U.S. SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 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, 1996

     [ ]  Transition report under Section 13 or 15(d) of the Securities Exchange
          Act of 1934

     For the transition period from ___________________ to ___________________

     Commission file number 0-26604

                        DIGITAL DESCRIPTOR SYSTEMS, INC.
                 (Name of Small Business Issuer in its Charter)

           Delaware                                                   23-2770048
(State or Other Jurisdiction of                                 (I.R.S. Employer
(Incorporation or Organization)                              Identification No.)

              2010-F Cabot Boulevard, Langhorne, Pennsylvania 19047
                    (Address of Principal Executive Offices)

                                 (215) 752-0963
                (Issuer's Telephone Number, Including Area Code)

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

                                 Not Applicable


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

    Units, each Unit consisting of one share common stock, $0.001 par value,
        one Redeemable Class A Warrant and one Redeemable Class B Warrant
                                (Title of Class)

     Check  whether  the issuer:  (1) filed all reports  required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter  period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.

Yes _X_   No  ___

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

     Issuer's revenues for its most recent fiscal year.  $2,728,368

<PAGE>

     The number of shares  outstanding of each of the issuer's classes of common
equity, as of March 17, 1997.

   Title of Each Class                              Number of Shares Outstanding
   -------------------                              ----------------------------

   Common Stock                                                        2,468,750
   ($.001 par value)

     The  aggregate  market  value  on such  date  of the  voting  stock  of the
Registrant  held by  non-affiliates  was an  estimated  $2,468,750  based on the
average of the high and low bid price for the  Company's  Common  Stock on March
17, 1997.

                       DOCUMENTS INCORPORATED BY REFERENCE

     The Company's Proxy Statement for the 1997 Annual Meeting of  Stockholders,
filed pursuant to Regulation  14A under the Securities  Exchange Act of 1934, is
incorporated by reference in Part III.

     Transitional Small Business Disclosure Format (check one): Yes ___  No _X_

<PAGE>

                                TABLE OF CONTENTS

Item No.                                                               Page No.

PART I   ...................................................................  1

1.  Business................................................................  1
    Products and Services...................................................  1
    Law Enforcement Programs................................................  1
    Compu-Color(R)Assessor Program..........................................  2
    Compu-Capture(R)ID Program..............................................  3
    Maintenance and Support.................................................  3
    New Products............................................................  3
    Marketing...............................................................  4
    Compu-Capture(R)........................................................  4
    Compu-Color(R)..........................................................  4
    Customers...............................................................  4
    Competition.............................................................  5
    Suppliers...............................................................  5
    Government Regulation or Government Approval............................  5
    Intellectual Property Rights............................................  6
    Employees...............................................................  6

2.  Description of Property.................................................  6

3.  Legal Proceedings.......................................................  6

4.  Submission of Matters to a Vote of Security Holders.....................  6

PART II  ...................................................................  7

5.  Market for Common Equity and Related Stockholders Matters...............  7

6.  Management's Discussion and Analysis or Plan of Operation...............  7
    Results of  Operations..................................................  8
    Liquidity and Capital Resources.........................................  9
    Asset Management........................................................  9
    General Risk Factors Affecting Results..................................  9

7.  Financial Statements.................................................... 10

8.  Changes in and Disagreements with Accountants on Accounting
    and Financial Disclosure................................................ 10

PART III ................................................................... 10

9.  Directors, Executive Officers, Promoters and Control Persons;
    Compliance with Section 16(a) of the Exchange Act....................... 10

10. Executive Compensation.................................................. 10

11. Security Ownership of Certain Beneficial Owners and Management.......... 10

12. Certain Relationships and Related Transactions.......................... 10

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PART IV  ................................................................... 11

13. Exhibits, Financial Statements and Reports on Form 8-K.................. 11


                                       ii

<PAGE>

                                     PART I

Item 1.    Business.

     The  Company  develops,   assembles  and  markets  computer  installations,
consisting of hardware and software, which utilize imaging technology to capture
video and scanned images,  digitize the image, link the digitized images to text
and store image and text. The Company's software programs record, store, process
and retrieve visual images and link textual  information with the images so that
customers  can record and retrieve  related text and images in the future.  Once
recorded,  the image and text can be  transmitted  by computer or over telephone
transmission lines to remote locations.

     From  the  Company's  base  software  program,   which  integrates  textual
information  with images,  the Company has developed  and marketed  several core
products  modifications to diverse customer bases. The Company  anticipates that
it will continue to adapt its base digital  software  program into new uses both
for government agencies and private industry.

     The  operations  of the Company  were started as a division of ASI Computer
Systems, Inc. of Waterloo, Iowa in 1986.  Compu-Color,  Inc. was formed in July,
1989 and as of July 1, 1989 purchased the assets of the Compu-Color  division of
ASI Computer Systems,  Inc. for a purchase price of $253,689.22.  The Company is
the successor to Compu- Color, Inc., an Iowa corporation.

     The Company's  principal offices and facilities are located at 2010-F Cabot
Boulevard West, Langhorne,  Pennsylvania 19047 and its telephone number is (215)
752-0963.

Products and Services

     The Company has adapted its digital  imaging  technology  and software into
several core  products:  Compu-Capture(R),  an image system to be combined  with
records  management  agreement for booking suspects by law enforcement  agencies
and tracking  inmates by  correctional  facilities,  Compu-Color(R),  a software
program for recording  images of real estate  together with property tax history
and underlying information for tax assessors, and Compu-Capture(R)ID,  a program
to produce  identification cards and security devices for governments or private
industry.  Although the uses for the Company's  core  products are diverse,  the
products  are  adaptations  of the  Company's  base  product  which uses imaging
technology to link digitized  images and text so that the related image and text
can be recorded, stored, processed and retrieved individually or together.

Law Enforcement Programs

     Compu-Capture(R) is the law enforcement application of the Company's system
for  combined  digitized  image and  textual  information.  The  system has been
developed  primarily for law enforcement and jail and  correctional  facilities.
The Company has installed more than 250 Compu-Capture(R) systems in 46 states as
well as jurisdictions in Europe, South America, Canada, Mexico and the Bahamas.

     Information  is  entered  into the  Compu-Capture(R)  system  at the time a
subject is booked or enters the facility.  Using the Compu-Capture(R)  system, a
law enforcement officer can complete more than one stage in the booking process,
such as entering booking  information and taking a mug shot, at one location.  A
video image of the subject,  a "mug shot", is taken by the booking officer.  The
booking officer can preview each mug shot image on the computer screen to insure
accuracy and clarity before processing and storing the image. Once an acceptable
image is obtained,  the booking  officer can rapidly store the image through the
computer application, along with the relevant textual information.

     The  information  entered  into the  Compu-Capture(R)  system  can  include
booking record, names,  aliases,  physical  characteristics,  such as size, hair
color,  facial  scars  or  physical  deformities,  and  fingerprint  codes.  The
Compu-Capture(R)

                                        1

<PAGE>

system allows the officer  conducting a search to assign priorities or values to
physical  characteristics  for the computer's search of the database of existing
subjects.  Features  that are  difficult  to disguise  or alter,  such as facial
scars,  can be assigned  higher values than other  characteristics  such as hair
color or facial hair.  In the  requested  search,  the  Compu-Capture(R)  system
automatically  sorts  based on the  highest  valued  characteristic  first.  The
sorting  feature  enables the system to  streamline  the process of  identifying
potential suspects from witness  descriptions by permitting  searches by various
identifying  characteristics of a suspect. The Compu-Capture(R)  system can also
sort on the basis of characteristics to create line-ups.  Sophisticated line-ups
can be created  without the need for time  consuming  viewing of individual  mug
shots.  Only those mug shots which the system  identifies  as close  matches are
assembled by the system for viewing.

     The  Compu-Capture(R)  system  produces  images  that  meet or  exceed  the
suggested  requirements of the Department of Justice National Crime  Information
Commission  ("NCIC"),  including  the NCIC  2000,  the  standard  adopted by the
Federal Bureau of Investigation  for the quality of mug shots. The NCIC does not
certify or otherwise approve any mug shot systems.

     Once entered into the Compu-Capture(R) system, the visual image and textual
material can be utilized in a variety of ways. Mug shots can be retrieved on the
computer screen or printed individually, with or without text information, or as
part of a line-up.  The digitized mug shot and information can be transmitted to
remote  locations  by  telephone  line or radio  frequency  or through  computer
networks and can be retrieved  rapidly  from  central or remote  locations.  The
ability to transmit  clear  images  with  related  text  allows law  enforcement
agencies to quickly disseminate all necessary information concerning suspects.

     During  1996,  the  Company  acquired  the assets of  VISATEX  Corporation,
including the proprietary rights to VISATEX products, Compu-Sketch,  Compu-Scene
and FotoFile. Compu-Sketch is a comprehensive program to generate composites and
provide  for  touch  up and  enhancement  of the  composites.  Compu-Scene  is a
computer-aided  drafting  program  specifically  selected for drawing  crime and
accident scenes. FotoFile is a mug-shot system similar to Compu-Capture(R).  The
Company  believes that these  additional  products will enhance its offerings to
law enforcement agencies.  These products are compatible with the Company's core
product, Compu-Capture(R).

Compu-Color(R) Assessor Program

     The  Compu-Color(R)  Assessor Program applies imaging technology to produce
digitized  images of property  and related  textual  information  for use in tax
assessment  jurisdictions.  Tax  assessors  generally  maintain  pictures of all
improved  properties within their  jurisdictions.  The  Compu-Color(R)  Assessor
Program allows each assessor's office to electronically maintain this picture as
part of a computer  system  that links the image  with  relevant  text about the
property.  The  image  and text can be  retrieved  and  viewed  individually  or
together on the computer screen or printed out on an attached printer along with
comparable properties.

     The  Compu-Color(R)  system processes a videotape or photographic  image of
improved  properties  and stores the images to a computerized  record,  together
with  relevant  information  from the  assessor's  records  with  respect to the
improved  property.  The programs  allow the  assessor to rapidly  access a full
color image of each improved property and the information available,  as well as
images and information  related to comparable  properties.  The program provides
for side-by-side  visualization of comparable improved  properties.  The program
can create a hard copy picture of the image,  including images of any comparable
improved properties.

     As an additional  service for assessor's  offices  interested in purchasing
the  Compu-Color(R)  system,  the Company will process and store the  assessor's
existing files on a  Compu-Color(R)  system.  This service enables  assessors to
have all deeds and records on the same computerized system.



                                        2

<PAGE>

Compu-Capture(R)ID Program

     The Company has begun marketing the  Compu-Capture(R)ID  Program, a version
of   the   Compu-Capture(R)   system,   for   commercial    applications.    The
Compu-Capture(R)ID   Program  produces  photograph   identification  cards  with
pictures of the  individual  and related  information.  The Company has sold the
Compu-Capture(R)ID system to private industry to produce employee identification
cards. A version of the  Compu-Capture(R)ID  system was installed by the Company
in Belgium in 1995 as a National Alien  Registration card system and is awaiting
approval  and payment  from the  government  of Belgium.  The card  includes the
picture,  fingerprint  and signature of each person  registered.  The Company is
also exploring the market for the Compu-Capture(R)ID identification badge system
in connection with voter registration, drivers' license and other identification
card applications.

Maintenance and Support

     In addition to the installation of a  Compu-Capture(R),  Compu-Color(R)  or
Compu-Capture(R)ID  system,  the Company trains the personnel of the customer in
the use and operation of the system.  After  installation,  the Company provides
maintenance  and support  for a limited  period of time.  The Company  offers to
customers  ongoing  maintenance  and support and updates of the  software for an
annual fee. Over ninety percent (90%) of customers purchase ongoing  maintenance
and support at the time of installation of the system.

New Products

     The VISATEX products,  Compu-Sketch, and Compu-Serve,  expand the Company's
offerings to law enforcement agencies. These offerings are logical extensions of
the Company's core product and core distribution,  Compu-Capture(R),  and expand
the Company's  relationship  with its  customers.  Compu-Sketch  is installed in
nearly  700   jurisdictions.   The  Company  expects  that  the  acquisition  of
Compu-Sketch will increase its access and sales to these jurisdictions.

     The Company has announced  plans to develop and  distribute an inkless live
scan fingerprint  system in conjunction with its  Compu-Capture(R)  product.  An
inkless fingerprint system electronically reads and creates a digital image of a
fingerprint.  Fingerprints  are  recorded by rolling the fingers of a subject on
the contact  surface of an optical  assembly  to create an optical  image of the
fingerprint.  The  optical  image  is  converted  into  a  digital  image  by  a
photo-imaging  detector.  The fingerprint  system is expected to be a compatible
addition to the  Compu-Capture(R)  product which is frequently  requested by law
enforcement  agencies.  When these products have been developed and tested,  the
Company  intends to  distribute  the inkless  fingerprint  system in  commercial
applications,  including as a security  device or an access control  device,  as
part of the  Compu-Capture(R)  ID product.  There can be no  assurance  that the
Company will be successful  in the  development  of the  products,  nor that the
products can be priced and marketed competitively.

     The Company has undertaken a research  study in Norway in conjunction  with
NORDIC SVA on the feasibility of production or licensing of a patented  portable
fingerprint  verification product. The product is the size of a credit card. The
study is being pursued with the intent by the Company to license the  technology
in 1998 if it becomes  feasible.  There can be no assurance that the product can
be developed and marketed commercially.

     The Company is offering CPC 2000/FE,  a program which enables a customer to
digitize images compatible with any software without  additional code writing by
the   customer.   This  solution  is  an  extension  of   Compu-Capture(R)   and
Compu-Color(R)  products  which  have  been  proven  in  over 50  public  sector
installations.

     The Company  introduced  a new  software  solution-SI  3000 - which  allows
jurisdictions to retain their legacy data and yet be able to be compliant to the
new National  Incident  Based  Reporting  System  (NIBRS) at a reduced cost from
other options. This solution is marketed by the Compu-Capture(R)  sales force to
larger  jurisdictions  and features a Graphical User Interface  which allows the
end user to retrieve  data from  multiple  applications  regardless of where the
date resides -- across Wide Area Networks or locally.


                                        3

<PAGE>

Marketing

Compu-Capture(R)

     The Company markets its Compu-Capture(R) products through an internal sales
force and vendors of  compatible  software  applications.  The  Company  markets
products  related to the  Compu-Capture(R)  system in the same way.

     The Company  employs 6 full-time  employees  in sales or sales  management.
These salesmen  market directly to customers and to sales leads developed by the
Company. The employees also work with sales employees of other vendors in making
sales calls and proposals.

     In addition, the Company has marketed the Compu-Capture(R) products through
vendors of compatible  software  applications  such as IBM Business Partners and
other hardware suppliers. IBM Business Partners is a designation used by IBM for
certain vendors that sell products which are compatible  with IBM products.  The
Company is an IBM Business  Partner.  Through the IBM Business  Partner program,
the Company has been  introduced to other IBM Business  Partners with compatible
products which have marketed the Compu-Capture(R) program. To increase its sales
through IBM  Business  Partners,  the  Company has  directed  its  research  and
development  efforts in the last five years to  developing  software  interfaces
which enable the Compu-Capture(R) program to operate in conjunction with various
jail management and other law enforcement programs of IBM Business Partners. The
Company believes that its growth will come, in part, by expanding the number and
size of sales in  conjunction  with  systems  of  existing  and  additional  IBM
Business Partners and other software suppliers.  Currently more than one-half of
the revenues from the Company's sales are generated from outside vendors.

     The Company has recently begun exploring the market for its products in the
European,  South and  Central  American  and other  international  markets.  The
Company  has been  working  in  conjunction  with IBM to  develop  some of these
markets and has opened sales representative offices in Sweden and Belgium.

     The  Company   anticipates   that  its  future   marketing   strategy   for
Compu-Capture(R)  will focus on expanding  the quantity and size of sales to law
enforcement  agencies  and  jail  facilities  of its  existing  Compu-Capture(R)
program and new compatible  products in the same field, such as Compu-Sketch and
Compu-Scene.  A 1990 survey  conducted  by The Law  Enforcement  Management  and
Administrative Statistics (LEMAS) program of the Bureau of Justice Statistics of
the United  States  Department  of Justice (the "LEMAS  Survey") of a nationally
representative sample of state and local police departments indicated that there
are  approximately  17,000 state and local law  enforcement  agencies.  Of those
agencies,  52% of the agencies  surveyed,  employing 90% of all sworn  officers,
were using one or more types of computers. Of local police departments surveyed,
30% use computers for criminal  investigations,  criminal  histories and Uniform
Crime Reports. The Company believes that as law enforcement agencies become more
familiar  with  available  technology,  the market for products  using  computer
technology, such as Compu-Capture(R), will increase.

Compu-Color(R)

     The Company has marketed the Compu-Color(R) system to tax assessors through
its own  employees  and through  companies  which  consult with tax assessors in
connection with the revaluation of improved  properties.  The consultants market
the  Compu-Color(R)  system  as part of a package  of  revaluation  systems  and
services.  The Company's  sales  personnel  market both the  Compu-Color(R)  and
Compu-Capture(R) systems.

     The  Company  intends to  continue  marketing  the  Compu-Color(R)  program
through its own  employees,  and,  when  available,  through  other  vendors and
consultants.

Customers

     The Company  maintains a continuing  relationship  with its customers based
upon  support  services  and  periodic  upgrades  of  the  Compu-Capture(R)  and
Compu-Color(R) software. The major revenue generating event is the initial

                                        4

<PAGE>

installation and any significant  expansion of that  installation.  The sales of
maintenance  support  services  which the  Company  performs  subsequent  to the
installation do not generate sufficient revenue to sustain the operations of the
Company. The Company must rely on new business to sustain and grow the Company.

     The Company also relies on maintaining ongoing  relationships with vendors,
especially IBM Business  Partners,  for continuing  sales  introductions  to new
customers.  The Company has  concentrated on expanding the  compatibility of its
Compu-Capture(R)  and  Compu-Capture(R)ID  system  with more  computer  software
applications  in order to expand the number of vendors  which may  recommend the
Company's products.

Competition

     The Company currently has two national  competitors to the Compu-Capture(R)
system.  TFP, Inc. of Greenville,  South Carolina,  is a privately-held  company
with   approximately  150  installations  of  a  system   competitive  with  the
Compu-Capture(R)  system.  X-Image of San Jose,  California has approximately 65
installations of a competitive system and is also a privately-held company.

     Various regional software companies market services or software programs to
tax assessors which are in competition with the Compu-Color(R) system.

     The Company intends to continue to develop software  interfaces to make its
products,  including new products introduced by the Company, compatible with new
and  expanded  versions  of systems  offered by IBM  Business  Partners or other
vendors of law  enforcement  and tax  assessor  related  software.  The  Company
believes  that  expanding  the  number  of  computer   systems  with  which  the
Compu-Capture(R)  and  Compu-Color(R)  systems  are  compatible  will assist the
Company in maintaining its competitiveness.

     In the event that the  Company is  successful  in  developing  the  inkless
fingerprint  system in a  commercially  acceptable  form,  the Company will face
significant  competition in the market from  long-established  companies such as
Identix,  Inc. and Digital Biometric Systems,  Inc. Each company currently sells
similar products;  each has expended  significant capital in the development and
marketing  of those  products  and  neither has yet to achieve  significant  and
consistent profitability.

Suppliers

     The Company has sold most of its systems for use on IBM personal computers.
However,  the Company's programs are compatible with the IBM AS400 or IBM clones
and also products of other computer manufacturers. The peripheral equipment used
in connection with the Company's systems,  such as videotape  equipment,  can be
provided  by a wide  range of  manufacturers.  As a result  the  Company  is not
dependent on any particular supplier of raw material.

Government Regulation or Government Approval

     Most law  enforcement  agencies  purchasing  new or  upgraded  or  expanded
systems  require that the system meet the  requirements of NCIC 2000, a standard
issued by the National Crime Information Commission and specified by the FBI for
the  size,  quality  and  type  of mug  shots  produced  by a mug  shot  system.
Compu-Capture(R) currently meets or exceeds this standard.

     The FBI has  developed an  extensive  certifying  process  which an inkless
fingerprint  system must pass before the FBI will accept cards  produced by that
system. If the Company develops an inkless  fingerprint system, the Company will
need to submit the inkless fingerprint system to the FBI for certification.


                                        5

<PAGE>

Intellectual Property Rights

     The  Company  owns  the  proprietary  rights  to the  software  used in the
Compu-Color(R) and Compu-Capture(R) programs.

     In   addition,   the   Company   owns   the   rights   to  the   trademarks
"Compu-Capture(R)", "Compu-Color(R)", "Compu-Sketch(R)".  These  trademarks have
been registered with the United States Patent and Trademark Office.

Employees

     The Company  employs 22  full-time  employees.  None of the  employees  are
represented  by a labor  organization  and  the  Company  is not a party  to any
collective bargaining agreements.

Research and Development Expenditures

     The Company expended  $134,951 in 1995 and $446,776 in 1996 on research and
development.

Item 2.   Description of Property

     On July 1, 1995,  the Company  entered into a lease of 6,000 square feet of
office space from Advent Realty Limited  Partnership,  at 2010-F Cabot Boulevard
West,  Langhorne,  Pennsylvania 19047, its current location, at an annual rental
of  $70,380  per year  with  certain  escalations.  The  lease has a 5 year term
beginning  July 1,  1995.  The  Company  uses the space for its  offices,  sales
offices and research and development facilities.

Item 3.   Legal Proceedings

     The Company is not a party to any pending legal  proceeding and the Company
is not aware of any contemplated proceeding by a government authority,  with the
exception of a law suit which has been filed  against the Company  alleging that
the plaintiff in that matter rendered services to the Company for which he seeks
compensation  by the issuance of 15,000 shares of the Company's  common stock or
the payment of  $100,000.  The  Company has denied this claim and is  vigorously
defending this litigation.

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

     No matters were submitted to the vote of security holders during the fourth
quarter of 1996.



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                                     PART II

Item 5.   Market for Common Equity and Related Stockholders Matters.

     Market Information

     The Common  Stock of the Company is traded on the  over-the-counter  market
and is quoted on the National Association of Securities Dealers,  Inc. Automated
Quotation System SmallCap Market ("NASDAQ") under the symbol DDSI. Additionally,
the Company has two classes of warrants to purchase  common  stock  outstanding.
Current and future  warrant  holders may not be able to exercise  their warrants
until the Company files an amendment to update its registration statement.

     The following  table presents the range of high and low bid information for
the Company's Common Stock for each quarter since the Company's Common Stock was
publicly traded.  The quotations  reflect  inter-dealer  prices,  without retail
mark-up, mark-down or commission and may not represent actual transactions.

                                        1995                    1996
                                  -----------------       -----------------
     Quarter                      High        Low         High        Low
     -------                      ----        ---         ----        ---
     First Quarter                n/a         n/a         5.125       3.375
     Second Quarter               n/a         n/a         5.625       3.000
     Third Quarter                5.625       4.750       3.625       1.75
     Fourth Quarter               4.750       3.500       2.375        .406

     (a)  Security Holders

     The Company had approximately 19 holders of record of Common Stock on March
17, 1997.

     (b)  Dividends

     The Company has not paid any dividends in the last two years.  The Board of
Directors of the Company  anticipates the retention of all available earnings to
support  expected  growth and does not  anticipate  payment of  dividends in the
foreseeable future.

Item 6.   Management's Discussion and Analysis or Plan of Operation

     The  Company  develops,   assembles  and  markets  computer  installations,
consisting of hardware and software for law enforcement agencies,  tax assessors
and  businesses.  The system  captures video and scanned  images,  digitizes the
images and links the digitized images to text to build a computer database.  The
data is stored in the  computer  and can be  retrieved on demand and viewed on a
computer or  transmitted  over a computer  network,  telephone  line or by radio
frequency to remote locations within seconds.

     The principal product of the company is the Compu-Capture(R)  system, which
is marketed to law enforcement agencies, jails, and correctional facilities. The
Compu-Capture(R) system produces and stores a digitized video image or


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"mug shot" of the subject along with the record,  physical description and other
pertinent  information about the subject.  The image can then be produced in the
appropriate  format,  such as a full-color  picture or  identification  badge or
wristband when the subject is booked.

     Since the  introduction  of  Compu-Capture(R)  the  Company  has  installed
approximately  250  systems  in 46  states  in the  United  States  as  well  as
jurisdictions  in  Europe,  South  America,  Canada,  Mexico  and  the  Bahamas.
Management believes there is significant growth potential for this product since
only a small percentage of the approximately  17,000 law enforcement agencies in
the United States use a digitized computer imaging system.

     The Compu-Color(R)  system digitizes  videotape and photographs of improved
properties  (buildings and other property  improvements).  Compu-Color(R) stores
these images along with the relevant  record card  information for the local tax
assessors and  revaluation  companies.  The system allows the assessor to access
full-color  images of improved  properties  and related  information  to compare
properties and to review property  assessments  within seconds.  During 1996 and
1995,  the  system  accounted  for  approximately   16.2%  and  7.7%  of  sales,
respectively.

     The  Company  recognizes  revenue  in  accordance  with the  guidelines  of
Statement  of  Position  91-1 of the  American  Institute  of  Certified  Public
Accounts,  Software  Revenue  Recognition  (SOP  91-1).  Revenue  from  software
licenses is recognized when the Company has satisfied all  significant  contract
obligations, which generally occurs when installation of the system is complete.
Revenue from consulting or other software-related  services is recognized as the
services are rendered.  Revenue from post-contract  support (PCS or maintenance)
agreements is recognized ratably over the term of the agreements.

     If funds are  available,  management  will increase  funds for research and
development  of an inkless  fingerprint  imaging  storing and  retrieval  system
which, if successfully developed, is expected to enhance the law enforcement and
business products of the Company.

Results of  Operations

     Sales for the twelve months ended December 31, 1996 of $2,728,368 increased
by 22% from sales of $2,229,691  for the twelve months ended  December 31, 1995.
This increase is attributed  to an increase in the amount of  installations  and
contracts  awarded to the Company.  The  Company's  deferred  revenue  decreased
$80,496 to  $446,844 as of December  31, 1996 from  $527,340 as of December  31,
1995.  Additionally,  the  Company's  backlog  of orders to be  installed  as of
December 31, 1996 was approximately  $900,000. The Company anticipates that both
the deferred  revenue and backlog  amounts will be recognized as revenue  during
fiscal year 1997.

     The Company's gross profit in absolute  dollars  increased 30% from 1995 to
1996 due to an increase in total revenue  generated by the Company.  Overall the
gross  profit  percentage  per sale  increased  3% to an  average of 50% from an
average of 47% in 1995.

     Operating  expenses  increased 33% for the twelve months ended December 31,
1996 due to increases in all areas except general and administrative costs which
declined by 4%. The increases  were due primarily to an increase in personnel to
support the larger client base, to expand sales volume and geographic  reach and
the number of development projects that the Company has undertaken.

     The net loss from  operations for the Company  increased 34% for the twelve
months ending December 31, 1996 to ($2,796,064) from ($2,084,047) for the twelve
months ended December 31, 1995.


                                        8

<PAGE>

Liquidity and Capital Resources

     The  Company  is  currently  funding  its  business  principally  from  the
remaining  proceeds  of its initial  public  offering.  However,  the Company is
operating  on a  negative  cash  flow  basis  and  anticipates  it will  require
additional  financing  during the second quarter of 1997. To achieve and sustain
financial  stability  over a longer  period,  the  Company  requires  additional
amounts of capital.  There is no assurance  that the Company can obtain any such
financing on terms that will enable the Company to implement a long-term  growth
strategy.  Accordingly,  the Company's  viability for the foreseeable  future is
questionable if additional funding is not obtained. The Company is attempting to
obtain such funds through venture capital or other private or public  financing,
joint ventures or merger  transactions,  the sale of certain assets and research
and development  partnership financing.  The Company has engaged a consultant to
assist in obtaining  additional  funding.  There can be no  assurance  that such
funds will be available, or if available, the cost to the Company.

     As of December 31, 1996 the Company had working capital of approximately of
$639,280  which  decreased  $2,634,986  from December 31, 1995.  During the year
ended December 31, 1996 the Company incurred net loss of $2,706,521.

     Net cash used in operating activities was $2,124,715 and $2,292,063 for the
years ended December 31, 1996 and 1995. The use of cash in operating  activities
for the years ended December 31, 1996 and 1995, resulted largely from continuing
losses

Asset Management

     The Company manages its inventory by ordering specific hardware for just in
time delivery for each installation. The hardware is received, checked, modified
and shipped to each jurisdiction for installation within a short period of time.
Therefore,  the Company usually maintains in inventory only the equipment needed
for programming and testing.  Inventory may also include the hardware needed for
a customer's  installation that may already be shipped. During the twelve months
ending December 31, 1996, inventories decreased $72,476 due to increased control
and better scheduling of installations.

     As of December  31, 1996 most of the  Company's  receivables  are due under
contracts with county and city  jurisdictions.  The balance are with third party
vendors.  Once the contract has been awarded and the purchase  order issued by a
jurisdiction,  the  jurisdiction  must  encumber  the funds for  payment  of the
purchase order. The encumbered funds are typically paid to the Company after the
satisfactory completion of the installation.  Accounts receivable as of December
31, 1996 were $408,803, net of an allowance for doubtful accounts of $187,019.

General Risk Factors Affecting Results

     The software  industry is  characterized by rapid  technological  change as
well as changes in customer  requirements and preferences.  The Company believes
that its future quarterly  results will depend in large part upon its ability to
offer  products  that  compete   favorably   with  respect  to  price,   product
reliability,  performance,  range of useful  features,  ease-of-use,  continuing
product  enhancements,  reputation,  support and  training.  Further,  increased
competition  in the market for digital  imaging could have a negative  effect on
the Company's results of operations.

     Due to the factors  noted above,  the Company's  future  earnings and stock
price may be subject to  significant  volatility,  particularly  on a  quarterly
basis.  Any  shortfall  in  revenues  or earnings  could have an  immediate  and
significant  adverse  effect on the  trading  price of the  Company's  stock and
warrants and on its continued listing on the NASDAQ small cap system.


                                        9

<PAGE>

Item 7.   Financial Statements

     The Financial Statements are included in this Annual Report under Item 13.


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

     The  information  required  by this Item is set forth  under  "Election  of
Directors" and  "Executive  Officers" in the Company's  Proxy  Statement for the
1997 Annual Meeting of  Stockholders  filed pursuant to Regulation 14A under the
Securities  Exchange Act of 1934 (the "Exchange Act") and is incorporated herein
by reference.

Item 10.  Executive Compensation

     The information  required by this Item is set forth under  "Compensation of
Directors and Executive  Officers" in the Company's Proxy Statement for the 1997
Annual  Meeting of  Stockholders  filed  pursuant  to  Regulation  14A under the
Exchange Act and is incorporated herein by reference.

Item 11.  Security Ownership of Certain Beneficial Owners and Management

     The  information  required  by  this  Item  is set  forth  under  "Security
Ownership of Certain  Beneficial  Owners and  Management" in the Company's Proxy
Statement  for the  1997  Annual  Meeting  of  Stockholders  filed  pursuant  to
Regulation 14A under the Exchange Act and is incorporated herein by reference.

Item 12.  Certain Relationships and Related Transactions

     The  information  required  by this Item is set forth  under  "Election  of
Directors"  in the  Company's  Proxy  Statement  for the 1997 Annual  Meeting of
Stockholders  filed  pursuant to  Regulation  14A under the  Exchange Act and is
incorporated herein by reference.


                                       10

<PAGE>

                                     PART IV

Item 13.  Exhibits, Financial Statements and Reports on Form 8-K

Exhibit
Number                Description of Document
------                -----------------------

(a)    Exhibits

3.1    Certificate of Incorporation of the Company.

3.2    By-Laws of the Company.

4.1    Specimen Common Stock Certificate.

4.2    Warrant Agreement.

4.3    Specimen Warrant Certificate.
       (a)  Redeemable Class A Warrant.
       (b)  Redeemable Class B Warrant.

4.4    Warrant  Agreement  dated  April 19,  1995  between  the  Company and Jay
       Teitlebaum.

4.5    Warrant  Agreement  dated June 16,  1995  between  the Company and Norman
       Cohn.

9.0    Form of Voting Trust Agreement between Norman Cohn and Garrett U. Cohn.

10.1   Cohn  Employment  and  NonCompetition  Agreement of Garrett U. Cohn dated
       July 7, 1994.

10.2   Restricted Stock Agreement  between the Company and Garrett U. Cohn dated
       July 7, 1994.

10.3   Stock Option Agreement between Norman Cohn and Garrett U. Cohn dated July
       10, 1995.

10.4   1994 Stock Option plan of the Company as Approved by the  Stockholders on
       May 8, 1995.

10.6   Lease for Company Premises dated July 1, 1995.

10.7   Monthly Rental Agreement for Company Premises, dated February 1, 1994.

10.8   IBM Business Partner Agreement dated May 1, 1993.

10.9   Sony Corporation of America Value Added Reseller Certification January 1,
       1993.

10.10  Letter from Tekbilt,  Inc. dated June 23, 1994  confirming  commitment to
       appoint the Company as exclusive distributor.

10.11  Contribution Agreement between the Company and Norman Cohn dated February
       7, 1995.

10.12  Loan and Warrant  Purchase  Agreement  dated  April 19, 1995  between the
       Company and Jay Teitlebaum.


                                       11

<PAGE>

10.13  Loan and Security  Agreement  dated June 16, 1995 between the Company and
       National Business Services, Inc.

10.14  Warrant  Purchase  Agreement  dated June 16, 1995 between the Company and
       Norman Cohn.

10.15  Marketing  Agreement  dated  August  24,  1995  between  A.L.  Roark  and
       Associates,  Inc.,  IBM de  Mexico,  S.A.  and  the  Company  (under  the
       Company's former name Compu-Color, Inc.).

10.16  Agreement  dated  September  19,  1995  between  Nordic  VLSI  AS and the
       Company.

10.17  Consulting  Agreement  dated  August 30,  1995  between  the  Company and
       XLdynamics.

10.18  Loan  Agreement  dated  September  1, 1995  between the Company and First
       Valley Bank.

10.19  Loan Agreement - See Annual Report and March 31, 1996 10-QSB

10.20  Agreement  for  the  Sale of  Assets  between  the  Company  and  Visatex
       Corporation

10.21  Consultants and Advisors Compensation Plan adopted February 8, 1996.

10.22  Demand Note dated March 3, 1996 in  principal  amount of $45,500  made by
       Garrett U. Cohn in favor of the Company  (superseded by subsequent Note -
       see Exhibit 10.24)

10.23  1996 Director  Option Plan adopted by Board of Directors  August 14, 1996
       and subject to stockholder ratification


10.24* Security  Agreement and Note dated as of August 14, 1996 in the principal
       amount of $125,000 made by Garrett U. Cohn in favor of the Company

10.25* Joint Venture Agreement between Information  Technology  Solutions,  Inc.
       and the Company

10.26* Employee Stock Purchase Plan adopted by the Board of Directors August 14,
       1996 and February 20, 1997 and subject to stockholder ratification.

10.27* Restated  1994 Stock Option Plan adopted by the Board of Directors  March
       20, 1997 and subject to stockholder ratification

23.2*  Consent of KPMG Peat Marwick LLP.

*Filed herewith

(b)    Reports on Form 8-K

       None

(c)    Financial Statements


                                       12

<PAGE>

                                   SIGNATURES

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

                                         DIGITAL DESCRIPTOR SYSTEMS, INC.


                                         By:    /s/ Garrett U. Cohn
                                            ----------------------------
                                         Title: President
                                         Date:  March 28, 1997


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


Signature                   Title                                 Date
---------                   -----                                 ----

/s/ Garrett U. Cohn         President, Chief Executive Officer,   March 28, 1997
--------------------------  Treasurer and Director
Garrett U. Cohn             (principal executive officer)

/s/ Michael Ott             Vice President, Secretary             March 28, 1997
--------------------------  and Director
Michael Ott

/s/ Michael Pellegrino      Vice President, Finance and           March 28, 1997
--------------------------  Administration and Chief
Michael Pellegrino          Financial Officer (principal
                            financial officer and
                            accounting officer

/s/ Myrna L. Cohn Ph.D.     Director                              March 28, 1997
--------------------------
Myrna L. Cohn, Ph.D.

/s/ Bartlett R. Rhoades     Director                              March 28, 1997
--------------------------
Bartlett R. Rhoades

/s/ Stephen Bright          Director                              March 28, 1997
--------------------------
Stephen Bright Esq.

<PAGE>

DIGITAL DESCRIPTOR SYSTEMS, INC.

Financial Statements

December 31, 1996 and 1995

(With Independent Auditors' Report Thereon)

<PAGE>


DIGITAL DESCRIPTOR SYSTEMS, INC.

Table of Contents

December 31, 1996 and 1995
================================================================================
                                                                           Page
                                                                           ----
Independent Auditors' Report...............................................  2

Financial Statements:

      Balance Sheets as of December 31, 1996 and 1995......................  3

      Statements of Operations for the years ended December 31,
        1996 and 1995......................................................  4

      Statements of Shareholders' Equity (Deficit) for the years ended

         December 31, 1996 and 1995........................................  5

      Statements of Cash Flows for the years ended December 31,
         1996 and 1995.....................................................  6

Notes to Financial Statements..............................................  7

================================================================================

                                       1
<PAGE>


Independent Auditors' Report

The Board of Directors and Shareholders
     Digital Descriptor Systems, Inc.:

We have audited the accompanying  balance sheets of Digital Descriptor  Systems,
Inc.  (successor to Compu-Color,  Inc. - see note 1) as of December 31, 1996 and
1995, and the related statements of operations,  shareholders' equity (deficit),
and cash flows for the years then  ended.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial  position of Digital  Descriptor  Systems,
Inc. as of December 31, 1996 and 1995, and the results of its operations and its
cash  flows for the years  then  ended in  conformity  with  generally  accepted
accounting principles.

The accompanying  financial  statements have been prepared assuming that Digital
Descriptor Systems,  Inc. will continue as a going concern. As discussed in note
3 to the financial  statements,  the Company has incurred  recurring losses from
operations and anticipates  that it will require  additional  financing in 1997,
which may not be readily  available,  which raises  substantial  doubt about the
Company's ability to continue as a going concern. Management's plans relating to
these matters are  described in note 3. The financial  statements do not include
any adjustments that might result from the outcome of this uncertainty.

                                              /s/ KPMG Peat Marwick LLP

March 12, 1997


                                       2
<PAGE>

DIGITAL DESCRIPTOR SYSTEMS, INC.

Balance Sheets

December 31, 1996 and 1995
=============================================================================
Assets                                                     1996          1995
-----------------------------------------------------------------------------
Current assets:
     Cash and cash equivalents                     $    494,091     2,778,185
     Short-term investments                             120,376       389,343
     Restricted cash                                    150,000       150,000
     Accounts receivable:
        Trade, net of allowance for doubtful
          accounts of $187,019 and $138,085 in
          1996 and 1995                                 408,803       689,240
        Unbilled                                           --         113,172
        Other                                             2,000         1,000
     Inventories                                        145,036       217,512
     Prepaid expenses                                    85,765        84,536
     Other current assets                                16,981        79,122
-----------------------------------------------------------------------------
Total current assets                                  1,423,052     4,502,110
Deposits                                                  7,059         7,590
Officer note receivable (note 11)                       125,000          --
Furniture and equipment, net                            274,697       333,901
Intangible assets, net                                  100,000          --
-----------------------------------------------------------------------------
                                                   $  1,929,808     4,843,601
=============================================================================

Liabilities and Shareholders' Equity (Deficit)
-----------------------------------------------------------------------------
Current liabilities:
     Accounts payable                              $    202,082       329,559
     Accrued expenses                                    84,846       249,032
     Deferred income                                    446,844       527,340
     Due to affiliates                                     --          71,913
     Current portion of note payable                     50,000        50,000
-----------------------------------------------------------------------------

Total current liabilities                               783,772     1,227,844
-----------------------------------------------------------------------------

Note payable, excluding current portion                  37,500        87,500

Commitments and contingencies (notes 4, 7, 11,
  and 14)

Shareholders' equity:
     Common stock, $.001 par value, 10,000,000
       shares authorized; 2,468,750 and 2,408,750
       shares issued and outstanding as of
       December 31, 1996 and 1995                         2,469         2,409
     Additional paid-in capital                      10,148,528     9,885,788
     Unearned compensation                              (86,000)     (110,000)
     Accumulated deficit                             (8,956,461)   (6,249,940)
-----------------------------------------------------------------------------
Total shareholders' equity                            1,108,536     3,528,257
-----------------------------------------------------------------------------
                                                   $  1,929,808     4,843,601
=============================================================================
See accompanying notes to financial statements

                                       3

<PAGE>

DIGITAL DESCRIPTOR SYSTEMS, INC.

Statements of Operations

December 31, 1996 and 1995
================================================================================
                                                          1996             1995
--------------------------------------------------------------------------------

Revenues                                           $ 2,728,368        2,229,691
Cost of revenues                                     1,366,107        1,178,454
--------------------------------------------------------------------------------

Gross profit                                         1,362,261        1,051,237
--------------------------------------------------------------------------------

Operating expenses:
     Sales and marketing                             1,166,509          472,131
     Research and development                          446,776          134,951
     Depreciation and amortization                     223,154          111,107
     General and administrative                      2,321,886        2,417,095
--------------------------------------------------------------------------------

Total operating expenses                             4,158,325        3,135,284
--------------------------------------------------------------------------------

Loss from operations                                (2,796,064)      (2,084,047)
Other income (expense):

     Interest income                                    98,164           45,377
     Interest expense                                   (8,621)         (15,189)
--------------------------------------------------------------------------------

Net loss                                           $(2,706,521)      (2,053,859)
================================================================================

Net loss per share                                 $     (1.10)           (1.33)

Weighted average shares outstanding                  2,452,476        1,542,860
================================================================================
See accompanying notes to financial statements.


                                       4
<PAGE>

DIGITAL DESCRIPTOR SYSTEMS, INC.

Statements of Shareholders' Equity (Deficit)

Years ended December 31, 1996 and 1995

<TABLE>
<CAPTION>
========================================================================================================
                                     Common stock      Additional
                                 -------------------     paid-in     Unearned     Accumulated
                                   Shares     Amount     capital    compensation    deficit       Total
--------------------------------------------------------------------------------------------------------
<S>                               <C>         <C>       <C>           <C>         <C>           <C>
Balances at January 1, 1995      1,000,000    $1,000    3,709,630     (120,000)  (4,196,081)    (605,451)

Conversion of affiliate debt
   to equity (note 10)                 --         --      700,000           --           --      700,000

Initial public offering proceeds,
   net of issuance costs of
   $1,567,592 (note 11)          1,408,750     1,409    5,476,158           --           --    5,477,567

Amortization of unearned
   compensation                         --        --           --       10,000           --       10,000

Net loss                                --        --           --           --   (2,053,859)  (2,053,859)
--------------------------------------------------------------------------------------------------------

Balances at December 31, 1995    2,408,750    $2,409    9,885,788     (110,000)  (6,249,940)   3,528,257
========================================================================================================

Stock granted to consultants        60,000        60      262,740           --           --      262,800
   (note 8)

Amortization of unearned
   compensation                         --        --           --       24,000           --       24,000

Net loss                                --        --           --           --   (2,706,521)  (2,706,521)
--------------------------------------------------------------------------------------------------------

Balances at December 31, 1996    2,468,750    $2,469   10,148,528      (86,000)  (8,956,461)   1,108,536
========================================================================================================
</TABLE>

See accompanying notes to financial statements.

                                       5
<PAGE>

DIGITAL DESCRIPTOR SYSTEMS, INC.

Statements of Cash Flows

Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
=============================================================================================
                                                                       1996             1995
---------------------------------------------------------------------------------------------
<S>                                                              <C>               <C>
Cash flows from operating activities:
     Net loss                                                   $(2,706,521)      (2,053,859)
     Adjustments to reconcile net loss to net cash used in
        operating activities:
            Depreciation and amortization                           243,154          111,107
            Amortization of unearned compensation                    24,000           10,000
            Changes in assets and liabilities:
                Receivables                                         392,609         (526,332)
                Inventories                                          41,872         (126,671)
                Prepaid expenses and other current assets            60,912         (138,730)
                Accounts payable                                   (127,477)         (73,894)
                Accrued expenses and other liabilities               98,614          216,121
                Deferred income                                     (80,496)         348,759
                Other noncurrent assets                                 531           (3,490)
                Due to affiliates                                   (71,913)         (55,074)
---------------------------------------------------------------------------------------------
Net cash used in operating activities                            (2,124,715)      (2,292,063)
---------------------------------------------------------------------------------------------
Cash flows from investing activities:
     Equipment purchases                                            (93,346)        (319,672)
     Increase in officer note receivable                           (125,000)              --
     Acquisition of Visatex, including prepaid royalty (note 4)    (160,000)              --
     Increase (decrease) in short-term investments,
        including restricted cash                                   268,967         (539,343)
---------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities                (109,379)        (859,015)
---------------------------------------------------------------------------------------------
Cash flows from financing activities:
     Proceeds from initial public offering, net of offering costs
        disbursed in 1995 of $1,314,561                                  --        5,730,598
     Proceeds from (repayment of) note payable                      (50,000)         137,500
     Proceeds from bridge financings                                     --          500,000
     Repayment of bridge financings                                      --         (450,000)
---------------------------------------------------------------------------------------------
Net cash provided by financing activities                           (50,000)       5,918,098
---------------------------------------------------------------------------------------------
Increase (decrease) in cash                                      (2,284,094)       2,767,020
Cash at beginning of year                                         2,778,185           11,165
---------------------------------------------------------------------------------------------
Cash at end of year                                             $   494,091        2,778,185
=============================================================================================
Supplemental disclosure of cash flow information:
     Cash payments made during the year for interest            $     8,621           15,189

Supplemental schedule of noncash financing activities:
     Conversion of affiliate debt to equity                              --          700,000
     Common stock granted to consultants                            262,800               --
     Conversion of inventory to fixed assets                         30,604               --
=============================================================================================
</TABLE>

See accompanying notes to financial statements.

                                       6

<PAGE>

DIGITAL DESCRIPTOR SYSTEMS, INC.

Financial Statements

December 31, 1996 and 1995
================================================================================

   (1)   Basis of Presentation

         Digital Descriptor Systems, Inc. (DDSI or the Company) was incorporated
         in Delaware in June of 1994 but had no substantive  operations prior to
         its merger with Compu-Color, Inc. (CCI) on August 10, 1995. The merger,
         which was  consummated  concurrent  with the Company's  initial  public
         offering  (IPO)  described  in note 12, was effected by the exchange of
         all of the issued and outstanding CCI shares for 1,000,000 DDSI shares.
         The  merger  was  accounted  for in a manner  similar  to a pooling  of
         interests  since the companies  were under common  control and DDSI had
         been formed  solely to continue the  business of CCI and to  facilitate
         the IPO. The accompanying  financial  statements reflect the historical
         results of CCI through the merger date and the  operations  of DDSI, as
         successor to CCI,  thereafter,  and include appropriate  adjustments to
         shareholders'  equity accounts to incorporate the capital  structure of
         DDSI, on a retroactive  basis, as if the merger had occurred on January
         1, 1995.

   (2)   Nature of Operations and Summary of Significant Accounting Policies

         Description of Business

         The Company  develops  and markets  computer  software  products  which
         capture video and scanned images,  digitize the  information,  link the
         digitized  images to text,  store the images and text and transmit this
         information to required locations. The principal product of the Company
         is the Compu-Capture Law Enforcement Program,  which is marketed to law
         enforcement  agencies and jail facilities and generated the majority of
         the Company's  revenues in the years ended  December 31, 1996 and 1995.
         The  Company  also  markets the  Compu-Color  Assessor  Program,  which
         combines  digitized  images of videotaped  properties with relevant tax
         assessment information.

         Substantially all of the Company's revenues are derived from government
         agencies.  For years ended  December 31, 1996 and 1995,  12% and 11% of
         total revenues were derived from foreign sales.

         Accounting Estimates

         The  preparation of financial  statements in conformity  with generally
         accepted  accounting  principles  requires management to make estimates
         and  assumptions  that  affect  the  reported  amounts  of  assets  and
         liabilities and disclosure of contingent  assets and liabilities at the
         date of the financial  statements and the recorded  amounts of revenues
         and expenses during the reporting  period.  Actual results could differ
         from these estimates.

                                                                     (Continued)

                                       7
<PAGE>


DIGITAL DESCRIPTOR SYSTEMS, INC.

Notes to Financial Statements

================================================================================

   (2)   Continued

         Cash and Cash Equivalents

         The  Company  considers  all  highly  liquid  debt  instruments  with a
         maturity of three months or less to be cash equivalents for purposes of
         the statement of cash flows.

         Short-term Investments

         Short-term  investments  consist of U.S.  Treasury  Bills maturing from
         April  1997 to June  1997.  Such  investments  are  considered  held to
         maturity.   As  of  December  31,  1996,  the  market  value  of  these
         investments exceeds their carrying value by $2,337.

         Revenue Recognition

         The Company  recognizes  revenue in accordance  with the  guidelines of
         Statement  of Position  91-1 of the  American  Institute  of  Certified
         Public Accountants,  Software Revenue  Recognition (SOP 91-1).  Revenue
         from software licenses is recognized when the Company has satisfied all
         significant   contract   obligations,   which  generally   occurs  when
         installation  of the system is  complete.  Revenue from  consulting  or
         other  software-related  services is  recognized  as the  services  are
         rendered.   Revenue  from   post-contract   customer  support  (PCS  or
         maintenance)  agreements  is  recognized  ratably  over the term of the
         agreements.

         Inventories

         Inventories are stated at cost, using the first-in,  first-out  method,
         which is not in excess of market value.

         Furniture and Equipment

         Furniture and equipment are stated at cost.  Depreciation is determined
         using  straight  line  method  over the  estimated  useful  life of the
         related assets, as follows:

               Furniture and fittings                               5 years
               Vehicles                                             3 years
               Computer equipment                                   2 years
               Leasehold improvements                               5 years
               ------------------------------------------------------------

         Intangible Assets

         Intangible assets include purchased  software/technology  and are being
         amortized  over three years.  Amortization  expense was $30,000 for the
         year ended December 31, 1996.

                                                                     (Continued)

                                      8
<PAGE>

DIGITAL DESCRIPTOR SYSTEMS, INC.

Notes to Financial Statements

================================================================================

   (2)   Continued

         The  Company  periodically  reviews  the  intangible  assets  to assess
         recoverability and any impairment would be charged to operations in the
         period in which such impairment becomes evident.

         Research and Development

         All research and development  costs are expensed as incurred.  To date,
         the Company has not  capitalized any software  development  costs since
         the amount of such costs qualifying for capitalization  under Statement
         of Financial  Accounting Standards No. 86 (SFAS No. 86), Accounting for
         the  Costs of  Computer  Software  to be  Sold,  Leased,  or  Otherwise
         Marketed, has not been significant.

         Net Loss Per Share

         Net loss per share is computed  using the  weighted  average  number of
         outstanding shares of common stock. Common stock equivalent shares have
         been excluded from the  computation  as their effect is  anti-dilutive.
         The computation also gives retroactive effect to the merger of DDSI and
         CCI by assuming  that the DDSI shares  issued as  consideration  in the
         merger were outstanding for all periods presented.

         Fair Value of Financial Instruments

         The carrying amount of cash and cash equivalents,  accounts receivable,
         accounts payable and notes payable  approximates  fair value due to the
         short maturity of these instruments.

         Translation of Foreign Currencies

         Foreign  currency   transaction   gains  and  losses  are  included  in
         determining net income.

         Recently Adopted Accounting Standards

         The Company adopted the provisions of SFAS No. 121,  Accounting for the
         Impairment  of  Long-Lived  Assets  and  for  Long-Lived  Assets  to Be
         Disposed  Of,  on  January  1,  1996.  This  Statement   requires  that
         long-lived assets and certain identifiable  intangibles be reviewed for
         impairment  whenever events or changes in  circumstances  indicate that
         the  carrying  amount of an asset may not be  recoverable.  Adoption of
         this  Statement  did  not  have a  material  impact  on  the  Company's
         financial position, results of operations, or liquidity.

                                                                     (Continued)
                                      9
<PAGE>

DIGITAL DESCRIPTOR SYSTEMS, INC.

Notes to Financial Statements

================================================================================

   (2)   Continued

         The Company has adopted the provisions of SFAS No. 123,  Accounting for
         Stock-Based  Compensation  on January 1, 1996.  SFAS 123 defines a fair
         value based method of accounting  for stock based  compensation  plans,
         however it allows the continued use of the intrinsic value method under
         Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
         to Employees.  The Company has elected to continue to use the intrinsic
         value  method with pro forma  disclosures  of net income as if the fair
         value method had been applied, as discussed in note 9.

   (3)   Liquidity

         The  financial  statements  have been  presented  on the basis that the
         Company is a going  concern,  which  contemplates  the  realization  of
         assets and the  satisfaction  of  liabilities  in the normal  course of
         business.  The  Company  has  incurred  net  losses in each year of its
         existence,  aggregating  $8,956,461,  including $2,706,521 for the year
         ended December 31, 1996. Also, the Company has received  correspondence
         from NASDAQ  warning of possible  delisting if the closing bid price of
         the  Company's  common  stock did not remain  over $1 for more than ten
         days or if certain other  criteria were not met. The closing bid of the
         Company's common stock has subsequently  remained over $1 for more than
         ten days  and the  Company  is  currently  in  compliance  with  NASDAQ
         requirements.

         The Company is  currently  funding its  business  principally  from the
         remaining proceeds of its initial public offering. However, the Company
         is  operating  on a negative  cash flow basis and  anticipates  it will
         require  additional  financing  during the second  quarter of 1997.  To
         achieve and  sustain  financial  stability  over a longer  period,  the
         Company  may  require  additional  amounts  of  capital.  There  is  no
         assurance  that the Company can obtain any such financing on terms that
         will enable the  Company to  implement  a  long-term  growth  strategy.
         Accordingly,  the  Company's  viability for the  foreseeable  future is
         questionable if additional funding is not obtained.

         The Company is in the process of attempting to raise additional capital
         as of March 12, 1997. In addition, management is continuing its efforts
         to reduce overhead costs and identify new business opportunities.

  (4)    Acquisition

         In  January  1996  the  Company  acquired  certain  assets  of  Visatex
         Corporation  for  $100,000 in cash and  potential  additional  payments
         equal to the greater of a royalty calculated as 10% of revenues for the
         three years ended  December 31, 1998 or a  commission  based on certain
         agreed upon rates for a similar  three year period.  Such  royalties or
         commissions are to be determined  based on the licensing or maintenance
         of the  software  products of Visatex,  a California  corporation.  The
         purchase    price    was    allocated    principally    to    purchased
         software/technology.
                                                                     (Continued)

                                       10
<PAGE>

DIGITAL DESCRIPTOR SYSTEMS, INC.

Notes to Financial Statements

================================================================================

  (4)    Continued

         The   Company   made  an  advance   payment  of  $60,000   against  the
         royalty/commission   obligations  in  February  1996.  Royalty  expense
         related to the acquired technology was $20,000 during 1996.

   (5)   Furniture and Equipment

         Furniture and equipment at December 31, 1996 and 1995 consist of:

                                                       1996              1995
         -----------------------------------------------------------------------

         Furniture and fixtures                     $ 180,159           136,687
         Vehicles                                      80,089            80,089
         Computer equipment                           533,456           445,109
         Leasehold improvements                        30,086            27,956
         -----------------------------------------------------------------------
                                                      823,790           689,841
         Accumulated depreciation                    (549,093)         (355,940)
         -----------------------------------------------------------------------
                                                    $ 274,697           333,901
        ========================================================================

   (6)   Note Payable

         In December of 1995,  the Company  entered  into a $137,500  bank loan,
         repayable in monthly installments through September 1998 of $4,167 plus
         interest.  Interest accrues at 2% above the Bank's variable  commercial
         deposit rate (7.4% at December 31, 1995). The note is collateralized by
         a $150,000  certificate  of deposit  which is  classified as restricted
         cash.  At  December  31, 1996 the  remaining  balance  outstanding  was
         $87,500.

         Interest  expense on this note payable  totaled  $8,621 and $2,574  for
         the years ended  December 31,  1996 and 1995.

   (7)   Commitments

         The Company leases certain  facilities under operating lease agreements
         that expire through June 30, 2000. The Company also leases vehicles and
         office equipment under operating lease agreements.

                                                                     (Continued)
                                       11
<PAGE>

DIGITAL DESCRIPTOR SYSTEMS, INC.

Notes to Financial Statements

================================================================================

   (7)   Continued

         Future minimum lease payments under these agreements are as follows:

               1997                                           102,662
               1998                                            75,556
               1999                                            75,556
               2000                                            37,998
               ======================================================

         Rent expense  related to operating  leases was $75,447 and $59,874  for
         the years ended  December 31,  1996 and 1995.

         In 1996 the Company  entered  into an  agreement  pursuant to which the
         Company is  committed  to pay  $15,400 in February  1997 for  technical
         services  during 1997. Also the Company has committed to making $30,000
         available in the form of a loan.  Interest on this loan will be payable
         at prime plus one percent.

         As of  December  31,  1996,  the  Company  has also  committed  to fund
         $135,000 for three phases of a research and development agreement.

   (8)   Consultants and Advisors Compensation Plan

         In February  1996,  the Company  adopted the  Consultants  and Advisors
         Compensation Plan (the Plan).  Persons eligible under this Plan include
         any  consultant  or advisory of the Company who has provided  bona fide
         services to the  Company,  except for services  provided in  connection
         with the offer or sale of securities in a capital raising  transaction.
         The Company has  reserved  300,000  shares of common stock for issuance
         under this Plan.  Awards may be granted in the form of stock options or
         stock  grants.  No awards shall be made after  December  31,  2001.  In
         February  1996,  the Company  granted  60,000 shares of common stock to
         three  consultants under this Plan. No amounts were required to be paid
         by such consultants for the shares awarded.  Accordingly,  compensation
         expense of  $262,800  based on the fair market  value of the  Company's
         stock as of the award date, was recorded in general and  administrative
         expenses in connection with this grant.

   (9)   Stock Option Plans

         In May 1995,  the Company  adopted the 1994 Stock Option Plan (the 1994
         Plan) pursuant to which the Company  reserved  200,000 shares of common
         stock.  Under the 1994 Plan,  each  outside  director  is  entitled  to
         receive an option to  purchase  1,000  shares of common  stock for each
         year  served on the Board of  Directors  commencing  in 1995.  With the
         exception of the stock options to outside directors under the 1994 Plan
         which vest on the first  anniversary  of the grant date,  options  vest
         over a four year period and have a term of ten years. There were 93,000
         and 3,000 shares granted in 1996 and 1995, respectively, under the 1994
         Plan, 2,000 of which were exercisable at December 31, 1996.

                                                                     (Continued)
                                       12
<PAGE>

DIGITAL DESCRIPTOR SYSTEMS, INC.

Notes to Financial Statements

================================================================================

   (9)   Continued

         In August 1996, the Company  adopted the 1996 Director Option Plan (the
         Director Plan) pursuant to which the Company reserved 200,000 shares of
         common  stock.  Under the  Director  Plan,  each  outside  director  is
         automatically  granted an option to  purchase  15,000  shares of common
         stock  (first  option) upon  adoption of the Director  Plan or the date
         such person  becomes a director.  Every year  thereafter,  each outside
         director is  automatically  granted an option to purchase  1,000 shares
         (subsequent  option) on each date of the annual meeting if a minimum of
         six months were served on the Board of Directors. The exercise price of
         options  granted under the Director Plan is to be the fair market value
         on the date of the grant.  A portion of the first  option  vests at the
         six month  anniversary  of the date of the grant and  continues  over a
         four year period.  Subsequent  options vest on the first anniversary of
         the date of grant.  Options may not be  exercised  more than five years
         from the date of the grant.  In 1996 there were 45,000 options  granted
         under the Director Plan, none of which are vested at December 31, 1996.

         In  addition,  the  Company  granted a former  director  the  option to
         purchase  3,812 shares of common  stock at an exercise  price of $3.81,
         the fair market value of the Company's  common stock at the date of the
         grant.  A portion of the option  vests on December 31, 1996 and ratably
         thereafter  for a 41 month period.  The option has a term of ten years.
         At December 31, 1996, there were 476 options vested and exercisable.

         Following is a summary of option activity under all plans:

                                                   Number of    Weighted average
                                                      shares      exercise price
         -----------------------------------------------------------------------

         Options outstanding at December 31, 1994   $    --             --
            Granted                                   3,000            5.13
            Exercised                                    --             --
            Canceled                                     --             --
        ------------------------------------------------------------------------

        Options outstanding at December 31, 1995      3,000            5.13
           Granted                                  141,812            3.26
           Exercised                                     --              --
           Canceled                                  (1,000)           3.30
        ------------------------------------------------------------------------

        Options outstanding at December 31, 1996    143,812            3.30
        ========================================================================

                                                                     (Continued)
                                       13
<PAGE>

DIGITAL DESCRIPTOR SYSTEMS, INC.

Notes to Financial Statements

================================================================================

   (9)   Continued

         At December 31, 1996, the range of exercise prices and weighted-average
         remaining contractual life of outstanding options was $2.19 - $5.25 and
         9.37 years, respectively.

         At December 31, 1996, the number of options  exercisable was 2,476, and
         the weighted-average exercise price of those options was 4.82.

         The Company applies APB Opinion No. 25 and related  interpretations  in
         accounting for the Plan.  Accordingly,  no  compensation  cost has been
         recognized.   Had  compensation   cost  for  the  Company's  Plan  been
         determined  consistent  with FASB  Statement No. 123, the Company's net
         income and  earnings per share would have been reduced to the pro forma
         amounts indicated below:

                                                       1996              1995
          ----------------------------------------------------------------------

          Net loss            As reported          $(2,706,521)      (2,053,859)

                              Pro forma             (2,769,480)      (2,057,641)

          Loss per share      As reported                (1.10)           (1.33)

                              Pro forma            $     (1.13)           (1.33)
         =======================================================================

         The per share  weighted-average  fair  value of stock  options  granted
         during 1996 and 1995 was $2.22 and $3.50 on the date of grant using the
         Black Scholes option-pricing model with the following  weighted-average
         assumptions:  1995 - expected dividend yield 0%, expected volatility of
         80%, risk-free interest rate of 6.12% to 6.36%, and an expected life of
         five years; 1996 - expected  dividend yield 0%, expected  volatility of
         80%, risk-free interest rate of 6.04% to 6.44%, and an expected life of
         five years.
                                                                     (Continued)
                                       14
<PAGE>

DIGITAL DESCRIPTOR SYSTEMS, INC.

Notes to Financial Statements

================================================================================

  (10)   Income Taxes

         CCI had  historically  operated as a subchapter "S" corporation and its
         operating losses were passed through to its sole shareholder. Effective
         with the date of the merger  described in note 1, results of operations
         are subject to tax at the corporate level.

         The tax effects of temporary differences that give rise to deferred tax
         assets and  deferred  tax  liabilities  at December  31,  1996  consist
         primarily of net operating  loss  carryforwards  as well as differences
         related to fixed asset  depreciation  and certain reserves and accruals
         for book and tax  purposes.  The Company is in a net deferred tax asset
         position at  December  31, 1996  (before  consideration  of a valuation
         allowance) due to the net operating loss carryforwards described below.
         However,  due principally to the  uncertainty of the Company  realizing
         this  carryforward  benefit  through  future  taxable  income,  the net
         deferred tax asset is fully reserved and no benefit has been recognized
         in the statement of operations.

         The tax effects of temporary  differences that give rise to significant
         portions  of  deferred  tax  assets and  deferred  tax  liabilities  at
         December 31, 1996 and 1995 are presented below:

                                                    1996              1995
         -----------------------------------------------------------------------

         Deferred tax assets:
           Net operating loss carryforwards      1,428,282           403,984
           Bad debt reserve                         71,197            50,009
           Inventory reserves                       11,421                --
           Depreciation expense                         --             3,807
           Accrued expense                             116            27,862
           Deferred income                          36,354                --
           Unearned compensation                    12,944                --
          ----------------------------------------------------------------------

          Total gross deferred tax assets        1,560,314           485,662

          Less:  valuation allowance            (1,551,186)         (485,662)
          ----------------------------------------------------------------------
          Deferred tax liability:
               Depreciation expense                 (9,128)               --
          ----------------------------------------------------------------------
          Net deferred tax assets                 $     --                --
          ======================================================================

                                                                     (Continued)
                                       15
<PAGE>

DIGITAL DESCRIPTOR SYSTEMS, INC.

Notes to Financial Statements

================================================================================

  (10)   Continued

         In  assessing  the  realizability  of deferred  tax assets,  management
         considers  whether it is more likely than not that some  portion or all
         of  the  deferred  tax  assets  will  not  be  realized.  The  ultimate
         realization  of deferred tax assets is dependent upon the generation of
         future taxable income during the periods in which temporary differences
         representing  future deductible amounts become deductible.  The Company
         will  periodically  assess and  reevaluate  the status of its  recorded
         deferred tax asset. The valuation  allowance for deferred tax assets as
         of December  31,  1995 was  $485,662.  The net change in the  valuation
         allowance  for the year  ended  December  31,  1996 was a  decrease  of
         $1,065,524.

         As of December 31, 1996,  the Company had  approximately  $3,751,866 of
         net  operating  loss  carryforwards  for  tax  purposes  which  may  be
         available to offset future  federal  taxable  income,  if any,  through
         2010.

  (11)   Related Party Transactions

         Prior to the DDSI's IPO (see note 12),  CCI was wholly  owned by Norman
         Cohn,  the  brother  of  DDSI's   President,   Garrett  Cohn.  CCI  had
         historically  conducted  business with certain entities which were also
         wholly owned by Norman Cohn, including National Business Services, Inc.
         (NBS),  Medical Data  Institute,  Inc. (MDI) and ASI Computer  Systems,
         Inc. (ASI). In 1994, CCI incurred costs of  approximately  $324,600 for
         certain  technical  services,  inventory  purchases and  administrative
         expenses billed by these affiliated companies. As of December 31, 1994,
         CCI was indebted to these  affiliates  in the amount of $776,987.  This
         obligation was  noninterest-bearing  and included certain cash advances
         made by NBS to fund the Company's  operations and costs associated with
         the IPO.  On  February 7, 1995,  $700,000  of this  affiliated  company
         obligation was converted to additional paid-in capital. During 1996 and
         1995,  the  Company was billed an  additional  $136,021  and  $352,630,
         respectively,  for goods or  services  provided by  companies  owned by
         Norman Cohn.  In addition,  during 1995,  NBS and Norman Cohn  provided
         financing  to the Company in the form of a bridge loan which is further
         described in note 12.

         In July 1994, the Company entered into a five-year employment agreement
         with  Garrett  Cohn,  which  provides for a base salary of $150,000 per
         year  plus  benefits.  Pursuant  to the  agreement,  Mr.  Cohn was also
         granted the right to purchase  119,999  shares of common  stock of DDSI
         for $.001 per share.  Mr. Cohn exercised that right,  but  subsequently
         adjusted his  ownership to 60,000 shares of common stock at the time of
         the merger of CCI into the Company. Mr. Cohn has agreed not to transfer
         his stock for the period of his  employment and for a period of 3 years
         following the  termination or expiration of the  employment  agreement.
         DDSI has recorded $120,000 in unearned compensation,  based on the fair
         value of the  restricted  stock at the date of issuance.  Such unearned
         compensation  is amortized to expense in the operating  statement  over
         the  period  of the  employment  agreement.  The  related  amortization

                                                                     (Continued)
                                       16
<PAGE>

DIGITAL DESCRIPTOR SYSTEMS, INC.

Notes to Financial Statements

================================================================================

  (11)   Continued

         expense,  which  commenced  upon  the  effective  date of the  DDSI-CCI
         merger,  was $24,000 and $10,000 for the years ended  December 31, 1996
         and 1995, respectively.

         In the third quarter of 1995,  following the  consummation  of the IPO,
         the Company entered into a consulting  contract with XLdynamics,  which
         subsequently  changed  its name to Nova  Temps,  a sole  proprietorship
         owned by Myrna  Cohn,  a director  of the Company and the spouse of the
         Company's   President.   The   contract  is  for   personnel   testing,
         organizational  development,  and human resource services.  The Company
         paid XLdynamics  $22,500 upon contract signing and has committed to pay
         an  additional  $3,500  per month  for a period of 24 months  ending in
         August of 1997. In 1996 the Company paid $46,606 under this  agreement,
         which is classified as general and  administrative  expense,  leaving a
         remaining commitment of $28,000 as of December 31, 1996.

         During  1996 an  officer  of the  Company  borrowed  $125,000  which is
         evidenced by a promissory  note.  The note bears interest at prime plus
         one and is payable  together with the principal on August 13, 1999. The
         note is  collateralized  by a pledge of  certain  assets  held in trust
         totaling $102,500.

  (12)   Financing Transactions and Outstanding Warrants

         In April of 1995, the Company borrowed $200,000 from Jay Teitlebaum, an
         individual investor (the Teitlebaum bridge financing). In June and July
         of 1995, the Company borrowed $300,000 from NBS (the Norman Cohn bridge
         financing).  Both of these bridge loans carried  interest at prime plus
         2% and provided warrant  coverage,  as further detailed below. No value
         was assigned to the warrants granted in these  transactions since their
         exercise  prices were greater than the initial public offering price of
         the DDSI  units  described  in the  following  paragraph.  All  amounts
         borrowed  were repaid from the proceeds of the IPO,  with the exception
         of $50,000  which was  repaid in April  1996.  Interest  expense on the
         bridge loans totaled $12,058 in 1995.

         In August 1995,  the Company issued  1,408,750  units at $5 per unit in
         the IPO,  resulting in proceeds,  net of issuance  costs of $5,477,567.
         Each unit consists of one share of common stock,  $.001 par value,  one
         Redeemable  Class A Warrant  and one  Redeemable  Class B Warrant.  The
         securities  comprising  the  units  were  immediately   detachable  and
         separately  transferable.  Each Class A Warrant  entitles the holder to
         purchase  one share of common  stock for 120% of the  initial  offering
         price of the unit ($6.00), subject to adjustment,  during the four-year
         period commencing one year from the date of the offering.  Each Class B
         Warrant  entitles  the holder to purchase one share of common stock for
         145% of the  initial  offering  price of the units  ($7.25)  subject to
         adjustment,  during the four-year  period  commencing one year from the

                                                                     (Continued)
                                       17
<PAGE>

DIGITAL DESCRIPTOR SYSTEMS, INC.

Notes to Financial Statements

================================================================================

  (12)   Continued

         date of the offering. The Class A Warrants are subject to redemption by
         the  Company  under  certain  circumstances  after  one  year  from the
         offering  and the Class B Warrants  are  subject to  redemption  by the
         Company under certain circumstances after two years.

         A summary of common stock purchase warrants outstanding at December 31,
         1996 is as follows:

         Description                         Outstanding         Exercise price
        -----------------------------------------------------------------------

        Redeemable Class A Warrants           1,408,750                   $6.00
        Redeemable Class B Warrants           1,408,750                   $7.25
        Redeemable Class A-1 Warrants            95,000                   $6.00
        Redeemable Class B-1 Warrants            95,000                   $7.25
        =======================================================================

         All warrants  expire in August 2000 and may be redeemed by the Company,
         at its option,  under  certain  circumstances  commencing  in August of
         1996. The Class A-1 and B-1 warrants were issued in connection with the
         Teitlebaum   (75,000   each)  and  Norman  Cohn  (20,000  each)  bridge
         financings  described  above  and  provide  the  holders  with  certain
         registration rights.

  (13)   Retirement Plan

         Effective  February 1, 1996,  the Company  implemented a 401(k) Savings
         Plan which permits employees to make  contributions to the Savings Plan
         on a pretax  salary  reduction  basis in  accordance  with the Internal
         Revenue Code.  Under the Savings  Plan,  the employer has the option to
         match  25% of the  employee  contributions  up to 6% of the  employee's
         eligible  salary or 50% of the employee  contributions  up to 6% of the
         employee's eligible salary for those participants who are fully vested.
         Participants  vest over a period of 6 years.  The  Company did not make
         any contributions to the Savings Plan during 1996.

                                                                     (Continued)
                                       18
<PAGE>

DIGITAL DESCRIPTOR SYSTEMS, INC.

Notes to Financial Statements

================================================================================

  (14)   Litigation

         A lawsuit has been filed  against  the Company in the New York  Supreme
         Court  in  which  the  plaintiff  alleges  that he  rendered  services,
         including investment banking services,  for which the plaintiff alleges
         that he was promised 15,000 shares of the Company's  common stock.  The
         plaintiff seeks 15,000 shares of the Company's common stock or $100,000
         in damages. The Company intends to vigorously contest the matter in the
         belief that the  plaintiff has been fully paid pursuant to the terms of
         the written contract between the parties, and that material allegations
         of the complaint are false.  Management does not believe the resolution
         of  this  matter  will  materially   impact  the  Company's   financial
         statements.

================================================================================

                                       19
<PAGE>

                                INDEX TO EXHIBITS

Exhibit
Number                              Description of Document
------                              -----------------------

10.24       Security  Agreement  and Note  dated as of  August  14,  1996 in the
            principal amount of $125,000 made by Garrett U. Cohn in favor of the
            Company

10.25       Joint Venture Agreement between  Information  Technology  Solutions,
            Inc. and the Company

10.26       Employee  Stock  Purchase  Plan  adopted  by the Board of  Directors
            August 14, 1996 and  February  20,  1997 and subject to  stockholder
            ratification.

10.27       Restated  1994 Stock  Option Plan  adopted by the Board of Directors
            March 20, 1997 and subject to stockholder ratification