U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-KSB

     (Mark One)
[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 For the transition period from _____ to _____

                         Commission file number 0-23503

                                 InnovaCom, Inc.
             (Exact name of registrant as specified in its charter)

   Nevada                                 367                     88-0308568
(State or other jurisdiction of  (Primary Standard Industrial  (I.R.S. Employer
  incorporation or organization)      Classification Code)   Identification No.)


               3400 Garrett Drive, Santa Clara, California 95054;
                  408-727-2447 (Address and telephone number of
                          principal executive offices)

Securities registered under Section 12(b) of the Exchange Act: None
Securities  registered  under Section  12(g) of the Exchange Act:

 Title of Each Class
---------------------
    Common Stock

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

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

Revenues for the year ended December 31, 1998, were approximately $108,000.

As of April 1, 1999, the aggregate  market value of the voting common stock held
by non-affiliates was $3,575,803 based on the average bid and ask price of $0.18
per share.

As of April 1,  1999,  the  number of shares of  common  stock  outstanding  was
25,035,796.

Documents incorporated by reference: None

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

<PAGE>2



         With the exception of  historical  facts stated  herein,  the following
discussion may contain forward-looking statements regarding events and financial
trends which may affect the  Company's  future  operating  results and financial
position.  Such  statements  are subject to risks and  uncertainties  that could
cause the Company's actual results and financial  position to differ  materially
from those anticipated in such  forward-looking  statements.  Factors that could
cause actual results to differ materially  include, in addition to other factors
identified in this report, the Company's  operating losses,  need for additional
capital,  its ability to develop new products,  the security  interest in all of
the Company's assets, and dependence on key personnel,  all of which factors are
set forth in more detail in the sections entitled "Certain  Considerations"  and
"Management's  Discussion and Analysis or Plan of Operation" herein.  Readers of
this  report  are  cautioned  not to put undue  reliance  on  "forward  looking"
statements  which are, by their  nature,  uncertain  as reliable  indicators  of
future  performance.  The Company disclaims any intent or obligation to publicly
update  these  "forward  looking"  statements,   whether  as  a  result  of  new
information, future events, or otherwise.

                                     Part I.

Item 1.  Description of Business

                                    BUSINESS

                             Corporate Information

         The Company is a development  stage  company  focusing on digital video
compression,  transmission,  and  processing  technology  compliant  with MPEG-2
standards.  It was  originally  incorporated  in  Florida  in March of 1993 as a
research and  development  company and was  essentially  dormant  until 1996. In
March of 1996,  the Company  began to  emphasize  the  development  of broadcast
quality encoded video utilizing the Motion Picture Experts Group ("MPEG") second
generation  standard for video and audio  compression  ("MPEG-2") and obtained a
license from  FutureTel,  Inc to utilize  portions of its development of a video
compression chip and related MPEG-2 technology,  termed the "Gecko"  technology.
From 1993  until  1995,  Mr.  Mark C. Koz,  the  Company's  founder,  was also a
shareholder,  an  officer,  and  director  of  FutureTel  and  assisted  in  the
development of the Gecko  technology.  Mr. Koz terminated his relationship as an
officer,  director and  shareholder  of FutureTel  and, in  connection  with his
departure,  FutureTel  licensed the Gecko  technology to the Company in exchange
for royalties,  for a period of seven years and not to exceed $3 million,  based
on sales  of  video  compression  chips  utilizing  or  derived  from the  Gecko
technology.  The Company applied certain aspects of the Gecko  technology in the
project undertaken to development of its single chip video encoder, the DVImpact
Chip. This development project was terminated in June 1998.

         In July 1996,  the  Company  merged  with  Jettson  Realty  Development
Corporation,  a Nevada  corporation  ("Jettson").  The merger took the form of a
share  for  share  exchange,  in which all of the  shares  of the  Company  were
exchanged for approximately  52% of Jettson.  The merger was accounted for under
the reverse take-over method of accounting.  Thereafter, the name of Jettson was
changed to "InnovaCom,  Inc." The Company's Common Stock currently trades on the
OTC Bulletin  Board under the symbol  "MPEG." The merger between the Company and
Jettson is currently the subject of litigation. See "Legal Proceedings."

         In May 1997, the Company acquired Sierra Vista  Entertainment,  Inc., a
Nevada  corporation  ("Sierra  Vista") in a share for share  exchange by issuing
8,514,500 shares of its Common Stock to Sierra Vista shareholders.  Sierra Vista

<PAGE>3


was a motion picture production company and as a result of the acquisition,  the
Company  gained  access to  approximately  $3 million of working  capital  and a
credit  facility  of  up to $5  million.  As  discussed  below,  Sierra  Vista's
operations were discontinued as part of the Company's  re-ordering of priorities
in June 1998.

         On May 1, 1998,  Thomas E. Burke became the  Company's  new  president,
replacing Mark Koz. On June 5, 1998, Mr. Burke resigned.  Shortly afterward,  he
filed  for  arbitration  claiming  that  the  Company  breached  his  employment
contract,  and filed a related claim for unpaid wages with the California  State
Labor  Commissioner.  The Company  maintained  that Mr.  Burke had  breached his
employment contract, and vigorously defended itself against Mr. Burke's actions.
On December 14, 1998, the Company and Mr. Burke settled their respective  claims
against  each other,  such  settlement  including a payment by each party to the
other. The amount of these payments was not material to the Company.

         On June 23, 1998,  Frank J. Alioto was elected  President and appointed
to the Company's board of directors. In December 1998 Frank Alioto replaced Mark
Koz as the Chairman of the Board of Directors.

         Concurrent  with the election of Mr.  Alioto as President in June 1998,
the Board of Directors  decided to focus the Company on those  projects that had
the greatest short-term promise,  and that were closest to market.  Accordingly,
essentially  all  development  effort was  focused on the  development  of video
compression  technology  products in the areas of video transmission and digital
video  disks  (DVD)  mastering.  At the same  time  the  Company  terminated  or
suspended all non-core activities. The Gecko project was ended, Sierra Vista was
discontinued, and the development of an exhibition facility in China was halted.
At the same time the  Company  took other steps to reduce  expense and  conserve
cash, including  termination of approximately half of its workforce.  One result
was a  reduction  in the loss  reported  by the  Company  in its  statements  of
operations.  The reported loss in the second half of 1998 was  approximately 21%
of the loss  reported in the first half. In addition,  development  of shippable
products was enhanced.  In the fourth quarter of 1998,  the Company  shipped the
first of its MPEG-2 transmission systems to a customer.

Certain Considerations

         In addition to the other  information  presented in the Annual  Report,
the Company and its  business  are subject to certain  factors as  discussed  as
follows.

         Limited  Operating  History.  Since  its  inception,  the  Company  has
generated  nominal  revenues.  Its  primary  activities  to date  have  been the
research and  development of MPEG-2  products for digital video  compression and
processing  technology.  The Company's success is dependent upon the development
and marketing of its proposed  products,  as to which there can be no assurance.
Unanticipated  problems,  expenses,  and delays are  frequently  encountered  in
developing  new  products.  Other  factors  that may affect the  development  of
products  and their sales  include,  but are not  limited  to, new or  competing
products  developed  by  competitors,  the  need  to  develop  customer  support
capabilities and market expertise, delays in product development,  manufacturing
difficulties,  market  acceptance,  and the  success  or  failure  of sales  and
marketing  activities.  The Company has no  experience  in bringing  products to
market in any  substantial  manner and the failure of the Company to meet any of
the conditions  discussed above could have a materially  adverse effect upon the
Company's  operations.  No assurances  can be given that the Company can or will
ever be profitable.


<PAGE>4

         Operating Losses. Since its inception, the Company has incurred losses.
For the years ended December 31, 1998 and 1997, the Company  incurred net losses
of  approximately  $16,466,000  and $11,065,000 and has accumulated a deficit of
approximately  $35,727,000  since inception.  The Company expects to continue to
incur losses and to continue to increase its deficit until the Company  develops
and markets its products and gains  significant  market  acceptance.  Management
anticipates  that the Company  will  continue  to incur  losses for at least the
first three  quarters of 1999. No assurances  can be given that the Company will
ever achieve profitability.

         Qualified Opinion. The report of the Company's independent  accountants
contains an explanatory paragraph regarding the Company's ability to continue as
a  going  concern.  Among  the  factors  cited  by the  accountants  as  raising
substantial  doubt as to the  Company's  ability to continue as a going  concern
include the fact that the Company has no established  source of operating income
and that it has recurring losses from operations.

         Need For Additional Capital and Dilution.  The Company's future capital
requirements  will depend on many factors,  including cash flow from operations,
progress  in  developing  new  products,   competing  technological  and  market
developments,  and the Company's  ability to  successfully  market its products.
Because the Company currently does not have significant  revenues,  and will not
have  revenues  until it begins to market  its  products,  the  Company  will be
required to raise  additional  capital  through equity or debt offerings to fund
its  operations.  Traditionally,  the  Company has relied on the sale of debt to
meet its capital  requirements.  Debt financing will result in interest expense,
and if convertible into equity,  could also dilute  then-existing  shareholders.
Any equity  financing  could result in dilution to the  Company's  then-existing
stockholders.  If the Company is unable to raise  additional  funds, the Company
may be  required  to  reduce  its  operations.  There can be no  assurance  that
additional  funding will be available  when required on terms  acceptable to the
Company.

         Litigation  Involving  the  Company.  The Company and its  officers and
directors  are  involved  in a number  of  legal  proceedings.  Such  litigation
includes an action by the Company  against former  directors and officers of the
Company and  alleged  financial  consultants  to the  Company  for,  among other
things,  breach of fiduciary  duty,  fraud,  breach of contract,  and RICO. Four
defendants  in this action are  contesting  the Company's  complaint,  and their
responses include several counter claims.  The Company is considering  expanding
this suit to name additional defendants. The Company has filed a separate action
against its former  auditor and its prior  attorneys  alleging  malpractice  and
conflict of interest.  Further,  several  alleged  creditors of the Company have
filed actions for the payment of monies. As a result of litigation,  the Company
has had to  spend a  substantial  amount  of time and  fees in  prosecuting  and
defending itself in these matters, and will continue to do so in the future. The
potential  also exists that one or more of the  counterclaims  made  against the
Company  will be  successful,  or that the  Company  might be  forced  to settle
counter claims, which in either case could cause financial loss to the Company.

         In  August  1998,  the  Staff of the  Division  of  Enforcement  of the
Securities and Exchange  Commission  advised the Company that the Commission had
issued a formal order for private investigation.  The investigation addresses in
large part the same issues that the  Company  raised in its RICO suit  discussed
above. The Company is cooperating with the SEC in this investigation. If the SEC
determines  that the Company's  actions in this matter in 1997 and 1996 were not
proper, the Company might be subject to SEC actions that could negatively affect
its business.

         Security  Interest in the Company's  Assets and Current Default Status.
In  December  1997,  the Company  issued  $5,000,000  face value of  Convertible
Debentures (the  "Debentures",  or "Convertible  Debentures").  Other Debentures
with similar terms have been issued  periodically  through  January 1999.  Three
Demand Notes (the "Demand Notes") have also been issued in March, April, and May
1999. The outstanding  principal and interest of the Debentures and Demand Notes

<PAGE>5


is  secured  by all of the assets of the  Company.  Therefore,  in the event the
Company is unable to repay the Debentures or Demand Notes, the holders will hold
a  first-priority  security  interest in the Company's  assets upon default.  No
assurances  can be made that the  Company  will be able to repay all amounts due
under the  Debentures  and Demand Notes when required or that a default will not
occur prior to repayment.

         Currently,  and for the  majority  of 1998,  the  Company is and was in
default on certain elements of the Debenture  agreements.  If the holders of the
Debentures  were to demand  that the  Company  cure these  defaults,  and if the
Company  was  unable to  comply,  the  holders of the  Debentures  could  demand
immediate  repayment  of the  Debentures.  If the  Company  was not able to find
replacement  financing  to satisfy the  Debenture  holders  and to continue  the
operations of the Company,  it would face the prospect of essential  shutdown of
all  operations.  See  also  "Possible  Change  of  Control  and  Dilution  From
Convertible Debentures and Warrants."

         Competition.  The digital video and audio  industry  contains  numerous
small and large competing companies.  See: "Competition",  below.  Additionally,
the Company competes in an industry  segment in which numerous  competitors have
substantially  greater  resources  than the Company.  No assurances can be given
that existing or potential  competitors of the Company will not develop products
equal to or better than those  developed  by the  Company or that such  products
will not receive greater market acceptance.

         Dependence on Independent Manufacturers/Subcontractors and Suppliers of
Components.  The Company does not maintain its own  manufacturing  or production
facilities,  aside from final assembly and test, and does not intend to do so in
the foreseeable future. The Company anticipates that major sub-assemblies of its
products will be manufactured and its components will be supplied by independent
companies.  Many of these independent  companies may also manufacture and supply
products for the Company's existing and potential competitors.  The Company does
not have any licensing or other supply  agreements  with its  manufacturers  and
suppliers. Therefore, the Company's suppliers could terminate their relationship
with the Company at any time. In the event the Company were to have difficulties
with its  manufacturers  and suppliers,  the Company could experience  delays in
supplying products to its customers.

         Uncertainty of Market Acceptance.  To date, the Company has had minimal
sales of its products.  The Company's success will depend upon acceptance of its
products by the technology industry, including independent third party companies
and the general  public.  Achieving  such  acceptance  will require  significant
marketing  investment.  No assurances can be given that the technology  industry
will accept the Company's  existing and proposed  products or, if accepted,  the
level of acceptance.

         Dependence on Technology Industries and Technological Obsolescence. The
digital  video and audio  industry is  characterized  by extensive  research and
development  and rapid  technological  changes,  resulting in very short product
life cycles.  Further,  the video and audio industry is characterized by intense
competition  among  various   technologies  and  their  respective   proponents.
Development of new or improved  products,  processes or technologies  may render
the  Company's  products  obsolete  or less  competitive.  The  Company  will be
required to devote  substantial  efforts and financial  resources to enhance its
existing  products and to develop new products.  No assurances can be given that
competing  products  or new  products or  technology  will not be  developed  by
competing companies rendering the Company's products and technology obsolete.

<PAGE>6


         Dependence  on MPEG-2  Acceptance  and  Continuation  as Standard.  The
Company has  focused  much of its  resources  on the MPEG-2  technology  and the
success of that standard will  dramatically  impact the  Company's  success.  No
assurances  can be given that the MPEG-2  standard  will  remain in favor in the
industry.   Furthermore,  should  the  standard  be  modified  or  replaced,  no
assurances can be given that the Company's  research and  development  work will
successfully transfer to an alternative standard.

         Reliance on Integrators, Distributors, and OEM Customers. The Company's
success  will  depend to a  significant  extent  upon its  ability  to develop a
distribution  system  with  integrators,   resellers,   and  original  equipment
manufacturers  ("OEMs") to  distribute  and sell the  Company's  products in the
marketplace.  No assurances  can be given that the Company will be successful in
obtaining  and  retaining  the sales  channel it requires to market and sell its
products successfully.

         Protection of Intellectual  Property.  The Company has no patents,  but
does hold  trademarks on the Company's  name and the names of certain  products.
The Company is considering  filing for patent protection for certain elements of
its intellectual  property, but is not currently pursuing any significant patent
applications.

         No  assurances  can be given that  another  company will not attempt to
infringe  upon any current or future  licenses,  patents,  patent  applications,
trademarks,  or copyrights of the Company or its products and technology or that
the Company may not inadvertently  infringe upon any current or future licenses,
patents,  patent applications,  trademarks,  or copyrights of another company or
its products and technology.  Such  infringement  could result in protracted and
costly  litigation  and sales losses.  Further,  no assurances can be given that
others will not independently develop products or technology that are equivalent
or superior to those of the Company or that such  products  will not utilize the
same or similar  technology  developed  by the  Company,  whether  protected  or
unprotected by a license or patent.

         Concentration  of Stock  Ownership.  As of April 1, 1999,  the  present
directors,  executive  officers,  and  stockholders  owning  more than 5% of the
outstanding  Common  Stock  and their  respective  affiliates  beneficially  own
approximately  29.6% of the outstanding Common Stock of the Company. As a result
of  their  ownership,  the  directors,  executive  officers,  and  more  than 5%
stockholders and their respective affiliates  collectively will have substantial
control of all matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions.

         Possible  Dilution from Employee,  Director,  and Other Options.  As of
April 1, 1999,  there were  options  outstanding  to  acquire  an  aggregate  of
6,332,059 shares of the Company's Common Stock. These options, which are held by
current and former  employees,  directors,  and consultants,  are exercisable at
prices  ranging  from $.12 to $3.375 per  share,  but  approximately  75% are at
prices at or below $.26 per share.  If these options are  exercised,  they could
dilute the value of other shareholders' stock, and increase the concentration of
stock  ownership in the hands of directors and  officers.  The presence of these
options  could  depress the market price of the  Company's  stock and effect the
cost and terms of future stock placements, if any, by the Company.

         Possible Change of Control and Dilution from Convertible Debentures and
Warrants.  As of April 1, 1999, the principal balance outstanding of Convertible
Debentures,  plus the  related  interest  and  penalties  due was  approximately
$10,708,000.  Under the terms of the Convertible Debenture  agreements,  at that
date, the balance could have been converted into approximately 71,898,000 shares
of Common Stock. The price at which the Convertible  Debentures can be converted
into Common  Stock in most part  depends  upon the current  market  price of the
stock,  and in most cases is below the current market price of the Common Stock.
In  addition  at April 1, 1999,  there were  Warrants  outstanding  to  purchase
2,987,500 shares of the Company's Common Stock at fixed prices ranging from $.11

<PAGE>7


to $2.43 per share.  If these  Convertible  Debentures are converted into Common
Stock,  or the  Warrants  are  exercised,  they could  dilute the value of other
shareholders'  stock. The presence of these Convertible  Debentures and Warrants
could  depress the market price of the  Company's  stock and effect the cost and
terms of future stock placements, if any, by the Company.

         Conversion of all or a major part of the  Convertible  Debentures  into
stock  could  give the  holders of the  Debentures  ownership  of a  controlling
interest  in the  Company,  and  control of all  matters  requiring  stockholder
approval. As of April 1, 1999, if the holders of the Convertible  Debentures had
converted their  Debentures and exercised their Warrants,  they would have owned
approximately  76% of the Company's  outstanding  Common  Stock.  As of April 1,
1999, the Company did not have sufficient  authorized,  unissued Common Stock to
satisfy the  conversion  rights of the  Convertible  Debentures  resulting  in a
default on the  Debentures.  The Company is  attempting  to cure this default by
amending the Articles of  Incorporation  to increase  the  authorized  number of
shares of Common Stock at a meeting of shareholders.

         Possible  Volatility  of  Securities  Prices.  The trading price of the
Company's  Common  Stock  could be subject to wide  fluctuations  in response to
quarterly  variations  in  operating  results,  announcements  of  technological
innovations  or new  products  by the  Company  or its  competitors,  changes in
financial  estimates  by  securities  analysts,  the  operating  and stock price
performance  of  other  companies  that  investors  may deem  comparable  to the
Company,  and other  events or factors.  Moreover,  in some  future  quarter the
Company's  operating  results  may fall  below the  expectations  of  securities
analysts and investors.  In such event, the market price of the Company's Common
Stock could likely be materially and adversely affected. In addition,  the stock
market in general,  and the market  prices for  high-tech  related  companies in
particular, have experienced extreme volatility that often has been unrelated to
the operating  performance  of such  companies.  These broad market and industry
fluctuations  may adversely  affect the trading  price of the  Company's  Common
Stock, regardless of the Company's operating performance.

         Penny Stock  Regulations.  The Securities and Exchange  Commission (the
"Commission") has adopted regulations which generally define "penny stock" to be
any equity  security  that has a market price (as  defined)  less than $5.00 per
share or an  exercise  price of less than  $5.00 per  share,  subject to certain
exceptions.  The Company's  securities  may be covered by the penny stock rules,
which impose additional sales practice  requirements on broker-dealers  who sell
to persons other than established customers and accredited investors (generally,
institutions  with assets in excess of $5,000,000 or individuals  with net worth
in excess of $1,000,000 or annual income exceeding  $200,000 or $300,000 jointly
with their spouse).  For transactions  covered by this rule, the  broker-dealers
must make a special  suitability  determination for the purchase and receive the
purchaser's   written   agreement  of  the   transaction   prior  to  the  sale.
Consequently,  the rule may affect the  ability  of  broker-dealers  to sell the
Company's  securities  and also affect the ability of  purchasers  to sell their
shares in the secondary market.

         Dependence on Key Personnel. The Company's performance is substantially
dependent on the performance of its executive  officers and key personnel and on
its ability to retain and  motivate  such  personnel.  Competition  between high
technology companies for qualified personnel is very high, and opportunities for
key  employees to move to other  companies,  including  direct  competitors  are
continually present. The loss of any of the Company's key personnel could have a
material  adverse  effect on the  Company's  business,  financial  condition and
operating  results.  The Company's  success will also depend upon its ability to
hire and retain additional qualified  personnel.  No assurance can be given that
the Company will be able to hire or retain such qualified personnel.

<PAGE>8


Digital Video Industry Overview

         In  the  past,   video  images  were   transmitted  and  stored  almost
exclusively in analog formats. Digital video technology, including the Company's
technology,  has been developed more recently and provides several benefits over
analog. For example,  unlike analog, digital video can be compressed,  providing
significant  storage and  transmission  efficiencies,  and can be duplicated and
transmitted  without  significant  loss of  quality.  Digital  video also allows
editing,  indexing,  distribution,  and storage features not available in analog
formats.   With  the  recent  growth  of  high   bandwidth   network   capacity,
broadcast-quality  real-time video over networks using compressed  digital video
is rapidly becoming available and cost effective.

         The Moving Picture Experts Group ("MPEG") was formed in 1988 to develop
a worldwide  industry  standard for digital  compression of video.  In 1991, the
MPEG committee adopted the first technical standard of digital video compression
for full video motion for personal  computers,  which is known as "MPEG-1."  The
MPEG  committee  determined  that a higher  quality  digital video  standard was
needed for broadcast quality video and eventually adopted the  second-generation
standard of MPEG for video and audio  compression  ("MPEG-2").  The MPEG-2 video
compression standard defines the standards applicable to broadcast quality video
for compression,  storage and  transmission,  and is the standard  worldwide for
video  compression at the professional  level. It is the chosen standard for the
FCC-mandated migration to digital video broadcast, for all DVD applications, for
future  HDTV and will  appear on  computing  and  networking  and  communication
platforms of all types.

The Company's Products and Technology

          The  Company  develops  core   technologies  and   methodologies   and
integrates  complimentary  third party  products for digital video  compression,
transmission,  and processing technology applications.  The Company's adheres to
MPEG-2 non-proprietary "open standards" to enhance flexibility and market appeal
for the  Company's  products.  The Company has several  products that are either
currently  released for shipping,  or that are in advanced stages of development
and are  scheduled  for release in 1999.  In addition  the Company has  multiple
development  projects in process or under  consideration to enhance the features
of products  already released or to develop products in complimentary or closely
related applications.

         TransPEG(TM).  Until  recently,  video  transmission  over  network was
restricted to low frame counts,  small  viewable  windows,  and low pixel counts
because of data rate limitations  within the carriers.  Alternatively,  carriers
with the  bandwidth  to achieve  higher  quality  video were too  expensive  for
widespread  usage.  The  management  of the  Company  believes  that the rapidly
increasing  data  bandwidth now  available and becoming  available in affordable
networks,  including  both  intranet  and  internet,  has  created a demand  and
opportunity  for  substantial  growth in video  transmission  products to supply
real-time, broadcast-quality video.

         The Company is currently  marketing four such transmission  products in
its TransPEG  product  line.  These are  interchangeable  digital  multi-channel
transmissions systems that compress video, transmit in standard carrier formats,
and decompress at the viewer's  location.  TransPEG products are available for a
variety of standard carriers (ATM, T1/E1, etc.), support unicast,  multicast and
broadcast transmission, and feature web based controls.

         DVD Impact(TM). DVD Impact is a DVD premastering suite which integrates
MPEG-2  video  compression  developed  by the Company  with a number of software
tools developed by third parties and targets  corporate and "prosumer" users for
the design of custom DVD's.  DVD Impact is currently  shipping.  This product is
intended  to be a  price/performance  leader with most of the  functionality  of
competing high-end systems, but at a much lower price.

<PAGE>9


         DV-2110. Currently under development,  the DV-2110 is an MPEG-2 encoder
board, designed to act as the system interface,  I/O manager, and host for third
party  MPEG-2  encoder  chips.  The  Company  intends  to imbed the  DV-2110  in
subsequent  versions of its  TransPEG and DVD Impact  products,  and to sell the
board as a stand alone  component,  or packaged  with certain  Company-developed
software as an OEM product to  customers  in markets  that the Company  does not
currently  service with its own system level products.  The board is intended to
be  compatible  with  personal  computers  running  Windows 95 and NT  operating
systems,  and to  operate  with a variety  of video  compression  hardware.  Its
modular design and flexible architecture are designed to allow it to function in
a wide range of digital audio and video  applications in many different hardware
and software environments.

Sales and Marketing

         The  Company  markets  its  system-based  solutions  (TransPeg  and DVD
Impact) to the  professional  video industry through direct sales calls from the
Company's sales force,  through  professional video dealerships,  through system
integrators,  and by attendance at national and  international  trade shows.  At
such  time,  if any,  as the DV2110 is  completed,  the  Company  intends to add
selected OEM's to its sales channel. Because the Company's products have been in
the development stage until recently,  the Company has not achieved  significant
revenue from sales.

Market for the Company's Products

         The  markets  for the  Company's  currently  shipping  products  can be
divided into two areas. The TransPEG  products target users of digital video who
wish to transmit this video over  standard  network  carriers.  The DVDImpact is
intended  for  producers  of digital  video  content who need to edit and master
video in preparation for end user consumption of the video.  Additional products
under  development or under  consideration  would address the needs of users and
producers of broadcast  quality video who are replacing  their analog video with
digital  video,  and  who  require  new  tools  to  replace  their  analog-based
equipment.

Video Transmission

         With the increase in bandwidth in the internet, in many intranets,  and
in a variety of available  standard  point to point  carriers,  applications  in
transmission  of  broadcast  quality  digital  video are emerging  rapidly.  The
Company's target applications  include:  Movement of video within multi-location
video  production  houses or between  multiple  contributors  to the creation of
video content (video collaboration); real time medical diagnosis or consultation
between multiple locations; deposition or arraignment by video to avoid prisoner
transportation  and to reduce  costs;  education  or  training  from one central
location  dispersed  to  satellite  classrooms;   surveillance  or  security  in
applications  where  video  quality  is  essential;  and a wide  range  of other
situations.  In general as  available  carrier  bandwidth  increases,  users are
finding  ways to  utilize  broadcast  quality  digital  video to  improve  their
operations,  and providers are discovering that broadcast  quality digital video
is good quality content to fill their pipelines and help justify the pipeline to
potential new users.

Video Content Creation

         As the demand for broadcast  quality  digital video grows,  so will the
demand for tools to produce it. The Company's first offering into this market is

<PAGE>10


the DVDImpact,  an integrated  suite of tools intended for a professional  level
customer who plans to edit digital  video  content into a completed  piece ready
for end-user  consumption.  The target  customer  includes both the  established
trade shop that is  converting  from analog  based video  technology  to digital
technology,  but also corporate,  government, and institutional users who create
their own content for  internal  uses.  The Company  believes  that  creation of
digital video  content by corporate,  government,  and  institutional  users for
internal  consumption  could  increase  sharply with the wide  acceptance of DVD
format and the rapid  decline in the costs  associated  with the  production  of
close-to-professional-quality digital video content that is seen currently.

         The  conversion  of the video market from analog to digital is expected
to create  demand for a wide range of products to replace  software and hardware
tools that were built to service  analog-based  video. The Company is developing
or considering a number of potential  products that are intended to address this
demand,  with a user look and feel that  mimics  that of the analog  tools being
replaced.

Competition

         The Company faces  competition from numerous  companies,  some of which
are  more  established,  have  greater  market  recognition,  and  have  greater
financial,  production,  and marketing resources than the Company. The Company's
products  compete on the basis of certain  factors,  including  first to market,
product capabilities,  product performance, price, support of industry standard,
ease of use, customer support, and user productivity.

         The market for the Company's products is competitive,  subject to rapid
change and significantly  affected by new product introductions and other market
activities  of industry  participants.  The Company  faces  direct and  indirect
competition  from a broad range of  competitors  who offer a variety of products
and solutions to the  Company's  current and  potential  customers.  Many of the
Company's  competitors  have  longer  operating  histories,   including  greater
experience in the market, significantly greater financial,  technical, and other
resources than the Company,  greater name  recognition,  and a larger  installed
base of customers.  Competition to supply the markets  identified by the Company
can be expected to grow as the markets mature.

         The Company's  competitors  include Spruce  Technologies,  Inc.,  Sonic
Solutions,  and Minerva  Systems,  Inc., which market products that compete with
the DVD Impact; and FVC.COM,  Inc. and Lucent  Technologies,  Inc. which compete
with the Company's TransPEG products. Several other companies market specialized
professional  video  production  boards that are  expected  to compete  with the
DV-2110 board at such time,  as any, that the Company  begins to ship this as an
OEM product.  Numerous  other  companies  offer products that do or will compete
with the  Company's  products,  and the  number of  competing  solutions  can be
expected  to grow.  This  growth  will come both from new  companies  founded to
participate in the markets,  and from  established  companies in related markets
widening their product offerings into the markets identified by the Company.

         The  Company's  competitors  can be expected to continue to improve the
design and  performance of their  products,  to introduce new products with more
competitive  prices and performance  features,  and to market more  aggressively
into the Company's  markets.  Creating and maintaining  technological  and other
advantages  for the  Company's  products  over its  competitors'  products  will
require a continued  high level of  investment  by the  Company in research  and
development and in operations.  No assurances can be given that the Company will
be able to continue to make such investments or that the Company will be able to
achieve the technological advances necessary to achieve competitive advantages.

<PAGE>11


Research and Development

         For the past two years, the majority of the Company's efforts have been
devoted  toward the  research  and  development  of digital  video  compression,
transmission,  and processing.  Product  development is performed  mostly at the
Company's  headquarters  in California by engineering  and technical  employees,
assisted  in certain  specialized  areas by  consultants.  The  Company's  total
expenditures  for research and  development  were  approximately  $3,167,000 and
$4,388,000 for the years ended December 31, 1998 and 1997, respectively.

FutureTel License Agreement

         In 1996 the Company  entered into an agreement with  FutureTel  whereby
FutureTel  licensed to the Company  certain  proprietary  technology  related to
digital video compression in exchange for royalty payments based on sales by the
Company that included this technology.  Under the license  agreement,  FutureTel
granted the Company the right to develop,  manufacture  and distribute  products
using the  licensed  technology  and  derivative  works.  Under the terms of the
license  agreement,  the  Company  will also have the  right to  sublicense  the
technology.

         This licensed  technology was incorporated into the Company's design of
its single chip MPEG-2 Gecko  encoder  chip,  and when the design effort on this
chip was suspended in 1998, the Company ceased using the technology.  Aside from
a sale or license by the Company to another party of the Company's  encoder chip
design, an event not considered likely by the Company's management,  the Company
has no plans to resume use of the technology licensed from FutureTel. No royalty
payments have ever been made by the Company to FutureTel.

Sierra Vista Entertainment, Inc.

         Sierra Vista Entertainment, Inc.("Sierra Vista") was incorporated under
the laws of Nevada on April 3, 1996,  for purposes of engaging in the production
of television or theatrical  feature films. The Company and Sierra Vista entered
into a Plan and Agreement of  Reorganization  in which the Company acquired 100%
of Sierra Vista's issued and outstanding  common stock in exchange for 8,514,500
shares of Common  Stock of the Company and Sierra  Vista  became a  wholly-owned
subsidiary of the Company. In June 1998 the Company's operations were reduced to
concentrate  on a few  products  deemed by  management  to be  closest to market
release.  As part of the steps taken to reduce the Company's use of cash, Sierra
Vista was closed,  its  employees  terminated,  and its assets  liquidated.  The
operations  of Sierra Vista have been  presented in the  accompanying  Financial
Statements as discontinued operations.  There are no plans to re-activate Sierra
Vista's production activities in the future.

China Joint Venture

         The Company entered into a joint venture  agreement with CRI, a Chinese
corporation  located in Beijing  ("CRI"),  in September  1997. The joint venture
intended to establish an exhibition  facility in China to display  United States
technology  and  products  and to  provide a forum  for  various  companies  and
individuals  to  develop  potential  business  relationships  and  projects.  In
connection with entering into the joint venture with CRI, the Board of Directors
approved the issuance of 100,000  shares of Common  Stock,  a payment of $60,000
per  year  for  ten  years,  and the  opportunity  to  receive  up to 50% of the
Company's joint venture  interest to NATV Marketing  ("NATV").  In June 1998 the
Company  initiated  steps to terminate the contracts  with both CRI and NATV. In
April 1999,  the Company  reached  agreement with both CRI and NATV to terminate
the  contracts  between  those  entities  and  the  Company.   As  part  of  the
termination,  the Company  agreed to issue an additional  100,000  shares of the
Company's  Common Stock to the principal of NATV, and made cash payments to both
CRI and NATV. The amount of the payments was not material to the Company.


<PAGE>12


Intelligent Instruments Corporation

         In 1997,  the  Company's  Board of Directors  tentatively  approved the
acquisition of Intelligent  Instruments,  a company wholly-owned by Mark C. Koz,
the Company's former President and Chief Executive Officer, for 2 million shares
of Common  Stock of the  Company,  subject to certain  conditions.  In 1998 this
tentative approval was withdrawn and the acquisition did not occur. There are no
plans to resume this acquisition effort.

Technical Systems Associates, Inc.

         The Company  entered  into an interim  agreement  to acquire  Technical
Systems  Associates,  Inc.  ("TSA"),  an antenna  company  located  in  Orlando,
Florida,  in March of 1997.  After conducting a due diligence review of TSA, the
Company  determined  that the  acquisition  would not  likely  meet its  current
business objectives.  In October 1997, the Company entered into an agreement for
a release from the interim agreement. Under this agreement, the Company paid TSA
an aggregate of $300,000,  of which  approximately  $180,000 had previously been
paid,  and agreed to provide a certain  amount of contingent  debt  financing in
exchange  for an option to be held by the  Company  to  acquire  TSA and for the
release. In January 1998, the Company fully terminated the relationship and paid
TSA approximately  $58,000 for a discharge of any financing or other obligations
under the previous agreements.

Innovative Technical Solutions, Inc.

         In January 1998, the Company entered into a binding letter of intent to
acquire the business and intellectual property of Innovative Technical Services,
Inc.  After further review by each party,  the parties  decided to rescind their
agreement without any obligations to the other.

Employees

         As of March 31,  1999,  the Company had 26  full-time  employees:  4 in
production,  10 in research and development,  6 in sales and marketing, and 6 in
general and administration.

Item 2.  Description of Property

         The Company is currently  renting  approximately  18,000 square feet of
space in Santa Clara,  California,  which  includes  offices and research  space
under a lease  agreement  that runs through  December  2002 with an option for a
three-year extension.  The monthly base rent was $28,800 for 1998, increasing by
$900 per month for each year thereafter,  plus operating expenses for the common
areas of the entire  complex equal to the Company's  pro-rata  square footage of
the complex (approximately 47% of the building, 27% of the project). The offices
house all of the Company's  operations  including the assembly and final testing
required for shipment of the Company's products.

         Sierra Vista  previously  occupied  approximately  2,800 square feet of
office space in Beverly Hills, California under a three (3) year lease agreement
effective  October 1, 1997,  which was guaranteed by InnovaCom,  Inc. This space
was vacated in 1998 and a replacement occupant is being sought. The monthly base
rent is $5,882 for the first eighteen months and $6,162 thereafter.

        Sierra   Vista   previously   leased  a   single-family   residence  of
approximately 2,500 square fee in Beverly Hills,  California at a cost of $7,000
per month. This lease was terminated in 1998.

<PAGE>13


Item 3.  Legal Proceedings

         Haynes,  et. al. On November  10,  1997,  InnovaCom  filed suit against
Michael D.  Haynes,  David S.  Jett,  Manhattan  West,  Inc.,  Marketing  Direct
Concepts,  Inc., Checkers  Foundation,  Atlas Stock Transfer  Corporation,  Arun
Pande,  Edwin  Reedholm,  and others in the Superior  Court of the County of San
Francisco  (Case Number 990965).  The complaint  alleges that in connection with
the reverse merger of Jettson Realty  Development  Corporation and InnovaCom,  a
Florida  corporation,  the Company  issued  shares of Common Stock to Michael D.
Haynes and David S. Jett and entities  controlled by them based upon  fraudulent
misrepresentations.  Further,  the Company is alleging that  Manhattan  West and
Marketing  Direct  Concepts and  Checkers  Foundation,  an entity  alleged to be
controlled  by Messrs.  Haynes and Jett,  were issued fees,  Common  Stock,  and
options  to  acquire  shares  of Common  Stock  based  upon  misrepresentations,
including  that they could raise  capital to assist the Company in its business.
The Company has received  monies in connection  with a stock purchase  agreement
between the Company and  Checkers  Foundation,  but will not issue the shares of
Common  Stock  until this  litigation  involving  Checkers  Foundation  has been
resolved.  The Company is also alleging that Atlas Stock Transfer, the Company's
former transfer  agent,  breached its contract in issuing shares of Common Stock
in these  transactions.  In addition,  the Company is alleging that Mr. Pande, a
former  director  and  officer of  InnovaCom,  violated  his  fiduciary  duty by
receiving  shares of InnovaCom  Common Stock based upon  misrepresentations  and
inadequate  or  no  consideration,   and  made  inappropriate  and  unauthorized
expenditures  on behalf of the Company for his  personal  benefit,  and that Mr.
Reedholm,  a former director of the Company,  received shares of Common Stock of
the Company without the payment of adequate  consideration.  The Company is also
alleging RICO (Racketeer  Influenced  Corrupted  Organizations  Act) against all
defendants.  The  Company  is  seeking  damages  in excess of $26  million  plus
punitive damages.

         Settlements have been reached with Mr. Pande,  Mr. Reedholm,  Marketing
Direct  Concepts,  and with one  other  defendant  for  payments  of cash by the
defendants  and  relief  of a  debt  previously  owed  by  the  Company  to  two
defendants,  all in the amount of approximately  $350,000. In addition as a part
of the settlements, options to purchase 1,098,999 shares of the Company's Common
Stock held by the defendants  were  cancelled.  The settlement with Mr. Reedholm
included  release of his claims  against  the  Company  in the  Decorah  Company
lawsuit, discussed below.

         A number of  defendants  have  defaulted  and InnovaCom has received an
entry of judgment against them. As a result,  the Company has cancelled  781,019
shares of its Common  Stock,  options to purchase  700,000  shares of its Common
Stock,  and a liability  payable of  $135,000.  An entry of default  against one
other  defaulted  defendant  is being  sought  which  would allow the Company to
cancel an additional  229,310 shares of its Common Stock, and another  liability
payable of  approximately  $112,000.  The Company is  pursuing  efforts to fully
collect its judgment from the defaulted defendants.

         Manhattan West has filed a counter-claim  against the Company  alleging
breach of its consulting contract with InnovaCom.  Further, Atlas Stock Transfer
has  filed  a  claim  against  the  Company  and all  other  defendants  seeking
indemnity.  The Company's  management does not believe that these  counterclaims
have  significant  merit,  or that they will  result in a  material  loss to the
Company.

         This  litigation  is still  in its  initial  stages  and  discovery  is
continuing.

         In  August  1998,  the  Staff of the  Division  of  Enforcement  of the
Securities and Exchange  Commission  advised the Company that the Commission had
issued a formal  order for private  investigation.  The  investigation  involves
allegations  that,  since January 1, 1995,  certain of the Company's  present or
former officers, directors, employees, business consultants, investment bankers,
and/or certain other persons or entities  associated with the Company,  may have
employed  devices,  schemes,  or artifices to defraud,  by, among other  things,

<PAGE>14


making undisclosed  payments to certain registered  representatives  relating to
sales of the Company's  securities,  and by  manipulating  the  Company's  stock
price. The Company's  management does not believe that any sanctions the Company
is likely to receive from the Securities and Exchange Commission based upon this
investigation  will  materially  affect  the  Company's  financial  position  or
operations. Discovery has been initiated.

         Hoffer, et. al. On September 24, 1998, InnovaCom filed suit against its
former  auditor and its former  attorney in Santa Clara  County  Superior  Court
(Case CV 776606)  which has since been  transferred  to Orange  County  Superior
Court No. 803328.  The complaint  alleges  malpractice  and conflict of interest
with respect to the auditor's and  attorney's  actions in the time frame covered
by the allegations in the Haynes suit, discussed above. This litigation is still
in its initial stages and discovery has not yet commenced.

         Maturi. On October 7, 1996, InnovaCom filed a complaint for declaratory
relief in Santa Clara County Superior Court (Case No. CV 761218) against Gregory
V. Maturi, a former employee. The complaint sought clarification that Mr. Maturi
is not  entitled  to any  further  payments  or  benefits  under his  employment
agreement with the Company, and that certain payments amounting to approximately
$150,000 made by InnovaCom to Mr.  Maturi should be returned to the Company.  On
October 18, 1996,  Mr.  Maturi filed a  cross-complaint  against the Company for
breach of contract, fraud and deceit, and breach of the implied covenant of good
faith  and fair  dealing,  seeking  damages  in excess  of $5  million.  In 1998
settlement  was reached  with Mr.  Maturi in which the Company made a payment to
him that was reimbursed to the Company under the Company's liability insurance.

         Decorah  Company.  On June 9,  1997,  the  Decorah  Company  and  Edwin
Reedholm,  a former director of the Company,  filed a complaint  against Digital
Hollywood,  the  Company and Mark C. Koz in the  Circuit  Court of Cook  County,
Illinois County  Department,  Law Division,  Case No.  97L06866.  Plaintiffs are
alleging  breach of  contract in the amount of $7,225  lent to the  Company.  In
addition,  Decorah  Company  is  alleging  that it has  lent  funds  to  Digital
Hollywood  which have not been  repaid and is seeking  damages of  approximately
$900,000. Further, Decorah Company is seeking damages against Mr. Koz because he
guaranteed the repayment of the monies by Digital  Hollywood to Decorah  Company
by pledging his Common Stock in the Company. In addition, the Company filed suit
against  Mr.  Reedholm  for  breach of  fiduciary  duty in the  Haynes,  et. al.
litigation.  The Company's involvement with this suit was settled in conjunction
with the settlement discussed above of Mr. Reedholm's involvement in the Haynes,
et.  al.  Lawsuit.  Mr Koz and  Digital  Hollywood  have also  settled  with Mr.
Reedholm  and  Decorah  Company,  such  settlement  to include  the  transfer of
2,080,000  shares of the  Company's  stock owned by Mr. Koz, to Decorah  Company
pursuant to the pledge.

         Collection.  The  Company has a number of overdue  accounts  payable to
vendors. Several of these vendors have filed suit against the Company to enforce
collection.  To date the Company has been able to reach  settlements  on most of
these  collection  actions,  but as of April 26, 1999, three of these collection
actions  seeking  to  collect  a  total  of  approximately  $40,000  were  still
outstanding.

Item 4.  Submission of Matters to a Vote of Security Holders

         None


<PAGE>15



                                                      Part II

Item 5.  Market for Common Equity and Related Stockholder Matters

         The  Company's  Common Stock began  trading on the OTC  Bulletin  Board
under the symbol  "MPEG" on July 19,  1996.  The  following  quotations  reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual  transactions.  The high and low prices of the Company's Common
Stock on a quarterly basis for the past two fiscal years are as follows:

         Quarter                                   High                 Low
         --------                                  -----                ---
         March 31, 1997                            $6.19                $1.63
         June 30, 1997                             $5.06                $2.44
         September 30, 1997                        $4.38                $2.05
         December 31, 1997                         $3.58                $2.00
         March 31, 1998                            $2.80                $1.53
         June 30, 1998                             $2.80                $0.22
         September 30, 1998                        $0.39                $0.08
         December 31, 1998                         $0.19                $0.08

Item 6.  Management's Discussion and Analysis of Financial Condition and Results
of Operations

         The following  sections discuss the Company's  financial  condition and
results of operations based upon the Company's consolidated financial statements
which have been  prepared  in  accordance  with  generally  accepted  accounting
principles.  The following sections also contain forward-looking statements that
involve  risks and  uncertainties.  The  Company's  actual  results  may  differ
materially from the results discussed in the forward-looking statements. Factors
that might  cause such a  difference  include,  but are not  limited  to,  those
discussed  in  "Certain  Considerations"  section and  elsewhere  in this Annual
Report.

General

         The Company is a development  stage  company  focusing on digital video
compression,  transmission,  and  processing  technology  compliant  with MPEG-2
standards.  The Company was founded in 1993, and began  significant  development
efforts on a number of chip,  board,  and system level products in 1996. In 1997
the Company  merged with Sierra Vista, a Nevada  corporation in the  development
stages of production and  distribution  of feature length films. In 1997 and the
first half of 1998 the Company also considered or began a number of acquisitions
of other companies in addition to Sierra Vista, none of which were finalized. In
the  first  half  of  1998  the  Company   significantly   expanded  employment,
accelerated  its efforts to complete the design of its single chip encoder,  and
incurred  the  cost  for  a  major  presence  at  the  National  Association  of
Broadcasters trade show, all of which increased the Company's use of cash.

         In June 1998 the Company experienced  substantial changes in management
and direction.  The Company  discontinued its chip development  efforts,  closed
Sierra Vista, laid off approximately half of its employees, and took substantial
steps to reduce all  expenses.  At the same time the  Company's  resources  were
focused on the  completion of those few board and system level product  projects
that  management  deemed most  promising,  and closest to market.  The effect of
these steps is reflected in the Company's  operating results.  The reported loss
for the first half of 1998 was  approximately  $13,577,000 as compared to a loss
of  approximately  $2,889,000  in the second half of 1998. In the second half of

<PAGE>16


1998,  the first of the Company's  products were released to production  and the
first  deliveries  were made to customers.  In 1999, the Company is scheduled to
release and begin shipment of multiple additional  products,  and to emerge from
development stage into full production.

         Management   anticipates   that  the  Company  will  begin  to  achieve
profitability  from  operations  by the end of 1999,  but that the Company  will
experience  a loss for 1999 as a whole.  The  Company  will be required to raise
additional  capital in 1999 to fund its  initial  losses  and to fund  increased
accounts  receivable and inventory.  No assurances can be given that the Company
will become  profitable  or that  additional  funding will be  available  or, if
available, that it will be on terms favorable to the Company.

         Product  development  in 1999 is planned to finish those projects close
to completion at the end of 1998, and to add functionality and reduce costs with
updated  versions  of the  products  released  in early 1999 and late  1998.  In
addition, the Company will also invest in the development of a limited number of
products  complimentary  to  existing  products,  or that use  existing  Company
technology in  applications  closely related to the Company's  current  markets.
Management  anticipates  modest  increases  in the  staffing in its research and
development efforts and in production, marketing, and sales in 1999.

         The Company does not believe that  inflation will have an impact on its
results of operations and does not believe that its business is seasonal.

Results of Operations

         The following  discussion  and analysis  should be read in  conjunction
with the Company's  consolidated  financial statements and the notes thereto and
other financial information included elsewhere in this Annual Report.

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

Revenues

         Revenues  for the year ended  December  31,  1998,  were  approximately
$108,000 as compared to  approximately  $149,000 for the year ended December 31,
1997. The revenue in 1998 includes sales of approximately  $31,000 in the fourth
quarter of the Company's first finished products,  and of approximately  $77,000
in the first three quarters of pre-production and sample products.  The revenues
in 1997 were from shipments of developer systems to five customers who purchased
the systems to begin  development of their own software in  anticipation  of the
Company's commercial release of its encoding products.

Cost of goods sold

         Cost of  goods  sold was  approximately  $339,000  for the  year  ended
December  31,  1998,  as  compared to  approximately  $53,000 for the year ended
December 31, 1997.  This cost in 1997 was  principally  the material cost of the
developer systems shipped,  while in 1998 it also included costs of building and
staffing a production department.  Cost of good sold as a percentage of sales as
seen in both 1998 and 1997 is not necessarily  representative  of the level that
the Company  expects to  experience  at such time, as any, that products ship to
customers in commercial volumes.

<PAGE>17


Research and development

         Research and development  expense was  approximately  $3,167,000 in the
year ended December 31, 1998, a decrease of approximately  $1,221,000,  from the
research and development expense of approximately  $4,388,000 for the year ended
December 31, 1997.  This  reduction  results from decreases from 1997 to 1998 of
approximately  $1,200,000 in the imputed  compensation  expense recognized under
APB  25  and  $500,000  in  expense  for  purchased  technology.  These  expense
reductions from 1997 to 1998 were partly offset by an increase of  approximately
$381,000 in consulting expense in 1998 relative to 1997.

Selling, general and administrative

         Selling,   general  and  administrative   expenses  were  approximately
$5,561,000  for the year ended  December 31, 1998, as compared to  approximately
$4,804,000  during the same period in 1997.  The increase  from 1997 to 1998 was
due in  largest  part to an  increase  of  approximately  $458,000  in sales and
marketing  expenses,  particularly  for the  costs  of  attending  the  National
Association of Broadcasters  show in 1998.  General and  administrative  payroll
expense also increased,  mostly due to the approximately $386,000 paid to or for
Thomas Burke, the Company's former  president,  and to increased rent expense of
approximately  $245,000  caused  by the  Company's  occupation  of new  space in
January 1998. General and administrative expense in 1997 also included a cost of
approximately   $358,000  related  to  the  acquisition  of  Technical   Systems
Associates, which was initiated and then abandoned in 1997. 1998 did not contain
a similar item.

Impairment loss on property and equipment

         In June 1998, the Company abandoned its chip development efforts, which
reduced  the  value of the  development  equipment  and  software  that had been
purchased  for this work.  The Company  recognized  an expense of  approximately
$937,000 at that time to write these assets down to their  realizable  value. No
corresponding expense occurred in 1997.

Interest expense, net of interest income

         Interest expense,  net of interest income increased from  approximately
$1,208,000 during the year ended December 31, 1997, to approximately  $4,751,000
for the year ended December 31, 1998. This increase  resulted from a substantial
increase in the level of debt  outstanding  in 1998  relative to 1997,  and to a
change in the nature of the debt.

         In 1997 interest  expense  arose  principally  from advances  against a
credit  facility  that the Company  acquired as a result of the  acquisition  of
Sierra Vista. In 1998,  stated  interest,  and interest  expense imputed on this
credit line to reflect  its  beneficial  conversion  feature  into common  stock
totaled  approximately  $260,000.  The balance on this credit line was converted
into Common  Stock of the Company in May and June of 1998.  The Company  induced
the holder of this credit facility to convert its June balance into Common Stock
by allowing conversion at market price at the date of the conversion,  which was
substantially below the conversion price specified under the terms of the credit
facility.  This  beneficial  conversion gave rise to  approximately  $261,000 of
additional  expense,  which  was  reported  as debt  conversion  expense  in the
statement of operations for 1998.

         Interest   expense  in  1998  also  includes  amounts  related  to  the
Convertible  Debentures,  the first of which were issued in December 1997,  with
additional  Debentures  issued in June,  August,  and December 1998 to the first

<PAGE>18


investor, and to one other investor who is related to the first. Stated interest
on these Debentures was approximately $432,000 in 1998. Interest expense in 1998
also included approximately $3,455,000 of imputed interest, which represents the
value of the  beneficial  conversion  feature of the Debentures and the value of
warrants  issued to the  Debenture  holders and to the brokers who  arranged the
financing.  Ordinarily this imputed interest would be amortized over the life of
the Debentures,  but the Company is in default on the Debentures at December 31,
1998, and accordingly,  the gross amount of the Debentures is shown as a current
liability and the entire imputed interest is recognized in 1998. Under the terms
of the  Debenture  agreements,  the Company is  obligated to register the Common
Stock underlying the conversion  feature within specified  periods.  The Company
has not done this, and accordingly, approximately $360,000 in penalties has been
accrued in 1998 and is included in interest expense.

         Interest income was not material in either 1997 or 1998.

Income Tax Expense

         Income tax  expense  was  approximately  $1,600 for the two years ended
December 31, 1997 and 1998. This represents the minimum franchise tax payable to
the  State  of  California  for  the  Company  and  its  non-operating   Florida
subsidiary.

Loss from discontinued operations

         On  June  15,  1998,  the  Company's  Board  of  Directors  decided  to
discontinue  the  operations of Sierra Vista,  its  wholly-owned  subsidiary and
entertainment  segment of the  business.  At that date,  the Company  wrote down
Sierra  Vista's  assets to  disposal  value.  The effect of this was the loss on
disposal of  discontinued  operations of  approximately  $1,155,000  reported in
1998. There was no  corresponding  item in 1997. The loss from operations of the
discontinued   operation  decreased  from  approximately  $759,000  in  1997  to
approximately $400,000 in 1998 in largest part because Sierra Vista operated for
a shorter period of time in 1998 than it did in 1997.

Liquidity and Capital Resources

         As of December 31, 1998,  the Company had negative  working  capital of
approximately  $11,851,000.  At  this  time,  the  Company  has  no  substantial
revenues,  and does not anticipate any substantial  revenues until such time, as
any, that products are completed and successfully  marketed.  Historically,  the
Company has funded its  operations  through sale of equity and debt. The Company
expects to continue to finance its  operations  in this manner for the immediate
future.  The Company is  currently  in  discussions  with  several  investors to
finance the Company through the issuance of stock or convertible debentures, but
no assurance can be given that these discussions and negotiations will culminate
in  adequate  funding,  or any  funding at all. In the event that the Company is
unable to obtain adequate financing,  there will be a material adverse effect on
the Company's ability to meet its business objectives.

         Net  cash  used in  operating  activities  from  continuing  operations
totaled approximately $7,182,000 during fiscal 1998 and $6,319,000 during fiscal
1997. Discontinued operations used additional cash of approximately $319,000 and
$787,000 in 1998 and 1997, respectively. This cash usage resulted primarily from
the net losses of approximately $16,466,000 in 1998 and $11,065,000 in 1997. The
net loss  during  1998 was offset by non-cash  interest  expense  imputed on the
Convertible Debentures issued in 1997 and 1998, increase in accounts payable and
accrued liabilities,  write down of the discontinued assets of Sierra Vista, and
the write down of assets  impaired when the Company closed its chip  development
efforts.  The net loss  during  1997 was offset by  non-cash  items  relating to
interest  expense from the discount  resulting  from the  beneficial  conversion
feature  of the  credit  facility,  compensation  expense  recognized  upon  the

<PAGE>19


issuance of Common Stock and stock  options,  and the  acquisition of technology
for Common Stock expensed.

         Net  cash  flows  from  financing   activities  totaled   approximately
$4,603,000  during fiscal 1998 as compared to  approximately  $9,217,000  during
1997.  During 1998 the Company received  $4,000,000 from the sale of Convertible
Debentures.  Also in 1998 the Company received  approximately $778,000 from four
other  lenders of which  approximately  $174,000 was repaid,  and  approximately
$468,000   converted   into  Common  stock.   In  1998  the  Company   purchased
approximately  $1,217,000 of property and  equipment.  During  fiscal 1997,  the
Company received approximately  $2,917,000 in connection with the acquisition of
Sierra Vista Entertainment, approximately $665,000 from the sale of Common Stock
to an investor,  $4,609,000 upon the issuance of debentures and $3,982,000 drawn
down from the credit facility.  This cash received was offset by the acquisition
of property and equipment of approximately $768,000.

         Between  December  1997,  and December 31, 1998,  the Company  issued a
total of $9,000,000  face value of  Convertible  Debentures to two investors who
are related to each other.  The  convertible  debentures bear interest at 7% and
are due five years after issuance.

         At  the  end  of  1998  the  Company  owed  $8,790,000  on  Convertible
Debentures which is net of $210,000 converted into Common Stock during 1998, and
another  $135,000 on short term notes to related  parties.  Accrued  liabilities
included  approximately  $798,000 in accrued  interest and penalties  related to
these debts.

         On December 22, 1997, the Company issued $5 million in the aggregate of
Convertible Debentures receiving  approximately  $4,609,000 in net proceeds. The
convertible  debentures  bear interest at 7% and are due December 22, 2002.  The
debentures  are  convertible  into  Common  Stock in  increments  of  one-third;
one-third  may be  convertible  upon  the  earlier  of the  effective  date of a
registration  statement  or after the 120th day after the  original  issue date;
one-third  after the 120th day of the original issue date but prior to the 150th
day from the original  issue date;  and  one-third  after the 150th day from the
original  issue  date.  . The  Debentures  are  convertible  into  shares of the
Company's  Common Stock at a  conversion  price equal to the lesser of (i) $3.47
and  (ii)  85% for  conversions  prior to 120 days  after  issuance,  82.5%  for
conversions 120-150 days after issuance, and 80% thereafter.  In connection with
the private placement, the Company issued five-year warrants to purchase 250,000
shares of Common  Stock at $3.00 per share and for  250,000  at $4.00 per share.
During 1998, the holders of these Debentures  converted a total of $210,000 face
value, plus approximately $11,000 of accumulated interest, into 1,459,539 shares
of Common Stock.

         On June 29,  1998,  the Company  issued $2 million in the  aggregate of
Convertible  Debentures  that bear interest at 7% and are due June 29, 2003. The
debentures are convertible into the Company's Common Stock at a conversion price
of $.35 per share.  In  connection  with the issuance of these  Debentures,  the
Company  issued the  Debenture  holder  five-year  warrants to purchase  500,000
shares of Common Stock at $.50 per share.

         On August 28, 1998,  the Company  issued  additional  Debentures in the
aggregate  principal  amount  of  $500,000,  with  the  right  to issue up to an
additional  $1 million  more  Debentures  under the same  terms.  In October and
November  of 1998,  a total of $1  million  more  Debentures  were  issued.  The
Debentures  accrue interest at the rate of 7% per annum and are convertible into
shares of the Company's  Common Stock at a conversion  price equal to the lesser
of (i) 125% of the five-day average share price at the time of issuance and (ii)
80% for  conversions  prior to 120 days after  issuance,  77.5% for  conversions

<PAGE>20


120-150 days after issuance,  and 75% thereafter.  The Debentures have a term of
five years,  expiring  August 28, 2003,  and are secured by all of the assets of
the Company.  As part of the issuance of the  Debentures,  the Company issued to
the  Debenture  holders  five-year  warrants to purchase up to 75,000  shares of
Common Stock at $.50 per share. Also in this  transaction,  the Company canceled
previously  issued  warrants to purchase up to 250,000 shares of Common Stock at
$3.00  per share  and up to  250,000  shares  at $4.00  replacing  the  canceled
warrants with a like number of five-year  warrants to purchase Common Stock at a
price of $.50 per share.

         On December  15, 1998,  the Company  issued an  additional  $500,000 in
Debentures for working capital under the same terms as those issued in August of
1998. In conjunction  with the sale of these  Debentures,  the Company issued to
the  Debenture  holders five year  warrants to purchase up to 125,000  shares of
Common Stock at $.50 per share.

         On January 15,  1999,  the  Company  issued an  additional  $750,000 in
Debentures  for working  capital  under the same terms as those issued in August
and December of 1998.  In  conjunction  with the sale of these  Debentures,  the
Company  issued to the  Debenture  holders five year  warrants to purchase up to
187,500 shares of Common Stock at $.50 per share.

         In March, April, and May 1999, the Company borrowed an additional total
of $1,650,000 from the investor who had purchased the majority of the Debentures
evidenced in the form of a three notes.  The notes bear  interest at 13% and are
due on demand.  In conjunction with this funding,  the Company issued the holder
of the notes five year  warrants to purchase  up to  1,000,000  shares of Common
Stock at $.60 per share.

         In connection  with the sales of the Debentures in December 1997,  June
1998,  August  1998,  November  1998 and January  1999,  and the demand notes in
March, April, and May 1999, the Company issued five year warrants to purchase up
to an aggregate total of 1,780,000 shares of common stock at prices ranging from
$2.43 per share to $.11 per share to two investment brokers.

         Impact of the Year 2000  Issue.  The Year 2000  Issue is the  result of
computer  programs being written using two digits rather than four to define the
applicable year. Any of the Company's, or its suppliers' and customers' computer
programs  that have  date-sensitive  software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in system failures or
miscalculations causing disruptions of operations including, among other things,
a temporary  inability  to process  transactions,  send  invoices,  or engage in
similar normal business activities.

         The Company's  operations are now based on software  applications  that
the Company believes to be Year 2000 compliant. This included recent purchase of
Year 2000  compliant  versions  of  software  for its  computer,  security,  and
communications  systems,  as necessary.  The Company has not yet  identified any
Year 2000 problem but will continue to monitor the issues.  No assurances can be
given that the Year 2000 problem  will not occur with  respect to the  Company's
computer systems.

         The Company  believes  that its products are Year 2000  compliant.  The
Company has initiated communications with significant suppliers to determine the
extent to which those third parties' failure to remedy Year 2000 issues in their
own  operation  or in their  products  might  materially  effect  the  Company's
operations  or products.  The Company has not received any  indication  from its
suppliers  that the Year 2000  Issue may  materially  effect  their  ability  to
conduct  business or supply Year 2000  compliant  products  to the  Company.  In
addition,  the  Company  continues  to test its  products  and the  third  party
software it purchases for Year 2000 compliance.


<PAGE>21


Item 7. Financial Statements.

         The financial statements for the Company are attached beginning on page
         F-1.

Item 8.  Changes In and Disagreements With Accountants on Accounting and
         Financial Disclosure.

         None.

                                                     Part III

Item 9.  Directors,  Executive  Officers,  Promoters  and control  Persons;
Compliance  With Section  16(a) of the Exchange Act.

Executive Officers and Directors

The directors and executive officers of the Company are as follows:

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

                                                                                                Held Position
Name                                        Age      Position                                        Since
------------------------------             ------    -----------------------------------        ---------------
Frank J. Alioto                              51       President, Chief Executive                  June 1998
                                                      Officer, Director
Stanton Creasey                              45       Chief Financial Officer, Director           April 1997

Mark C. Koz                                  44       Director                                       1993

Tony Low                                     45       Director                                   October 1996

Robert Sibthorpe                             50       Director                                     May 1997

John Champlin, M.D.                          43       Director                                   October 1997
</TABLE>

         The following sets forth the principal occupations during the past five
years  of  the  directors   and  executive   officers  of  the  Company  and  it
subsidiaries.

         Frank J. Alioto (age 51) has been  President and a Director  since July
1, 1998, and Chairman since December 1998.  From 1993 until 1997, Mr. Alioto was
Chief Operating Officer of Alamar Electronics,  a broadcast television equipment
manufacturer that he joined as part of a successful financial turnaround project
that  led  to  eventual  acquisition  by  Philips  NV in  1995.  Previously,  he
co-founded  ALTA Group,  a  manufacturer  of advanced  digital video systems for
professional  use, and served as Vice President of Marketing and Sales until the
company was acquired by Dynatech.  Mr. Alioto has over 25 years of experience in
broadcast  television,  and  in  management  of  advanced  electronic  equipment
manufacturers who service the broadcast and video markets.

         Stanton Richard Creasey (age 45) has been Chief Financial Officer since
April 1997 and was  appointed to the Board of Directors  in January  1999.  From
March 1996 through April 1997,  Mr.  Creasey was an  independent  consultant and
from  September  1994 through March 1996,  he was at Purus Inc. Mr.  Creasey was
Chief  Financial  Officer and  President  of  Sixty-Eight  Thousand,  Inc.  from
September  1989 through March 1994, and left that company in April 1994. In June

<PAGE>22


1994,  Sixty-Eight  Thousand,  Inc., a company which made  Macintosh  compatible
workstations, filed for bankruptcy protection in San Jose, California (Case No.:
94-54123).  Mr. Creasey is a CPA with 20 years of experience in finance, both in
public  accounting  with  Arthur  Andersen  & Co.,  and  with a  number  of high
technology manufacturing companies.

         Mark Koz (age 44) has been a Director  since March 3, 1993.  Previously
at various times, he was also Chairman,  Chief Executive  Officer and President,
and Chief  Technical  Officer of the Company.  Mr. Koz was also Chief  Executive
Officer,  Chief Technical Officer and a Director of FutureTel from 1993 to 1995,
and has been Chief  Executive  Officer of  Intelligent  Instruments  Corporation
since  1993.  Currently  he is  employed  as an  independent  consultant  in the
telecommunication  industry.  Mr. Koz has five years of  technical  education at
Florida Technological  University  (University of Central Florida). In addition,
he is a voting member of the Moving  Picture  Experts Group,  the  international
standards-setting body for MPEG.

         Tony Low (age 45) has been a  Director  of the  Company  since  October
1996.  Since July  1997,  Mr.  Low has been  Chief  Operating  Officer of Darwin
Digital, a Saatchi & Saatchi Vision Company involved in interactive  advertising
and media buying.  Prior to that,  from January 1996 through June 1997,  Mr. Low
was Director of Business Affairs at the Los Angeles based Saatchi  Entertainment
Group, a division of Saatchi & Saatchi,  the multinational  advertising  agency.
From June 1993 through  January 1996 he was President of Tercer  Mundo,  Inc., a
company marketing sound  recordings,  and from October 1983 through June 1993 he
was  Partner  and  Business  Manager at  Oberman,  Tivoli,  Miller  and Low,  an
entertainment industry accounting firm.

     Robert Alan Sibthorpe (age 50) has been a Director of the Company since May
1997. Mr. Sibthorpe has been owner of Mag South Research, Inc., a geological and
financial  consulting firm since October 1996. From June 1986 through April 1996
Mr. Sibthorpe was with Yorkton  Securities,  Inc. involved in investment banking
Mr.  Sibthorpe has an MBA in Finance and a Bachelor of Science in Earth Sciences
both from the University of Toronto.

     John  Joseph  Champlin,  M.D.  (age 43) has been a Director  of the Company
since October  1997.  He has been owner and president of the Med Center  Medical
Clinic in  Carmichael,  California,  since 1993.  Prior to  founding  Med Center
Medical Clinic,  he was a medical  director of Madison Center from 1988 to 1993.
He is also associate clinical professor,  family practice,  at the University of
California at Davis since 1986. Mr.  Champlin  earned his M.D. at the University
of Florida.

Committees of the Board.

     The Board has an Audit  Committee and a Compensation  Committee.  The Audit
Committee consists of Messrs. Low and Sibthorpe,  and the Compensation Committee
consists of Messrs. Koz and Sibthorpe.

         The primary  functions of the Audit  Committee  are to review the scope
and  results of audits by the  Company's  independent  auditors,  the  Company's
internal   accounting   controls,   the  non-audit  services  performed  by  the
independent  accountants,  and  the  cost  of  accounting  services.  The  audit
committee met in 1999 to review the results of the year ended December 31, 1998,
and to consider the performance and results of the audit.

         The Compensation Committee administers the Company's 1996 Incentive and
Nonstatutory  Stock Option Plan and  approves  compensation,  remuneration,  and
incentive arrangements for officers and employees of the Company.


<PAGE>23

         The board  previously  established  a litigation  committee,  which was
dissolved in 1998.

Section 16(a) Beneficial Ownership Reporting Compliance

         Based on the Company's information, none of the directors, officers and
beneficial  owners of more than 10% of any class of equity securities have filed
their  initial  report on Form 3. The Company has informed such persons of their
obligations who intend to file the reports as soon as practicable.

Item 10. Executive Compensation

Executive Compensation.

         The  following  table sets forth the  Compensation  of all officers who
received annual compensation in excess of $100,000 during 1998.


                           SUMMARY COMPENSATION TABLE

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

                                                                                         Long Term Compensation
                                       Annual Compensation                         Awards                    Payouts
                                 -------------- ----------------       -------------- ---------------      -----------


                                                          Other       Restricted      Securities
                                                         Annual          Stock        Underlying            LTIP
Name and Principal                                    Compensation     Award(s)        Options            Payouts      All Other
Position                      Year       Salary            ($)            ($)            (#)                ($)       Compensation
---------------------------   ----      ---------     -------------   ----------     ------------         --------    -------------

Frank J. Alioto               1998       $67,500        $51,171(1)         -          1,300,000              -             -
President and CEO

Thomas Burke                  1998      $260,624       $125,000(2)         -          1,000,000              -             -
Former President and CEO

Mark C. Koz                   1998      $198,604        $55,269(3)         -                 -               -             -
Former President and CEO      1997      $241,500        $10,500(4)         -           300,000(7)            -             -
                              1996      $120,000              -            -         2,000,000(5)            -             -

F. James Anderson             1998       $82,500        $27,500(6)         -                 -               -             -
Former Executive Director,    1997      $112,500        $37,500(6)         -           300,000(7)            -             -
Corporate Strategy and
Finance

Stanton Creasey               1998      $136,250              -            -           200,000(7)             -            -
CFO                           1997       $85,923        $12,000(8)         -           300,000(7)             -            -

Janek Kaliczak                1998      $122,500              -            -           150,000(7)             -            -
Vice President

Steven Levine                 1998      $107,292        $15,000(8)         -           150,000(7)             -            -
Vice President
</TABLE>

(1)  Effective June 23, 1998,  Mr. Alioto was elected  president of the Company.
     Prior to this date,  Mr. Alioto served as a consultant to the Company.  The
     $51,171 represents consulting fees paid to Mr. Alioto.

<PAGE>24


(2)  Compensation  relates to $40,000 of moving  expenses  and  $85,000 in legal
     expenses.

(3)  Represents $8,250 in auto expenses and $47,019 in expenses paid on behalf
     of Mr. Koz.

(4)  Represents a car allowance of $1,500 per month.

(5)  Represents options to acquire 2,000,000 shares of Common Stock at $3.00 per
     share.

(6)  Represents a $3,500 per month housing allowance and a $1,500 per month car
     allowance.

(7)  Represents options to acquire shares of Common Stock at $0.26 per share.

(8) Represents a bonus.

Employment Contracts

         On June 23,  1998,  the  Company  hired  Mr.  Frank  Alioto  to  become
President  effective  July 1, 1998.  Pursuant to his  employment  contract,  Mr.
Alioto receives a salary of $135,000 per year along with other benefits  granted
to  employees of the  Company.  Additionally,  Mr.  Alioto  received  options to
acquire,  during a five (5) year term, up to 1,000,000 shares of Common Stock of
the Company at an exercise  price  equal to $0.26 per share.  On June 26,  1998,
options to acquire 166,667 shares of Common Stock vested and became  immediately
exercisable.  Options to acquire  166,667  shares of Common  Stock shall vest on
June 26, 1999, and options to acquire  166,666 shares of Common Stock shall vest
on June 26,  2000.  Options to acquire the  remaining  500,000  shares of Common
Stock shall vest on June 26, 2003 or earlier as determined  by the  Compensation
Committee  based on performance  goals.  These options shall remain  exercisable
until June 26, 2003, and in addition shall not expire earlier than two (2) years
from the date of any change of  control.  Finally,  pursuant  to his  employment
contract,  Mr. Alioto shall be  indemnified  and held harmless by the Company in
connection  with his serving as  President  and Chief  Executive  Officer of the
Company.

         Mr. Alioto's employment is on an "at-will" basis. Either the Company or
Mr. Alioto may terminate the employment at any time for any reason.  However, in
the event of  termination  without  "cause," the Company  shall pay Mr. Alioto a
minimum  severance  salary,  which is equal to three months pay at Mr.  Alioto's
then-existing  salary as well as twelve  (12)  additional  months of medical and
dental  insurance  coverage for Mr. Alioto and his dependents.  In general,  the
term  "cause"  means a willful  breach of the duties Mr.  Alioto is  required to
perform under the terms of the  employment  contract,  or the commission of such
acts of dishonesty, fraud, or other acts of moral turpitude as would prevent the
effective  performance  of Mr.  Alioto's  duties.  Mr. Alioto was elected to the
Board of  Directors  on June 13,  1998,  and  became  Chairman  of the  Board on
December 15, 1998.

         On  March  23,  1998,  the  Company  hired  Thomas  E.  Burke  to begin
employment  as President  and Chief  Executive  Officer  effective  May 1, 1998.
Pursuant to his employment contract, Mr. Burke received a salary of $250,000 per
year, a signing bonus equal to $200,000 net of taxes,  a car allowance  equal to
$1,000 per month net of taxes, a housing allowance equal to $7,500 per month net
of taxes,  a life  insurance  policy  equal to  $1,500,000,  and other  benefits
granted to employees of the Company.  Mr.  Burke's  employment was for an agreed
term of five years and,  upon each  anniversary  date,  was to be  automatically
extended by an  additional  one year term unless  either party gave prior notice
not to extend.  Mr.  Burke was  eligible to receive an annual bonus of up to two
times Mr. Burke's annual salary based on achieving  certain  targets as mutually
agreed upon by Mr. Burke and the Board of  Directors.  Mr.  Burke also  received
options to acquire during a ten year term up to 1,000,000 shares of Common Stock
of the


<PAGE>25



Company at an  exercise  price equal to $1.75 per share.  The options  vested in
one-third  increments with one increment  vesting  immediately and the remaining
two increments to vest on each anniversary  date  thereafter.  In the event of a
change of control, all the options vested immediately.

         On June 5, 1998,  Mr.  Burke  resigned.  On July 21,  1998,  he filed a
statement of claim with the American  Arbitration  Association,  San  Francisco,
California.  Mr. Burke claimed the Company  breached his employment  contract by
failing  to pay him a lump-sum  cash  payment of $1  million,  salary,  bonuses,
expenses and other  termination  payments  under his  employment  contract.  The
Company  responded by claiming Mr.  Burke made  certain  misrepresentations.  On
December 14, 1998, the Company and Mr. Burke mutually  settled their claims with
each other.  Under the terms of the settlement,  each party paid the other a sum
of money,  which had no  significant  financial  impact on the Company,  and Mr.
Burke retained  ownership of options to purchase 500,000 shares of the Company's
common stock at a price of $1.75 per share.

         On May 15,  1997,  the  Company  and Mr. Koz  entered  into a five-year
employment contract.  Under the terms of Mr. Koz's employment contract,  Mr. Koz
served as  President  and  Chief  Executive  Officer  and  received  a salary of
$240,000 per annum subject to a 7% cost of living  increase and other  increases
as determined by the Board of Directors. Mr. Koz resigned as President and Chief
Executive  Officer on May 1, 1998, but remained as Chief  Technology  Officer of
the Company and Chairman of the Board. On June 16, 1998, Mr. Koz and the Company
mutually  agreed to amend his  employment  contract to provide for,  among other
things,  no  severance  upon  termination.  On  December  10,  1998,  Mr.  Koz's
employment with the Company ended. On December 15, 1998, Mr. Koz was replaced as
Chairman of the Board but remained as a director.

         On May 15, 1997, the Company and Mr. Anderson  entered into a five-year
employment contract, under the terms of which Mr. Anderson served as Director of
Strategic Planning and President of the Company's  Entertainment  Division.  Mr.
Anderson's initial salary was $180,000 per annum, subject to a 7% cost of living
increase and increases as determined by the Board of Directors.  Effective as of
June 30, 1998,  Mr.  Anderson and the Company agreed to terminate his employment
contract with the Company  without  severance pay, but with health care coverage
through June 30, 1999. Mr. Anderson continued as a director of the Company until
his resignation on April 12, 1999.

Options Granted in Last Fiscal Year

The  following  table sets forth  options  granted by InnovaCom  during the last
fiscal year to the executives listed in the summary compensation table.


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

                                        Option/SAR Grants in Last

                                                 Percentage of Total
                                                Options/SARs Granted
                         Options/SARs Granted      to Employees in
         Name                                        Fiscal Year        Exercise Price $/sh      Expiration Date
------------------------ ---------------------- ---------------------- ---------------------- ----------------------

Frank Alioto                         1,000,000                                          0.26               06/26/03
                                       300,000                 39.20%                   0.16               10/13/03

Stanton Creasey                        200,000                  6.03%                   0.26               03/30/03

Janek Kaliczak                          40,000                                          0.26               02/13/03
                                       110,000                  4.52%                   0.26               06/26/03

Steven Levine                          150,000                  4.52%                   0.26               06/26/03

Thomas Burke                         1,000,000                 30.15%                   1.75               03/30/08

F. James Anderson                            0                    --                      --                     --
</TABLE>
<PAGE>26

Aggregate Option Exercise in Last Fiscal Year and Fiscal Year-End Option Values

The following  table sets forth the value of exercised and  unexercised  options
and SARs held by the  executives  listed in the  summary  compensation  table at
fiscal year end.

                             Aggregated Option/SAR Exercises in Last Fiscal Year
                                    and Fiscal Year-End Option/SAR Values

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

                                                                                              Value of Unexercised
                                                                                                  in-the Money
                                                                          Options/SARs at       Options/ SARs at
                                                                          Fiscal Year-End        Fiscal Year-End
                                                                         Exercisable (E)/       Exercisable (E)/
                          Shares Acquired on                                Subject to             Subject to
         Name                  Exercise          Value Realized ($)       Repurchase (U)        Repurchase (U)(1)
------------------------ ---------------------- ---------------------- ---------------------- ----------------------

Frank Alioto                     None                   None             416,667 / 833,333            None
------------------------ ---------------------- ---------------------- ---------------------- ----------------------

Stanton Creasey                  None                   None             500,000 / 0                  None
------------------------ ---------------------- ---------------------- ---------------------- ----------------------

Janek Kaliczak                   None                   None                   0 / 150,000            None
------------------------ ---------------------- ---------------------- ---------------------- ----------------------


Steven Levine                    None                   None                   0 / 150,000            None
------------------------ ---------------------- ---------------------- ---------------------- ----------------------

Thomas Burke                     None                   None             500,000 / 0                  None
------------------------ ---------------------- ---------------------- ---------------------- ----------------------

Mark C. Koz                      None                   None             300,000 / 666,666            None
------------------------ ---------------------- ---------------------- ---------------------- ----------------------

F. James Anderson                None                   None             600,000(2)/0                 None
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
</TABLE>

(1)  As of December 31, 1998, all of the Options held were out of the money.

(2)  Includes options to acquire 300,000 shares of Common Stock  attributable to
     Mr. Anderson's Spouse. Mr. Anderson disclaims  beneficial  ownership to the
     option held by his spouse.

         During calendar year 1998, the Board of Directors repriced the exercise
price for stock  options to  acquire  2,467,233  shares of Common  Stock held by
directors,  officers,  and employees of the Company.  The  following  table sets
forth the ten year option repricing  information for the executives named in the
compensation table and directors.

Report on Repricing of Stock Options

         During calendar year 1998, the Board of Directors repriced the exercise
price for stock  options to  acquire  2,467,233  shares of Common  Stock held by
directors,  officers,  and employees of the Company.  The  following  table sets
forth the ten year option repricing  information for the executives named in the
compensation table and directors.

<PAGE>27




                                             TEN YEAR OPTION REPRICINGS
<TABLE>
<S>                          <C>                    <C>            <C>               <C>             <C>            <C>
                                                                                                                      Length of
                                                      Number of                        Exercise                        Original
                                                      Securities     Market Price      Price at                        Optional
                                                      Underlying      of Stock at       Time of         New         Term Remaining
                                Effective Date         Options          Time of      Repricing        Exercise          at work
Name                              of Reprice         Repriced (#)    Repricing ($)        ($)           Price ($)    of Repricing
---------------------------- ---------------------- --------------- ---------------- -------------- ------------- ------------------


Stanton Creasey              March 30, 1998             300,000            $2.28          $3.38         $1.75            4 years
Chief Financial Officer      June 26, 1998              500,000             $.26          $1.75          $.26       3 to 4 years

Mark Koz                     June 26, 1998              300,000             $.26          $2.59          $.26            4 years

F. James Anderson            June 26, 1998              300,000             $.26          $2.59          $.26            4 years

Janek Kaliczak               June 26, 1998               40,000             $.26          $2.50          $.26            4 years
</TABLE>


         During  the first and  second  quarter  of  calendar  1998  there was a
substantial  decrease in the market price of the Company's  Common Stock due, in
part, to the Company's management reorganization and concern about the Company's
ability  to raise  capital  to pay it prior  obligations  and to fund its future
business operations.  As a result, the Board of Directors repriced stock options
in June of 1998.  The  repricing  was done in an effort to retain the  Company's
quality employees, officers, and directors who had lost a significant portion of
their financial interest in the Company because their stock options were "out of
the money." In both March and June 1998,  the Company  completed  the  Company's
stock option  repricing  program for directors,  officers,  and employees of the
Company  pursuant to which stock options for  2,467,233  shares of Common Stock,
originally  issued with  exercise  prices  ranging from $3.06 to $.50 per share,
were reissued with an exercise  price of $0.26 per share,  which  exercise price
approximated  the fair  market  value  of the  Company's  shares  on the date of
repricing.

         Stock  options are  intended  to provide  incentives  to the  Company's
directors,  officers,  and employees.  The Board of Directors believes that such
equity incentives are a significant  factor in the Company's ability to attract,
retain, and motivate directors,  officers, and employees who are critical to the
Company's  long-term  success.  In  repricing  the stock  options,  the Board of
Directors  considered  the fact that  directors  are not  compensated  for their
services  other than  through  stock  options.  Further,  many of the  Company's
officers and employees  have had either to defer their salary or were delayed in
receiving  their salary at times during the current and prior  calendar year due
to the poor financial condition of the Company.  The Board of Directors believes
that the  repricing  of the  options is a form of  incentive  to the  directors,
officers,  and  employees  of the Company to remain with the Company  during its
period of financial  restructuring,  and believes that such  repricing is in the
best interests of the Company and its stockholders.

Director Compensation.

         Each  director  receives,  on the date of  appointment  as a  director,
options to acquire shares of Common Stock of the Company.  The exercise price of
the option is equal to the  trading  price of a share of Common  Stock as of the
date of grant.  A director who also serves as an officer of the Company shall be
entitled  to options  to  purchase  300,000  shares of Common  Stock.  All other
directors receive options to purchase 200,000 shares of Common Stock.


<PAGE>28

Item 11.  Security Ownership of Certain Beneficial Owners and Management.

                             PRINCIPAL STOCKHOLDERS

         The  following  table  sets  forth,  as  of  April  1,  1999,   certain
information  with respect to the  beneficial  ownership of the Company's  Common
Stock by (i) each stockholder known by the Company to be the beneficial owner of
more than 5% of the  Company's  Common  Stock,  (ii) each  officer  named in the
compensation  table, (iii) each director of the Company as of April 1, 1999, and
(iv) directors and executive officers of the Company,  as of April 1, 1999, as a
group.

         As of April 1,  1999,  there  were  25,035,796  shares of Common  Stock
outstanding.
<TABLE>
<S>                                                      <C>                                   <C>
                                                                                                Percentage
                                                                                                of Shares
                                                                   Number of                  Beneficially
                   Name and Address                                 Shares(1)                      Owned
--------------------------------------------------------- ---------------------------- -----------------------------

JNC                                                               74,742,047(2)                   76.02%
c/o Olympia Capital (Bermuda) Ltd.
Williams House, 20 Reid Street
Hamilton HM 11, Bermuda
--------------------------------------------------------- ---------------------------- -----------------------------

Microtechnology S.A.                                               2,962,970                      11.83%
P. O. Box 556
Charlestown, Nevis
--------------------------------------------------------- ---------------------------- -----------------------------
507784 BC Ltd.                                                     5,748,000(3)                   22.69%
10th Fl., Four Bentall Centre
P.O. Box  49333
1055 Dunsmuir Street
Vancouver BC V7X 1L4
Canada
--------------------------------------------------------- ---------------------------- -----------------------------

Frank Alioto                                                        466,667(4)                     1.83%
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95053
--------------------------------------------------------- ---------------------------- -----------------------------

Stanton Creasey                                                     800,000(4)                     3.10%
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
--------------------------------------------------------- ---------------------------- -----------------------------

John Champlin, MD                                                   300,000(4)                     1.18%
4373 Meadow Circle
Rescue, CA 95672
--------------------------------------------------------- ---------------------------- -----------------------------

<PAGE>29

Robert Sibthorpe                                                    200,000(4)                        *
6311 E. Naumann Dr.
Paradise Valley, AZ 85253
--------------------------------------------------------- ---------------------------- -----------------------------

Tony Low                                                           200,000(4)                         *
Darwin Digital
A Saatchi & Sacctchi Vision Company
735 Battery Street, Suite 200
San Francisco, CA  94111
--------------------------------------------------------- ---------------------------- -----------------------------

Mark C. Koz                                                       5,748,000(3)                    22.69%
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
--------------------------------------------------------- ---------------------------- -----------------------------

Janek Kaliczak                                                       12,000(4)                        *
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
--------------------------------------------------------- ---------------------------- -----------------------------

Steven Levine                                                           -0-                         -0-
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
--------------------------------------------------------- ---------------------------- -----------------------------

F. James Anderson                                                   600,000(5)                     2.34%
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
--------------------------------------------------------- ---------------------------- -----------------------------

Thomas Burke                                                        500,000(4)                     1.96%
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054
--------------------------------------------------------- ---------------------------- -----------------------------

All officers and directors as a group                             8,826,667(6)                    31.06%
(10 persons)
--------------------------------------------------------- ---------------------------- -----------------------------
</TABLE>


*Less than one percent

(1)      Except as otherwise indicated, the Company believes that the beneficial
         owners of Common Stock listed above, based on information  furnished by
         such owners, have sole investment and voting power with respect to such
         shares, subject to community property laws where applicable. Beneficial
         ownership is determined in accordance  with the rules of the Securities
         and Exchange  Commission  and generally  includes  voting or investment
         power with respect to  securities.  Shares of Common  Stock  subject to
         options or warrants  currently  exercisable,  or exercisable  within 60
         days, are deemed  outstanding  for purposes of computing the percentage
         ownership of the person  holding such options or warrants,  but are not
         deemed  outstanding for purposes of computing the percentage  ownership
         of any other person.

(2)      Includes  71,898,008  shares of Common Stock that may be acquired  upon
         the  conversion of  outstanding  Debentures,  and  1,387,500  shares of
         Common  Stock that may be acquired  upon the  exercise  of  outstanding
         Warrants.

<PAGE>30


(3)      Includes  1,000,000  shares of Common Stock owned by 507784 BC Ltd. and
         4,448,000  shares  beneficially  owned by Mark C. Koz, all of which are
         subject to a voting agreement by and between 507784 BC Ltd. and Mark C.
         Koz, wherein Mr. Koz has the right to nominate three (3) members of the
         six (6) member board of directors of the Company and 507784 BC Ltd. has
         the right to nominate  the  remaining  three (3) members of the six (6)
         member board of directors of the Company, and all shares subject to the
         voting  agreement  shall  vote in  favor of the six (6)  nominees.  The
         voting  agreement is for a period of five (5) years,  and terminates on
         February 26, 2002. The owners of 507784 BC Ltd. are not affiliated with
         either the Company or Mr. Koz. The  above-listed  number also  includes
         options to purchase 300,000 shares of Common Stock.

(4)      Represents shares of Common Stock that may be acquired within sixty
         days upon the exercise of options.

(5)      Includes options to acquire 300,000 shares of Common Stock  exercisable
         within 60 days and options to acquire  300,000  shares of Common  Stock
         attributable  to  Mr.  Anderson's   spouse.   Mr.  Anderson   disclaims
         beneficial ownership to the options held by his spouse.

(6)      Includes 3,378,667 options to acquire shares of Common Stock and
         1,000,000 shares subject to a voting agreement as discussed in
         footnotes (3) through (5).

Item 12.  Certain Relationships and Related Transactions

         Micro Technology Credit Facility.  In July 1997, a promissory note (the
"Note") was issued to Micro  Technology  in  connection  with a credit  facility
agreement (the "Credit Facility").  The Credit Facility and Note provided for an
aggregate  amount not to exceed $5 million.  The Credit Facility  terminated and
the Note was due on June 30,  1998 and bore  interest at the lower of 10% or the
maximum rate allowed by law (Federal  Reserve Bank of San Francisco's  rate plus
5%) The Company had the right to prepay the Note.  The principal and interest on
the Note might be converted,  at the option of the holder, into shares of Common
Stock in an amount equal to 80% of the trading  price of a share of Common Stock
on the date an  advance  of funds  was made  pursuant  to the  Credit  Facility.
Advances made under the Credit Facility were secured by all of the assets of the
Company including, but not limited to, receivables, goods, equipment, inventory,
contract rights and other property interests.

         In May 1998,  Micro  Technologies  converted  $4,181,422 of its line of
credit to the Company in exchange for 1,742,362 shares of Common Stock.

         On June 26, 1998, Micro Technologies converted its remaining balance on
the credit  facility of $317,358  into common  stock and  terminated  the credit
facility.  As an inducement to Micro  Technologies to make this conversion,  the
Company  allowed Micro  Technology to convert into 1,220,608  shares at the then
market price of the stock,  $.26 per share,  as opposed to the conversion  price
under the credit  facility,  which would have averaged  approximately  $2.40 per
share.

         Through  the  merger  with  Sierra  Vista,  Micro  Technology  received
2,500,000 shares of Common Stock, which at the time, represented approximately a
14% interest in the Company.  Prior to their  investment  in Sierra  Vista,  the
owners of Micro Technology were unaffiliated with Sierra Vista and the Company.



<PAGE>31



         Acquisition  of  Intelligent  Instruments  Corporation.  In  1997,  the
Company's Board of Directors tentatively approved the acquisition of Intelligent
Instruments,  a  company  wholly-owned  by Mark C.  Koz,  the  Company's  former
President and Chief  Executive  Officer for 2 million  shares of Common Stock of
the Company, subject to certain conditions.  In 1998 this tentative approval was
withdrawn and the acquisition did not occur.
There are no plans to resume this acquisition effort.

         FutureTel.  The Company has a license  ("FutureTel  License Agreement")
from FutureTel to manufacture, use, distribute, sell and otherwise deal with the
video  compression  technology  which is the subject of docket  numbers 2056 and
2057 for patent applications. Under the FutureTel License Agreement, the Company
has the rights to use, duplicate,  distribute, modify and enhance the technology
for  the  development,  manufacture  and  distribution  of its  products  and to
sublicense   the  technology  to  others  for  the   enhancement,   development,
manufacture  and  distribution  of its  products.  The term of the license  from
FutureTel to the Company is in perpetuity.

         This licensed  technology was incorporated into the Company's design of
its single chip MPEG-2 Gecko  encoder  chip,  and when the design effort on this
chip was suspended in 1998, the Company ceased using the technology.  Aside from
a sale or license by the Company to another party of the Company's  encoder chip
design, an event not considered likely by the Company's management,  the Company
has no plans to resume use of the technology licensed from FutureTel.

         From 1993 to 1996, Mr. Mark C. Koz was a substantial shareholder of and
Chief  Executive  Officer and Chairman of the Board of FutureTel.  In connection
with his departure from  FutureTel,  Mr. Koz exchanged his interest in FutureTel
for the  remaining  interest  held by a third party in  Intelligent  Instruments
Corporation.  In  addition,  FutureTel  granted  the  Company  rights  under the
FutureTel  License  Agreement.  The  Company,  with Mark C. Koz and  Intelligent
Instruments  Corporation,  filed a lawsuit against FutureTel and others claiming
fraud by the  defendants  in the formation of a business  venture  involving the
development and marketing of multimedia technology.  This litigation was settled
in 1997 by the Company paying  FutureTel  $100,000 and the parties  amending the
FutureTel License Agreement to make it irrevocable

         Settlement Agreement with Mark Koz. In 1997, the Company entered into a
Settlement  Agreement  with Mark C.  Koz,  which was  adopted  by the  Company's
Litigation  Committee  of the  Board  of  Directors.  The  Settlement  Agreement
concerns the lawsuit  filed by the Company  against  Haynes,  et. al.  regarding
Jettson Realty Development  Corporation and concerns transactions and contracts,
including stock options and consulting  agreements,  entered into by the Company
while Mr. Koz was an officer and director of the Company. The parties enter into
this  settlement  in light of their desire to resolve any issues and in light of
the  Company's  perceived  dependence  at  that  time  on  Mr.  Koz  for  future
technology.  Under the terms of the  Settlement  Agreement,  Mr.  Koz  agreed to
return to the  Company  for  cancellation  500,000  shares  of  Common  Stock in
exchange  for a  mutual  release.  See  "Legal  Proceedings"  for  a  discussion
regarding the Haynes, et. al. litigation.

     Other  transactions with Mark Koz. In 1998 the Company incurred a liability
of  approximately  $19,000 to a third party to pay a personal  obligation of Mr.
Koz, and paid the  obligation in 1999. In 1999 Mr. Koz agreed to compensate  the
Company for this item.

         In 1998 the Company rented certain items of engineering  test equipment
from Mark Koz,  or from his wife,  for a total  rental  amount of  approximately
$13,000. These rental arrangements were terminated in December 1998.


<PAGE>32



         Digital  Hollywood,  Inc.  Beginning in March 1996 and continuing  into
1997,  the Company  made  advances to or paid  obligations  on behalf of Digital
Hollywood,  Inc. in the  aggregate  amount of  approximately  $139,000.  Digital
Hollywood  is a  corporation  owned by Mr.  Mark C. Koz,  the  Company's  former
president,  and was formed to make and  distribute a musical video recorded on a
digital video disk ("DVD")  utilizing MPEG-2 compliant  compression  technology.
Digital  Hollywood  was  unable  to sell its video and  because  all of  Digital
Hollywood's assets were secured by another lender,  Decorah Company, the Company
wrote off its  advances.  Digital  Hollywood,  Mark Koz,  the  Company,  Decorah
Company and Edwin  Reedholm,  the principal of Decorah and a former  Director of
the Company, were in litigation which has been settled. See "Legal Proceedings."

         Robert  Sibthorpe.  In 1998 the Company  borrowed  $50,000  from Robert
Sibthorpe on an unsecured  demand note at an interest rate of 10% per annum.  As
of December 31, 1998 the principal balance outstanding on this note was $40,000.

          Champlin Turner Enterprises, Inc.  In December 1998, the Company
entered into an asset purchase agreement with Champlin Turner Enterprises, Inc.
("CTE"),  a corporation in which Dr. John  Champlin,  a director in the Company,
has an  interest  in and  serves  as  president.  Under  the  terms of the asset
purchase agreement,  the Company transferred to CTE certain applications for the
Company's video encoder and a non-exclusive license in the telemedicine field in
exchange  for CTE's  obligation  to  purchase  certain  parts from the  Company,
assumptions  of  future  liabilities  associated  with  the  development  of the
telemedicine business, and royalty payments. The value of the assets transferred
by the Company was approximately  $24,000. In addition, the Company received
a general release from CTE's principals.

Item 13.  Exhibits and Reports on Form 8-K.

         (a) Exhibits

3.1      Certificate  of   Incorporation,   as  amended,   of  the  Company
         (originally filed as exhibit 2.1)(1)
3.2      Amended and Restated Bylaws of  the  Company  (originally  filed  as
         exhibit  2.2)(1)  10.1  Plan  and Agreement of Reorganization,
         dated February 27, 1997, as amended April 1, 1997 and May 14,  1997,
         between the Company and Sierra  Vista  (originally filed as exhibit
         6.1)(1)
10.2     License  Agreement,  dated as of March 7, 1996, between the Company and
         FutureTel (originally filed as exhibit 6.2)(1)
10.3     Employment Agreement with Mark C. Koz, dated as of May 15, 1997
        (originally filed as exhibit 6.3)(1)
10.4     Employment Agreement with F. James Anderson, dated as of May 15, 1997
        (originally filed as exhibit 6.4)(1)
10.5     Escrow Agreement and Instructions between the Company,  Sierra Vista
         and Bartel Eng Linn & Schroder, dated as of February 27, 1997
         (originally filed as exhibit 6.5)(1)
10.6     Lease  between  Cooperage-Rose  Properties  II  and  the  Company
         (originally  filed as exhibit  6.6)(1)
10.7     Credit  Facility  Agreement between the Company and Micro Technology
         S.A., dated as of July 1, 1997 (originally filed as exhibit 6.7)(1)
10.8     Security Agreement between the Company and Micro Technology S.A., dated
         as of July 1, 1997 (originally filed as exhibit 6.8)(1)
10.9     Convertible Debenture Purchase Agreement, dated as of December 22,
         1997, with JNC (originally filed as exhibit 6.9)(2)
10.10    7% Convertible  Debentures,  due December 22, 2002, payable to JNC
         (originally filed as exhibit 6.10)(2)
10.11    Registration Rights Agreement,  dated as of December 22, 1997,
         with JNC (originally filed as exhibit 6.11)(2)
10.12    Escrow  Agreement,   dated  December  22,  1997,  between  the
         Company,  JNC and Robinson  Silverman Pearce Aronsohn & Berman
         LP (originally filed as exhibit 6.12)(2)
10.13    Warrants dated December 22, 1997, to purchase up to 500,000 shares of
         Common Stock held by JNC(originally filed as exhibit 6.13)(2)
10.14    Warrants dated December 22, 1997, to purchase up to 250,000 shares of
         Common Stock held by Cardinal (originally filed as exhibit 6.14)(2)

<PAGE>33


10.15    Addendum to Credit  Facility,  dated  December 18, 1997,  with
         Micro Technology S.A. (originally filed as exhibit 6.15)(2)
10.16    Settlement Agreement between the Company and Mark Koz (originally
         filed as exhibit  6.16)(3)  10.17 Joint  Venture  contract  between the
         Company and CRI, dated September 13, 1997 (3)
10.18    Accord and  satisfaction  and  Release  Agreement  between the
         Company and Technical Systems Associates,  Inc., dated
         January 16, 1998 (3)
10.19    Employment  Agreement with Thomas E. Burke,  dated March 23, 1998
         (3) 10.20 1996 Incentive and Nonstatutory Stock Option Plan (originally
         filed as exhibit  3.1)(1) 10.21 Voting  Agreement of  InnovaCom,  Inc.,
         dated February 27, 1997, and amended as of April 1, 1997,
         May 14,  1997,  June 10, 1997,  and December 1, 1997,  between Mark Koz
         and  507784  BC Ltd.  (originally  filed  as  exhibit 5.1)(1)
10.22    Convertible Debenture Purchase Agreement dated as of June 29, 1998
         between InnovaCom, Inc. and JNC Strategic Fund Ltd.(4)
10.23    Convertible Debenture Purchase Agreement dated August 28, 1998 between
         InnovaCom, Inc. and JNC Strategic Fund Ltd. (4)
10.24    Form of Debenture(4)
10.25    Waiver Agreement dated as of September 18, 1998(4)
10.26    Convertible Debenture Purchase Agreement dated December 15, 1998
         between InnovaCom, inc. and JNC Strategic Fund Ltd.
10.27    The Second Amended and Restated Security Agreement between the
         Company and JNC Strategic Fund Ltd.,  dated as of December 15, 1998
10.28    Employment  Agreement with Frank Alioto,  dated March 15, 1998
10.29    Asset Purchase  Agreement with John Champlin,  MD
10.30    Amended  Employment  Agreement with Mark Koz, dated April 20, 1998
10.31    Letter Agreement amending the Amended Employment Agreement with Mark
         Koz, dated June 16, 1998
16.1     Letter regarding change in certifying accountant(3)
21.1     Subsidiary of the small business issuer(3)
27.1     Financial Data Schedule

------------------------------------------------------------------------------
(1)  Previously filed with the Company's Form 10-SB on December 12, 1997
(2)  Previously  filed with the  Company's  Registration  Statement on Form SB-2
     filed on February 9, 1998.
(3)  Previously  filed  with  the  Company's  Pre-Effective  Amendment  No. 1 to
     Registration Statement on form SB-2 filed on April 15, 1998.
(4)  Previously  filed with the Company's  Form 10-QSB for the quarterly  period
     ended March 31, 1998, filed on September 24, 1998.

(b) Reports on Form 8-K.
    None



<PAGE>34



                                   SIGNATURES

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

                                 InnovaCom, Inc.

                                 /s/ FRANK ALIOTO
                                 ---------------------------------------------
                                 By: Frank Alioto, President


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



May 21, 1999                      /s/ FRANK ALIOTO
                                   _____________________________________________
                                   Frank Alioto, President and Chairman of the
                                   Board of Directors (Principal Executive
                                   Officer)

May 21, 1999                      /s/ STANTON R. CREASEY
                                   _____________________________________________
                                   Stanton R. Creasey, Chief Financial Officer
                                   (Principal Financial and Accounting Officer)

May 21, 1999                      /s/ MARK KOZ
                                   _____________________________________________
                                   Mark Koz, Director


May 21, 1999                      /s/ TONY LOW
                                   _____________________________________________
                                   Tony Low, Director


May 21, 1999                      /s/ ROBERT SIBTHORPE
                                   _____________________________________________
                                   Robert Sibthorpe, Director


May 21, 1999                      /s/ JOHN CHAMPLIN
                                   _____________________________________________
                                  John Champlin, Director

<PAGE>


                                                  InnovaCom, Inc.
                                                 and Subsidiaries
                                         (A Development Stage Enterprise)

                                               Financial Statements
                                                For the Years Ended
                                            December 31, 1998 and 1997,
                                                and For the Period
                                         From March 3, 1993 (Inception) to
                                                 December 31, 1998


<PAGE>F-1



                                    INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<S>                                                                                                         <C>

                                                                                                               PAGE

Independent Auditor's Report.......................................................................................F-2

Consolidated Balance Sheet - December 31, 1998.....................................................................F-3

Consolidated Statements of Operations - For the Years Ended December 31, 1998
     and 1997, and For the Period From March 3, 1993 (inception) to December 31, 1998..............................F-4

Consolidated Statement of Stockholders' Equity (Deficit) - For the Period from
     March 3, 1993 (inception) to December 31, 1998................................................................F-5

Consolidated Statements of Cash Flows - For the Years Ended December 31, 1998
     and 1997, and For the Period from March 3, 1993 (inception) to December 31, 1998..............................F-9

Notes to Consolidated Financial Statements.........................................................................F-11

</TABLE>

<PAGE>F-2





                                           INDEPENDENT AUDITOR'S REPORT

The Stockholders and Board of Directors
InnovaCom, Inc. and Subsidiaries (a Development Stage Enterprise)
Santa Clara, California

We have audited the accompanying  consolidated balance sheet of InnovaCom,  Inc.
and subsidiaries (a Development  Stage  Enterprise) as of December 31, 1998, and
the  related  consolidated   statements  of  operations,   stockholders'  equity
(deficit),  and cash flows for the years ended  December 31, 1998 and 1997,  and
for the period  from March 3, 1993  (inception)  to  December  31,  1998.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the financial position of InnovaCom,  Inc. and
subsidiaries (a Development  Stage  Enterprise) as of December 31, 1998, and the
results of their  operations  and their cash flows for the years ended  December
31, 1998 and 1997, and for the period from March 3, 1993 (inception) to December
31, 1998 in conformity with generally accepted accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has suffered recurring losses from operations,
and as of December 31, 1998 has negative working capital of $11,851,398, and has
a stockholders'  deficit of $11,510,684,  that raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans with regard
to these matters are also  described in Note 3. The financial  statements do not
include any adjustments  relating to the  recoverability  and  classification of
reported asset amounts or the amounts and  classification  of  liabilities  that
might result from the outcome of this uncertainty.


/S/HEIN + ASSOCIATES LLP

HEIN + ASSOCIATES LLP
Certified Public Accountants

Orange, California
April 8, 1999



<PAGE>F-3



                                         INNOVACOM, INC. AND SUBSIDIARIES
                                         (A DEVELOPMENT STAGE ENTERPRISE)

                                            CONSOLIDATED BALANCE SHEET

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


                                                                                                              DECEMBER 31,
                                                                                                                  1998
                                                                                                          ---------------------
                                                            ASSETS
CURRENT ASSETS:
     Cash                                                                                                 $            33,934
     Accounts receivable                                                                                                8,745
     Other receivables                                                                                                 78,248
     Prepaid expenses                                                                                                   1,746
                                                                                                          ---------------------
         Total current assets                                                                             $           122,673

PROPERTY AND EQUIPMENT, NET:                                                                                          303,514
DEPOSITS:                                                                                                              37,200
                                                                                                          ---------------------

TOTAL ASSETS:                                                                                             $           463,387
                                                                                                          =====================

                                        LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
     Notes payable - related parties                                                                      $           135,000
     Convertible debentures                                                                                         8,790,000
     Accounts payable                                                                                               1,720,849
     Accrued liabilities                                                                                            1,265,290
     Liabilities in excess of assets of
         discontinued operations                                                                                       62,932
                                                                                                          ---------------------
         Total current liabilities                                                                        $        11,974,071
                                                                                                          ---------------------

COMMITMENTS AND CONTINGENCIES: (Notes 3 and 9)                                                                              -

STOCKHOLDERS' EQUITY (DEFICIT):
     Common stock, $.001 par value, 50,000,00 shares
         authorized, 25,035,615 shares issued and
         outstanding                                                                                      $            25,036
     Warrants                                                                                                       1,307,403
     Additional paid-in capital                                                                                    22,883,852
     Deficit accumulated during development stage                                                                 (35,726,975)
                                                                                                          ---------------------
         Total stockholders' (deficit)                                                                            (11,510,684)
                                                                                                          ---------------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):                                                     $           463,387
                                                                                                          =====================
See accompanying notes to these consolidated financial statements
</TABLE>


<PAGE>F-4



                                         INNOVACOM, INC. AND SUBSIDIARIES
                                         (A DEVELOPMENT STAGE ENTERPRISE)

                                        CONSOLIDATED STATEMENTS OPERATIONS


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

                                                                                                               MARCH 3, 1993
                                                                         FOR THE YEARS ENDED                   (INCEPTION) TO
                                                                            DECEMBER 31,                        DECEMBER 31,

                                                              ------------------------------------------   -----------------------
                                                                     1998                   1997                    1998
                                                              --------------------   -------------------   -----------------------

REVENUES                                                      $           107,632    $         149,000     $        256,632
                                                              --------------------   -------------------   -----------------------

COSTS AND EXPENSES:
     Costs of goods sold                                                  338,763               52,538              391,301
     Research and development                                           3,167,316            4,388,180           10,266,524
     Selling, general and administrative                                5,561,068            4,804,375           15,838,021
     Impairment loss on property and equipment                            937,000                    -              937,000
                                                              --------------------   -------------------   -----------------------

         Total costs and expenses                                      10,004,147            9,245,093           27,432,846
                                                              --------------------   -------------------   -----------------------

OPERATING LOSS                                                         (9,896,515)          (9,096,093)         (27,176,214)
                                                              --------------------   -------------------   -----------------------

OTHER INCOME (EXPENSE):
       Interest income                                                     10,025               10,462               22,109
     Interest expense                                                  (4,761,319)          (1,218,620)          (5,990,550)
     Debt conversion expense                                             (260,645)                   -             (260,645)
                                                              --------------------   -------------------   -----------------------
         Total other income (expense)                                  (5,011,939)         (1,208,158)           (6,229,086)
                                                              --------------------   -------------------   -----------------------

LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAX EXPENSE AND DISCONTINUED OPERATIONS                        (14,908,454)         (10,304,251)         (33,405,300)

INCOME TAX EXPENSE                                                          1,600                1,600                6,400
                                                              --------------------   -------------------   -----------------------
LOSS FROM CONTINUING OPERATIONS:                                      (14,910,054)         (10,305,851)         (33,411,700)
                                                              --------------------   -------------------   -----------------------

     Loss on disposal of discontinued operations                       (1,154,980)                   -           (1,154,980)
     Loss from operations of discontinued operation,
       net of income tax expense of $800, $1600 and $2400                (400,843)           (759,452)           (1,160,981)
                                                              --------------------   -------------------   -----------------------
LOSS FROM DISCONTINUED OPERATIONS                                      (1,555,823)           (759,452)           (2,315,275)
                                                              --------------------   -------------------   -----------------------

NET LOSS                                                      $       (16,465,877)    $   (11,065,303)     $    (35,726,975)
                                                              ====================   ===================   =======================

BASIC AND DILUTED NET LOSS PER SHARE:
       Continuing operations                                  $             (0.64)    $         (0.58)
       Discontinued operations                                              (0.07)              (0.04)
                                                              --------------------   -----------------
       Basic and diluted net loss per share                   $             (0.71)    $         (0.62)
                                                              ====================   =================

WEIGHTED AVERAGE NUMBER OF SHARES
     OUTSTANDING                                                       23,032,965          17,895,305
                                                              ====================   ===================
</TABLE>

See accompanying notes to these consolidated financial statements


<PAGE>F-5




                        INNOVACOM, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)

            CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
       FOR THE PERIOD FROM MARCH 3, 1993 (INCEPTION) TO DECEMBER 31, 1998

                                   (Continued)

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

                                                                                                           DEFICIT
                                                                                                         ACCUMULATED       TOTAL
                                                      COMMON STOCK                           ADDITIONAL     DURING     STOCKHOLDERS'
                                              ----------------------------------               PAID-IN   DEVELOPMENT      EQUITY
                                                SHARES             AMOUNT         WARRANTS     CAPITAL      STAGE       (DEFICIT)
                                              -------------- ------------------  ----------  ---------- -------------  -------------
COMMON STOCK, issued to form company at
     $0.0017 per share (March 1993)           5,100,000       $   5,100          $      -     $  3,400   $        -     $    8,500

   Net loss                                          -                -                 -            -         (800)          (800)
                                             -----------     -----------        ----------    ---------    ----------   -----------
BALANCES, December 31, 1993                   5,100,000           5,100                 -        3,400         (800)         7,700

       Net loss                                       -               -                 -            -         (800)          (800)
                                             -----------     -----------        ----------    ---------    ----------   -----------

BALANCES, December 31, 1994                    5,100,000          5,100                 -        3,400       (1,600)         6,900

       Net loss                                        -              -                 -            -         (800)          (800)
                                             -----------     -----------        ----------    ---------    ----------   -----------
BALANCES, December 31, 1995                    5,100,000          5,100                 -        3,400       (2,400)         6,100

   Issuance  of  common  stock at $0.50
    per share to directors for services
    performed (March 1996)                       900,000            900                 -      449,100            -        450,000

   Acquisition of Jettson Realty
    Development, Inc. at $0.30 per
    share (June 1996)                            561,069            561                 -      168,184            -        168,745

   Sale of common stock, net of expenses at
     $0.16 per share (July 1996)               4,620,015          4,620                 -      715,380            -        720,000

   Issuance of common stock at $0.50 per
    share to employees for services
    performed (July 1996)                        500,000            500                 -      249,500            -        250,000

</TABLE>



<PAGE>F-6

                        INNOVACOM, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)

            CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
       FOR THE PERIOD FROM MARCH 3, 1993 (INCEPTION) TO DECEMBER 31, 1998

                                   (Continued)
<TABLE>
<S>                                           <C>            <C>                  <C>       <C>         <C>

                                                                                                           DEFICIT
                                                                                                         ACCUMULATED       TOTAL
                                                      COMMON STOCK                           ADDITIONAL     DURING     STOCKHOLDERS'
                                              ----------------------------------               PAID-IN   DEVELOPMENT      EQUITY
                                                SHARES             AMOUNT         WARRANTS     CAPITAL      STAGE       (DEFICIT)
                                              -------------- ------------------  ----------  ---------- -------------  -------------
   Issuance of common stock at $1.36 per
     share for consulting services
     performed (July 1996)                      250,000       $       250          $     -    $  388,960  $         -   $   389,210
   Sale of common stock at $5.00 per share,
     net of expenses (October 1996)             280,000               280                -     1,399,720            -     1,400,000
   Compensation recognized upon issuance
     of stock options                                 -                 -                -     2,493,873            -     2,493,873
   Contribution of product license                    -                 -                -     1,275,000            -     1,275,000
       Net loss                                       -                 -                -             -   (8,193,395)   (8,193,395)
                                               --------         ---------           ------    ----------   -----------   -----------

BALANCES, December 31, 1996                  12,211,084            12,211                -     7,143,117   (8,195,795)   (1,040,467)

   Issuance of common stock in exchange for
     technology at $5.00 per share (January
     1997)                                      100,000               100                -       499,900            -       500,000
   Sale of common stock, net of expenses at
     $2.90 per share (February 1997)            229,310               229                -       664,771            -       665,000
   Acquisition  of Sierra Vista at $0.50 per
   share (May 1997)                           8,514,500             8,515                -     4,248,735            -     4,257,250

   Issuance  of  common  stock at $2.43  per
    share for legal services rendered
    (June 1997)                                   7,003                 7                -        16,976             -       16,983

</TABLE>



<PAGE>F-7

                       INNOVACOM, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)

            CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
       FOR THE PERIOD FROM MARCH 3, 1993 (INCEPTION) TO DECEMBER 31, 1998

                                   (Continued)
<TABLE>
<S>                                          <C>                  <C>             <C>       <C>         <C>           <C>

                                                                                                           DEFICIT
                                                                                                         ACCUMULATED       TOTAL
                                                      COMMON STOCK                           ADDITIONAL     DURING     STOCKHOLDERS'
                                              ----------------------------------               PAID-IN   DEVELOPMENT      EQUITY
                                                SHARES             AMOUNT         WARRANTS     CAPITAL      STAGE       (DEFICIT)
                                              -------------- ------------------  ----------  ---------- -------------  -------------


Shares returned per settlement agreement at
    par value                                (500,000)     $     (500)         $       -    $      500   $         -    $         -
Warrants issued with sale of convertible
    debentures (December 1997)                      -               -            968,578            -              -        968,578
Allocation  of proceeds  from notes  payable
    and   long-term   liabilities   due   to
    beneficial conversion feature                   -               -                  -    2,086,988              -      2,086,988
Compensation  recognized  upon  issuance  of
    stock options                                   -               -                  -    1,558,666              -      1,558,666
       Net loss                                     -               -                  -            -    (11,065,303)   (11,065,303)
                                           ----------     -----------         ----------  -----------    -----------    ------------

BALANCES, December 31, 1997                20,561,897          20,562            968,578   16,219,653    (19,261,098)    (2,052,305)

Issuance of common stock at $1.75 per
    share in connection with issuance
    of notes payable (May 1998)               125,000             125                  -      218,625              -         218,750
Issuance of common stock at $2.40 per share
    in connection with conversion of notes
    payable - related party (May 1998)      1,742,362           1,742                  -    4,179,679              -       4,181,421
Issuance of common stock at $1.39 per
 share in connection with conversion of
    debentures (May 1998)                       7,431               7                  -       10,285              -          10,292

Issuance of common stock at $0.26 per share
  in connection with conversion of notes
  payable - related party (June 1998)       2,057,146           2,057                  -      532,800              -         534,857
Issuance of common stock at $0.29 per
  share in connection with conversion of
  debentures (June 1998)                       70,339              71                  -       20,638              -          20,709

Issuance of common stock at $0.32 per share
    in connection with conversion of
    debentures (June 1998)                     63,971              64                  -       20,624              -          20,688

Issuance of common stock at $0.26 per
  share for services (June 1998)              100,000             100                  -       25,900              -          26,000
Issuance of common stock at $0.19 per
  share in connection with conversion of
  debentures (July 1998)                       56,184              56                  -       10,372              -          10,428

</TABLE>

<PAGE>F-8


                       INNOVACOM, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)

            CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
       FOR THE PERIOD FROM MARCH 3, 1993 (INCEPTION) TO DECEMBER 31, 1998

                                   (Continued)
<TABLE>
<S>                                            <C>            <C>               <C>          <C>        <C>            <C>

                                                                                                           DEFICIT
                                                                                                         ACCUMULATED        TOTAL
                                                      COMMON STOCK                            ADDITIONAL     DURING    STOCKHOLDERS'
                                              ----------------------------------                PAID-IN   DEVELOPMENT      EQUITY
                                                SHARES             AMOUNT         WARRANTS      CAPITAL      STAGE       (DEFICIT)
                                              -------------- ------------------  ----------   ---------- --------------------------

Issuance of common stock at $0.26 per share
     in connection with conversion of
     debentures (July 1998)                     121,654       $     122           $     -      $  31,021  $          -   $   31,143
Issuance of common stock at $0.17 per share
     in connection with conversion of
     debentures (September 1998)                 60,160              60                 -         10,432             -       10,492
Issuance of common stock at $0.10 per share
     in connection with conversion of
     debentures (October 1998)                  110,264             110                 -         10,475             -       10,585
Issuance of common stock at $0.11 per share
     in connection with conversion of
     debentures (November 1998)                 969,536             970                 -        105,291             -      106,261
Shares canceled from default at par            (510,329)           (510)                -            510             -            0

Shares canceled from default judgement
     originally issued for services at
     $0.50 per share                          (500,000)            (500)                -       (249,500)            -     (250,000)

Compensation recognized upon issuance of             -                -                 -        366,303             -      366,303
     stock options
Allocation of proceeds from notes payable
     and debentures due to beneficial
     conversion features                             -                -                 -        859,140             -      859,140
Warrants issued with sale of convertible
     debentures                                      -                -            338,825                           -      338,825
Debt conversion expense                              -                -                  -       260,645             -      260,645
Contested proceeds from private placements
     reclassified from accrued liabilities
     due to defaults                                 -                -                  -       250,959             -      250,959

Net Loss                                             -                -                  -             -   (16,465,877) (16,465,877)
                                              ----------      ----------      ------------   ------------  ------------ ------------

Balances, December 31, 1998                    25,035,615     $   25,036     $   1,307,403   $ 22,883,852 $(35,726,975) (11,510,684)
                                              ===========     ===========     ============   ============ ============= ============

    See accompanying notes to these consolidated financial statements
</TABLE>

<PAGE>F-9



                                         INNOVACOM, INC. AND SUBSIDIARIES
                                         (A DEVELOPMENT STAGE ENTERPRISE)

                                       CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>

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

                                                                                                              MARCH 3, 1993
                                                                       FOR THE YEARS ENDED                    (INCEPTION) TO
                                                                           DECEMBER 31,                        DECEMBER 31,
                                                           ---------------------------------------------   ---------------------
                                                                   1998                    1997                    1998
                                                           ---------------------   ---------------------    --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss from continuing operations                     $     (14,910,054)      $      (10,305,851)      $     (33,411,700)
   Adjustments to reconcile net loss to net cash
     used in operating activities:
     Depreciation and amortization                                   291,363                  415,979                 728,517
     Amortization of discount on long-term debt                    2,345,866                        -               2,345,866
     Impairment loss on property and equipment                       937,000                        -                 937,000
     Interest related to beneficial conversion
       features of notes payable and convertible
       debentures                                                  1,197,965                1,101,107               2,299,072
     Compensation recognized upon issuance of
       stock and stock options                                       611,053                1,575,649               5,769,785
     Shares canceled from default judgement                         (250,000)                       -                (250,000)
     Contribution of product license                                       -                        -               1,275,000
     Write down of purchased incomplete
        research and development                                           -                  500,000                 500,000
     Debt conversion expense                                         260,645                        -                 260,645
     Write-off of related party receivable                                 -                   45,532                 139,594
     Write-off of acquisition costs                                   68,364                        -                  68,364
     Changes in operating assets and liabilities:
         Cash - restricted                                             8,481                    1,026                       -
         Accounts receivable                                          (8,745)                       -                  (8,745)
         Prepaid expenses                                             96,631                 (173,427)                (79,996)
         Deposits                                                     52,679                  (70,581)                (37,200)
         Accounts payable                                          1,438,485                  299,520               2,132,291
         Accrued liabilities                                         678,309                  291,680               1,851,489
                                                           -----------------       ------------------       ------------------
              Net cash used in operating  activities  from
              continuing operations                        $      (7,181,958)      $       (6,319,366)      $     (15,480,018)
                                                           ------------------      ------------------       -------------------

Net loss from discontinued operations                             (1,555,823)                (759,452)             (2,315,275)
     Loss on disposal of assets                                       48,568                        -                  48,568
     Write-down of film rights and film costs inventory              277,500                  (27,500)                250,000
     Write-down of goodwill                                          848,129                        -                 848,129
     Change  in   liabilities   in  excess  of  assets  of
         discontinued operations                                      62,932                        -                  62,932
                                                           ---------------------   ---------------------    --------------------
              Net cash used in operating  activities  from
              discontinued operations                      $        (318,694)      $         (786,952)      $      (1,105,646)
                                                           ------------------       ------------------       -------------------



</TABLE>

<PAGE>F-10




                        INNOVACOM, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)

                      CONSOLIDATED STATEMENTS OF CASH FLOW
        See accompanying notes to these consolidated financial statements

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

                                                                                                               MARCH 3, 1993
                                                                       FOR THE YEARS ENDED                    (INCEPTION) TO
                                                                           DECEMBER 31,                        DECEMBER 31,
                                                           ---------------------------------------------    --------------------
                                                                   1998                    1997                    1998
                                                           ---------------------   ---------------------    --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Cash received in acquisition of Sierra Vista
     Entertainment                                         $               -          $    2,916,798       $        2,916,798
   Cost incurred for organization of joint
    venture                                                                -                 (68,364)                 (68,364)
   Advance to related party                                                -                 (45,532)                (139,594)
   Purchases of property and equipment                            (1,216,870)               (768,181)              (2,190,217)
   Proceeds from sale of assets                                            -                   3,500                    3,500
                                                           ---------------------    -----------------       ------------------

              Net cash provided by (used in)
                  investing activities                     $      (1,216,870)      $        2,038,221       $          522,123
                                                           ------------------      ------------------       ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Bank overdraft                                                          -                  (38,574)                       -
   Proceeds from sale of common stock                                      -                  665,000                2,897,670
   Proceeds from note payable                                        777,500                3,981,512                4,865,490
   Net proceeds from sale of debenture with
     detachable warrants                                           4,000,000                4,608,593                8,608,593
   Principal payments on notes payable                              (174,478)                       -                 (274,278)
                                                           ------------------      ------------------       ------------------
         Net cash provided by financing
           activities                                      $       4,603,022       $        9,216,531       $       16,097,475
                                                           -----------------       ------------------        -----------------
NET INCREASE (DECREASE) IN CASH AND CASH
   EQUIVALENTS                                                    (4,114,500)               4,148,434                   33,934
CASH AND CASH EQUIVALENTS, beginning of
   Period                                                          4,148,434                        -                        -
                                                           -----------------       ------------------       ------------------
CASH AND CASH EQUIVALENTS, end of period                   $          33,934       $        4,148,434       $           33,934
                                                           =================       ==================       ==================

SUPPLEMENTAL CASH FLOW INFORMATION:
   Cash payments for:
     Interest                                              $              -        $                -       $           9,079
                                                           =================       ==================       =================
     Income taxes                                          $           2,400       $            4,800       $           6,200
                                                           =================       ==================       =================
NON-CASH INVESTING AND FINANCING
   ACTIVITIES:
   Net assets acquired, net of cash, through
     acquisition of Sierra Vista Entertainment             $              -        $        1,340,452       $       1,340,452
                                                           ================        ==================       =================
   Return of 500,000 shares of common stock
     per settlement agreement                              $              -        $              500       $             500
                                                           ================        ==================       =================
   Acquisition of technology for stock                     $              -        $          500,000       $         500,000
                                                           ================        ==================       =================
   Conversion  of notes  payable,  debentures  and accrued
     interest to equity                                    $      4,936,876        $                -       $       4,936,876
                                                           =================       ===================       =================


</TABLE>



<PAGE>F-11



                                         INNOVACOM, INC. AND SUBSIDIARIES
                                         (A DEVELOPMENT STAGE ENTERPRISE)

                                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.       NATURE OF OPERATIONS:

         InnovaCom,  Inc. (the  "Company")  was formed to develop  digital video
         compression  and  processing  technology to provide  broadcast  quality
         video encoding and processing products and systems.

         The Company was formed pursuant to a business reorganization  effective
         July 10, 1996 between  Jettson  Realty  Development,  Inc.  ("JRD"),  a
         Nevada  corporation  formed  in 1990  and  InnovaCom  Corp.  (InnovaCom
         Florida),   a   Florida   corporation   formed   in  1993.   Under  the
         reorganization,  JRD issued 6,000,000  previously  unissued  restricted
         common shares in exchange for all of the issued and outstanding  common
         stock of InnovaCom  Florida.  JRD's board of directors then changed the
         name of JRD to InnovaCom,  Inc. and InnovaCom Florida became its wholly
         owned subsidiary.  Prior to the reorganization,  JRD had no operations.
         This  transaction was accounted for as a reverse  acquisition of JRD by
         InnovaCom Florida.

         On  May  14,  1997,  the  Company  acquired  100%  of  the  issued  and
         outstanding  shares  of  Sierra  Vista  Entertainment,  Inc.,  a Nevada
         Corporation  ("Sierra  Vista"),  in exchange for  8,514,500  previously
         unissued  shares of common stock of the Company.  The  transaction  was
         accounted  for as a purchase.  The fair  market  value per share of the
         common  stock  issued  in the  transaction  was  $0.50.  The  resulting
         purchase  price was  $4,257,250  with  $1,090,452  being  allocated  to
         goodwill.  Sierra Vista was formed to acquire,  produce and  distribute
         low-budget  feature films.  On June 15, 1998  (measurement  date),  the
         Company's  Board of Directors  decided to discontinue the operations of
         Sierra  Vista.  Accordingly,   Sierra  Vista  is  accounted  for  as  a
         discontinued  operation  in  the  accompanying  consolidated  financial
         statements.  All operations  from the  measurement  date to the date of
         disposal have been estimated and included in the loss from discontinued
         operations  as of December 31, 1998.  All assets have been written down
         to their net realizable value as of December 31, 1998.

         Liabilities in excess of assets of discontinued  operations consists of
         Sierra Vista accounts payable as of December 31, 1998.

         Sierra Vista has never generated any revenues.

2        SIGNIFICANT ACCOUNTING POLICIES:

         Principles of  Consolidation - The  consolidated  financial  statements
         include the accounts of the Company and its wholly owned  subsidiaries.
         All  significant  intercompany  accounts  and  transactions  have  been
         eliminated in consolidation.

         Statement of Cash Flows - For purposes of the statements of cash flows,
         the Company considers all highly liquid debt instruments purchased with
         an original maturity of three months or less to be cash equivalents.

         Property  and  Equipment - Property and  equipment  are stated at cost.
         Depreciation  is  calculated  using the  straight-line  method over the
         estimated useful lives (3 years) of the respective assets.

<PAGE>F-12


                        INNOVACOM, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



         The cost of normal  maintenance and repairs is charged to operations as
         incurred. Material expenditures which increase the life of an asset are
         capitalized and depreciated over the estimated remaining useful life of
         the asset. The cost of fixed assets sold, or otherwise disposed of, and
         the related  accumulated  depreciation  or amortization is removed from
         the  accounts,  and any  gains  or  losses  are  reflected  in  current
         operations.

         Film  Rights and Film Cost  Inventory  - Film rights were stated at the
         fair market value of the stock issued upon contribution to the Company,
         which had become the cost of the assets, and consisted of screen plays,
         foreign films, and other materials  related to the film industry.  Such
         amounts were being  amortized to expense  over their  estimated  useful
         lives. In compliance with Financial  Accounting  Standards Board (FASB)
         Statement Number 53 "Financial  Reporting by Producers and Distributors
         of Motion Picture Films," the Company had capitalized  production costs
         as film cost  inventory.  Such amounts were being  amortized  using the
         individual-film-forecast-computation  method. Due to the discontinuance
         of Sierra Vista,  film rights and film cost  inventory in the amount of
         $277,500 were written off during the year ended December 31, 1998.

         Debt Issuance  Costs - Debt issue costs  represent  the offering  costs
         associated  with the sale of the debentures (See Note 7) and were being
         amortized  using the interest  method over the life of the  debentures.
         The Company was in  violation of certain  covenants  under the terms of
         the debentures.  Consequently, the debentures are classified as current
         in the accompanying  consolidated  financial  statements and debt issue
         costs of $664,815  capitalized as of December 31, 1997 were written off
         during the year ended  December 31, 1998.  Debt issue costs  associated
         with  debentures  sold  during the year ended  December  31,  1998 were
         immediately  expensed due to the violation of certain  covenants  under
         the terms of the debentures.

         Goodwill - Goodwill,  representing  the excess of the cost over the net
         tangible and identifiable  intangible assets of the acquired  business,
         was stated at cost and was amortized on a straight-line basis, over the
         future periods to be benefited  estimated to be three years. Due to the
         discontinuance of Sierra Vista,  goodwill in the amount of $848,129 was
         written off during the year ended December 31, 1998.

         Research and  Development  Costs - Research and  Development  costs are
         charged to operations in the period incurred.

         Income  Taxes  - The  Company  accounts  for  income  taxes  under  the
         liability method, which requires recognition of deferred tax assets and
         liabilities  for the expected  future tax  consequences  of events that
         have been  included in the financial  statements or tax returns.  Under
         this method,  deferred tax assets and liabilities are determined  based
         on the  difference  between the financial  statements  and tax basis of
         assets and  liabilities  using enacted tax rates in effect for the year
         in which the differences are expected to reverse.

         Accounting  Estimates - The  preparation  of  financial  statements  in
         conformity  with  generally  accepted  accounting  principles  requires
         management to make  estimates and  assumptions  that affect the amounts
         reported in the financial  statements and the  accompanying  notes. The
         actual results could differ from those estimates.



<PAGE>F-13

                        INNOVACOM, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTSINANCIAL STATEMENTS

         The  Company's  financial   statements  are  based  upon  a  number  of
         significant  estimates,  including the estimated  useful lives selected
         for property and  equipment  and the adequacy of valuation  allowances.
         Due to the uncertainties  inherent in the estimation  process, it is at
         least reasonably  possible that these estimates will be further revised
         in the near term and such revisions could be material.

         Impairment  of  Long-Lived  Assets  -  In  the  event  that  facts  and
         circumstances  indicate  that  the  cost of  long-lived  assets  may be
         impaired,  an evaluation of  recoverability  would be performed.  If an
         evaluation is required,  the estimated future  undiscounted  cash flows
         associated  with the asset would be  compared  to the asset's  carrying
         amount to determine if a write-down to market value or discounted  cash
         flow value is required.

         Stock-Based Compensation - The Company has elected to follow Accounting
         Principles  Board  Opinion  No.  25,  "Accounting  for Stock  Issued to
         Employees"  (APB25) and related  interpretations  in accounting for its
         employee stock options. In accordance with FASB123 entitled "Accounting
         for Stock-Based Compensation";  the Company will disclose the impact of
         adopting  the  fair  value   accounting  of  employee   stock  options.
         Transactions  in equity  instruments  with  non-employees  for goods or
         services have been accounted for using the fair value method prescribed
         by FASB123.

         Concentrations  of Credit Risk - Credit risk  represents the accounting
         loss that would be recognized at the reporting  date if  counterparties
         failed  completely to perform as contracted.  Concentrations  of credit
         risk  (whether  on or off  balance  sheet)  that arise  from  financial
         instruments  exist for groups of customers or groups of  counterparties
         when they have similar economic  characteristics that would cause their
         ability to meet  contractual  obligations  to be similarly  effected by
         changes in economic or other  conditions.  In  accordance  with FASB105
         entitled  "Disclosure of Information  about Financial  Instruments with
         Off-Balance-Sheet Risk and Financial Instruments with Concentrations of
         Credit  Risk",  the credit risk amounts  shown do not take into account
         the value of any collateral or security.

         Fair Value of Financial  Instruments  - The  estimated  fair values for
         financial  instruments,  under FASB107 entitled "Disclosures about Fair
         Value of Financial  Instruments",  are determined at discrete points in
         time based on relevant  market  information.  These  estimates  involve
         uncertainties  and cannot be determined with  precision.  The estimated
         fair values of the Company's financial instruments,  which includes all
         cash, accounts receivable,  accounts payable,  convertible  debentures,
         and other debt,  approximates  the carrying  value in the  consolidated
         financial statements at December 31, 1998.

         Earnings per Share - Basic earnings per share excludes  dilution and is
         computed by dividing  income  available to common  stockholders  by the
         weighted  average number of shares of common stock  outstanding for the
         period. Diluted earnings per share reflects the potential dilution that
         could occur if securities or other contracts to issue common stock were
         exercised or converted into common stock or resulted in the issuance of
         common stock that then shared in the  earnings of the entity.  All such
         securities  or  other  contracts  were  anti-dilutive  for all  periods
         presented and, therefore, excluded from the computation of earnings per
         share.

         Impact of Recently  Issued  Standards - In June 1998,  the  Financial
         Accounting  Standards  Board issued Statement of Financial  Accounting
         Standards No. 133 (FASB133),  "Accounting  for Derivative  Instruments
         and Hedging Activities".  This statement is effective for fiscal years

<PAGE>F-14

         beginning  after June 15,  1999.  Earlier  application  is  encouraged;
         however,  the Company does not  anticipate  adopting  FASB133 until the
         fiscal year beginning January 1, 2000.  FASB133 requires that an entity
         recognize all  derivatives as assets or liabilities in the statement of
         financial  position and measure those  instruments  at fair value.  The
         Company  does not believe the  adoption of FASB133 will have a material
         impact on  assets,  liabilities  or  equity.  The  Company  has not yet
         determined the impact of FASB133 on the income  statement or the impact
         on comprehensive income.

         FASB132,    "Employers'    Disclosures   about   Pensions   and   Other
         Postretirement  Benefits" and FASB134,  "Accounting for Mortgage-Backed
         Securities Retained after the Securitization of Mortgage Loans Held for
         Sale by a Mortgage Banking  Enterprise" were issued in 1998 and are not
         expected   to  impact  the   Company's   future   financial   statement
         disclosures, results of operations or financial position.

3        BASIS OF PRESENTATION:

         The financial  statements  have been prepared on a going concern basis,
         which  contemplates,  among other things, the realization of assets and
         the  satisfaction  of  liabilities  in the normal  course of  business.
         However,  there is  substantial  doubt about the  Company's  ability to
         continue as a going  concern  because of the  magnitude  of its loss of
         $16,465,877  for the year ended  December  31,  1998,  and its negative
         working  capital  of  $11,851,398  and  its  stockholder's  deficit  of
         $11,510,684 as of December 31, 1998. The Company's  continued existence
         is dependent upon its ability to raise substantial capital, to generate
         revenues and to significantly improve operations.

         Management has taken several  actions in response to these  conditions.
         During 1998, the Company sold  $4,000,000 of 7% convertible  debentures
         (See Note 7) and converted  $4,936,876 of debt to equity. Also, in June
         1998, the Company  discontinued  its Sierra Vista operation and further
         reduced  expenses by  discontinuing  certain  development  projects and
         reducing  personnel.  Subsequent to December 31, 1998, the Company sold
         $750,000 in 7% convertible  debentures and borrowed  $1,200,000 through
         the  issuance  of 13% notes due on demand  and is  attempting  to raise
         additional  capital.  Management believes that these actions will allow
         the Company to continue as a going concern.

         Accordingly,  the financial  statements do not include any  adjustments
         relating to the  recoverabilty  and  classification  of recorded  asset
         amounts or the amount and  classification  of  liabilities or any other
         adjustment  that might be  necessary  should  the  Company be unable to
         continue as a going concern.

4        PROPERTY AND EQUIPMENT:

         Property and equipment consists of the following:

             Computer and equipment                          $          332,261
             Office equipment and furniture                             125,774
                                                             ------------------
                                                                        458,035

               Accumulated depreciation                                 154,521
                                                             ------------------
                                                             $          303,514
                                                             ==================
<PAGE>F-15



                        INNOVACOM, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5        ACCRUED LIABILITIES:

         Accrued liabilities consists of the following:

                  Accrued payroll and benefits               $          190,915
                  Accrued interest                                      431,229
                  Other                                                 643,146
                                                             ------------------
                                                             $        1,265,290
                                                             ==================
6        NOTES PAYABLE - RELATED PARTIES:

         Note  payable  -  related  party in the  original
         amount of $50,000  bearing  interest at 10%,  due
         on demand                                           $           40,000

         Note payable - related party in the original amount of $125,000 bearing
         interest at 8% with monthly payments of $10,000, due on demand

                                                                         95,000
                                                             ------------------
                                                             $          135,000
                                                             ==================

         In connection with the notes payable - related parties discussed above,
         the  Company  issued  100,000  shares  of common  stock to the  related
         parties and has  recognized  $175,000 in interest  expense for the year
         ended December 31, 1998 for the fair value of the shares issued.

         During  1997,  the Company  entered into a revolving  convertible  debt
         facility with a shareholder which bore interest at 10% and provided for
         the  conversion  of all  amounts  outstanding  into  common  stock at a
         conversion price equal to 80% of the market price for a share of common
         stock  at the  time a draw is  funded.  In May  1998,  the  shareholder
         converted $4,181,421 of the amount outstanding into 1,742,362 shares of
         common stock.  In June 1998,  the  shareholder  converted its remaining
         balance  outstanding  of $317,357 into common stock and  terminated the
         credit facility. As an inducement to make this conversion,  the Company
         allowed the shareholder to convert the remaining balance into 1,220,608
         shares of common  stock based on the market price of the stock of $0.26
         per share as opposed to the  conversion  price of $2.40 per share.  The
         Company  recognized an additional  expense of $260,645 for the value of
         the additional shares issued to induce the conversion.

7        LONG-TERM DEBT:

         In December  1997,  the Company  issued  $5,000,000  of 7%  convertible
         debentures due in December 2002. The debentures  accrue  interest at 7%
         per  annum  and are  convertible  into  shares  of  common  stock  at a
         conversion  price  equal to the lesser of $3.47 per share or 80% of the
         five day average market price per share prior to conversion. As part of
         the issuance of the  debentures,  the Company  issued to the  debenture
         holders five year warrants to purchase  250,000  shares of common stock
         at $3.00  per  share and  250,000  shares of common  stock at $4.00 per
         share. In addition,  the Company issued a five-year warrant to purchase
         250,000 shares of common stock at $2.43 per share as a finders fee.


<PAGE>F-16

                        INNOVACOM, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




         In  June  1998,  the  Company  issued   $2,000,000  of  7%  convertible
         debentures due in June 2003. The debentures  accrue  interest at 7% per
         annum and are  convertible  into shares of common stock at a conversion
         price  equal  to  $0.35  per  share.  As  part of the  issuance  of the
         debentures,  the  Company  issued to the  debenture  holders  five-year
         warrants to purchase 500,000 shares of common stock at $0.50 per share.
         In addition,  the Company issued five-year warrants to purchase 400,000
         shares of common stock at $0.34 per share as a finders fee.

         In  August  1998,  the  Company  issued  $1,500,000  of 7%  convertible
         debentures due in August 2003. The debentures accrue interest at 7% per
         annum and are  convertible  into shares of common stock at a conversion
         price  equal to the  lesser  of $0.26  per share or 75% of the five day
         average  market  price per share  prior to  conversion.  As part of the
         issuance of the debentures, the Company issued to the debenture holders
         five year  warrants to purchase  75,000 shares of common stock at $0.50
         per share,  and cancelled the 500,000 warrants issued with the December
         1997  debentures and issued new five year warrants to purchase  500,000
         shares of common  stock at $0.50 per share.  In  addition,  the Company
         issued five-year warrants to purchase 300,000 shares of common stock at
         $0.21 per share as a finders fee.

         In  December  1998,  the  Company  issued  $500,000  of 7%  convertible
         debentures due in December 2003. The debentures  accrue  interest at 7%
         per  annum  and are  convertible  into  shares  of  common  stock  at a
         conversion  price  equal to the lesser of $0.18 per share or 75% of the
         five day average market price per share prior to conversion. As part of
         the issuance of the  debentures,  the Company  issued to the  debenture
         holders  five-year  warrants to purchase 125,000 shares of common stock
         at $0.50 per share. In addition,  the Company issued five-year warrants
         to  purchase  100,000  shares of  common  stock at $0.14 per share as a
         finder's fee.

         All of the  debentures are secured by all of the assets of the Company.
         The  Company  was in  violation  of  certain  covenants  related to the
         debentures;  consequently all of the debentures have been classified as
         current in the accompanying financial statements.  The unamortized debt
         issuance costs and discount in the amount of $2,345,866 associated with
         the December 1997  debentures  were  written-off  during the year ended
         December 31, 1998. The Company has also recognized  interest expense of
         $1,093,879   during  the  year  ended   December   31,  1998  which  is
         attributable  to the fair  value  of the  warrants  and the  beneficial
         conversion features associated with the debentures issued during 1998.

         During 1998,  holders of the  December  1997  debentures  converted
         $210,000 in principal  and $10,597 in accrued interest into 1,459,539
         shares of common stock.

8       STOCKHOLDERS' EQUITY:

         In  October  1996,   the  Company   adopted  the  1996   Incentive  and
         Nonstatutory  Stock  Option  Plan (the 1996  Plan)  covering  1,500,000
         shares.  In  1997  this  was  increased  to  3,000,000  shares  pending
         shareholder  approval.  Under the plan,  the  Company  can grant to key
         employees, directors, and consultants either incentive,  non-statutory,
         or performance  based stock options.  The price of the options  granted
         pursuant  to the plan  shall not be less  than 100% of the fair  market
         value of the shares on the date of grant.  The board of directors  will
         decide the vesting period of the options, if any, and no option will be
         exercisable after ten years from the date granted. Prices for incentive
         options granted to employees who own 10% or more of the Company's stock
         are at least 110% of market value at date of grant.


<PAGE>F-17


                        INNOVACOM, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         In  January  1997,   the  Company   purchased  the  rights  to  certain
         proprietary  technology  from a third  party in  exchange  for  100,000
         shares of the Company's  common stock.  This  technology  was valued at
         $500,000 or $5.00 per share,  which was the current market value of the
         Company's  common  stock.  At December  31,  1997,  the $500,000 of the
         technology cost is included in research and development costs.

         During 1997 the Company granted options under the 1996 plan to purchase
         1,278,640  shares of common stock to  employees  who were hired in 1997
         and 1996.  The options were granted with exercise  prices  ranging from
         $0.50 to $3.75 per share, expire in 2002 and vest over three years from
         the date of hire.  The Company has  recognized  $91,824 and $911,531 in
         compensation  expense related to services provided for the years ending
         December 31, 1998 and 1997, respectively.  In June 1998, 530,600 of the
         options  were  repriced to the current  fair market  value of $0.26 per
         share.  As  of  December  31,  1998,  748,040  of  these  options  were
         forfeited.

         In April 1997, the Company granted  options to purchase  100,000 shares
         of common  stock  for  $3.375  per  share for a term of three  years in
         exchange for consulting services. Compensation expense in the amount of
         $272,480  was  recognized  during the year ended  December 31, 1997 for
         services provided.

         In May 1997, the Company granted options to purchase  1,000,000  shares
         of common  stock  under the 1996 Plan to an officer.  The options  were
         granted with exercise prices ranging from $2.75 to $4.75 per share. All
         of these options were forfeited during 1998.

         In July 1997, the Company  granted  122,160  options to purchase common
         stock for prices  ranging from $0.50 to $3.00 per share for  consulting
         services  rendered.  Consulting  expense in the amount of $374,295  was
         recorded for the year ending December 31, 1997.

         In July 1997,  the  Company  retained  the  services  of an  investment
         advisor to assist in raising up to $15,000,000 in a private  placement.
         In  connection  with these  services,  the Company  granted  options to
         purchase  400,000  shares of common  stock  under the Plan at $2.50 per
         share.  200,000  of  the  options  were  exercisable  upon  grant;  the
         remainder were forfeited during 1998.

         In October 1997, the Company granted options to purchase 261,233 shares
         of common  stock to  employees  under the 1996 plan.  The options  were
         granted with an exercise price equal to market,  $3.0625 per share. The
         options expire in 2002 and vest over three years or upon  attainment of
         certain performance criteria. As of December 31, 1998, 230,900 of these
         options were forfeited.

         In November  1997,  the  Company  granted  options to purchase  105,000
         shares of common  stock to employees  under the 1996 Plan.  The options
         were granted with an exercise price equal to market, $2.5938 per share.
         The options  expire in 2002 and vest over three  years.  As of December
         31, 1998, 55,000 of these options were forfeited.

         In November  1997,  the Company  granted  non-plan  options to purchase
         1,500,000  shares of common  stock to  directors  of the  Company.  The
         options were granted  with an exercise  price equal to market,  $2.5938
         per share,  and expire in 2002. In June 1998, the options were repriced
         to the current fair market value of $0.26 per share. The options vested
         immediately.


<PAGE>F-18

                        INNOVACOM, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



         In December 1997, a former  president of the Company  returned  500,000
         shares of common stock  originally  issued at par value.  The stock was
         returned to settle any  potential  claims the Company may hold  against
         him relating to the November 10, 1997 legal action described in Note 9.
         The return of these shares was recorded  based on their  original issue
         cost.

         During 1998, the Company granted options to purchase  1,966,400  shares
         of common  stock to  employees  under the 1996 plan.  The options  were
         granted with  exercise  prices equal to market on the date of grant and
         range  from $0.26 to $2.50 per share.  The  options  expire in 2003 and
         vest over three years.

         In March 1998, the Company granted  non-plan options to purchase 50,000
         shares of common stock to an employee. The options were granted with an
         exercise  price of $1.75  per  share.  One  third of the  options  vest
         immediately and the remainder vest over two years. Compensation expense
         of $8,854  was  recognized  in the year  ended  December  31,  1998 for
         services provided.

         In May 1998,  the Company  borrowed  $217,500  which was converted into
         836,538 shares of common stock.  In connection  with this borrowing the
         Company issued 25,000 shares of common stock and recognized  $43,750 in
         interest  expense  for the year ended  December  31,  1998 for the fair
         value of the 25,000 shares issued.

         In May 1998, the Company granted options to purchase  1,000,000  shares
         of common stock at an exercise  price of $1.75 per share in  connection
         with the hiring of a new  president.  In  December  1998,  the  Company
         settled a claim with this  individual in which 500,000 of these options
         were forfeited. See Note 9: Litigation.

         In October  1998,  the  Company  granted  non-plan  options to purchase
         300,000 shares of common stock to a director.  The options were granted
         with an exercise  price equal to market on the date of grant ($0.16 per
         share) and vest immediately.

         The following  table sets forth activity for all options  granted under
the Plan:

<TABLE>
                <S>                                                       <C>                      <C>
                                                                                                           AVERAGE
                                                                                                        EXERCISE PRICE
                                                                                  NUMBER                   PER SHARE
                                                                           ---------------------    --------------------
                  BALANCE, December 31, 1996                                          369,500       $              1.62
                      Granted                                                       3,044,873                      2.60
                      Forfeited                                                      (606,050)                     1.84
                      Exercised                                                             -                         -
                                                                           ------------------        --------------------

                  BALANCE, December 31, 1997                                        2,808,323                      2.63

                      Granted                                                       2,669,833                       .31
                      Forfeited                                                    (2,808,323)                     2.63
                      Exercised                                                             -                        -
                                                                           ------------------         -----------------

                  BALANCE, December 31, 1998                                        2,669,883       $               .31
                                                                           ==================       ===================
</TABLE>



<PAGE>F-19


                        INNOVACOM, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



         At  December  31,  1998  options  to  purchase  1,058,547  shares  were
         exercisable  at  prices  ranging  from  $0.26 to $2.59 per  share.  The
         remaining 1,611,336 options outstanding become exercisable at $0.26 per
         share through June 2001.

         If not previously exercised or forfeited, 810,933 and 1,858,950 options
         outstanding  will expire  during the year ended  December  31, 2002 and
         2003, respectively.

         The following is a summary of all of the activity for non-plan options:
<TABLE>
                <S>                                                       <C>                     <C>

                                                                                                        WEIGHTED AVERAGE
                                                                             NUMBER OF SHARES            EXERCISE PRICE
                                                                           ---------------------    ---------------------
                  BALANCE, December 31, 1996                                        4,200,000       $                3.00
                      Vested options granted to consultants                           217,500                        2.89
                      Options granted to consultants                                    4,660                         .50
                      Options granted to directors                                  1,500,000                        2.59
                      Expired/cancelled options                                    (1,171,667)                       3.00
                                                                           ------------------       ---------------------

                  BALANCE, December 31, 1997                                        4,750,493                        2.86

                      Vested options granted to consultants                                 -                           -
                      Options granted to consultants                                        -                           -
                      Options granted to employees                                  1,050,000                        1.75
                      Options granted to directors                                  1,800,000                         .24
                      Expired/cancelled options                                    (4,366,665)                       2.78
                                                                           ------------------       ---------------------

                  BALANCE, December 31, 1998                                        3,233,827       $                1.24
                                                                           ==================       =====================
</TABLE>



         At  December  31,  1998  options  to  purchase  2,533,827  shares  were
         exercisable  at  prices  ranging  from  $0.16 to $3.37 per  share.  The
         remaining options  outstanding  become exercisable upon the achievement
         of certain performing criteria.

         If not  previously  exercised  or  forfeited,  all options  will expire
         during the years ended December 31, 2003 through 2008.

         As  stated  in Note 2, the  Company  has not  adopted  the  fair  value
         accounting  prescribed by FASB123 for employees.  Had compensation cost
         for stock options issued to employees been determined based on the fair
         value at grant  date for  awards in 1998 and 1997  consistent  with the
         provisions  of FASB123,  the  Company's net loss and net loss per share
         would have been adjusted to the proforma amounts indicated below:

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

                                                                                   1998                     1997
                                                                           ---------------------    --------------------

                  Net loss                                                 $      (21,295,706)      $      (12,594,406)
                                                                           =====================    =====================
                  Basic and diluted net loss per common share              $            (0.92)      $            (0.70)
                                                                           =====================    =====================
</TABLE>


<PAGE>F-20

                        INNOVACOM, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         The fair value of each option is  estimated  on the date of grant using
         the present value of the exercise  price and is pro-rated  based on the
         percent of time from the grant date to the end of the  vesting  period.
         The  weighted-average  fair value of the  options on the grant date for
         1998 and  1997  was  $1.41  and  $2.10  per  share,  respectively.  The
         following  assumptions were used for grants in 1998 and 1997: risk-free
         interest rates of 5.6% and 6.22%, respectively; expected lives of three
         years;  dividend  yield  of 0%;  and  expected  volatility  of 140% and
         144.0%, respectively.

9        COMMITMENTS AND CONTINGENCIES:

         In July 1997, the board of directors approved the Company entering into
         an  agreement  to obtain a 66%  interest in a joint  venture with China
         International Radio Development. As part of this agreement, the Company
         will have to fund up to $200,000 of expenses.  The purpose of the joint
         venture  is to  develop an  exhibition  center in China to display  new
         high-tech  products.  In  connection  with  obtaining the joint venture
         interest,  during 1998,  the Company  issued  100,000  shares of common
         stock to a third party as a finder's fee upon closing of the  agreement
         and recognized $26,000 in expense for services provided.  Subsequent to
         December  31, 1998,  the Company  entered into an agreement to obtain a
         release from all  obligations  under the joint  venture  agreement.  In
         exchange,  the  Company  will pay  $53,000 in cash,  cancel the 100,000
         shares previously issued as a finders fee and issue 200,000 new shares.
         The Company has accrued  $77,000 as of December 31, 1998 in  connection
         with this agreement.

                                     LEASES

         The Company  leases  office  space in  California  and  certain  office
         equipment  under  long-term  operating  leases.  The  Company's  leases
         include  the cost of real  property  taxes  and  maintenance  expenses.
         Insurance  and  utilities  are  the  Company's  responsibility.  Future
         minimum lease payments for all  non-cancelable  operating leases are as
         follows:


         YEAR ENDING DECEMBER 31,                                   AMOUNT
         ------------------------                                -------------
                  1999                                           $  345,600
                  2000                                              345,600
                  2001                                              345,600
                  2002                                              345,600
                                                                 -------------

                                                                 $1,382,400

         Rent expense was $427,826 and $193,214 for 1998 and 1997, respectively.

                              EMPLOYMENT AGREEMENT

         In connection with the acquisition of Sierra Vista Entertainment,  Inc.
         (See Note 1), the Company entered into five year employment  agreements
         with its  president and the president of Sierra Vista which provide for
         minimum annual salaries totaling $420,000 and other incentives, as well
         as  severance  payments  equal to one  year's  salary  for  termination
         without cause, and three years salary for termination  without cause in
         connection with a change in control. During 1998, these agreements were
         canceled in exchange for a mutual release of all claims.



<PAGE>F-21


                        INNOVACOM, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





                                   LITIGATION

         On October 7, 1996,  the  Company  filed a  complaint  for  declaratory
         relief  against a former  employee.  The lawsuit states that the person
         breached a written  employment  agreement  between the two parties.  In
         response to the action,  the employee filed a similar  cross-complaint,
         which was subsequently amended after an unsuccessful mediation process.
         The amended  cross-complaint  seeks damages in excess of $5,000,000 and
         2% of the Company's stock outstanding as of April 1996. In August 1998,
         the parties reached an agreement whereby the Company paid $4,000.

         On December 27, 1996,  the Company  issued a purchase  order to Compass
         Design Automation  ("Compass") in the amount of $1,021,300 for software
         tools.  On March 18, 1997,  the Company  canceled this  purchase  order
         because it believes  Compass  reneged on certain  commitments.  In July
         1997,  Compass made a demand for payment.  Company  management  has had
         discussions with Compass to resolve this issue;  however,  no agreement
         has been reached.  Management  believes,  based on current information,
         that any  settlement  would not have a material  adverse  impact on the
         Company.

         On November 10, 1997 the Company filed a suit against  former  officers
         and  directors  of the Company for breach of  fiduciary  duty and third
         parties who were involved in the initial merger between the Company and
         Jettson  Realty  Development  as well as the private  placements of the
         Jettson  Realty  Development  stock.  The suit claims fraud,  breach of
         fiduciary duty and negligence  surrounding the acquisition.  Management
         intends to pursue this lawsuit vigorously and believes that no material
         adverse impact will arise as a result of the  litigation.  During 1997,
         the Company has entered into a settlement  agreement with the Company's
         former president  related to this suit whereby the Company's  president
         agreed to return 500,000  shares of common stock.  (See Note 8). During
         1998, the Company  obtained  defaults against certain of the defendants
         whereby the Company was awarded  approximately  $25 million in damages,
         was allowed to cancel  1,010,329  shares of its common stock previously
         issued to the defendants and retain $250,959 of contested proceeds from
         a private placement. The Company has given no accounting recognition to
         the $25 million in damages.

         As part of the  November  10, 1997  lawsuit,  a former  director of the
         Company filed a  counterclaim  asserting  approximately  $11 million in
         damages.  In  addition,  the suit also  sought  to  remove  restrictive
         legends on the stock currently owned.  During 1998, the Company entered
         into a settlement agreement with this former director.  In exchange for
         a mutual  release of all claims,  the former  director  placed  500,000
         shares of the  Company's  common  stock  previously  issued to him into
         escrow.  These shares were then sold and the proceeds of  approximately
         $64,000  were used by the Company to pay off certain  accounts  payable
         and legal accruals.

         A former  consultant has asserted claims against the Company for unpaid
         compensation of approximately $30,000 and stock option rights involving
         169,500 shares.  Settlement  discussions  are now underway.  The unpaid
         compensation  has been  accrued as of  December  31,  1997.  Management
         believes, based on current information, that this lawsuit will not have
         any additional material adverse impact on the Company.

         Effective in May 1998,  the Company  hired a new  president and entered
         into an employment  contract with him. In June 1998,  the new president
         resigned and subsequently filed a claim against the



<PAGE>F-22

                        INNOVACOM, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         Company  alleging that his employment  contract had been breached.  The
         Company  believed that this individual made certain  misrepresentations
         and defended itself  vigorously.  In December 1998, the parties settled
         their respective claims including a payment by each party to the other.
         The  amount of these  payments  was not  material  to the  Company.  In
         addition, the Company agreed to allow the individual to keep options to
         purchase  500,000  shares of common stock at an exercise price of $1.75
         per share. These options vested immediately. The company has recognized
         compensation  expense of $265,625 in the year ended  December  31, 1998
         related to these options.

         In  August  1998,  the  Staff of the  Division  of  Enforcement  of the
         Securities  and  Exchange  Commission  advised  the  Company  that  the
         Commission  had issued a formal  order for private  investigation.  The
         investigation involves allegations that, since January 1, 1995, certain
         of the  Company's  present or former  officers,  directors,  employees,
         business consultants,  investment bankers, and/or certain other persons
         or entities  associated  with the Company  may have  employed  devices,
         schemes,  or  artifices  to defraud,  by,  among other  things,  making
         undisclosed payments to certain registered  representatives relating to
         sales of the Company's  securities,  and by manipulating  the Company's
         stock price. Discovery has been initiated. Management believes based on
         current  information,  that there will be no material adverse impact on
         the Company as a result of this investigation.


                                 PRODUCT LICENSE

         The Company is committed  under a license to pay  royalties for the use
         of technology to develop  video  encoding  systems on a chip to a third
         party  for a  percentage  of gross  revenue  on  sublicenses  and for a
         percentage of the Foundry price for silicon in connection with sales to
         end users as follows:

                          12-MONTH PERIOD
                         ENDING MARCH 26,                         PERCENTAGE
                                                            --------------------
                               1998                                  15%
                               1999                                   8%
                               2000                                   5%
                               2001                                   3%
                               2002                                   1%
                               2003                                   1%

         The maximum  amount of royalties to be paid under the license shall not
         exceed  $3,000,000.  No  royalties  have been  earned  or paid  through
         December 31, 1998. The Company has abandoned the use of this technology
         during 1998.

<PAGE>F-23


                        INNOVACOM, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



10      INCOME TAXES:

         Income tax expenses is comprised of the following:

<TABLE>
<S>                                                    <C>                   <C>                   <C>
                                                                                                         MARCH 3, 1993
                                                                  FOR THE YEAR ENDED                     (INCEPTION) TO
                                                                     DECEMBER 31,                         DECEMBER 31,
                                                      --------------------------------------------   -----------------------
                                                             1998                    1997                     1998
                                                      --------------------    --------------------   -----------------------
                  Current
                      Federal                         $              -       $               -       $                 -
                      State                                      2,400                   3,200                     8,800
                                                      ----------------        ----------------       -------------------
                                                                 2,400                   3,200                     8,800
                                                      ----------------        ----------------       -------------------

                  Deferred
                      Federal                                       -                       -                         -
                      State                                         -                       -                         -
                                                      ----------------        ----------------       -------------------


                  Income tax expense                  $          2,400        $          3,200       $             8,800
                                                      ================        ================       ===================
</TABLE>


         Deferred income tax assets (liabilities) are comprised of the following
at December 31, 1998:

    Current deferred income tax assets (liabilities):
      Accrued vacation                                      $            21,143
      Accrued wages                                                      54,832
      Stock based compensation                                        1,760,219
      Accrued settlement                                                 21,112
      Other                                                               8,484
                                                            -------------------
                                                                      1,865,790
                                                            -------------------
    Valuation allowance                                              (1,865,790)
      Net current deferred tax asset                        $                 -
                                                            ===================

   Long-term deferred tax assets (liabilities):
     Depreciation/amortization                              $           549,627
     Net operating loss carryforward                                  9,427,698
     Research and development credit                                    794,320
                                                            -------------------
                                                                     10,771,645
   Valuation allowance                                              (10,771,645)
                                                            -------------------
     Net long-term deferred tax asset                      $                  -
                                                            ===================

<PAGE>F-24




         Total income tax expense differed from the amounts computed by applying
         the U.S. federal statutory tax rates to pre-tax income as follows:
<TABLE>
<S>                                                     <C>                   <C>                     <C>

                                                                                                          MARCH 3, 1993
                                                                  FOR THE YEAR ENDED                     (INCEPTION) TO
                                                                     DECEMBER 31,                         DECEMBER 31,
                                                      --------------------------------------------    ----------------------
                                                             1998                    1997                     1998
                                                      --------------------    --------------------   -----------------------
                Total expense (benefit)
                  computed by applying the
                  U.S. statutory rate                            (34.0%)                 (34.0%)                (34.0%)
                Nondeductible license costs                          -                       -                    1.3
                Nondeductible goodwill                             5.7                      .7                    3.3
                Non deductible interest                           14.4                       -                    9.6
                Other                                               .4                       -                     .2
                Change  in   beginning   balance   of
                valuation allowance                               13.5                    33.3                   19.6
                                                      -------------------     -------------------    -----------------
                                                                     -  %                    - %                    -%
                                                      ==================      ==================     =================
</TABLE>


         As of December 31, 1998,  the Company has available net operating  loss
         carryforwards  for income taxes of $21,958,000 for Federal purposes and
         $22,193,000  for California  purposes which begin to expire in the year
         2011 and 2001,  respectively.  The Company has $579,000 and $275,000 of
         credit  carryforward  for federal  and  California,  respectively.  The
         benefit  of the net  operating  loss and  credit  carryovers  to offset
         future  taxable  income  may be subject  to  limitation  as a result of
         changes in stock  ownership  as  prescribed  in Internal  Revenue  Code
         Section 382.

11        PROFIT SHARING PLAN:

         During 1998, the Company established the InnovaCom,  Inc. 401(K) Profit
         Sharing Plan (the Plan)  covering  substantially  all of its employees.
         Management determines, at its discretion, the amount of any matching or
         other contributions to the Plan. The Company made no such contributions
         to the Plan during the year ended December 31, 1998.