCK        OUTSTANDING SHARES
BENEFICIAL OWNERS (1)(2)        BENEFICIALLY OWNED    BENEFICIALLY OWNED (1)
------------------------        ------------------    ----------------------
Dominick M. Seminara (3)        2,172,606                 18.7%

Benjamin Cohen                  1,126,970                  9.7%

Mirco Vietti (4)                2,386,605                 20.6%

Carol J. Seminara (5)           2,172,606                 18.7%

Lisa A. Davidson                  838,970                  7.2%

Deborah A. Vietti (6)           2,386,605                 20.6%
2599 N.W. 63rd Street
Boca Raton, Florida 33496

Richard Proodian                   50,000                  *

George Erfurt                      15,000                  *

Nico B.M. Letschert (7)           202,777                  1.7%
1801 Clint Moore Road
Suite 100
Boca Raton, Florida 33487

Cornelis F. Wit                        --                  *
1801 Clint Moore Road
Suite 100
Boca Raton, Florida 33487

Martin Epstein (8)                 25,000                  *

All Executive Officers and 
Directors as a Group 
(9 persons)                     6,817,928                  57.6%
--------------------
*Less than 1%

(1)   Unless otherwise indicated below, the persons in the table above have sole
      voting and investment power with respect to all shares shown as
      beneficially owned by them, subject to community property laws where
      applicable. A person is deemed to be the beneficial owner of securities
      that can be acquired by such person within 60 days from the date of this
      Prospectus upon the exercise of options. Each person's percentage of
      ownership is determined by assuming that any options held by such person
      have been exercised.

(2)   Unless otherwise indicated below, the address of each person is c/o the
      Company at 1160 B South Rogers Circle, Boca Raton, Florida 33487.

                                       23
<PAGE>

(3)   Includes 984,469 shares held by Carol Seminara, Mr. Seminara's wife, as to
      which Mr. Seminara disclaims beneficial ownership.

(4)   Includes 1,001,719 shares held of record by Deborah Vietti, Mr. Vietti's
      wife, as to which Mr. Vietti disclaims beneficial ownership and 183,166
      shares held jointly with his wife.

(5)   Includes 1,191,137 shares held by Dominick Seminara, her husband, as to
      which Mrs. Seminara disclaims beneficial ownership.

(6)   Includes 1,201,720 shares held by Mirco Vietti, her husband, as to which
      Mrs. Vietti disclaims beneficial ownership and 183,166 shares held jointly
      with her husband.

(7)   Includes 202,777 shares underlying warrants issued to Noesis Capital
      Corp., the placement agent of the Company's 1997 private offering. Mr.
      Letschert is the beneficial holder of a majority interest in Noesis
      Capital Corp.

(8)   Includes 25,000 shares of Common Stock underlying immediately exercisable
      options.

ITEM 12.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      In 1992, the Company advanced the sum of $138,098 to Photoline Partners, a
general partnership comprised of Dominick Seminara, Carol Seminara, his wife,
Mirco Vietti, his son-in-law, Deborah Vietti, his daughter and Mr. Vietti's
wife, and Lisa Davidson, his daughter (collectively the "Shareholders"). In
1996, as distributions for the period during which the Company was a Subchapter
S corporation, the aggregate additional sum of $117,138 was distributed to the
Shareholders.

      On January 1, 1997, in connection with the issuance of shares to the
Company's new President, Benjamin Cohen, the Shareholders sold an aggregate of
1,164,470 shares to the Company at a purchase price of $.15 per share. The
purchase price for the redeemed shares was paid by the Company's forgiveness and
cancellation of the promissory note to Photoline Partners and the forgiveness of
the sum of $36,572 of advances due to the corporation by the Shareholders.

      In 1996 and 1997, the Company made certain advances and paid certain
expenses to Dominick Seminara, Benjamin Cohen, Mirco Vietti and Lisa Davidson.
As of December 31, 1998, the aggregate of these advances which represent loans
payable to the Company totalled $433,844. The amount of each of these officers'
loan accounts as of December 31, 1998 was $269,840 for Mr. Seminara, $90,448 for
Mr. Cohen, $34,005 for Mr. Vietti, and $39,551 for Mrs. Davidson. Although the
loans are due on demand, the Company does not currently intend to demand
repayment.

      The mortgage on the building owned by the Company has been personally
guaranteed by Dominick Seminara and Carol Seminara. In connection with the
provision of the guaranty to the bank, the Company and the guarantors entered
into an agreement under the terms of which the Company agreed to a transfer of
the property to guarantors in the event that the guarantors are required to
repay the mortgage to the bank. See "DESCRIPTION OF PROPERTY".

                                      24
<PAGE>
      All transactions between the Company and its officers, shareholders and
each of their affiliated companies have been made on terms no less favorable to
the Company than those available from unaffiliated parties. In the future, the
Company intends to handle transactions of a similar nature on terms no less
favorable to the Company than those available from unaffiliated parties. In
addition, any forgiveness of loans must be approved by a majority of the
Company's independent directors who do not have an interest in the transaction
and who have access, at the Company's expense, to the Company's counsel or
independent counsel.

ITEM 13.    EXHIBITS AND REPORTS ON FORM 8-K.

A.    EXHIBITS:

EXHIBIT
NUMBER            DESCRIPTION

1.1   Form of Underwriting Agreement[1.1](2)

2     Articles of Merger[2](1)

3.1   Form of Amended and Restated Articles of Incorporation[3.1](2)

3.2   By-Laws, as amended[3.6](1)

4.1   Designation of Series C Convertible Preferred Stock[4.1](2)

4.2   Form of Warrant Certificate[4.2](1)

4.3   Form of Series A Preferred Stock Certificate[4.3](1)

4.4   Form of Series B Preferred Stock Certificate[4.4](1)

4.7   Form of Underwriters' Purchase Option[4.7](2)

10.1  1996 Stock Option Plan, as amended(3)

10.2  License Agreement between Registrant and Polaroid Corp. dated November 1,
      1997[10.2](1)

10.3  Employment Agreement for Benjamin Cohen dated January 1, 1997[10.3](1)

10.4  Employment Agreement for George Erfurt dated July 1, 1997[10.4](1)

10.5  Photoline Standardized Profit Sharing Plan & Trust[10.5](1)

10.6  Loan and Security Agreement between Registrant and LaSalle National Bank
      dated September 15, 1998[10.6](1)

10.7  Promissory Note of Registrant and Mortgage Deed between Registrant and
      Mellon United National Bank dated December 16, 1998[10.7](1)

10.8  Consulting Agreement between Registrant and Stedman Walker dated August
      26, 1998 ([10.8](3)

10.9  Financial Advisory Agreement between Registrant and Merit Capital
      Associates, Inc. dated October 1, 1998[10.9](3)

10.10 Manufacturing & Sales Agreement between Registrant, Chengdu Hoist
      Recording Instrument Co., Ltd. and Mass Chance Electronics dated March 26,
      1999[10.10](3)

21    List of Subsidiaries of the Company[21](2)

27.1  Financial Data Schedule*

------------------------
*    Filed herewith

(1)   Incorporated by reference to the exhibit number indicated as filed with
      the Company's Registration Statement on Form 10-SB (File No. 001-14747) as
      filed with the Commission on December 30, 1998.

(2)   Incorporated by reference to the exhibit number indicated as filed with
      the Company's Registration Statement on Form SB-2 (File No. 333-74111) as
      filed with the Commission on March 9, 1999.

(3)   Incorporated by reference to the exhibit number indicated as filed with
      the Company's Amendment to the Registration Statement on Form 10-SB (File
      No. 001-14747) as filed with the Commission on April 13, 1999.

B.   REPORTS ON FORM 8-K:

     None.
                                       25
<PAGE>
                                   SIGNATURES

      In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                    PSI INDUSTRIES, INC.


DATE:   April 15, 1999  By:     /S/ DOMINICK M. SEMINARA 
                                    Dominick M. Seminara, Chairman
                                    and Chief Executive Officer


        In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated:



DATE:   April 15, 1999  /S/ DOMINICK M. SEMINARA      
                        Dominick M. Seminara, Chairman, Chief
                        Executive Officer and Principal Executive
                        Officer

DATE:   April 15, 1999  /S/ BENJAMIN COHEN                  
                        Benjamin Cohen, President, Chief Operations
                        Officer and Director

DATE:   April 15, 1999  /S/ MIRCO VIETTI                    
                        Mirco Vietti, Director

DATE:   April 15, 1999  /S/ MARTIN D. EPSTEIN         
                        Martin D. Epstein, Director and Principal Financial
                        and Accounting Officer

DATE:   April 15, 1999  /S/ LISA A. DAVIDSON                
                        Lisa A. Davidson, Director

DATE:   April 15, 1999  /S/ NICO B.M. LETSCHERT       
                        Nico B.M. Letschert, Director

DATE:   April 15, 1999  /S/ CORNELIS F. WIT                 
                        Cornelis F. Wit, Director

                                       26
<PAGE>
                                INDEX TO EXHIBITS

EXHIBIT
NUMBERS           DESCRIPTION

27.1              Financial Data Schedule

                                       27
<PAGE>

                              PSI INDUSTRIES, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                       Page

Independent Auditors' Report                                            F-1

Consolidated Balance Sheets as of December 31, 1998 and 1997            F-2

Consolidated Statements of Operations for the years ended
    December 31, 1998 and 1997                                          F-3

Consolidated Statements of Stockholders' Equity for the years
    ended December 31, 1998 and 1997                                    F-4

Consolidated Statements of Cash Flows for the years ended
    December 31, 1998 and 1997                                        F-5 - F-6

Notes to Consolidated Financial Statements                            F-7 - F-20


<PAGE>
                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors of
 PSI Industries, Inc.

         We have audited the accompanying consolidated balance sheets of PSI
Industries, Inc. (the "Company") as of December 31, 1998, and 1997, the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

         We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. 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 PSI Industries, Inc.
as of December 31, 1998, and 1997, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.

                                     /s/ Feldman Sherb Ehrlich & Co., P.C.
                                     Feldman Sherb Ehrlich & Co., P.C.
                                     Certified Public Accountants

New York, New York 
February 26, 1999, except 
for note 10 as to which the 
date is April 6, 1999

                                       F-1


<PAGE>




PSI INDUSTRIES, INC.

REPORT ON AUDIT OF CONSOLIDATED
FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1998 AND 1997


<PAGE>



                                      F-1
<PAGE>
                              PSI INDUSTRIES, INC.

                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                                   ----------------------------
                                                                                       1998           1997
                                                                                   ------------    ------------
<S>                                                                                <C>             <C>
ASSETS
CURRENT ASSETS:
    Cash                                                                           $    275,987    $    224,680
    Accounts receivable, net of allowance for doubtful
      accounts of $217,415  in 1998 and $138,142 in 1997                              3,096,434       4,479,636
    Inventories                                                                      12,270,811       5,774,263
    Deferred income taxes                                                               194,324          25,708
    Prepaid expenses and other current assets                                           935,178         272,200
                                                                                   ------------    ------------
                          Total current assets                                       16,772,734      10,776,487

    Notes receivable from and advances to related parties                               458,787         380,613
    Property and equipment, net                                                       1,400,653       1,355,501
    Deferred income taxes                                                                  --
    Other assets                                                                        528,802         624,466
                                                                                   ------------    ------------
                                  Total assets                                     $ 19,160,976    $ 13,137,067
                                                                                   ============    ============


LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
    Trade accounts payable                                                         $  4,849,882    $  1,984,426
    Accrued expenses                                                                    233,620         241,460
    Line of credit                                                                    6,425,413       7,103,984
    Notes payable                                                                       303,320            --
    Current portion of long-term notes payable                                           33,328          22,682
                                                                                   ------------    ------------
                     Total current liabilities                                       11,845,563       9,352,552

Deferred income taxes                                                                   194,324          25,708
Long-term notes payable                                                                 632,152         517,196

STOCKHOLDERS' EQUITY:
    Common Stock, $.0001 par value - 20,000,000 shares authorized, 9,985,743 and
      8,836,943 shares issued and outstanding in 1998 and 1997                              999             884
    Convertible Preferred Stock - Series A, $.0001 par value,
      70,000 shares authorized, 48,667 shares issued and
      outstanding, $1,460,010 liquidation value                                               5               5
    Convertible Preferred Stock - Series B, $.001 par value,
      20,000 shares authorized, 15,022 shares issued and
      outstanding, $1,502,200 liquidation value                                              15            --
    Additional paid-in capital                                                        5,024,427       2,512,925
    Deferred compensation                                                                (4,853)        (63,076)
    Stock subscription receivable                                                       (39,747)        (60,747)
    Retained earnings                                                                 1,508,091         851,620
                                                                                   ------------    ------------
                    Total stockholders' equity                                        6,488,937       3,241,611
                                                                                   ------------    ------------

      Total liabilities and stockholders' equity                                   $ 19,160,976    $ 13,137,067
                                                                                   ============    ============
</TABLE>
                 See notes to consolidated financial statements

                                      F-2
<PAGE>
                              PSI INDUSTRIES, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                       Year Ended December 31,
                                                     ----------------------------
                                                          1998         1997
                                                     ------------    ------------
<S>                                                  <C>             <C>         
Net sales                                            $ 28,278,852    $ 23,976,069
Cost of sales                                          22,001,443      19,179,005
                                                     ------------    ------------
Gross profit                                            6,277,409       4,797,064

Selling, general and administrative expenses            4,883,568       4,251,152
Product development costs                                  31,165         408,486
                                                     ------------    ------------
Operating income                                        1,362,676         137,426

Other expenses:
    Interest expense, net of interest income             (633,205)       (582,809)
                                                     ------------    ------------
Income (loss) before income taxes                         729,471        (445,383)
Income tax provision (benefit)                               --           (15,874)
                                                     ------------    ------------
Net income (loss)                                    $    729,471    $   (429,509)

Cumulative preferred stock dividend                        73,000          18,965
                                                     ------------    ------------

Net income to common stockholders                    $    656,471    $   (448,474)
                                                     ============    ============

Net income per common share - basic                  $       0.07    $      (0.06)
                                                     ============    ============

Net income per common share - diluted                $       0.07    $      (0.06)
                                                     ============    ============

Weighted average number of common shares - basic        8,873,967       7,392,619
                                                     ============    ============

Weighted average number of common shares - diluted      9,781,764       7,392,619
                                                     ============    ============
</TABLE>
                 See notes to consolidated financial statements.

                                       F-3
<PAGE>
                              PSI INDUSTRIES, INC.

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                  Common Stock                  Preferred Stock          Additional 
                                                          ---------------------------     --------------------------     Paid - In  
                                                            Shares          Amount          Shares          Amount        Capital   
                                                          -----------     -----------     -----------    -----------    ----------- 
<S>                                                         <C>           <C>               <C>          <C>            <C>         
Balance at December 31, 1996                                7,767,610     $       777            --      $      --      $   989,494 
  Pruchase of treasury stock                               (1,164,470)           (116)           --             --         (174,554)
  Deferred compensation related to issuance of
    1,164,470 shares of common stock in
    connection with an employment agreement                 1,164,470             116            --             --          174,554 
  Amortization of deferred compensation                          --              --              --             --             --   
  Issuance of Preferred Stock-Series A, net of
    issuance costs of $72,733                                    --              --            48,667              5      1,387,639 
  Issuance of common stock for cash                           156,000              16            --             --           15,584 
  Issuance of common stock for services                       397,000              40            --             --           59,512 
  Issuance of common stock for subscription receivable        516,333              51            --             --           60,696 
  Preferred stock dividends                                      --              --              --             --             --   
  Net loss                                                       --              --              --             --             --   
                                                          -----------     -----------     -----------    -----------    ----------- 
Balance at December 31, 1997                                8,836,943             884          48,667              5      2,512,925 
  Issuance of Preferred Stock-Series B for inventory             --              --            15,022             15      1,502,185 
  Issuance of common stock for cash                         1,078,300             108            --             --          858,404 
  Issuance of common stock for services                       120,500              12            --             --          155,908 
  Cancellation of common stock                                (50,000)             (5)           --             --           (4,995)
  Preferred stock dividends                                      --              --              --             --             --   
  Deferred compensation amortization                             --              --              --             --             --   
  Net income                                                     --              --              --             --             --   
                                                          -----------     -----------     -----------    -----------    ----------- 
Balance at December 31, 1998                                9,985,743     $       999          63,689    $        20    $ 5,024,427 
                                                          ===========     ===========     ===========    ===========    =========== 
<CAPTION>
                                                                             Stock                            Total
                                                            Deferred      Subscription      Retained       Stockholders'
                                                          Compensation     Receivable       Earnings         Equity
                                                           -----------     -----------     -----------     -----------
<S>                                                        <C>             <C>             <C>             <C>        
Balance at December 31, 1996                               $      --       $      --       $ 1,300,094     $ 2,290,365
  Pruchase of treasury stock                                      --              --              --          (174,670)
  Deferred compensation related to issuance of
    1,164,470 shares of common stock in
    connection with an employment agreement                   (174,670)           --              --              --
  Amortization of deferred compensation                        111,594            --              --           111,594
  Issuance of Preferred Stock-Series A, net of
    issuance costs of $72,733                                     --              --              --         1,387,644
  Issuance of common stock for cash                               --              --              --            15,600
  Issuance of common stock for services                           --              --              --            59,552
  Issuance of common stock for subscription receivable            --           (60,747)           --              --
  Preferred stock dividends                                       --              --           (18,965)        (18,965)
  Net loss                                                        --              --          (429,509)       (429,509)
                                                           -----------     -----------     -----------     -----------
Balance at December 31, 1997                                   (63,076)        (60,747)        851,620       3,241,611
  Issuance of Preferred Stock-Series B for inventory              --              --              --         1,502,200
  Issuance of common stock for cash                               --            21,000            --           879,512
  Issuance of common stock for services                           --              --              --           155,920
  Cancellation of common stock                                    --              --              --            (5,000)
  Preferred stock dividends                                       --              --           (73,000)        (73,000)
  Deferred compensation amortization                            58,223            --              --            58,223
  Net income                                                      --              --           729,471         729,471
                                                           -----------     -----------     -----------     -----------
Balance at December 31, 1998                               $    (4,853)    $   (39,747)    $ 1,508,091     $ 6,488,937
                                                           ===========     ===========     ===========     ===========
</TABLE>
                 See notes to consolidated financial statements.

                                       F-4
<PAGE>
                              PSI INDUSTRIES, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                         Year ended December 31,
                                                        -------------------------
                                                          1998           1997
                                                        -----------   -----------
<S>                                                     <C>           <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income (loss)                                  $   729,471   $  (429,509)
                                                        -----------   -----------
     Adjustments to reconcile net income (loss) to net 
       cash provided by (used in) operating activities:
        Bad debt expense                                    154,000       116,000
        Depreciation                                        126,095        76,500
        Amortization                                         58,223       111,594
        Loss on disposal of asset                              --           3,693
        Deferred income taxes                                  --         (15,874)
        Issuance of common stock for services               155,920        59,551
        Changes in operating assets and liabilities:
          Accounts receivable                             1,229,202    (2,913,824)
          Notes receivable                                     --        (174,670)
          Inventories                                    (4,994,348)      945,194
          Prepaid expenses and other current assets        (662,978)       65,819
          Other assets                                       95,664      (452,462)
          Accounts payable                                2,865,456    (1,627,260)
          Notes payable                                     303,320          --
          Accrued expenses                                   (7,840)      114,758
                                                        -----------   -----------
          Total adjustments                                (677,286)   (3,690,981)
                                                        -----------   -----------
NET CASH PROVIDED BY (USED IN )
        OPERATING ACTIVITIES                                 52,185    (4,120,490)
                                                        -----------   -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment                         (65,158)     (407,055)
Proceeds from disposal of property and equipment               --          15,900
Advances to stockholders                                    (78,174)     (125,377)
                                                        -----------   -----------
NET CASH USED IN INVESTING ACTIVITIES                      (143,332)     (516,532)
                                                        -----------   -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from/(Payments to) line of credit, net            (678,571)    3,248,955
Proceeds from issuance of common and preferred stock,
        net of issuance costs                               874,512     1,403,244
Principal payments on borrowings                           (550,487)      (14,514)
Proceeds from borrowings                                    570,000          --
Distributions to stockholders                               (73,000)      (18,965)
                                                        -----------   -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES                   142,454     4,618,720
                                                        -----------   -----------
NET INCREASE (DECREASE) IN CASH                              51,307       (18,302)
CASH AT BEGINNING OF YEAR                                   224,680       242,982
                                                        -----------   -----------
CASH AT END OF YEAR                                     $   275,987   $   224,680
                                                        ===========   ===========
</TABLE>
                 See notes to consolidated financial statements.

                                       F-5
<PAGE>
                              PSI INDUSTRIES, INC.

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                                                               Years ended 
                                                               December 31,
                                                           --------------------
Supplemental disclosures of cash flow information:           1998        1997
                                                           ----------  --------

Noncash investing and financing activities:
Decrease in investment in H& G Venture, Inc. and
     increase in property and equipment                    $     --    $706,455
                                                           ==========  ========
Purchase of equipment for a note payable                   $  106,089  $   --
                                                           ==========  ========
Purchase of common stock in exchange for notes receivable
     from and advances to related parties                  $     --    $174,670
                                                           ==========  ========
Issuance of common stock related to deferred compensation  $     --    $174,670
                                                           ==========  ========
Issuance of common stock for services                      $  155,920  $ 59,552
                                                           ==========  ========
Issuance of common stock for subscriptions receivable      $     --    $ 60,696
                                                           ==========  ========
Reduction of stock receivable for services related to
     issuance of common stock                              $   21,000  $   --
                                                           ==========  ========
Purchase of inventory for preferred stock                  $1,502,200  $   --
                                                           ==========  ========
Interest paid                                              $  661,682  $598,675
                                                           ==========  ========

                 See notes to consolidated financial statements.

                                       F-6
<PAGE>
                              PSI INDUSTRIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1998 AND 1997
1.  ORGANIZATION

      PSI Industries, Inc. (the "Company") was incorporated in 1986 under the
      laws of the State of Florida. The Company manufactures and distributes a
      single-use camera, "The Message Camera." In addition, the Company is a
      wholesale distributor of photographic film, cameras and ancillary
      photographic equipment nationwide to wholesale and retail businesses.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      A. PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
      statements include the accounts of the Company and its wholly owned
      subsidiaries. All material inter-company transactions have been eliminated
      in consolidation.

      B. REVENUE RECOGNITION - Sales are recorded at the time merchandise is
      shipped and risk of ownership is transferred, and are reported net of
      estimated returns and allowances.

      C. INVENTORIES - Inventories, consisting primarily of finished goods held
      for resale, and raw material, are stated at the lower of cost, determined
      on the average method or market.

      D. PROPERTY AND EQUIPMENT - Property and Equipment are carried at cost.
      Depreciation is computed using the straight-line method over the estimated
      useful lives of the asset which range from 5 to 30 years.

      E. USE OF ESTIMATES - The preparation of the financial statements in
      conformity with generally accepted accounting principles requires
      management to make estimates and assumptions that affect the amounts
      reported in the consolidated financial statements and accompanying notes.
      Actual results could differ from those estimates.

      F. PRODUCT DEVELOPMENT COSTS - Costs related to the design and development
      of The Message Camera are expensed as incurred.

                                       F-7
<PAGE>
      G. INCOME TAXES - Deferred income taxes are determined on the liability
      method in accordance with the Statement of Financial Accounting Standards
      ("SFAS") No. 109, ACCOUNTING FOR INCOME TAXES.

      H. LONG LIVED ASSETS - The Company has adopted SFAS, No. 121, Accounting
      for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
      Disposed Of. In accordance with this statement, the Company evaluates the
      recovery of the carrying amount of its long-lived assets, primarily
      property and equipment, whenever events or changes in circumstances
      indicate that the carrying amount of such assets may not be fully
      recoverable. If this review indicates that the carrying value of the
      assets will not be recoverable, as determined based on the estimated
      non-discounted cash flows of the Company over their remaining estimated
      useful lives, the carrying amount is reduced by the estimated shortfall of
      cash flows.

      I. EARNINGS PER SHARE - The Company has adopted SFAS, No. 128, Earnings
      per Share. Net income (loss) per common share has been restated for all
      periods presented to conform to the provisions of SFAS No. 128. Basic
      earnings (loss) per share is computed by dividing net income (loss)
      available to common stockholders by the weighted average number of common
      shares outstanding during the period. Diluted earnings per share reflects
      the per share amount that would have resulted if diluted potential common
      stock had been converted to common stock, as prescribed by SFAS No. 128.

      J. RECENT ACCOUNTING PRONOUNCEMENTS - In June 1997, the Financial
      Accounting Standards Board issued Statement of Financial Accounting
      Standards No. 130, "reporting Comprehensive Income" ("SFAS 130"), and No.
      131, Disclosures about Segments of an Enterprise and Related Information"
      ("SFAS 131"). SFAS 130 establishes standards for reporting and displaying
      comprehensive income, its components and accumulated balances. SFAS 131
      establishes standards for the way that public companies report information
      about operating segments in annual financial statements and requires
      reporting of selected information about operating segments in interim
      financial statements issued to the public. Both SFAS 130 and SFAS 131 are
      effective for periods beginning after December 15, 1997. The Company
      adopted these new accounting standards in 1998, and their adoption had no
      effect on the Company's financial statements and disclosures.

      K. FAIR VALUE OF FINANCIAL INSTRUMENTS - The respective carrying value of
      certain on-balance- sheet financial instruments approximated their fair
      values. Fair value estimates discussed herein are based upon certain
      market assumptions and pertinent information available to management.
      These financial instruments include cash, accounts receivable, accounts
      payable and accrued expenses. Fair values were assumed to approximate
      carrying values for these financial instruments since they are short term
      in nature and their carrying amounts approximate fair values or they are
      receivable or payable on demand. The fair value of the Company's long-term
      debt, which approximates its carrying value, is estimated based upon the
      quoted market prices for the same or similar debt instruments or on the
      current rates
                                       F-8
<PAGE>
      offered to the Company for debt of the same remaining maturities.

3.  CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS

      Financial instruments which potentially subject the Company to
      concentrations of credit risk consist principally of cash in banks and
      accounts receivable. The credit risk associated with cash in banks is
      considered low due to the credit quality of the institutions. The Company
      performs on-going credit evaluations of its trade customers and generally
      does not require collateral.

      At December 31, 1998 and 1997, accounts receivable include two customers
      and one customer representing 25% and 18%, respectively, whose balance
      exceeds 10% of aggregate accounts receivable.

4.  INVENTORIES

      At, December 31, 1998 and 1997, inventories are comprised of the
following:
                                     1998            1997
                                 ------------     -----------
Raw materials                    $  1,497,808     $ 1,147,599

Finished goods                     10,773,003       4,626,664
                                 ------------     -----------
                                 $ 12,270,811     $ 5,774,263
                                 ============     ===========

5.  PROPERTY AND EQUIPMENT

      At, December 31, 1998 and 1997, property and equipment is comprised of the
following:
                                     1998            1997
                                 ------------     -----------
Building and building
improvements                     $    849,557     $   844,320
Machinery and equipment               488,715         484,583
Furniture and fixtures                332,892         173,044
Vehicles                               71,368          69,338
                                 ------------     -----------
                                    1,742,532       1,571,285
Less: Accumulated depreciation        341,879         215,784
                                 ------------     -----------
                                 $  1,400,653     $ 1,355,501
                                 ============     ===========

                                       F-9
<PAGE>
6.  LINE OF CREDIT

      On September 15, 1998, the Company entered into a new credit agreement
      with a bank, which replaced the existing line of credit. The new agreement
      of up to $12,000,000 provides for borrowings based on a percentage of
      eligible accounts receivable and inventory. Several options are available
      to borrow at floating interest rates based on LIBOR (London Interbank
      Offered Rate) plus 2.25% or, at the financial institution's prime
      rate(7.75% at December 31, 1998). The loan is due on demand. The credit
      agreement is collateralized by substantially all assets of the Company.
      The credit agreement contains covenants that place certain limits on the
      Company's ability to merge with another entity, incur debt or create liens
      on assets. In addition the credit agreement requires the Company to meet a
      tangible net worth test. The credit facility terminates on September 15,
      2001 and shall automatically renew from year to year.

      On May 29, 1997, the Company refinanced its existing revolving line of
      credit. The new line of credit of $7,500,000 provides for borrowings based
      on a percentage of eligible trade accounts receivable and inventories.
      Borrowings pursuant to the agreement bear interest, payable monthly, at
      the financial institution's prime rate plus .25%(8.75% at December 31,
      1997) and are due on demand. At December 31, 1997, there was no additional
      availability under this agreement. This revolving line of credit is
      collateralized by substantially all accounts receivable and inventories of
      the Company and is guaranteed by certain stockholders of the Company.

      Prior to May 29, 1997, the Company had a revolving line of credit with a
      financial institution for $5,000,000 and provided for borrowings based on
      a percentage of eligible trade accounts receivable and inventories.
      Borrowings pursuant to the agreement bore interest, payable monthly, at
      the financial institution's prime rate plus .25% and were due on demand.
      This revolving line of credit was collateralized by substantially all
      accounts receivable and inventories of the Company and was guaranteed by
      certain stockholders of the Company.

                                      F-10
<PAGE>
7.  DEBT

      Long-term debt consists of the following:
                                                              December 31
                                                       ------------------------
                                                          1998           1997
                                                       ---------      ---------
Mortgage note, payable monthly with
interest at 8% with a balloon payment of
$497,344 due on December 16, 2003,
collateralized by building and building
improvements and guaranteed by the Chief
Executive Officer and his wife                         $ 570,000      $    --

Mortgage note, payable in monthly
principal payments of $1,890 plus
interest at the financial institutions
prime rate plus .50% (9.00% at December
31, 1997) with a balloon payment of
$449,150 due on March 31, 2002,
collateralized by building and building
improvements                                                --          539,878

Leased equipment                                       $  95,480           --
                                                         665,480        539,878
Less current maturities                                  (33,328)       (22,682)

                                                       $ 632,152      $ 517,196
                                                       =========      =========

      Maturities on long-term debt are as follows:

           1999                                      $ 33,328
           2000                                        35,278
           2001                                        35,954
           2002                                        37,177
           2003                                       523,743
                                                     --------
                                                     $665,480
                                                     ========
                                     F-11
<PAGE>
8.  RELATED PARTY TRANSACTIONS
      On January 1, 1997, in connection with the issuance of shares under an
      employment agreement (Note 10) certain stockholders' sold 1,164,740 shares
      of common stock to the Company at a purchase price of $.15 per share
      totaling $174,670. The purchase price of $174,670 was paid through the
      reduction of notes receivable and advances to related parties.

      For the year ended December 31, 1998 the Company had approximately
      $4,500,000 of sales to an affiliate of the holder of its Series B
      Convertible Preferred Stock for which the Company received payment in
      inventory which remains at year end. In addition the Company had
      approximately $2,000,000 of purchases from such affiliate for the year.

      As of December 31, 1998, the Company had notes receivable and advances to
      related parties, due on demand, totaling $458,787. The Company does not
      intend to demand repayment prior to January 1, 2000.

9.  INCOME TAXES

       The components of the income tax provision for the year ended December
      31, 1998 and 1997 is as follows:
                                             1998              1997
                                        --------------    ---------------
Current                                 $     -           $      -
Deferred                                      -                  (15,874)
Total                                   $     -           $      (15,874)
                                        ==============    ===============

      Deferred income taxes reflect the net tax effects of temporary differences
      between the carrying amounts of assets and liabilities for financial
      reporting purposes and the amounts used for income tax purposes.
      Significant components of the Company's deferred tax assets (liabilities)
      are as follows:

                                             1998              1997
                                        --------------    ---------------
Deferred tax assets:
   Net operating loss carryforwards     $       49,060    $        49,587
   Allowance for doubtful accounts              78,932             51,983

                                      F-12
<PAGE>
   Uniform inventory capitalization             66,332             61,332
Deferred tax assets                            194,324            162,902

Less valuation allowance                         -              (137,194)
                                        --------------    ---------------
Total deferred tax assets                      194,324             25,708
Deferred tax liabilities:
   Fixed assets                              (194,324)           (25,708)

Total deferred tax liabilities               (194,324)           (25,708)
                                        $        -        $       -
  Total net deferred taxes              $        -        $       -
                                        ==============    ===============

      The reconciliation of the income tax computed at the U.S. federal
      statutory rate to income tax expense for the years ended December 31, 1998
      and 1997 is as follows:

                                                 1998        1997
                                              ----------- ----------
Tax at federal statutory rate                     34.00 %   (34.00)%
State taxes, net of federal tax benefit            -          (3.32)
Utilization of Net Operating Loss Carryforward    (34.00)     -
Nondeductible items                                -            2.95

Valuation allowance                                -           30.80
Total                                              -         (3.57)%
                                              =========== ==========

      SFAS No. 109 requires a valuation allowance to reduce the deferred tax
      assets reported if, based on weight of the evidence , it is more likely
      than not that some portion or all of the deferred tax assets will not be
      realized. After consideration of all the evidence, both positive and
      negative, management has determined that a $137,194 valuation allowance at
      December 31, 1997 is necessary to reduce the deferred tax assets to the
      amount that will more likely than not be realized. The change in the
      valuation allowance for the current year is $137,194. At December 31,
      1998, the Company has available net operating loss carryforwards of
      approximately $130,000 which expire in the year 2012.

10.  COMMITMENTS

      OPERATING LEASES
                                     F-13
<PAGE>
      The Company leases vehicles and office equipment under noncancelable
operating leases expiring in various years through 2003. The leases require the
Company to pay maintenance, taxes and insurance. Future minimum rental
commitments under long-term noncancelable operating leases are as follows:

                             Year ending December 31,
                                              1999                  $126,721
                                              2000                    92,580
                                              2001                    65,739
                                              2002                    54,684
                                              2003                    31,918
                                                                    --------
                                                                    $371,642
                                                                    ========
      During the years ended December 31, 1998 and 1997, rent expense was
      $55,478 and $110,384 respectively.

      AGREEMENTS

      Effective December 1, 1995, the Company entered into an exclusive
      distributorship agreement with Keepsake, Inc. (Keepsake), a Florida
      Corporation, from which the Company obtained a license to utilize the
      intellectual property (technology) of Keepsake in the manufacturing and
      sale of "The Message Camera." The technology involves the imprint of
      graphic pictorial representations upon photographic film for these single
      use cameras. On October 22, 1996, the Company amended this agreement
      extending the initial term from 5 to 20 years. The agreement provided for
      monthly royalty payments based on sales of single-use cameras. In order to
      prevent the termination of the Company's rights under this amended
      agreement, the Company is required to make certain minimum annual
      guaranteed royalty payments. During 1997, the Company incurred royalty
      expense to Keepsake of approximately $538,000 of which $95,667 remains
      unpaid and is included in trade accounts payable at December 31, 1997. At
      December 31, 1997, the remaining guaranteed royalty commitment was
      approximately $23.3 million. However, effective November 1, 1997, the
      Company discontinued the payments to Keepsake due to a dispute that arose
      in connection with the validity of Keepsake's patents. On February
      20,1998, Keepsake terminated the distributorship agreement and brought a
      suit against the Company for, among other things, breach of contract. At
      December 31,1998 and 1997, raw material inventory totaling approximately
      $273,000 and $434,000, respectively, was being held by Keepsake, and,
      accordingly, is
                                     F-14
<PAGE>
      included in noncurrent other assets. See legal matters below.

      On November 1, 1997 the Company entered into a nonexclusive license
      agreement with Polaroid, the owner of certain patents, for the manufacture
      and sale of pre-exposed film for use in The Message Camera. The license
      agreement with Polariod continues until the
      patents expire and may be terminated by the Company at any time by 60 days
      prior written notice. In the event the Company is unable to substantially
      perform its obligations under the agreement and such default or inability
      is not cured within 60 days after written notice from Polaroid, then
      Polaroid may terminate the agreement by giving written notice. The
      agreement provides for monthly royalty payments of $.30 for each licensed
      product sold or disposed of or 5% of the net selling price of the licensed
      product, whichever is greater. During 1998 and 1997, the Company incurred
      royalty expense to Polaroid of approximately $281,000 and $27,000
      respectively, of which $70,741 and $27,000 is included in trade accounts
      payable at December 31, 1998 and 1997.

      On January 1, 1997, the Company entered into a five-year employment
      agreement with an officer that requires the Company to pay a minimum
      compensation of $180,000 per year. At such time as the Company completes
      an underwritten public offering, the base salary shall increase to
      $250,000 per year. In addition, the Company issued to this officer
      1,164,470 shares of common stock, of which 388,156 vested on January 1,
      1997. The remaining shares vested pro rata on a monthly basis over the
      period from February 1, 1997 through January 1, 1999. Deferred
      compensation of $4,853 and $63,076 relates to the unvested shares at
      December 31, 1998 and 1997 respectively, and is being amortized over the
      vesting period of the related shares.

      On July 1, 1997, the Company entered into a three year employment
      agreement with an officer that requires the Company to pay a minimum
      compensation of $100,000 per year, plus commissions. He is also entitled
      to options based upon certain performance standards being met.

      LEGAL MATTERS

      The Company is a defendant in an action by Keepsake, alleging, among other
      things, breach of contract (failure to make continuing fee payments,
      failure to accurately report sales and make payments under its
      agreements), civil theft, declaratory judgement, specific performance and
      injunctive relief ( failure to obtain written approval from Keepsake
      before appointing exclusive sub-distributorships). This action is at the
      pleadings stage. No trial date has been set. Management believes it has a
      strong defense in this action; however, given the complexity of the issues
      involved, it is unable to evaluate the likelihood of a favorable or
      unfavorable outcome at this time.

      The Company is a defendant in an action filed in the U.S. District Court
      for the Middle District of Florida (Orlando Division) in November 1998 by
      Keepsake, Inc. and Laura 
                                      F-15
<PAGE>
      Dobbs. The other defendants are Wallgreen Company, Party City and K-Mart
      Corp. The action is for, among other things, unfair competition and patent
      infringement. The Company intends to vigorously contest the complainants'
      claims.

      In December, 1998, the Company commenced an action in the Circuit Court of
      Palm Beach County, Florida against Keepsake, Inc., The Edge Sports,
      Promotional Designs, Inc., Playboy Enterprises, Inc. and Custom Camera
      Design. In the action, the Company is seeking damages and injunctive
      relief for claims of trademark infringement, tradename infringement, trade
      dress infringement and unfair competition arising out of the defendants'
      manufacture, marketing, distribution and sale of a disposable, single-use
      camera containing, among other things, the Company's trademark, Message
      Camera (TM), as well as the Company's tradename, PSI Industries, Inc.
      Defendants' responses to the complaint have not yet been served.

      On April 6,1999, the Company and Keepsake, Inc. entered into a Mediated
      Settlement Agreement whereby the Company agreed to pay Keepsake $ 850,000
      within 90 days, subject to, and conditioned upon the funding of the
      Company's pending private placement in an amount not less than $
      4,000,000. Such payment shall be in full and final settlement of all
      claims arising in actions filed in the Circuit Court of Orange County,
      Florida, the U.S. District Court for the Middle District of Florida
      (Orlando Division) and the Circuit Court of Palm Beach County, Florida. In
      the event the Company does not make payment within 48 hours of receipt of
      funding, Keepsake shall be entitled to a judgement in the amount of $
      850,000 upon the filing of an affidavit with notice to defendants.

      In June of 1998, the Company commenced an action against Jonathan Barash,
      a former employee. In this action, the Company seeks injunctive relief and
      damages for breach of a confidentiality agreement and misappropriation of
      trade secrets. As of October 30, 1998, the Company had succeeded in
      obtaining a temporary injunction against Mr. Barash, enjoining him from
      using, communicating, disclosing, disseminating and misappropriating any
      documents, information or computer records as well as any trade secret
      information. He is also enjoined from soliciting and contacting the
      Company's customers, distributors and sales representatives and from
      competing with the Company through and including May 9, 1999 and must
      return all originals and copies of the Company's documents and computer
      records.

      The Company is one of 28 defendants in an action by Fuji Film, alleging
      violation of a number of its patents. On February 26, 1999 the
      Administrative Law Judge ruled in favor of Fuji potentially eliminating
      the Company's use of recycled cameras. Although such ruling is not the
      final decision of the International Trade Commission, nor is it binding or
      enforceable, there can be no assurance the International Trade Commission
      will change such ruling. However, the Company has completed the design and
      development of a new 35mm camera which management believes should
      eliminate any potential conflict or 

                                     F-16
<PAGE>
      infringement within any of the Fuji patents. Therefore even if Fuji Film
      prevails, the Company believes that this will not have a material effect
      on the Company's business.

11.  EMPLOYEE BENEFIT PLANS

      The Company has a defined contribution profit sharing plan, covering
      substantially all employees with more than one year of service.
      Contributions for the profit sharing plan are discretionary and determined
      by the Company's Board of Directors. During the years ended December 31,
      1998 and 1997, no contributions were made to this plan

12.  STOCKHOLDERS' EQUITY

      In April 1997, the Company issued 90,000 shares of its Common Stock to
      four employees in connection with the exercise of stock options. The
      Company received proceeds of $9,000.

      In June 1997, the Company issued 40,000 shares of its Common Stock to two
      attorneys for legal services rendered.

      In July 1997, the Company issued 15,000 shares of its Common Stock to a
      consultant in consideration for consulting services rendered.

      In August 1997, the Company issued 30,000 shares of its Common Stock to
      two employees for a purchase price of $.10 per share in connection with
      the exercise of stock options.

      In August 1997, the Company issued 1,164,470 shares of its Common Stock to
      its President, Benjamin Cohen. The stock was issued pursuant to the terms
      of an employment agreement.

      In October 1997, the Company issued 183,167 shares of its Common Stock to
      both its Chief Executive Officer and its Executive Vice President, and
      30,000 shares of its Common Stock to a former officer, in connection with
      the exercise of stock options. Both current officers paid $.11 per share
      and the former officer paid $.10 per share by delivery of promissory
      notes.

      In December 1997, the Company issued 15,000 shares of its Common Stock to
      its Vice President of Sales, in connection with the exercise of stock
      options. The Company received $.15 per share.

      In December 1997, the Company issued 5,000 shares of its Common Stock to
      an accountant for professional services rendered which were not related to
      the auditing of the Company's financial statements.

                                     F-17

<PAGE>
      In December 1997, the Company issued 335,000 shares to a consultant for
      services rendered, of which 285,000 have been delivered and 50,000 shares
      were cancelled in May of 1998.

      In December 1997, the Company completed a private placement of 48,667
      shares of Series A Convertible preferred stock with a $.0001 par value, at
      $30.00 per share for an aggregate offering price of $1,460,010.

      The Series A Convertible preferred stock provides for payment of
      semiannual cash dividends of 5% per annum ($73,000 and $18,695 for the
      years ended December 31, 1998 and 1997 respectively). Each share of Series
      A Convertible preferred stock is convertible at the option of the holder
      into twenty shares of the Company's common stock, $.0001 par value,
      equivalent to a price of $1.50 per share of common stock.

      At any time after one year from the date of issuance, the Company can
      require that all outstanding shares of the Series A Convertible preferred
      stock be automatically converted at the conversion price then in effect if
      at any time (i) the closing bid price of the Company's common stock has
      exceeded $7.50 per share for a period of 20 consecutive trading days, (ii)
      the Company's common stock has been listed on NASDAQ or another national
      securities exchange and (iii) a registration statement covering the shares
      of common stock issuable upon conversion of the Series A Convertible
      preferred stock has been filed with the Securities and Exchange Commission
      and declared effective. The holders of the Series A convertible preferred
      stock are entitled to such number of votes as are equal to the number of
      shares into which their holdings are convertible and vote together with
      the holders of the Company's common stock.

      In the event of liquidation, dissolution or winding up of the Company, the
      holders are entitled to share ratably, with all other holders of preferred
      stock all assets remaining available for distribution after payment of
      liabilities, but before any payments are made to the holders of Common
      Stock, up to $30.00 per share, plus any accrued but unpaid dividends.

      In connection with this private placement, the Company issued warrants to
      purchase 202,777 shares of common stock to the placement agent. The
      warrants are exercisable at $1.50 per share after December 30, 1998 and
      prior to December 30, 2003.

      In the period from September 1997 through May 1998, the Company issued
      176,800 shares of its Common stock to eleven employees and one former
      employee in connection with their exercise of stock options at per share
      prices ranging from $.10 to $.25.

      In July 1998, the Company issued 15,022 shares of its Series B Convertible
      Preferred Stock to a manufacturer of its products in satisfaction of an
      obligation to pay the 
                                     F-18
<PAGE>
      manufacturer the sum of $1,502,200. The holders of the Series B
      Convertible Preferred Stock do not have any voting rights and do not
      receive any dividends. Each share of Series B Convertible Preferred Stock
      is convertible into 33.3 shares of Common Stock at any time.

      In the event of liquidation, dissolution or winding up of the Company, the
      holders are entitled to share ratably, with all other holders of preferred
      stock all assets remaining available for distribution after payment of
      liabilities, but before any payments are made to the holders of Common
      Stock, up to $100.00 per share.

      In September 1998, the Company issued 62,500 shares of its Common Stock to
      two investors for gross proceeds of $125,000 in connection with a private
      placement.

      In September 1998, the Company issued 7,500 shares to a public relations
      firm, for services to be rendered.

      In September 1998, the Company issued an aggregate of 15,000 shares to two
      accountants in return for professional services to be rendered which were
      not related to the auditing of the Company's financial statements.

      In October 1998, the company issued 100,000 shares to an investment
      banking firm for services to be rendered pursuant to a financial advisory
      agreement.

      In November 1998, the Company issued an aggregate of 975,000 shares of its
      Common Stock to six investors for aggregate proceeds of $875,000.

14.  STOCK OPTION PLAN

      On March 15, 1996, the Company established the PSI Industries, Inc. 1996
      Stock Option Plan (the "Plan"). The Plan was amended January 1999 and
      February 1999. Under the Plan, the Company has reserved 3,500,000 shares
      of Common Stock for issuance pursuant to options granted under the Plan.

      From July 1, 1997 through December 31, 1997 the Company granted options to
      its employees to purchase 135,000 shares of its common stock at an
      exercise price of $.15 per share and 9,050 shares at an exercise price of
      $.25 per share. The exercise prices were determined by the Board of
      Directors to be the market value at the date of grant, and, therefore, no
      compensation expenses was recognized. Under the Plan, incentive stock
      options ("ISOs") may be granted at an exercise price of not less than the
      market value at the date of grant, except for ISOs granted to a 10% or
      greater stockholder, for which the exercise price is no less than 110% of
      the market value at the date of grant.

      Pro forma information regarding net income is required by SFAS No. 123,
      and has been 
                                      F-19
<PAGE>
      determined as if the Company had accounted for its employees stock options
      under the fair value method of that statement. The fair value of
      outstanding options was estimated at the date of grant using the minimum
      value method, using the following assumptions: risk free rate of 5.11% for
      1998 and 1997, no expected dividends and weighted average expected life of
      the options of 2.7 years.

      For purposes of pro forma disclosures, the estimated fair value of the
      options is amortized to expense over the options' vesting period. Based on
      the assumptions utilized above, the pro forma impact on net income (loss)
      for 1998 and 1997 is not materially different from amounts reported.

      As of December 31, 1998, 759,383 options have been granted, all of which
      were vested at the date of grant and of which 4,200 have been forfeited by
      the optionee's termination from employment with the Company. As of the
      same date, 740,633 options had been exercised.

15.  EARNINGS PER SHARE
      The following table sets forth the computation of basic and diluted
earnings per share:
                                                       Year Ended December 31
                                                     --------------------------
                                                        1998            1997
                                                     -----------    -----------
Numerator:
Net (loss) income                                    $   729,471    $  (429,509)
Dividend on Series A preferred stock                      73,000        (18,965)
                                                     -----------    -----------
Numerator for basic and diluted earnings
(loss) per share-income available to
common stockholders                                  $   656,471    $  (448,474)
                                                     -----------    -----------
Denominator:
Denominator for basic earnings (loss)
per share-weighted average shares
outstanding                                            8,873,967      7,392,619
Effect of dilutive securities
Options                                                   28,949           --
Warrants                                                 128,480           --
Preferred Stock                                          750,368           --
                                                     -----------    -----------
Denominator for diluted earnings (loss)
per share-adjusted weighted average and
assumed conversions                                    9,781,764      7,392,619
                                                     -----------    -----------
Basic earnings (loss) per share                      $      0.07    $     (0.06)
                                                     -----------    -----------
Diluted earnings (loss) per share                    $      0.07    $     (0.06)
                                                     -----------    -----------
                                      F-20
<PAGE>

                                 EXHIBIT INDEX

EXHIBIT            DESCRIPTION
-------            -----------

 27.1          Financial Data Schedule