<PAGE>   1
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON D.C. 20549

                                    FORM 10-K

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

                  For the fiscal year ended: December 31, 1997

                                       OR

             [ ] 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 - 24836

                                      VOXEL
             (Exact name of registrant as specified in its charter)

              California                                       33-0301060
       (State or other jurisdiction of                      (I.R.S. Employer
       incorporation or organization)                       Identification No.)

              26081 Merit Circle, Suite 117, Laguna Hills, CA 92653
               (Address of principal executive offices) (zip code)

                                 (714) 348-3200
              (Registrant's telephone number, including area code)

        Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                    Yes X  No
                                       ---   ---

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

        Aggregate market value of the voting stock held by non-affiliates of the
registrant as of the close of business on March 10, 1998: $33,850,000.

        Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.

        Common Stock, no par value: 8,447,015 shares outstanding at March 10,
1998.

                       DOCUMENTS INCORPORATED BY REFERENCE

        The information required by Part III of Form 10-K is incorporated herein
by reference to the registrant's definitive proxy statement to be delivered in
connection with the Annual Meeting of Shareholders to be held on May 29, 1998.



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                                      VOXEL

                                TABLE OF CONTENTS



<TABLE>
<CAPTION>
                                     PART I

<S>                                                                                 <C>
        Item 1.  Business............................................................1
        Item 2.  Properties.........................................................13
        Item 3.  Legal Proceedings..................................................13
        Item 4.  Submission of Matters to a Vote of Security Holders................14

                                    PART II

        Item 5.  Market for Registrant's Common Equity and Related Shareholder
                       Matters......................................................14
        Item 6.  Selected Financial Data............................................15
        Item 7.  Management's Discussion and Analysis of Financial Condition and
                       Results of Operations........................................17
        Item 8.  Financial Statements and Supplementary Data........................20
        Item 9.  Changes in and Disagreements With Accountants on Accounting and
                       Financial Disclosure.........................................35

                                    PART III

        Item 10. Directors and Executive Officers of the Registrant.................35
        Item 11. Executive Compensation.............................................35
        Item 12. Security Ownership of Certain Beneficial Owners and Management.....35
        Item 13. Certain Relationships and Related Transactions.....................35

                                    PART IV

        Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....36
        Signatures..................................................................39
</TABLE>



<PAGE>   3


                                     PART I

ITEM 1.  BUSINESS

        Voxel (the "Company") is engaged in the development and marketing of a
proprietary system, Digital Holography(TM), that produces "three-dimensional
X-rays" of the internal structure of the human body. The Digital Holography
system (the "System") consists of: the Voxcam(R) imager, an electro-optical
instrument that holographically images CT and MR data on film; Voxbox(R) light
boxes to view the film; and Voxfilm(R), special silver halide film to record the
hologram. The proprietary process used by the Voxcam to encode information makes
it possible to record up to 200 or more cross-sectional images from a CT or MR
examination on a single sheet of Voxfilm. The completed image is called a
Voxgram(R). On September 29, 1995, the Company received clearance from the FDA
to market all three elements of its Digital Holography System.

        The Voxgram image, projected by the Voxbox, is an accurate,
three-dimensional holographic replica of the patient's anatomy which fills a
six-inch deep volume. Conventional CT and MR display techniques provide a large
number of individual two-dimensional images, each representing a single
cross-sectional plane through the body. The physician is required either to
mentally integrate those many images or to examine computer generated views that
simulate the third dimension. However, these computer generated renderings can
not and do not display accurate volumetric information and are to be
distinguished from Voxel's true three-dimensional holographic images.

        More than 40 medical centers have studied Voxgrams' clinical utility in
connection with conditions that affect the anatomical regions most commonly
targeted by CT and MR examinations -- the head, spine, skeleton, and blood
vessels. This research has yielded more than 170 oral papers and scientific
exhibits and several articles in relevant medical journals. The results of these
studies suggest that Voxgrams provide for more accurate and comprehensive
diagnosis of medical conditions and improve surgical planning. The Company
believes that Voxgrams may also save time in the operating theater and in the
surgical planning process, and may enable physicians to diagnose conditions that
are extremely difficult or impossible to detect with existing display
techniques.

        Voxel's principal strategic objective is to make it necessary for
diagnostic imaging sites to offer Voxgrams in addition to cross-sectional images
in order to be considered acceptable providers. The Company's potential United
States market encompasses more than 6,200 hospitals and diagnostic imaging
centers which, using more than 9,500 scanners, performed in excess of 32 million
CT and MR examinations in 1996. Each of these sites is a potential customer for
the System and each of these patient examinations could potentially be printed
on Voxfilm. The Company believes that Japanese utilization of CT and MR scanners
is comparable to that of the United States and Europe's utilization of CT and MR
scanners is substantial.

        Assimilating Voxel's technology will not require a major change in a
hospital's equipment or procedures. CT and MR data will continue to be collected
in the current format, without any modification in routine physician practice.
Additional scanner time will not be required and the patient's radiation dose
will not be changed. The data will be prepared for holographic printing using a
technique similar to that used to prepare two-dimensional images. After scanning
the patient, the technician will adjust brightness and contrast to obtain the
most useful images, which will then be printed by the Voxcam.

        Voxel has established manufacturing arrangements for the Voxfilm media
with Konica Corporation and for the Voxbox lightbox with a supplier in Southern
California. The Company is vigorously pursuing the development of a commercial
version of the Voxcam and arranging for its manufacture. This program includes
securing sub-systems from qualified vendors, performing final assembly and
in-house testing for prototype and pilot production runs, and selecting a system
integrator for volume manufacturing. The Company has selected Kaiser
Electro-Optics, Inc. ("KEO"), a leader in the design and production of advanced
high performance electro-optical display systems for



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commercial and military applications, as a key vendor for the new program. Voxel
and KEO have entered into a contract pursuant to which KEO has already commenced
design of the optical subsystem for the commercial Voxcam. Voxel has also
selected and been working with other vendors who are providing additional
subsystems and critical components for the Voxcam, such as the film processor
and the film dispenser assembly.

        During the past 12 months, the Company's internal engineering staff has
refined the high-level system design of the Voxcam, developed detailed
specifications, drafted statements of work for each of the subsystems, prepared
and disseminated requests for proposals to potential subsystem vendors,
evaluated vendors' proposals, qualified and selected vendors, resolved
industrial design issues, constructed a prototype of critical elements of the
new design, and instituted quality systems for managing the program. In
particular, the Company has in recent months confirmed the functionality of its
optics design, refined and tested a prototype of the film processor, extensively
tested the central element of the film dispenser subsystem, and made
considerable progress in the development of control software for the Voxcam. The
current program to commercialize the Voxcam is the successor to an effort in
which the Company was engaged from 1994 through the end of 1996 with General
Scanning, Inc. ("GSI"). See "Legal Proceedings."

        Voxel believes that its granted patents and patent applications provide
a meaningful proprietary position in all elements of the System.

        Initial sales activities are underway, focusing on institutions with
active neurosurgery and/or orthopedic surgery practices. The Company expects to
work closely with its customers to broaden the clinical applications in which
Voxgrams will be routinely used and thereby increase Voxfilm utilization. The
Company's objective is to make Digital Holography a standard of medical imaging.

     MEDICAL IMAGING

        The ability to examine and comprehend the internal workings of the human
body is a critical element of diagnostic medicine. Before the discovery of
X-rays, a physician's ability to understand internal human anatomy was limited
to indirect, visual and acoustic techniques or exploratory surgery. The critical
importance of discovering what was occurring inside the patient led to the
adoption of a series of increasingly advanced medical imaging modalities: first
X-ray, then CT, then MR Management believes that these improvements in the
means for collecting information about the inside of the body have not been
matched by corresponding progress in techniques for displaying the data.

        The more advanced medical imaging modalities, CT and MR, are highly
specialized. These modalities can be crucial to accurate diagnosis and
successful treatment, and are now in general use. However, the complexity of
their images limits the degree to which doctors can appreciate and utilize the
information they contain. Unlike the conventional X-ray films familiar to most
physicians, the complicated CT and MR displays may be fully understood only by
radiologists.

         Two-Dimensional Data Acquisition

        X-rays were discovered in 1895. For the first time, physicians were able
to see inside the human body without performing surgery. The images were simple
projections of the anatomy onto one plane created by the differential absorption
of X-rays by the various body tissues. The physician used his or her prior
knowledge and experience to generate the third dimension mentally.

         Three-Dimensional Data Acquisition: CT and MR

        All forms of medical imaging collect information from volumetric
targets. However, all depth information is lost in conventional X-ray images.
CT, the first practical system to provide more data about the third dimension,
was developed during the late 1960s. CT scanners employ a mathematical technique
to derive images from a series of measurements taken with a rotating X-ray
source and electronic detectors. Each of the resulting images shows a "slice"
through the patient. A sequence of such slices is obtained by repeating the
imaging process while moving the patient along the axis of the



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scanner. The resulting stack of slices contains detailed information about the
three-dimensional structure of the patient. The slices are printed next to each
other on a flat piece of film.

        MR imaging was developed in the early 1980s. MR measures radio waves
emitted by a chemical element in the body which is selectively excited in the
presence of a strong magnetic field. The signals emitted are influenced by their
environment, which is important for tissue differentiation. Because the body is
primarily made up of water and fat (both of which contain abundant quantities of
the needed element), a great many signals are produced. The computers in MR
scanners use complex mathematical formulae to convert these signals into slice
images. An advantage of using MR is that anatomical structures can be observed
from any orientation. Nonetheless, the MR data are displayed in two-dimensional
form on flat film or a video terminal.

        In order to benefit from CT and MR technologies, radiologists have had
to learn to interpret changes through the volume of the patient's anatomy from
sets of two-dimensional slices, attempting three-dimensional reconstruction in
their minds.

         Interpreting CT and MR Data

        The radiologist is one of several people involved in the medical imaging
process. A patient will have seen a primary care physician who will have made a
provisional diagnosis prior to referring the patient to a radiologist. The
radiologist will consider the provisional diagnosis in deciding how to examine
the patient. Selection of the appropriate modality, i.e., CT or MR, the specific
techniques to be used in collecting the data, and whether to use contrast agents
to enhance the data, require considerable skill and experience. A radiological
technologist follows the radiologist's instructions, examines the images to
confirm their quality, and routes them to a camera (sometimes referred to as a
printer) that makes black and white film copies of the cross-sectional CT or MR
images.

        The radiologist examines the CT and MR images on a light box and
dictates a report for the referring physician. In arriving at a conclusion, the
radiologist attempts to integrate the information from all of the slices to
create a single mental picture of the relevant portion of the patient's anatomy.
Mental reconstruction can be subjective. Different examiners may "see" different
pictures. Radiologists sometimes find it difficult to visualize the third
dimension accurately. Referring physicians (who have had less training and
experience examining images) may be at an even greater disadvantage. Management
believes that radiologists and referring physicians would benefit from a more
direct way to evaluate CT and MR scans. A better display technique could enhance
the efficiency -- and the accuracy -- of interpretation. Patients would benefit
from seeing a more recognizable representation of their condition, so that they
could better understand the advice of their physicians and provide more fully
informed consents.

     THE VOXEL SOLUTION

         Digital Holography

        Unlike traditional two-dimensional displays of CT and MR data, the
Digital Holography System provides an accurate, life-size, three-dimensional
image of the patient's anatomy. The System, for which pre-production prototypes
are currently under development, consists of three components -- the Voxcam, the
Voxbox, and Voxfilm. Together, they enable a user to produce and examine Voxgram
images. The Voxcam is a laser-driven optical camera that receives electronic
images collected by CT and MR scanners, projects them using a liquid crystal
display (similar to those used in certain video projection systems), and records
them on Voxfilm. Each image from a scan is individually exposed in sequential
fashion and at its proper location. All of these exposures are recorded on a
single piece of Voxfilm, which is then developed in an attached automatic
processor.

        Once the Voxfilm has been processed, it is displayed on a special
lightbox called a Voxbox. The Voxbox is an inexpensive, compact, self-contained,
portable unit. Although the Voxbox contains proprietary technology to illuminate
the Voxgram, it is similar in appearance to the light boxes currently used
throughout medicine for viewing conventional two-dimensional images. The Voxbox
uses



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ordinary white light to reconstruct the hologram instead of requiring a laser as
is usually the case. The Voxbox can be rotated or tilted, allowing the user to
view a Voxgram from a variety of different perspectives.

        Voxfilm shares many characteristics with ordinary X-ray film, but its
composition and the proprietary process used to encode information make it
possible to record, when appropriate, more than 200 slices from a CT or MR
examination on a single sheet. An exposed and developed Voxgram is a 14" by 17"
sheet of film which reveals only a faint glow when held up to ambient light.
When placed upon a Voxbox, it displays a detailed three-dimensional image
stretching through a six-inch deep volume.

        Assimilating Voxel's technology will not require a major change in a
hospital's equipment or procedures. The CT and MR examination procedures are
unchanged. Additional scanner time will not be required and the patient's
radiation dose will not be changed. The data will be prepared for printing using
a technique similar to that used to prepare two-dimensional images. After
scanning the patient, the technician will adjust brightness and contrast to get
the most useful image, which will then be printed by the Voxcam.


        THE IMAGING SYSTEM


                                    [GRAPHIC]


        The Digital Holography System as it is expected to be used in a typical
        radiology suite. The Voxcam and Voxboxes are analogous to conventional
        two-dimensional cameras and light boxes.


         Holography

         Holography is similar to photography. In both, light illuminates an
         object and the reflected light is recorded in a thin photosensitive
         layer on a sheet of film. There are, however, substantial differences
         between photography and holography. The lens of a photographic camera
         forms a single image of an object, flattening it to a two-dimensional
         picture. When looking at a photograph, one can only see this flat
         picture as it appeared from the original vantage point of the camera
         lens. A holographic camera, on the other hand, uses a laser in place of
         a lens and records the entire wave front emanating from an object. This
         wave front contains intensity, distance, and directional information.
         The object is recorded and displayed three-dimensionally, and one can
         view the object as it would have appeared from a whole range of
         different vantage points by simply moving one's head.

         Conventional Holography



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        A conventional hologram is made by splitting a laser beam in half,
        shining one part, the "reference beam," onto the holographic film and
        directing the other, the "object beam," to reflect off the object to be
        holographed. Information about the object's appearance and position are
        recorded when the beams intersect on film.

         Multiple Exposure Holography

        Reflecting light off of an object is not feasible when the "object" is
        inside a patient's body. Thus, a Voxgram cannot be a conventional
        hologram. Instead, the "object" for a Voxgram is a projection screen
        which sequentially shows slices from a CT or MR scan. A hologram of the
        first slice is made; then the screen is moved back a distance
        corresponding to the gap between the slices; the next slice is projected
        onto it; and a second hologram is superimposed on the first. More slices
        are encoded by repeating this procedure with appropriately greater
        distances between the screen and the film. The process is similar to
        multiple-exposure photography where several exposures are made on a
        single piece of film, but the holograms encode the location as well as
        the intensity of each exposure. When reconstructed, each holographic
        exposure appears at a different distance from the film; the slices are
        suspended in space with the correct separation between them.


        VOXCAM DIGITAL HOLOGRAPHY (TM) CAMERA


                                   [GRAPHIC]


        Schematic of the prototype Voxcam, a printer for making a volumetric
        multiple-exposure hologram of an MR or CT scan (simplified).


        A large number of exposures (up to 200 or more) can be combined with
proper selection of holographic angles, intensities, and processing chemicals.
Management believes that without Voxel's proprietary technology one cannot
combine more than a small number of slices.

        The Company has expended substantial resources developing the Digital
Holography System, including research and development expenses totaling $3.6
million, $4.3 million, and $2.8 million for the years ended December 31, 1995,
1996, and 1997, respectively.

         Holographic Display Systems

        A hologram must be illuminated correctly to be seen as a bright,
undistorted image without any compromise in its three-dimensionality. To achieve
correct illumination, the classic method is to use



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laser light identical to that with which the hologram was made. However,
suitable lasers are expensive and inconvenient; they generally are not found
outside optics laboratories. There are several alternatives which use white
light instead of a laser:

        o       One approach uses the hologram as a filter to reduce the
                incoming light to one color: the image becomes sharper but
                dimmer. Medical images require a sharp, bright image.

        o       Another approach is to sacrifice the vertical information in a
                hologram, which causes the image to disappear when viewed from
                above or below. Medical images must be viewable from vertical as
                well as horizontal perspectives.

        o       The proprietary Voxbox solves the current limitations inherent
                in white light displays by pre-splitting the light into an
                inverted spectrum, enabling the hologram to recombine the light
                into a bright, sharp image while preserving both vertical and
                horizontal perspectives.


        VOXBOX


                                    [GRAPHIC]


        Schematic of the prototype Voxbox, a white-light viewer for holograms
        (simplified).



     CLINICAL APPLICATIONS RESEARCH

        Evaluations of Voxel's proposed system have been conducted, and are
continuing, at medical centers throughout the United States, including Harvard
University, George Washington University, the Mallinckrodt Institute of
Radiology, and the University of New Mexico. These programs have concentrated on
the parts of the body (i.e., the head, spine, skeleton, and blood vessels) and
the kinds of conditions (i.e., tumors, trauma, and vascular abnormalities) that
are commonly examined with CT and MR scanners. The studies are designed to
determine if the Digital Holography System will (i) allow diagnosis of
conditions that are extremely difficult or impossible to detect with existing
technology; (ii) provide for more accurate and comprehensive diagnosis and
understanding of conditions that are difficult to characterize fully with
existing technology; (iii) increase the radiologist's confidence in the
diagnosis made; (iv) reduce the time required to arrive at a diagnosis; (v)
facilitate communication of relevant information to referring physicians; (vi)
improve surgical planning; and (vii) allow for more fully informed patient
consent to treatment.



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        Studies of the System began in the Spring of 1992. In practice, the
Voxcam is intended to be directly connected to CT and MR scanners so that the
digital data from the scanners can be made into Voxgrams on site. In order to
conserve the Company's financial resources, a program was designed to simulate
the presence of a Voxcam in each participating institution. Participating
institutions transmit data from study cases to the Company by sending relevant
tapes or disks. Using a lab prototype Voxcam, Voxel's personnel produce the
corresponding Voxgrams and return them to the institutions by overnight courier.
Approximately 8,000 Voxgrams have been produced on the lab prototype Voxgram in
support of this clinical research program. Because each site has been provided
with Voxboxes, physicians can examine the Voxgrams in the same manner as if they
had been produced on site. The Company does not pay for the CT or MR scan or the
interpretation. No payments have been made to investigators or their
institutions other than, on rare occasions, a modest research stipend.
Participants are free to publish their findings.

        Voxel's research collaborators have presented over 170 oral papers and
scientific exhibits at domestic and international meetings of medical and
scientific organizations, and have published several articles in prestigious
medical journals, all reporting on the usefulness of the Company's technology.

        The principal forum for scientific reports on medical imaging is the
annual meeting of the Radiological Society of North America ("RSNA") which is
attended by more than 20,000 physicians and health professionals. Many of the
aforementioned papers and exhibits have been presented at RSNA meetings and
others have been given at meetings of radiologic subspecialists (e.g., American
Society of Neuroradiology, European Society of Neuroradiology, British Society
of Neuroradiology, and American Society of Emergency Radiology). Referring
physicians, especially neurosurgeons, orthopedists, and cardiologists, have also
made presentations to their peers at their own professional meetings.
Presentations have been made at the Congress of Neurosurgeons, the American
Academy of Neurological Surgeons, the American Academy of Orthopedic Surgeons,
the American Heart Association, and the American College of Cardiology.

        The reports by Voxel's research collaborators at domestic and
international meetings suggest that the Company's technology is useful in
diverse settings and in support of the indications most commonly targeted by CT
and MR procedures, including neurological, orthopedic, and cardiac conditions.
Most of the data for these submissions were collected using traditional CT or MR
techniques, but these submissions also included studies using leading edge
scanner applications such as (i) non-invasive MR visualization of blood vessels,
(ii) MR visualization of the nervous system, (iii) high speed, high resolution
CT, and (iv) three-dimensional ultrasound.

        In November 1997, the Company installed a beta version of the Voxcam at
the Department of Veterans' Affairs Joint Imaging Service ("JIS") located at the
New Mexico Regional Federal Medical Center. This unit is a pre-production
prototype produced by GSI, extensively retrofitted by the Company's personnel,
so that its opto-mechanical performance, and the quality of the Voxgrams it
makes, are sufficient to enable the JIS program to go forward. By monitoring the
Voxcam's use at JIS, Voxel is collecting data regarding clinical impact,
physician utilization, and user interface preferences. This information will
help the Company develop programs to maximize the value of Digital Holography in
routine clinical settings.

     SALES AND MARKETING

        Voxel's principal strategic objective is to make it necessary for
diagnostic imaging sites to offer volumetric holographic images in addition to
cross-sectional images in order to be considered acceptable providers. In 1996,
approximately 6,200 sites in the United States, using more than 9,500 CT and MR
scanners, performed approximately 32 million scan procedures. This represents a
level of CT and MR utilization equal to or greater than that of prior years. The
Company believes that Japanese utilization of CT and MR scanners is comparable
to that of the United States and Europe's utilization of CT and MR scanners is
substantial. The Company expects to participate in those foreign markets after
the Digital Holography System has been introduced in the United States. However,
there can be no



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assurance that the Digital Holography System will be accepted for general use in
any of these markets in connection with any of the illnesses which are commonly
examined with CT or MR scanners.

        The Company's primary offering to potential customers is a fee-per-use
service package. Under this arrangement, Voxel will place the Voxcam, Voxboxes,
and related hardware at the customer site, supply all necessary Voxfilm and
other consumables, and furnish training and System maintenance. The customer
will be charged based upon actual Voxfilm usage, subject to a minimum monthly
usage guarantee and a four-year commitment to the Digital Holography service.

        The Company's initial marketing efforts are focusing on institutions
with CT or MR scanners that have active neurosurgery and orthopedic surgery
practices. These practices are responsible for prescribing the majority of CT
and MR studies performed and they use the resulting images in the planning and
execution of surgical procedures. After an institution has acquired a Digital
Holography System, the Company intends to expand the System's utilization and
increase film consumption by promoting the technology to other of the
institution's medical specialists.

        The Company is developing a direct sales force to call on potential
customers. Prospects are qualified by factors which include the type and
quantity of scanners they use, the number of neurosurgical and orthopedic
procedures they perform, and, after the System is in commercial use, their
geographic proximity to System installations then in place. The sales effort is
expected to include intensive after-sale customer service to facilitate the
routine use of Voxgrams for the aforementioned conditions and the use of
Voxgrams for new medical applications which may be revealed by ongoing research.

        A quality field service program is another prerequisite to the Company's
success. Established national organizations have expressed interest in
performing field service on the Company's behalf. However, there can be no
assurance that the Company will be able to obtain field service on commercially
desirable terms or at all.

        To market the System, the Company must further develop its sales force
and must arrange for supporting service and training. Although the Company has
commenced the development of a direct sales organization, there can be no
assurance that the Company will be able to establish suitable sales or support
capabilities.

     INTELLECTUAL PROPERTY

        The Company's success is dependent in large measure on its ability to
obtain patent protection for the System, maintain confidentiality of its trade
secrets and proprietary know-how, and operate without infringing upon the
proprietary rights of third parties.

        The Company's intellectual property derives in large part from a unique
method for making a multiple exposure hologram which may contain 200 or more
individual images. This method requires an understanding of a variety of factors
that control how many exposures a given piece of film can accommodate (the
film's image capacity), as well as the ability to make each of the exposures in
the hologram so that it uses the appropriate portion of that image capacity.

        Voxel holds a U.S. patent (which will expire in 2014) covering the key
innovative elements of the Voxcam and the System as a whole. The Company has
also recently received a notice of allowance for another patent, related to the
same subject matter, that is expected to issue in the near future. The Company
also holds patents specifically relating to the Voxbox. Two such patents
(expiring in 2003) have been granted in the United States, and corresponding
patents have issued in Japan, Canada, the United Kingdom, Australia, and
numerous European countries. An additional U.S. patent (which will expire in
2014) issued recently with respect to one key element of the Voxbox.

        The Company believes that it will be granted further proprietary
protection for both the individual elements of the Digital Holography System and
for the System as a whole. The Company's pending patent applications cover
additional aspects of the System and numerous other technological



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advancements developed by the Company. These pending applications were filed in
the United States, preserving all applicable rights to file timely corresponding
applications throughout the world.

        There can be no assurance that any current or future patent applications
filed by the Company will be granted or that, if a patent is granted as a result
of these applications, such patent will cover all or a substantial portion of
the proposed claims. With respect to patents currently held by the Company or
issued to the Company in the future, there can be no assurance that such patents
will provide the anticipated competitive advantages or will not be challenged by
third parties or that patents issued to others will not have an adverse effect
on the ability of the Company to conduct its business. In addition, there can be
no assurance that the Company's patents would be held valid by a court of law of
competent jurisdiction or, if held valid, the Company would have sufficient
resources to enforce its patent rights. In the event the Company is found to
have infringed upon the patent rights of others, there can be no assurance that
Voxel would be able to obtain licenses to any of such patents.

        The Company also relies on trade secrets and proprietary know-how. The
Company has been, and will continue to be, required to disclose its trade
secrets and proprietary know-how to employees and consultants, and may also
disclose such information to potential corporate partners, collaborators, and
contract manufacturers. Although the Company seeks to protect its trade secrets
and proprietary know-how, in part by entering into confidentiality agreements
with such persons, there can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach, or that
the Company's trade secrets and proprietary know-how will not otherwise become
known or be independently discovered by competitors.

     THIRD-PARTY REIMBURSEMENT

        The cost of a significant portion of medical care in the United States
is funded by government and private insurance programs, such as Medicare,
Medicaid, health maintenance organizations, and private insurers, including Blue
Cross/Blue Shield plans. Government-imposed limits on reimbursement of hospitals
and other health care providers have significantly impacted their budgets. Under
certain government insurance programs, a health care provider is reimbursed a
fixed sum for services rendered in treating a particular condition, regardless
of the actual costs of such treatment. Private third-party reimbursement plans
and health maintenance organizations are also developing increasingly
sophisticated methods of controlling health care costs through redesign of
benefits and exploration of more cost-effective methods of delivering health
care. In general, these government and private cost-containment measures have
caused health care providers to be more selective in the purchase of medical
products.

        The availability and magnitude of third party reimbursement for the
costs of use of Digital Holography may vary as a function of the identity of the
payor, the setting in which the CT or MR examination is performed, and the
billing practices of the entity that uses the System. The Company will attempt
to provide its customers with guidance as to the appropriate methods to seek
third-party reimbursement for use of Digital Holography. The CPT Editorial Panel
of the American Medical Association (AMA) has amended an existing code for
reporting medical procedures, effective January 1, 1998, to reference
holographic imaging of CT and MR data explicitly. This will provide a method by
which clinicians may more accurately report, and seek reimbursement for, use of
Digital Holography. Reference to holographic imaging in a CPT code is generally
based upon the procedure being consistent with contemporary medical practice and
being performed by many physicians in clinical practice in multiple locations,
but does not represent endorsement of the procedure by the AMA.

        Significant uncertainty exists as to the reimbursement status of newly
approved health care products, and there can be no assurance that adequate
third-party reimbursement will be available. Neither Medicare nor any other
third-party payor has considered the reimbursement status of the System.
Limitations imposed by government and private insurance programs and the failure
of certain third-party payors to reimburse (fully or substantially), health care
providers for the procedures associated with use of the System could have a
material adverse effect on the Company.



                                     - 9 -

<PAGE>   12

     MANUFACTURING

        The Company is vigorously pursuing the development of a commercial
version of the Voxcam and arranging for its manufacture. This program includes
securing sub-systems from qualified vendors, performing final assembly and
in-house testing for prototype and pilot production runs, and selecting a system
integrator for volume manufacturing. The Company has selected Kaiser
Electro-Optics, Inc. ("KEO"), a leader in the design and production of advanced
high performance electro-optical display systems for commercial and military
applications, as a key vendor for the new program. Voxel and KEO have entered
into a contract pursuant to which KEO has already commenced design of the
optical subsystem for the commercial Voxcam. Voxel has also selected and been
working with other vendors who are providing additional subsystems and critical
components for the Voxcam, such as the film processor and the film dispenser
assembly.

        During the past 12 months, the Company's internal engineering staff has
refined the high-level system design of the Voxcam, developed detailed
specifications, drafted statements of work for each of the subsystems, prepared
and disseminated requests for proposals to potential subsystem vendors,
evaluated vendors' proposals, qualified and selected vendors, resolved
industrial design issues, constructed a prototype of critical elements of the
new design, and instituted quality systems for managing the program. In
particular, the Company has in recent months confirmed the functionality of its
optics design, refined and tested a prototype of the film processor, extensively
tested the central element of the film dispenser subsystem, and made
considerable progress in the development of control software for the Voxcam.

        The commercial Voxcam under development is intended to implement
significant improvements over the lab prototype of the Voxcam on which
approximately 8,000 Voxgrams have been produced. The Company believes that these
improvements are necessary to create a commercial product that would satisfy
potential customers. Areas of improvement, vis-a-vis the laboratory prototype of
the Voxcam, include shape, size, user interface, extent of automation, component
cost, and ability to withstand hostile environments.

        The current program to commercialize the Voxcam is the successor to an
effort in which the Company was engaged from 1994 through the end of 1996. The
previous effort relied upon General Scanning, Inc. ("GSI"), a firm that has
designed and manufactured medical imaging devices for major domestic suppliers,
to perform the development and engineering with respect to pre-production
prototypes and commercial units of the Voxcam. The GSI program failed to meet
its design and manufacturing objectives. The Company believes that GSI failed to
meet the engineering specifications, product performance requirements, and
schedule obligations arising under the parties' agreement and relationship. As a
consequence, a binding arbitration proceeding to resolve the parties'
differences has taken place. See "Legal Proceedings."

        Voxel manages the development and engineering of the Voxbox and Voxfilm
but uses original equipment manufacturers to produce them. Voxel has qualified
local suppliers for the Voxbox. The Company currently purchases Voxfilm from
Konica Corporation, one of the world's leading manufacturers of silver halide
film products.

        There can be no assurance that vendors with which the Company is
currently cooperating will meet the Company's requirements for quality,
quantity, and timeliness and the FDA's design and manufacturing process
requirements or that, in the future, the Company would be able to find
substitute manufacturers for the elements of the Digital Holography System. The
System must be manufactured in compliance with FDA regulations in order for it
to be distributed in the United States. The Company's dependence on others for
the manufacture of key elements of its products may adversely affect its future
profit margins and the Company's ability to develop and deliver products on a
timely and competitive basis, or at all.



                                     - 10 -

<PAGE>   13

     COMPETITION

        Voxel is not aware of any academic or commercial institution actively
developing multiple exposure holography to display medical images.

        The Digital Holography System may compete in the future for market share
with currently available methodologies for viewing the results of CT and MR
scans. Potential purchasers of the Digital Holography System may determine that
currently available display techniques for CT and MR with which they are already
familiar (including unaided, visual examination of the slice images) are
sufficient to make requisite diagnoses and facilitate treatment. The perceived
value of the Digital Holography System may be influenced by future health care
legislation, insurance reimbursement policies, and cost-containment measures
adopted by health care providers and payors. In addition, competition may arise
from products currently in development, or that may be developed in the future,
by other companies. Many of the current and potential competitors are likely to
have substantially greater capital resources, research and development staffing,
and facilities than the Company. In addition, many potential competitors have
extensive experience with CT and MR procedures and technologies.

        One currently available alternative approach to volumetric display is to
use computer graphics technology. A single pseudo-three-dimensional picture is
synthesized from the individual two-dimensional images. Traditional artistic
effects (e.g., shading, perspective) are used to convey an impression of depth.
The Company believes that one of the limitations of computer-generated
pseudo-three-dimensional images is that only psychological depth cues can be
used. Psychological cues depend on surfaces; computer-generated surfaces
introduce certain compromises and distortions. Moreover, substantial computer
hardware and software skill, experience, time, and effort are required to
produce these pictures. A variety of suppliers of CT and MR scanners as well as
independent companies offer software and workstations that generate pseudo
three-dimensional pictures. These systems also have other uses; they enable
radiologists to interact with the data that have been collected by scanners and
they may facilitate the production of "what if" images which some surgeons have
found useful in surgical planning. When used for that purpose, the workstations
can serve as a source of data for Voxgrams so true volumetric displays can be
made after the data have been manipulated. The Company believes that Voxgrams
may, therefore, add value to users of workstations. While the Company views
workstations as complementary, some physicians may find them to be an acceptable
alternative to the Digital Holography System.

     GOVERNMENT REGULATION

        The medical devices currently under development by the Company are
regulated by the FDA under the Federal Food, Drug and Cosmetic Act (the "FDC
Act") and require regulatory clearance prior to commercialization in the United
States. Under the FDC Act, the FDA regulates preclinical and clinical testing,
manufacturing, labeling, distribution, sale, marketing, advertising, and
promotion of medical devices in the United States. Noncompliance with applicable
requirements can result in fines, injunctions, civil penalties, detention,
recall, or seizure of products, total or partial suspension of production,
distribution, sales and marketing, withdrawal of marketing approvals or
clearances, a recommendation by the FDA that the manufacturer or distributor not
be permitted to enter into government contracts, and criminal prosecution. In
certain circumstances, the FDA also has the authority to order the manufacturer
or distributor of a device to repair, replace, or refund the cost of, the
device. Various states and other countries in which the Digital Holography
System may be sold in the future may impose additional regulatory requirements.

        Following the enactment of the Medical Device Amendments of 1976 to the
FDC Act, the FDA classified medical devices in commercial distribution at the
time of enactment into one of three classes -- Class I, II, or III. This
classification is based on the controls necessary to reasonably ensure the
safety and effectiveness of medical devices. Class I devices are those whose
safety and effectiveness can reasonably be ensured through 'general' controls
such as (i) labeling requirements, (ii) adherence to the FDA-mandated quality
system ("QS") regulation (which includes good manufacturing practices ("GMP")
requirements), and (iii) for certain Class I devices, the requirement for
successful completion



                                     - 11 -

<PAGE>   14

of the pre-market notification ("510(k)") process. Class II devices are those
whose safety and effectiveness can reasonably be ensured through the use of
general controls (which include the requirement of 510(k) clearance for most
Class II devices) together with 'special' controls, such as performance
standards, patient registries, and FDA guidelines. Generally, Class III devices
are devices that must receive pre-market approval by the FDA to ensure their
safety and effectiveness. They are typically life-sustaining, life-supporting or
implantable devices, and also include most devices that were not on the market
before May 28, 1976 and for which the FDA has not made a finding of substantial
equivalence based upon a 510(k).

        If a manufacturer or distributor of medical devices can establish to the
FDA's satisfaction that a new device is substantially equivalent to a legally
marketed Class I or Class II medical device or to a Class III device for which
the FDA has not yet required pre-market approval, the manufacturer or
distributor may market the device. In the 510(k) process, a manufacturer or
distributor makes a claim of substantial equivalence, which the FDA may require
to be supported by various types of information showing that the device is as
safe and effective for its intended use as the legally marketed predicate
device. Following submission of the 510(k), the manufacturer or distributor may
not place the new device into commercial distribution until an order is issued
by the FDA finding the new device to be substantially equivalent.

        On September 6, 1995, the Company submitted a 510(k) to the FDA with
respect to each of the three elements of the System -- the Voxcam, Voxbox, and
Voxfilm. On September 29, 1995, the Company received findings of substantial
equivalence from the FDA for each of the three elements, permitting the
commercial distribution of the Digital Holography System as an adjunct to
current two-dimensional display techniques for diagnostic image data. Effective
February 19, 1998, under the Food and Drug Administration Modernization Act of
1998, the Voxbox appears to be exempt from the 510(k) process.

        If, either before or after commercial release of the Voxcam, the Company
makes a modification (e.g., in design or intended use) which could significantly
affect the safety or effectiveness of the Voxcam, the Company will be required
to submit a new 510(k) for the Voxcam and establish to the FDA's satisfaction
that the Voxcam, as modified, is substantially equivalent to the predecessor
version which is the subject of the current 510(k) clearance. If the commercial
Voxcam resulting from the current development program differs in safety or
effectiveness from the model which was the subject of the 510(k) clearance
received by the Company in 1995, such a submission would be required. The need
to obtain FDA clearance of a new 510(k) (which would not be assured) could
significantly delay (or prevent) commercialization of a modified Digital
Holography System. The Company does not currently intend to take any action to
modify the Voxcam or its intended use in a fashion which would make it
unsuitable for 510(k) clearance.

        The Company is also registered as a medical device manufacturer with the
FDA and with state agencies, such as the California Department of Health
Services ("CDHS"). Voxel is also subject to a continuing obligation to file a
listing of its products with those agencies periodically. The Company or its
contract manufacturers may be inspected on a routine basis by both the FDA and
the CDHS for compliance with (i) the FDA's QS regulation and (ii) other
requirements for labeling, promotion, and reporting of adverse events (the
medical device reporting regulation).

        The FDA's QS regulation, which includes but is not limited to GMP
requirements, mandates, among other things, that (i) the manufacturing process
be regulated, controlled and documented by the use of written procedures and
(ii) the ability to produce devices which meet the manufacturer's specifications
be validated by extensive and detailed testing of every aspect of the process.
This regulation also requires (i) investigation of any deficiencies in the
manufacturing process or in the products produced, (ii) purchasing controls,
(iii) detailed record keeping including the maintenance of service records, and
(iv) pre-production design controls. The pre-production design controls do not
apply to Voxfilm or the Voxbox. They do however apply to the current design
program for the Voxcam, effective June 1, 1997, except that the FDA has stated
that as long as manufacturers are taking reasonable steps to come into
compliance with the design control requirements, the FDA will not



                                     - 12 -

<PAGE>   15

initiate action (including enforcement cases) based on a failure to comply with
the design control requirements before June 1, 1998.

        The FDA's medical device reporting regulation requires that the device
manufacturer provide information to the FDA on deaths or serious injuries
alleged to have been associated with the use of its marketed devices, as well as
product malfunctions that would likely cause or contribute to a death or serious
injury if the malfunction were to recur. Also, because the Voxcam will contain a
laser, the Company will be required to comply and certify compliance with the
FDA's performance (safety) standard governing laser products. Changes in
existing requirements or interpretations (on which regulations heavily depend)
or adoption of new requirements or policies could adversely affect the ability
of the Company to comply with regulatory requirements. Failure to comply with
regulatory requirements could have a material adverse effect on the Company's
business, financial condition, and results of operations. Compliance with such
laws and regulations now or in the future could require substantial expenditures
by the Company.

     OTHER POTENTIAL MARKETS

        Voxel's technology is also potentially useful in a variety of other
non-medical settings where volumetric information is important, such as
non-destructive testing of airplane parts and volumetric visualization of oil
fields and atomic reactor cores. In order for the Digital Holography System to
be useful for these applications, potential customers would have to collect data
in an appropriate format. Collecting appropriate data could be expensive and
time consuming and, as a result, potential customers may consider the System
unsuitable. Proving that the Digital Holography System is suitable for these
applications will involve additional applications research. While the Company
currently intends to pursue these applications in the future, there can be no
assurance that it will have the resources to do so or that its efforts will be
successful.

     EMPLOYEES

        As of December 31, 1997, the Company employed 38 persons on a full-time
basis, of whom 24 were engaged in research and development, eight in marketing,
and six in administration. The Company's ability to attract and retain qualified
personnel will be a significant factor in its potential for success. None of the
Company's employees is covered by collective bargaining agreements and
management considers the Company's relations with its employees to be good.


ITEM 2.  PROPERTIES

        The Company leases approximately 18,300 square feet of laboratory and
office space in a business park in Laguna Hills, California. The leases for this
facility expire in December 2000. The Company believes that this facility,
together with additional space available within the vicinity, should be
sufficient to meet its needs at acceptable rents for the foreseeable future.


ITEM 3.  LEGAL PROCEEDINGS

        The only pending or threatened litigation matter to which the Company is
a party is an arbitration proceeding against a significant former vendor, GSI.
In late February 1997, Voxel entered into a binding arbitration proceeding with
GSI, the company previously responsible for the development and engineering of
pre-production prototypes, and the subsequent manufacture of commercial units,
of the Voxcam. The arbitration arises under the Development Agreement executed
by the parties in August 1994. The Company believes that the efforts made by,
and limited results achieved by, GSI between the signing of the Development
Agreement and the commencement of arbitration constitute a breach of GSI's
obligations which have arisen during the course of the relationship between the
parties. GSI disputes the Company's assertions and alleges that Voxel has
breached the Development Agreement by failing to allow GSI to continue the
program. GSI has alleged damages of up to approximately $4,000,000; Voxel has
alleged damages of in excess of $7,500,000.



                                     - 13 -

<PAGE>   16

        Because the Company believes that GSI's material breach of the
Development Agreement excuses continued performance by Voxel, the Company
suspended payments to GSI under the Development Agreement in late 1996. Between
mid-November 1996 and April 1997, the Company received invoices from GSI for
services and parts totaling approximately $537,000 for which Voxel has withheld
payment.

        The arbitration proceeding with GSI has had, to date, three phases:
procedural, discovery, and trial. The procedural phase established the "ground
rules" for the arbitration, including the identity of the arbitrators and the
format for the activity that followed. These matters were resolved by
negotiations between the parties between March and June 1997. The discovery
phase involved the exchange of information between the parties regarding their
respective positions. This included exchange of voluminous documents,
designation of witnesses, and depositions of numerous witnesses. The discovery
phase of this proceeding was completed in mid-November 1997. The trial phase
commenced on December 8, 1997. The trial phase consisted of each side presenting
its case to the three-member arbitration panel, and the rendering of a decision
by the panel. The presentation of testimony by both parties in the trial phase
concluded on January 20, 1998. The submission of post-hearing written briefs
concluded in early March 1998. The panel of arbitrators commenced deliberations
in mid-March.

        Management believes, as a consequence of its active involvement in all
phases of the proceeding as well as its discussions with counsel, that the
Company's position will be upheld in the arbitration and that the likelihood of
a decision awarding monetary damages to GSI is remote. However, no assurance can
be given as to the timing of a decision or, more importantly, the outcome of the
proceeding.

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

        Not Applicable.


                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

        The Company's Common Stock, Redeemable Class A Common Stock Purchase
Warrants (the "Class A Warrants"), and Units have traded on The Nasdaq SmallCap
Market(SM) tier of The Nasdaq Stock Market(SM) under the symbols: VOXL, VOXLW,
and VOXLU, respectively, since the Company's initial public offering (the "IPO")
closed on November 1, 1994. Each Unit consists of one share of Common Stock and
one Class A Warrant. According to records of the Company's transfer agent, the
Company had approximately 257 holders of Common Stock of record as of March 10,
1998. Many of the Company's shares are held by brokers and other institutions on
behalf of shareholders; the Company estimates the total number of beneficial
owners of Common stock represented by these record holders to exceed 5,800. On
March 10, 1998 the closing sales prices for the Company's Common Stock,
Warrants, and Units were $5.31, $1.19 and $6.00, respectively. The following
table sets forth the high and the low sale prices of the Company's equity
securities during the fiscal quarters in the years ended December 31, 1996 and
1997.

COMMON STOCK (VOXL)

<TABLE>
<CAPTION>
        1996                                                         HIGH       LOW

<S>                                                              <C>       <C>
        First Quarter..........................................  $ 8.69    $ 2.00
        Second Quarter.........................................  $ 8.63    $ 4.88
        Third Quarter..........................................  $ 7.50    $ 3.25
        Fourth Quarter.........................................  $ 6.13    $ 2.81
</TABLE>



                                     - 14 -

<PAGE>   17

<TABLE>
        1997
<S>                                                             <C>       <C>
        First Quarter.......................................... $  3.94   $  2.38
        Second Quarter......................................... $  3.50   $  1.38
        Third Quarter.......................................... $  6.00   $  2.75
        Fourth Quarter......................................... $  8.44   $  4.94

<CAPTION>
CLASS A WARRANTS (VOXLW)

        1996

<S>                                                              <C>       <C>
        First Quarter..........................................  $ 3.38    $ 0.50
        Second Quarter.........................................  $ 3.25    $ 1.75
        Third Quarter..........................................  $ 2.69    $ 1.25
        Fourth Quarter.........................................  $ 1.94    $ 0.63

        1997

        First Quarter.......................................... $  0.94   $  0.63
        Second Quarter......................................... $  0.88   $  0.31
        Third Quarter.......................................... $  1.69   $  0.34
        Fourth Quarter......................................... $  2.50   $  0.94

<CAPTION>
UNITS (VOXLU)

        1996

<S>                                                              <C>      <C>
        First Quarter..........................................  $10.75   $  2.25
        Second Quarter.........................................  $10.75   $  6.75
        Third Quarter..........................................  $ 9.25   $  5.00
        Fourth Quarter.........................................  $ 7.50   $  3.25

        1997

        First Quarter.......................................... $  3.75   $  3.38
        Second Quarter......................................... $  3.63   $  2.00
        Third Quarter.......................................... $  5.63   $  2.75
        Fourth Quarter......................................... $ 10.75   $  6.50
</TABLE>


        The Company has not paid cash dividends since inception. The Company
currently intends to retain all of its earnings, if any, for use in its business
and does not anticipate paying any cash dividends in the foreseeable future.

ITEM 6.  SELECTED FINANCIAL DATA

        The selected consolidated financial data set forth below with respect to
the Company's statements of operations for each of the three years in the period
ended December 31, 1997 and for the period from April 15, 1988 (inception) to
December 31, 1997, and with respect to the Company's balance sheets at December
31, 1996 and 1997 are derived from the Company's audited Consolidated Financial
Statements which are included elsewhere in this report. The statement of
operations data for the years ended December 31, 1993 and 1994 and the balance
sheet data at December 31, 1993, 1994, and 1995 have been derived from audited
consolidated financial statements which are not included herein. The data set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and the notes thereto included elsewhere in this report.



                                     - 15 -

<PAGE>   18



                         (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                                                     PERIOD FROM
                                                                                                                      APRIL 15,
                                                                                                                    1988 (DATE OF
                                                                                                                    INCEPTION) TO
                                                               YEAR ENDED DECEMBER 31,                              DECEMBER 31,
                                     ---------------------------------------------------------------------------     -----------
                                         1993            1994           1995             1996            1997            1997
                                     -----------     -----------     -----------     -----------     -----------     -----------

<S>                                  <C>             <C>             <C>             <C>             <C>             <C>
STATEMENT OF OPERATIONS DATA (1)
 Costs and expenses:
  Research and development........   $     1,191     $     2,924     $     3,619     $     4,257     $     2,805     $    16,191
  General and administrative......         1,035           1,149           1,888           2,186           3,129          10,418
    Depreciation and amortization
    expense.......................           148             335             236             247             243           1,386
    Interest (income) expense.....           223             349            (166)           (250)           (213)            (50)
                                     -----------     -----------     -----------     -----------     -----------     -----------

Net loss.........................    $    (2,597)    $    (4,757)    $    (5,577)    $    (6,440)    $    (5,964)    $   (27,945)
                                     ===========     ===========     ===========     ===========     ===========     ===========
Basic and diluted net loss
per share........................                                    $     (1.33)    $     (1.02)    $     (0.71)
                                                                     ===========     ===========     ===========
Shares used in computing
basic and diluted net loss per
share............................      2,043,842       2,677,788       4,183,355       6,314,102       8,407,683
                                     ===========     ===========     ===========     ===========     ===========
</TABLE>



<TABLE>
<CAPTION>
                                                             December 31,
                                 --------------------------------------------------------------------
                                   1993           1994           1995           1996           1997
                                 --------       --------       --------       --------       --------
<S>                              <C>            <C>            <C>            <C>            <C>
BALANCE SHEET DATA
Cash, cash equivalents, and
  short-term investments ......  $    160       $  5,708       $  4,398       $  6,919       $  1,537

Working capital (deficit)......    (1,924)         5,408          3,822          6,825          1,002

Total assets ..................       945          6,419          4,980          7,625          2,190

Notes payable..................     1,857             --            105             --             --

Long-term obligations,
including capital leases ......       168            108             28              7             94


Accumulated deficit ...........    (5,187)        (9,964)       (15,541)       (21,981)       (27,945)

Convertible redeemable
preferred stock ...............     3,799             --             --             --             --


Total shareholders'
  equity (deficit) ............    (5,143)         5,984          4,342          7,406          1,521
</TABLE>



----------
(1) The Company is a development-stage business and has generated no operating
revenue.



                                     - 16 -

<PAGE>   19


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

        Since its inception in 1988, the Company has been engaged in the design,
development, and medical evaluation of Digital Holography, a sophisticated
system that yields film-based, hard copy images of the internal structure of the
human body. The Digital Holography System consists of the Voxcam imager, a
camera to convert computed tomography and magnetic resonance scans into
holograms; Voxbox light boxes to view the holograms; and Voxgram film on which
the hologram is recorded.

        The Company has not yet developed products for sale, has not earned
revenues, and has incurred substantial losses since inception. The Company
expects to continue to incur substantial operating losses for at least twelve
months from the date of this report, as research, development, manufacturing,
and marketing activities expand. The prerequisites to initial commercial sales
include development and testing of pre-production prototypes of the Voxcam,
manufacturing of production units of the Voxcam, and achieving market acceptance
for the Digital Holography System. There can be no assurance that, on a timely
basis or at all, any or all of these prerequisites will be satisfied.

        The Company's primary current focus is the development and testing of
pre-production prototypes of the Voxcam. The Company is vigorously pursuing the
development of a commercial version of the Voxcam and arranging for its
manufacture. This program includes securing sub-systems from qualified vendors,
performing final assembly and in-house testing for a pilot production run, and
selecting a system integrator for volume manufacturing. The Company previously
relied upon GSI for these functions. As a consequence of GSI's failure to meet
its obligations, the schedule for commercialization of the Voxcam was delayed
and the Company's requirements for capital increased. See "Liquidity and Capital
Resources." The delivery date for commercial Voxcams under the current program
depends on a variety of factors, including (i) timely achievement of engineering
and manufacturing objectives by subsystem vendors, (ii) on-schedule completion
of system integration, and (iii) successful field testing of pre-production
prototypes. The Company expects that it will be better able to forecast end
dates for these milestones as it garners additional experience with the vendors.

        The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and notes thereto appearing elsewhere in
this report.

     RESULTS OF OPERATIONS

         Years Ended December 31, 1997 and 1996

        Net loss for 1997 decreased by 7% to $6.0 million from $6.4 million in
1996. The Company had no revenues during 1997 or 1996. Research and development
("R&D") expense decreased by 34% to $2.8 million from $4.3 million. The decrease
in R&D expense is primarily a consequence of the Company's implementation in
1997 of the new program to develop the commerical version of the Voxcam. In
1997, most of this program's efforts utilized Voxel's enhanced in-house
engineering capabilities to perform critical steps in the development of the new
Voxcam. These steps include high-level engineering design, development of
detailed specifications, drafting of statements of work for each of the
subsystems, preparation and dissemination of requests for proposals to potential
subsystem vendors, evaluation of vendors' proposals, qualification and selection
of vendors, resolution of industrial design issues, construction of a prototype
of critical elements of the new design, and establishment of quality systems for
managing the program. In contrast, 1996 R&D expenditures included a sizable
component of payments to GSI for Voxcam imager design services and parts for
pre-production prototypes.

        General and administrative ("G&A") expense (which includes marketing
activities) increased by 43% to $3.1 million from $2.2 million. This increase is
primarily a consequence of the costs of the pending arbitration against GSI,
which progressed through the procedural and discovery phases, and



                                     - 17 -

<PAGE>   20

into the trial phase, during 1997. See "Legal Proceedings." Marketing expenses
increased modestly as the cost of increased sales activities (focused on
developing relationships with the Company's most qualified customer prospects)
more than offset savings from a reduction in broad-brush promotional efforts
(such as trade shows and marketing materials). G&A expenditures, excluding the
impact of the arbitration costs, grew slightly while supporting a substantial
increase in Company headcount. Depreciation and amortization expense was
essentially unchanged. Net interest income for 1997 was $213,000 compared to
$250,000 in 1996. This difference is due to lower average investment balances in
1997 due to the use during 1997 of proceeds from the Company's 1996 second
public offering (the "Secondary").

         Years Ended December 31, 1996 and 1995

        Net loss for 1996 increased by 15% to $6.4 million from $5.6 million in
1995. R&D expense increased by 18% to $4.3 million from $3.6 million. This
increase resulted from (i) enhanced in-house support of GSI's product
development and manufacturing activities, including increased technical
headcount and travel; (ii) costs of preparing for beta site installations; and
(iii) initiation of beta Voxbox production. Total payments to design engineering
firms with respect to the Voxcam development program, which represent over half
of R&D expense in both 1996 and 1995, increased modestly. However, the majority
of such payments in 1996 represented reimbursement for beta unit parts while
such payments in 1995 were primarily for engineering services.

        G&A expense (which includes marketing activities) increased by 16% to
$2.2 million from $1.9 million. This increase resulted primarily from the growth
of the sales organization and increased marketing effort; administrative costs
were essentially unchanged. In 1996, the Company's primary marketing focus
shifted from promoting clinical activities to developing customer relationships.
Depreciation and amortization expense decreased were virtually unchanged. Net
interest income for 1996 was $250,000 compared to net interest income of
$166,000 in 1995. The difference is due to higher average investment balances as
a consequence of the Secondary.

     LIQUIDITY AND CAPITAL RESOURCES

        The Company has financed its operations primarily through private and
public sales of equity securities and the private placement of debt securities
and, to a far lesser extent, through equipment lease financing. Through December
31, 1997 the Company has raised $9.3 million net of underwriting commissions and
offering expenses from the Secondary, $9.0 million net of underwriting
commissions and offering expenses from the IPO, $3.8 million from the sale of
convertible redeemable preferred stock, $3.6 million net of underwriting
commissions and expenses from the sale of convertible preferred stock, and $4.7
million from the sale of debt securities. The convertible redeemable preferred
stock and $2.5 million of the debt (together with accrued interest thereon) were
converted to common stock at the closing of the IPO on November 1, 1994. The
remaining $2.2 million of the debt securities (together with accrued interest
thereon) was repaid from the proceeds of the IPO on November 1, 1994. The
convertible preferred stock was converted to common stock during 1996. The
Company had capital lease obligations of $13,000 as of December 31, 1997.

        The Company's net cash used in operating activities during the years
ended December 31, 1997, 1996, and 1995 was $5.2 million, $6.7 million, and $5.0
million, respectively. The decrease in cash used in operations between 1997 and
1996 was due to payments made in 1996 to GSI for Voxcam design services and
parts for beta units, for which no equivalent payments were made in 1997. The
increase in cash used in operations between 1996 and 1995 was due primarily to
increased research and development, medical evaluation activity, and marketing.
As of December 31, 1997, the Company had cash totaling $1.5 million. This
compares with cash and short-term investments totaling $6.9 million and $4.4
million at December 31, 1996 and 1995, respectively. The decrease in cash at
year end 1997 was due to the use of cash for operating activities. The increase
in cash and short-term investments from 1995 to 1996 is the result of the
receipt of funds from the Secondary. As of December 31, 1997, the Company had
working capital of $1.0 million as compared to working capital of $6.8 million
and $3.8 million at December 31, 1996 and 1995, respectively. The reduction in
working capital at December 31, 1997 is primarily the result of using Secondary
proceeds for 1997 operating expenses.



                                     - 18 -

<PAGE>   21

Working capital at December 31, 1996 consisted primarily of the net proceeds
received from the Secondary.

        The Company has no material commitments for capital expenditures.
However, the Company expects to incur substantial expense to complete the design
of the commercial version of the Voxcam under the current program, conduct field
tests of pre-production units of the Voxcam, perform the manufacturing
engineering of the commercial Voxcam, and commence its production.

        The Company believes that available cash will be sufficient to meet the
Company's operating expenses and capital requirements for calendar year 1998.
However, the pace of the Company's product development and marketing activities
in 1998 will depend in large part on the Company's cash position during the
year. The cash position may be affected significantly by the Company's capital
raising activities as well as the outcome of the arbitration with GSI. See
"Legal Proceedings."

        The Company expects to require additional funding on one or more
occasions in order to achieve all of its operating objectives. The amount and
timing of the Company's future capital requirements will depend upon many
factors, including progress of the Voxcam engineering activities, the success
and duration of beta unit field testing, the timing of the transition from beta
to commercial unit production, and the extent and timing of acceptance of the
Digital Holography System. There can be no assurance that any additional
financing will be available to the Company on acceptable terms, or at all, when
required by the Company.

        In the event that the Company (i) is unable to obtain additional funding
or (ii) does not receive and collect a significant cash award from the GSI
arbitration, by June 1, 1998, management will significantly reduce or postpone
certain product development and marketing activities in order to maintain cash
liquidity through the end of 1998. This would entail a substantial reduction in
headcount, discontinuation of sales activities, a decrease in the in-house
engineering effort in support of Voxcam development, and a reduction of activity
on the Company's behalf by engineering services vendors. These cutbacks would
occur to a sufficient extent to reduce the Company's monthly cash usage rate to
a level which ensures that the Company's currently available cash would sustain
operations through 1998. Any of these cutbacks could have a material adverse
effect on the Company's business prospects.

        The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. The Company
uses only third-party software and has completed an assessment of each program
to ensure compliance with the Year 2000. Management believes all software
currently used by the Company is Year 2000 compliant.



                                     - 19 -

<PAGE>   22



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                               Page
                                                                               ----
<S>                                                                            <C>

Report of Independent Auditors..................................................21

Consolidated Financial Statements

Consolidated Balance Sheets ....................................................22

Consolidated Statements of Operations...........................................23

Consolidated Statements of Convertible Redeemable Preferred Stock and
    Shareholders' Equity (Deficit)..............................................24

Consolidated Statements of Cash Flows...........................................26

Notes to Consolidated Financial Statements......................................27
</TABLE>



                                     - 20 -

<PAGE>   23



                         REPORT OF INDEPENDENT AUDITORS


The Board of Directors
Voxel

        We have audited the accompanying consolidated balance sheets of Voxel (a
development stage company) as of December 31, 1996 and 1997, and the related
consolidated statements of operations, convertible redeemable preferred stock
and shareholders' equity (deficit), and cash flows for each of the three years
in the period ended December 31, 1997 and for the period from April 15, 1988
(inception) to December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

        In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Voxel
(a development stage company) at December 31, 1996 and 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997 and for the period from April 15,
1988 (inception) to December 31, 1997, in conformity with generally accepted
accounting principles.



                                                               ERNST & YOUNG LLP


Orange County, California
February 13, 1998



                                     - 21 -

<PAGE>   24



                                              VOXEL
                                  (A DEVELOPMENT STAGE COMPANY)

                                   CONSOLIDATED BALANCE SHEETS
                                (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                            DECEMBER 31,
                                                                     -----------------------
                                                                       1996           1997
                                                                     --------       --------
<S>                                                                  <C>            <C>
ASSETS
Currents assets:
    Cash                                                             $    807       $  1,537
    Short-term investments                                              6,112             --
    Other current assets                                                  118             40
                                                                     --------       --------
Total current assets                                                    7,037          1,577

Property and equipment:
    Furniture and equipment                                             1,157          1,351
    Leasehold improvements                                                224            254
                                                                     --------       --------
                                                                        1,381          1,605
    Less accumulated depreciation and amortization                       (867)        (1,057)
                                                                     --------       --------
                                                                          514            548
Other assets (net of accumulated amortization of $70 in
     1996 and $78 in 1997)                                                 74             65
                                                                     --------       --------
Total assets                                                         $  7,625       $  2,190
                                                                     ========       ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Accounts payable and accrued expenses                            $    207       $    566
    Current portion of lease obligation                                     5              9
                                                                     --------       --------
Total current liabilities                                                 212            575

Long-term lease obligation                                                  7              4
Other long-term liabilities                                                --             90

Commitments and contingencies

Shareholders' equity:
    Common stock, no par value:
        Authorized shares - 15,000,000;  Issued and outstanding
        shares - 8,395,398 in 1996 and 8,425,244 in 1997               29,417         29,496
    Deficit accumulated during the development stage                  (21,981)       (27,945)
    Notes receivable from shareholders                                    (30)           (30)
                                                                     --------       --------
Total shareholders' equity                                              7,406          1,521
                                                                     --------       --------
Total liabilities and shareholders' equity                           $  7,625       $  2,190
                                                                     ========       ========
</TABLE>



See accompanying notes.



                                     - 22 -

<PAGE>   25
                                     VOXEL
                         (A DEVELOPMENT STAGE COMPANY)

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>

                                                                                                PERIOD FROM
                                                                                                  APRIL 15,
                                                                                                1988 (DATE OF
                                                       YEAR ENDED DECEMBER 31,                  INCEPTION) TO
                                       --------------------------------------------------        DECEMBER 31,
                                           1995               1996               1997               1997
                                       ------------       ------------       ------------       ------------
<S>                                    <C>                <C>                <C>                <C>

Net revenues                           $         --       $         --       $         --       $         --

Costs and expenses:
    Research and development                  3,619              4,257              2,805             16,191
    General and administrative                1,888              2,186              3,129             10,418
    Depreciation and amortization               236                247                243              1,386
    Interest expense                             33                 10                  2                813
    Interest income                            (199)              (260)              (215)              (863)
                                       ------------       ------------       ------------       ------------

                                              5,577              6,440              5,964             27,945
                                       ------------       ------------       ------------       ------------

Net loss                               $     (5,577)      $     (6,440)      $     (5,964)      $    (27,945)
                                       ============       ============       ============       ============

Basic and diluted net loss
    per share                          $      (1.33)      $      (1.02)      $      (0.71)
                                       ============       ============       ============

Shares used in computing
    basic and diluted net
    loss per share                        4,183,355          6,314,102          8,407,683
                                       ============       ============       ============
</TABLE>



See accompanying notes.



                                     - 23 -

<PAGE>   26
                                     VOXEL
                         (A DEVELOPMENT STAGE COMPANY)



CONSOLIDATED STATEMENTS OF CONVERTIBLE REDEEMABLE PREFERRED
STOCK AND SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)


Issuance of common stock at $.26 per share in exchange for notes

Issuance of common stock at $.26 per share in exchange for shares of Holoplex
stock and cancellation of indebtedness of $35

Net loss

Balance at December 31, 1988

Repurchase of common stock for cash at $.26 per share

Net loss

Balance at December 31, 1989

Issuance of Series A preferred stock at $.10 per share in exchange for cash of
$16 and cancellation of indebtedness of $33

Issuance of Series A preferred stock at $.10 per share in exchange for
cancellation of accrued interest

Net loss

Balance at December 31, 1990

Issuance of Series B preferred stock at $.10 per share in exchange for
cancellation of indebtedness

Issuance of common stock at $.26 per share in exchange for notes receivable

Issuance of Series B preferred stock at $.60 per share in exchange for cash of
$3,130 and cancellation of indebtedness and related interest of $611

Repurchase of common stock at $.26 per share for cash of $3 and cancellation of
advances receivable of $18

Contribution to capital forgiveness of indebtedness by shareholders

Net loss

Balance at December 31, 1991

Net loss

Balance at December 31, 1992

Net loss

Balance at December 31, 1993

Stock option exercise at $.51 per share

Amortization of deferred compensation

Conversion of Series A preferred stock to common stock at the rate of 5.145346
shares of preferred to one share of common

Conversion of Series B preferred stock to common stock at the rate of 5.145346
shares of preferred to one share of common

Issuance of 1,900,000 Units at $5.50/Unit in initial public offering for cash of
$10,400 and cancellation of debt of $50, net of underwriting commissions &
expenses

Conversion of promissory notes ($2,460 of principal and $454 of interest) to
common stock at the rate of $5.00 per share

Issuance of common stock in payment for services totaling $21

Net loss

Balance at December 31, 1994

Amortization of deferred compensation

Bridge warrant exercise of 120,000 shares at $2.50 per share

Stock option exercise at $.51 per share

Issuance of common stock in payment for services totaling $9

Stock option exercise at $1.03 per share

Issuance of Series C preferred stock at $1.00 per share, net of underwriting
commissions & expenses

Net loss

Balance at December 31, 1995

Amortization of deferred compensation

Bridge warrant exercise of 60,000 shares at $2.50 per share

Stock option exercise at $.51 per share

Conversion of Series C preferred stock to common stock at a weighted-average
rate of 3.602536 shares of preferred to a share of common

Issuance of common stock at $3.50/share in second public offering for cash of
$10,465, net of underwriting commissions & expenses

Net loss

Balance at December 31, 1996

Amortization of deferred compensation

Issuance of common stock at $2.00 per share for compensation of accrued payroll,
net of taxes

Stock option exercise at $2.63 per share

Stock option exercise at $.51 per share

Stock option exercise at $.51 per share

Net loss Balance at December 31, 1997



See accompanying notes.



                                     - 24 -

<PAGE>   27



<TABLE>
<CAPTION>
     SERIES A PREFERRED              SERIES B PREFERRED              SERIES C PREFERRED
---------------------------     ---------------------------     --------------- -----------
   SHARES          AMOUNT         SHARES          AMOUNT           SHARES          AMOUNT
-----------------------------------------------------------     -----------     -----------
<S>             <C>             <C>             <C>             <C>             <C>
         --     $        --              --     $        --     $        --              --
         --              --              --              --              --              --
         --              --              --              --              --              --
-------------------------------------------------------------------------------------------
         --              --              --              --              --              --
         --              --              --              --              --              --
         --              --              --              --              --              --
-------------------------------------------------------------------------------------------
         --              --              --              --              --              --
    490,801              49              --              --              --              --
      2,103              --              --              --              --              --
         --              --              --              --              --              --
-------------------------------------------------------------------------------------------
    492,904              49              --              --              --              --
         --              --          87,500               9              --              --
         --              --              --              --              --              --

         --              --       6,234,791           3,741              --              --
         --              --              --              --              --              --
         --              --              --              --              --              --
         --              --              --              --              --              --
-------------------------------------------------------------------------------------------
    492,904              49       6,322,291           3,750              --              --
         --              --              --              --              --              --
-------------------------------------------------------------------------------------------
    492,904              49       6,322,291           3,750              --              --
         --              --              --              --              --              --
-------------------------------------------------------------------------------------------
    492,904              49       6,322,291           3,750              --              --
         --              --              --              --              --              --
         --              --              --              --              --              --
   (492,904)            (49)             --              --              --              --
         --              --      (6,322,291)         (3,750)             --              --

         --              --              --              --              --              --
         --              --              --              --              --              --
         --              --              --              --              --              --
         --              --              --              --              --              --
-------------------------------------------------------------------------------------------
         --              --              --              --              --              --
         --              --              --              --              --              --
         --              --              --              --              --              --
         --              --              --              --              --              --
         --              --              --              --              --              --
         --              --              --              --              --              --
         --              --              --              --       4,000,000           3,600
         --              --              --              --              --              --
-------------------------------------------------------------------------------------------
         --              --              --              --       4,000,000           3,600
         --              --              --              --              --              --
         --              --              --              --              --              --
         --              --              --              --              --              --
         --              --              --              --      (4,000,000)         (3,600)
         --              --              --              --              --              --
         --              --              --              --              --              --
-------------------------------------------------------------------------------------------
         --              --              --              --              --              --
         --              --              --              --              --              --
         --              --              --              --              --              --
         --              --              --              --              --              --
         --              --              --              --              --              --
         --              --              --              --              --              --
         --              --              --              --              --              --
-------------------------------------------------------------------------------------------
         --     $        --              --     $        --              --     $        --
===========================================================================================
</TABLE>




<TABLE>
<CAPTION>
                                  DEFICIT ACCU-      NOTES
            COMMON STOCK          MULATED DURING   RECEIVABLE
   -----------     -----------     DEVELOPMENT     FROM SHARE-
     SHARES           AMOUNT          STAGE          HOLDERS          TOTAL
   -----------     -----------     -----------     -----------     -----------
<S>                <C>             <C>             <C>             <C>
   $    38,870              10     $        --     $       (10)    $        --
       349,831              90              --              --              90
            --              --            (143)             --            (143)
   ---------------------------     -----------     -----------     -----------
       388,701             100            (143)            (10)            (53)
       (97,175)            (25)             --              --             (25)
            --              --            (254)             --            (254)
   ---------------------------     -----------     -----------     -----------
       291,526              75            (397)            (10)           (332)
            --              --              --              --              --
            --              --              --              --              --
            --              --            (238)             --            (238)
   ---------------------------     -----------     -----------     -----------
       291,526              75            (635)            (10)           (570)
            --              --              --              --              --
        77,740              20              --             (20)             --

            --              --              --              --              --
       (82,599)            (21)             --              --             (21)
            --              20              --              --              20
            --              --            (514)             --            (514)
   ---------------------------     -----------     -----------     -----------
       286,667              94          (1,149)            (30)         (1,085)
            --              --          (1,461)             --          (1,461)
   ---------------------------     -----------     -----------     -----------
       286,667              94          (2,610)            (30)         (2,546)
            --              --          (2,597)             --          (2,597)
   ---------------------------     -----------     -----------     -----------
       286,667              94          (5,207)            (30)         (5,143)
           834               1              --              --               1
            --             117              --              --             117
        95,796              49              --              --              49
     1,228,740           3,750              --              --           3,750

     1,900,000           9,032              --              --           9,032
       582,704           2,914              --              --           2,914
         4,276              21              --              --              21
            --              --          (4,757)             --          (4,757)
   ---------------------------     -----------     -----------     -----------
     4,099,017          15,978          (9,964)            (30)          5,984
            --              20              --              --              20
       120,000             300              --              --             300
         6,139               3              --              --               3
         1,143               9              --              --               9
         2,570               3              --              --               3
            --              --              --              --           3,600
            --              --          (5,577)             --          (5,577)
   ---------------------------     -----------     -----------     -----------
     4,228,869          16,313         (15,541)            (30)          4,342
            --              36              --              --              36
        60,000             150              --              --             150
         6,200               3              --              --               3
     1,110,329           3,600              --              --              --
     2,990,000           9,315              --              --           9,315
            --              --          (6,440)             --          (6,440)
   ---------------------------     -----------     -----------     -----------
     8,395,398          29,417         (21,981)            (30)          7,406
            --              36              --              --              36
        20,690              31              --              --              31
         3,417               9              --              --               9
         3,239               2              --              --               2
         2,500               1              --              --               1
            --              --          (5,964)             --          (5,964)
   ---------------------------     -----------     -----------     -----------
     8,425,244     $    29,496     $   (27,945)    $       (30)    $     1,521
   ===========================     ===========     ===========     ===========
</TABLE>



                                     - 25 -

<PAGE>   28


                                      VOXEL
                          (A DEVELOPMENT STAGE COMPANY)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                      PERIOD FROM
                                                                                                     APRIL 15, 1988
                                                                                                   (DATE OF INCEPTION)
                                                                                                      TO DECEMBER 31,
                                                              1995           1996           1997           1997
                                                            --------       --------       --------       --------
<S>                                                         <C>            <C>            <C>            <C>
OPERATING ACTIVITIES
Net loss                                                    $ (5,577)      $ (6,440)      $ (5,964)      $(27,945)
Adjustments to reconcile net loss to net
   cash used in operating activities:
       Depreciation and amortization                             216            211            207          1,155
       Amortization of deferred compensation                      20             36             36            231
       (Gain) loss on sale of equipment                           --             (5)             1             (4)
       Change in operating assets and
         liabilities:
           Other assets                                           (6)          (140)            78           (124)
           Accounts payable and accrued expenses                 249           (217)           390            756
           Short-term note payable                               105           (105)            --             --
           Other long-term liabilities                            --             --             90             90
                                                            --------       --------       --------       --------
Net cash used in operating activities                         (4,993)        (6,660)        (5,162)       (25,841)

INVESTING ACTIVITIES
Purchases of property and equipment                              (80)          (196)          (227)        (1,461)
Increase in other assets                                          --             --             --            (33)
Proceeds from sale of equipment                                   --              6              1              7
(Increase) decrease in short-term investments                  5,095         (6,112)         6,112             --
                                                            --------       --------       --------       --------
Net cash provided by (used in) investing activities            5,015         (6,302)         5,886         (1,487)


FINANCING ACTIVITIES
Issuance of common stock, net of
  registration costs                                             305          9,468             12         18,740
Increase in notes payable                                         --             --             --          5,683
Payments on notes payable                                         --             --             --         (2,151)
Proceeds from issuance of preferred stock, net
   of offering costs                                           3,600             --             --          6,746
Proceeds from sale/leaseback transaction                          --             --             --            406
Payments on capital lease obligation                            (142)           (97)            (6)          (559)
                                                            --------       --------       --------       --------
Net cash provided by financing activities                      3,763          9,371              6         28,865
                                                            --------       --------       --------       --------

Net increase (decrease) in cash and cash equivalents           3,785         (3,591)           730          1,537
Cash and cash equivalents at the beginning of period             613          4,398            807             --
                                                            --------       --------       --------       --------

Cash and cash equivalents at end of period                  $  4,398       $    807       $  1,537       $  1,537
                                                            ========       ========       ========       ========

Cash paid for interest                                      $     33       $     10       $      2       $    202
                                                            ========       ========       ========       ========
Cash paid for income taxes                                  $      1       $      1       $      1       $      8
                                                            ========       ========       ========       ========

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

Issuance of common stock in exchange for
   cancellation of indebtedness                             $     --       $     --       $     --       $  2,999
Issuance of Series A preferred stock in
   exchange for cancellation of indebtedness                $     --       $     --       $     --       $     33
Issuance of Series B preferred stock in
   exchange for cancellation of indebtedness                $     --       $     --       $     --       $    620
Conversion of Series A preferred stock to common stock      $     --       $     --       $     --       $     49
Conversion of Series B preferred stock to common stock      $     --       $     --       $     --       $  3,750
Conversion of Series C preferred stock to common stock      $     --       $  3,600       $     --       $  3,600
Forgiveness of indebtedness by shareholders                 $     --       $     --       $     --       $     20
Capital lease transaction for equipment                     $     --       $     --       $     --       $    261
Issuance of common stock in exchange for
   cancellation of payable                                  $      9       $     --       $     31       $     40
</TABLE>



See accompanying notes.



                                     - 26 -

<PAGE>   29


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1997


     1.  SIGNIFICANT ACCOUNTING POLICIES

Description of Business

        Voxel (the "Company") was incorporated in the State of California on
April 15, 1988. The Company is developing a system for producing and viewing
volumetric holograms which will interface with existing medical scanning
equipment and yield authentic three-dimensional images.

Basis of Presentation

        The accompanying consolidated financial statements have been prepared
assuming the Company will continue to operate as a going concern. The Company
has lost approximately $5.6 million, $6.4 million and $6.0 million in 1995,
1996, and 1997, respectively, and has an accumulated deficit of approximately
$27.9 million at December 31, 1997. The Company's operations have mainly
consisted of research and development, marketing, and capital raising
activities. The Company has not completed the development of its products.
Through December 31, 1997, the Company has financed the development of its
products primarily through the issuance of approximately $7.8 million ($7.4
million net of underwriting commissions and offering expenses) in preferred
stock, approximately $2.9 million in common stock in exchange for cancellation
of indebtedness, approximately $10.4 million ($9.0 million net of underwriting
commissions and offering expenses) in units (each consisting of a share of
common stock and a warrant to purchase an additional share of common stock) and
approximately $10.5 million ($9.3 million net of underwriting commissions and
offering expenses) in common stock. The units were sold in the Company's initial
public offering and the common stock in a second public offering.

        Ultimately, the Company's success will be dependent upon its ability to
achieve profitable operations. Management's plans include the successful
completion of the development, production, and marketing of its products,
achieving profitable operations, and obtaining additional financing through the
public and private placement markets as needed. The Company believes that
available cash will be sufficient to meet the Company's operating expenses and
capital requirements for calendar year 1998. However, the pace of the Company's
product development and marketing activities in 1998 will depend in large part
on the Company's cash position during the year. The cash position may be
affected significantly by the Company's capital raising activities as well as
the outcome of the arbitration with GSI. See Note 6.

        The Company expects to require additional funding on one or more
occasions in order to achieve all of its operating objectives. The amount and
timing of the Company's future capital requirements will depend upon many
factors, including progress of the Voxcam engineering activities, the success
and duration of beta unit field testing, the timing of the transition from beta
to commercial unit production, and the extent and timing of acceptance of the
Digital Holography System. There can be no assurance that any additional
financing will be available to the Company on acceptable terms, or at all, when
required by the Company.

        In the event that the Company (i) is unable to obtain additional funding
or (ii) does not receive and collect a significant cash award from the GSI
arbitration, by June 1, 1998, management will significantly reduce or postpone
certain product development and marketing activities in order to maintain cash
liquidity through the end of 1998. This would entail a substantial reduction in
headcount, discontinuation of sales activities, a decrease in the in-house
engineering effort in support of Voxcam development, and a reduction of activity
on the Company's behalf by engineering services vendors. These cutbacks would
occur to a sufficient extent to reduce the Company's monthly cash usage rate to
a level which ensures that the Company's currently available cash would sustain
operations through 1998. Any of these cutbacks could have a material adverse
effect on the Company's business prospects.

        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 at the
date of the financial statements and the reported amounts of expenses during the
reporting periods. Actual results could differ from those estimates.



                                     - 27 -

<PAGE>   30

Investments

        Effective January 1, 1994, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". The adoption did not have a
significant impact on the Company's consolidated financial statements.
Management determines the appropriate classification of such securities at the
time of purchase and reevaluates such classification as of each balance sheet
date. Based on its intent, the Company's investments are classified as
available-for-sale and are carried at fair value, with unrealized gains and
losses, net of tax, reported as a separate component of shareholders' equity.
The investments are adjusted for amortization of premiums and discounts to
maturity and such amortization is included in interest income. Short-term
investments held by the Company have consisted of certificates of deposit, U.S.
government securities, and commercial paper. As of December 31, 1996, there were
no material gross unrealized gains or losses as the carrying value of the
portfolio approximated fair value. Gross realized gains and losses on sales of
securities for the years ended December 31, 1996 and 1997, were not material.
The cost of securities sold is based on the specific identification method.

Stock Option Plans

        During 1996, the Company adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123") and accordingly, is continuing to account for its
stock-based compensation plans under previous accounting standards. The adoption
of SFAS No. 123 had no impact on the Company's consolidated results of
operations or financial position.

Concentration of Credit Risk

        Financial instruments which potentially expose the Company to
concentration of credit risk consist primarily of cash and short-term
investments. The Company maintains its cash and short-term investments with one
major bank and one major securities firm. At December 31, 1996 and December 31,
1997, the Company had no cash deposits in excess of Federal Deposit Insurance
Corporation insurance limits. At December 31, 1996, the Company had cash and
cash equivalents totaling $0.7 million and short-term investments totaling $5.7
million in excess of Securities Investors Protection Corporation ("SIPC")
limits. At December 31, 1997 the Company had cash and cash equivalents totaling
$1.4 million in excess of SIPC limits.

Per Share Information

        In 1997, the Company adopted Statement of Financial Accounting Standards
No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. Basic and diluted net loss has been
calculated using the weighted average number of common shares outstanding. All
earnings per share amounts for all periods have been presented to conform with
SFAS No. 128.

Stock Split

        On June 17, 1994, the Company's Board of Directors approved a
one-for-5.145346 reverse stock split of its common stock, which became effective
on June 24, 1994. Unless otherwise indicated, the accompanying consolidated
financial statements have been adjusted retroactively to reflect the stock
split.



                                      -28 -

<PAGE>   31

Consolidation

        The accompanying consolidated financial statements include the accounts
of the Company and Holoplex Systems, an inactive subsidiary chartered in the
United Kingdom. All significant intercompany accounts and transactions have been
eliminated.

Cash and Cash Equivalents

        The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Included in cash and
cash equivalents are refundable customer deposits that are maintained in a
separate account in consideration of their special status.

Property and Equipment

        Property and equipment are stated at cost. Depreciation is provided
using the straight-line method over the estimated useful life of the property or
equipment which is from five to seven years.

Other Assets

        Other assets include acquired patent rights related to the Voxbox
lightbox, which are being amortized on a straight-line basis over their
estimated useful life of ten years.

Other Long-term Liabilities

        Other long-term liabilities include certain refundable customer
deposits. The Company has obtained from prospective customers letters of intent
to acquire the Company's Digital Holography System when it becomes commercially
available. Each letter of intent is typically accompanied by a cash deposit. The
customer's commitment to acquire the System is subject to various contingencies
identified in the letter of intent. If those contingencies are not met, the
deposit is refundable at the customer's option. Each deposit amount will be
applied against accounts receivable when a Digital Holography System is
delivered to the respective customer and the revenue related to such delivery is
recognized.

Impact of Year 2000

        The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. The Company
uses only third-party software and has completed an assessment of each program
to ensure compliance with the Year 2000. Management believes all software
currently used by the Company is Year 2000 compliant.

     2.  STOCK OPTION PLANS

        The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
No. 123 requires use of option valuation models that were not developed for use
in valuing employee stock options. Under APB No. 25, when the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.

        The Company's 1992 Stock Plan (the "1992 Plan") permits the Company to
grant incentive stock options to employees at 100% of the fair value of the
Company's common stock at the date of grant, and nonqualified stock options at
no less than 85% of the fair value of the Company's common stock at the grant
date. However, options granted to employees owning more than 10% of all classes
of stock of the Company at the grant date are to be at no less than 110% of the
fair market value of the Company's common stock. All options granted have 10
year terms and, if subject to vesting, vest starting on either the grant date
or, if different, on the vesting commencement date specified by the



                                     - 29 -

<PAGE>   32

Board of Directors. Such vesting is subject to continued employment with the
Company. The 1992 Plan also permits the Company to grant stock purchase rights
at no less than 85% of the fair value of the Company's common stock at the grant
date. No stock purchase rights have been granted as of December 31, 1997.

        In March 1994, the Company adopted the 1994 Executive Stock Option Plan
(the "1994 Plan") under which options may only be granted to Company executives.
The 1994 Plan permits the Company to grant incentive stock options and
nonqualified stock options. Incentive stock options may be granted at no less
than 100% of the fair market value of the Company's common stock at the date of
grant and incentive stock options granted to employees owning more than 10% of
all classes of stock of the Company at the grant date are to be at no less than
110% of the fair market value of the Company's common stock. All options granted
have 10 year terms and vesting begins on either the grant date or, if different,
on the vesting commencement date specified by the Board of Directors.

Information with respect to options granted under the 1992 Plan and the 1994
Plan is summarized as follows:

<TABLE>
<CAPTION>
                                         (IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
                                                  SHARES UNDER OUTSTANDING OPTIONS
                                  -----------------------------------------------------------------------
                                                                                                WEIGHTED-
                                     SHARES                                     AGGREGATE       AVERAGED
                                   AVAILABLE                   OPTION PRICE      EXERCISE       EXERCISE
                                   FOR GRANT       SHARES       PER SHARE         PRICE          PRICE
                                  ----------     ----------     ----------      ----------     ----------
<S>                                  <C>            <C>         <C>             <C>            <C>
Balance at December 31, 1994         485,514        388,229     $0.51-6.00      $      335     $     0.86

  Grants ...................         (65,776)        65,776      1.50-8.63             356           5.41

  Exercises ................              --         (8,710)     0.51-1.03              (6)          0.66

  Forfeitures ..............          21,318        (21,318)     0.51-1.03             (20)          0.92
                                  ----------     ----------     ----------      ----------     ----------

Balance at December 31, 1995         441,056        423,977      0.51-8.63             665           1.57

  Grants ...................        (197,044)       197,044      2.63-7.06             709           3.60

  Exercises ................              --         (6,200)          0.51              (3)          0.51

  Forfeitures ..............          60,161        (60,161)     1.03-8.63            (303)          5.03
                                  ----------     ----------     ----------      ----------     ----------

Balance at December 31, 1996         304,713        554,660      0.51-7.06           1,068           1.93

  Grants ...................        (117,500)       117,500      2.63-5.50             452           3.85

  Exercises ................              --         (9,156)     0.51-2.63             (12)          1.30

  Forfeitures ..............           3,583         (3,583)          2.63              (9)          2.63
                                  ----------     ----------     ----------      ----------     ----------

Balance at December 31, 1997         190,796        659,421     $0.51-7.06      $    1,499     $     2.27
                                  ==========     ==========     ==========      ==========     ==========
</TABLE>



                                     - 30 -

<PAGE>   33


The following table summarizes information about stock options outstanding at
December 31, 1997:

<TABLE>
<CAPTION>
                                    OUTSTANDING                               EXERCISABLE
                   -----------------------------------------------  ----------------------------
                                   WEIGHTED
                                   AVERAGE         WEIGHTED                         WEIGHTED
   RANGE OF                       REMAINING        AVERAGE                          AVERAGE
  EXERCISE             NUMBER    CONTRACTUAL      EXERCISE            NUMBER       EXERCISE
   PRICES           OUTSTANDING      LIFE          PRICE            EXERCISABLE      PRICE
------------------------------------------------------------------  ----------------------------
<S>                  <C>            <C>         <C>                   <C>         <C>
$         0.51       133,136        4.8         $   0.51              133,136     $   0.51
  1.03 to 1.50       213,465        6.3             1.06              205,985         1.05
  2.63 to 3.88       157,044        8.7             2.86               96,842         2.80
  4.13 to 5.50       146,500        8.9             4.72               59,623         4.80
  6.25 to 7.06         9,276        7.6             6.63                8,761         6.65
</TABLE>


        At December 31, 1995, 1996, and 1997, options to purchase approximately
326,745, 412,963, and 504,347 shares, respectively, were exercisable. For the
option grants made during the years ended December 31, 1995, 1996 and 1997 the
weighted-average fair value was $6.28, $2.93, and $3.26, respectively, per
share. For option grants exercisable at December 31, 1995, 1996, and 1997, the
weighted-average exercise price was $0.99, $1.46, and $1.78, respectively, per
share. The weighted-average remaining contractual life of options outstanding at
December 31, 1995, 1996, and 1997, was 7.9 years, 7.6 years, and 6.2 years,
respectively.

        Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, which also requires that the information be determined
as if the Company has accounted for its employee stock options granted
subsequent to December 31, 1994 under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option valuation model with the following weighted-average
assumptions for 1995, 1996, and 1997: risk-free interest rate equal to 6.5%,
6.5%, and 5.45%, respectively; no dividend yield; a volatility factor for the
expected market price of the Company's common stock equal to 0.92, 0.92, and
1.00, respectively; and a weighted-average expected life of each option equal to
7 years.

        The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

        For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except per share data):

<TABLE>
<CAPTION>
                                    1995                              1996                           1997
                             As                                As                             As
                          Reported         Pro forma        Reported         Pro forma     Reported    Pro forma
                        -----------------------------------------------------------------------------------------
<S>                     <C>             <C>             <C>             <C>             <C>             <C>
Net loss                $  (5,577)      $  (5,647)      $  (6,440)      $  (6,589)      $  (5,964)      $  (6,345)
                        -----------------------------------------------------------------------------------------
Basic and diluted
net loss per share      $   (1.33)      $   (1.35)      $   (1.02)      $   (1.04)      $   (0.71)      $   (0.75)
                        -----------------------------------------------------------------------------------------
</TABLE>


        Because SFAS No. 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1999.



                                     - 31 -

<PAGE>   34

     3.  WARRANTS

        The Company sold 1,900,000 Units in its initial public offering. Each
unit consisted of one share of common stock and one redeemable Class A warrant.
The Class A warrants carry an exercise price of $6.25, subject to adjustment,
are immediately exercisable, and expire on September 27, 1999. The Class A
warrants are also subject to redemption by the Company at $0.05 per warrant if
the average closing bid price of the Company's common stock exceeds $9.00 for 20
consecutive business days.

        The Company granted to the underwriter of its initial public offering
the right to purchase 190,000 units at an exercise price per unit of $8.80. Each
unit thereby purchasable consists of one share of common stock and one warrant.
The warrant entitles the holder to purchase a share of common stock at an
exercise price of $10.00, is immediately exercisable, and expires on September
27, 1999.

        The Company granted to an investment banker a warrant to purchase 1,944
shares of the Company's common stock at an exercise price of $3.09 per share.
The warrant is currently exercisable and expires on August 31, 1998. The Company
granted to an equipment leasing company a warrant to purchase 16,196 shares of
the Company's common stock at an exercise price of $3.09 per share. The warrant
is currently exercisable and expires in 2003. The Company granted to the
representative of the underwriters in the Company's second public offering a
warrant to purchase 208,000 shares of the Company's common stock at an exercise
price of $4.20 per share. The warrant became exercisable on August 1, 1997 and
expires in 2001.

        On July 25, 1994, the Company issued unsecured promissory notes
aggregating $1,000,000 and warrants to acquire 200,000 shares of common stock.
The notes were repaid from the proceeds of the initial public offering. The
warrants are exercisable for five years at a per share exercise price equal to
$2.50. As of December 31, 1997, warrants to acquire 180,000 of such shares have
been exercised.

        At December 31, 1997, the Company has reserved 2,526,140 shares of
common stock for all outstanding warrants.

     4.  INCOME TAXES

        The Company utilizes the liability method of accounting for income taxes
as set forth in Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Under the liability method, deferred taxes are determined
based on the differences between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. Deferred tax assets are recognized and
measured on the likelihood of realization of the related tax benefits in the
future.

        At December 31, 1997, the Company had approximately $9.6 million of net
operating loss carryforwards for federal income tax purposes which begin to
expire in 2004. In addition, the Company has net operating loss carryforwards
for California income tax purposes of approximately $8.1 million which begin to
expire in 1998. The Company also has general business credit carryforwards for
federal and California income tax purposes of $487 thousand and $366 thousand,
respectively. The federal general business credits begin to expire in 2007.

        For the years ended December 31, 1995, 1996, and 1997, the Company did
not recognize federal or state income tax benefit.

        The reconciliation of income tax expense (benefit) computed at U.S.
federal statutory rates to income tax expense (benefit) for the years ended
December 31, 1995, 1996, and 1997 is as follows:

<TABLE>
<CAPTION>
                                                                  (IN THOUSANDS)
                                                    12/31/95         12/31/96         12/31/97
                                                   ----------       ----------       ----------
<S>                                                <C>              <C>              <C>
          Tax at U.S. statutory rate ........      $   (1,896)      $   (2,190)      $   (2,028)
          Losses without benefit ............           1,896            2,190            2,028
                                                   ----------       ----------       ----------
          Income tax expense................       $       --       $       --       $       --
                                                   ==========       ==========       ==========
</TABLE>



                                     - 32 -

<PAGE>   35

        Deferred income taxes reflect the tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred tax assets and liabilities as of December 31, 1996
and 1997 are as follows:

<TABLE>
<CAPTION>
                                                                      (IN THOUSANDS)
                                                                  12/31/96       12/31/97
                                                                  --------       --------
<S>                                                               <C>            <C>
          Deferred tax liabilities:
            Tax depreciation in excess of book depreciation       $    (99)      $    (62)

          Deferred tax assets:
            Capitalized research and development costs .....      $  5,724       $  7,007
            Operating loss carryforwards ...................         2,712          3,747
            General business credit carryforwards ..........           635            853
            Other, net .....................................            --            105
                                                                  --------       --------
                                                                     9,071         11,712
            Valuation allowance ............................        (8,972)       (11,650)
                                                                  --------       --------
          Net deferred tax assets ..........................      $     --       $     --
                                                                  ========       ========
</TABLE>

        The Tax Reform Act of 1986 contains provisions which could substantially
limit the availability of the net operating loss carryforwards if there is a
greater than 50% change in ownership during a three-year period. The Company has
experienced such a change, resulting in a limitation on the utilization of its
net operating loss carryforwards. The limitation is based upon the value of the
stock on that date. Management believes that the limitation will not have a
material adverse effect on the company's ability to utilize fully its net
operating loss carryforwards. The ultimate realization of the loss carryforwards
is dependent upon the future profitability of the Company.

     5.  ACCOUNTS PAYABLE AND ACCRUED EXPENSES

        Accounts payable and accrued expenses at December 31, 1996 and 1997
consisted of $44 thousand and $283 thousand of accounts payable, respectively,
$95 thousand and $81 thousand of accrued wages, respectively, and $68 thousand
and $202 thousand of other accrued expenses, respectively.

     6.  COMMITMENTS AND CONTINGENCIES

        The Company leases office space under operating leases which expire in
December 2000 and which provide for increases in base rent of 4% annually. Rent
expense was $133 thousand, $122 thousand and $186 thousand in 1995, 1996 and
1997, respectively. Aggregate future minimum payments under these leases as of
December 31, 1997 total $233 thousand, $242 thousand, and $252 thousand for the
years ended December 31, 1998, 1999, and 2000, respectively.

        In February 1997, Voxel entered into a binding arbitration proceeding
with GSI, the company previously responsible for the engineering and
manufacturing of commercial units of Voxel's Voxcam imager. The arbitration
arises under the Development Agreement executed by the parties in August 1994.
The Company believes that the efforts made by, and limited results achieved by,
GSI since the signing of the Development Agreement constitute a breach of GSI's
obligations which have arisen during the course of the relationship between the
parties. GSI disputes the Company's assertions and alleges that Voxel has
breached the Development Agreement. GSI has alleged damages of up to
approximately $4,000,000; Voxel has alleged damages of in excess of $7,500,000.
Because the Company believes that GSI's material breach of the Development
Agreement excuses continued performance by Voxel, the Company has suspended
payments to GSI under the Development Agreement. As of March 10, 1998, the
Company had received invoices from GSI totaling approximately $537,000 for which
Voxel has withheld payment. The arbitration is expected to be concluded during
1998.

        Management believes, as a consequence of its active involvement in all
phases of the proceeding as well as its discussions with counsel, that the
Company's position will be upheld in the arbitration and that the likelihood of
a decision awarding monetary damages to GSI is remote. However, no assurance can
be given as to the timing of a decision or, more importantly, the outcome of the
proceeding.


                                     - 33 -

<PAGE>   36

     7.  SUBSEQUENT EVENT

        On March 17, 1998, the Company completed the first closing of a private
financing transaction in which it issued secured promissory notes in the
aggregate principal amount of $2.0 million in exchange for gross cash proceeds
of the same amount. The notes have a term of one year and bear interest at nine
percent per annum (compounded quarterly). Holders of the notes also received at
closing, in the aggregate, warrants to purchase 130,000 shares of common stock
at an exercise price of $5.39 per share. The Company is entitled to prepay the
notes without penalty; however, if the notes remain outstanding, the holders are
entitled to receive additional warrants on the 90th, 270th, and 360th day
anniversaries of the notes' issuance. The number of warrants issued on each such
anniversary and their exercise price are determined as a function of the trading
price of the Company's common stock immediately prior to the time of each such
issuance. All the warrants issued in this financing have a term of 10 years. The
Company may raise, at a subsequent closing, up to an additional $1.0 million on
the same terms as part of this transaction.



                                     - 34 -

<PAGE>   37


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

                None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        The information required by Item 10 of Form 10-K is incorporated herein
by reference to the Company's definitive proxy statement to be mailed to
shareholders within 120 days of the end of the Company's most recently completed
fiscal year.

ITEM 11. EXECUTIVE COMPENSATION

        The information required by Item 11 of Form 10-K is incorporated herein
by reference to the Company's definitive proxy statement to be mailed to
shareholders within 120 days of the end of the Company's most recently completed
fiscal year.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The information required by Item 12 of Form 10-K is incorporated herein
by reference to the Company's definitive proxy statement to be mailed to
shareholders within 120 days of the end of the Company's most recently completed
fiscal year.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information required by Item 13 of Form 10-K is incorporated herein
by reference to the Company's definitive proxy statement to be mailed to
shareholders within 120 days of the end of the Company's most recently completed
fiscal year.



                                     - 35 -

<PAGE>   38


                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

        (a) 1.  Consolidated Financial Statements:

                The following financial statements of Voxel are included in Item
                   8 of this report:

                Report of Independent Auditors

                Consolidated Balance Sheets

                Consolidated Statements of Operations

                Consolidated Statements of Convertible Redeemable Preferred
                   Stock and Shareholders' Equity (Deficit)

                Consolidated Statements of Cash Flows

                Notes to Consolidated Financial Statements

           2.  Consolidated Financial Statement Schedules:

                All schedules are omitted because they are not required or the
                required information is shown in the consolidated financial
                statements or notes thereto.

           3.  Exhibit Listing

<TABLE>
<CAPTION>
                EXHIBIT
                NUMBER                         DESCRIPTION
                ------                         -----------

<S>                           <C>
               *3.1           Amended and Restated Articles of Incorporation of
                              the Company, as filed on August 2, 1991 and as
                              amended on May 24, 1993 and June 24, 1994 (Filed
                              as an exhibit to the Company's Registration
                              Statement on Form S-1, Registration #33-81938,
                              which was declared effective on September 27, 1994
                              (the "IPO Filing"))

               *3.2           By-laws of the Company (Filed as an exhibit to the
                              IPO Filing)

               *3.3           Certificate of Amendment to the Amended and
                              Restated Articles of Incorporation of the Company
                              (Filed as an exhibit to the Company's Report on
                              Form 8-K dated January 15, 1996 (the "January '96
                              8-K"))

               *4.1           Specimen Certificate for Common Stock (Filed as an
                              exhibit to the IPO Filing)

               *4.2           Form of Unit Purchase Option (Filed as an exhibit
                              to the IPO Filing)

               *4.3           Form of Warrant Agreement (including Form of Class
                              A Warrant) among the Company, A.R. Baron & Co.,
                              Inc. (the "IPO Underwriter") and American Stock
                              Transfer & Trust Company (Filed as an exhibit to
                              the IPO Filing)
</TABLE>



                                     - 36 -

<PAGE>   39



<TABLE>
<CAPTION>
              EXHIBIT
               NUMBER                          DESCRIPTION
               ------                          -----------

<S>                           <C>
               *4.4           Escrow Agreement among Voxel, the IPO Underwriter
                              and Chemical Bank (Filed as an exhibit to the IPO
                              Filing)

               *4.5           Form of Bridge Warrant (Filed as an exhibit to the
                              IPO Filing)

               *4.6           Certificate of Determination for the Series C
                              Preferred Stock (Filed as an exhibit to the
                              January '96 8-K)

               *10.1          License Agreement between Voxel and Holoplex
                              Systems dated April 11, 1990 (Filed as an exhibit
                              to the IPO Filing)

               *10.2          Agreement between Voxel and Dynamic ReSolutions
                              Inc. dated April 29, 1994 (Filed as an exhibit to
                              the IPO Filing)

               *10.3+         Employment Agreement between Voxel and Dr. Allan
                              M. Wolfe dated June 1, 1994 (Filed as an exhibit
                              to the IPO Filing)

               *10.4+         1992 Stock Plan (Filed as an exhibit to the IPO
                              Filing)

               *10.5+         1994 Executive Stock Option Plan (Filed as an
                              exhibit to the IPO Filing)

               *10.6          Master Lease Agreement between Voxel and Pacific
                              Venture Finance, Inc. dated December 16, 1991
                              (Filed as an exhibit to the IPO Filing)

               *10.7          Amendment No. 1 to Master Lease Agreement between
                              Voxel and MMC/GATX Partnership No. I dated April
                              30, 1993 (Filed as an exhibit to the IPO Filing)

               *10.8          Industrial Lease Agreement between Voxel and
                              Saddleback II Associates dated June 7, 1994
                              regarding 26081 Merit Circle, Suite 116, Laguna
                              Hills, California (Filed as an exhibit to the IPO
                              Filing)

               *10.9          Industrial Lease Agreement between Voxel and
                              Saddleback II Associates dated August 6, 1991
                              regarding 26081 Merit Circle, Suite 117, Laguna
                              Hills, California, together with renewal amendment
                              thereto dated June 7, 1994 (Filed as an exhibit to
                              the IPO Filing)

                10.10         Not Used

               *10.11         Form of Merger and Acquisition Agreement between
                              Voxel and the IPO Underwriter, providing for a fee
                              to the IPO Underwriter upon consummation of
                              certain transactions between the Company and a
                              party introduced to the Company by the IPO
                              Underwriter (Filed as an exhibit to the IPO
                              Filing)
</TABLE>



                                     - 37 -

<PAGE>   40



<TABLE>
<CAPTION>
               EXHIBIT
               NUMBER                          DESCRIPTION
               ------                          -----------

<S>                           <C>
               *10.12         Form of Indemnification Agreement entered into
                              between Voxel and each of its directors and
                              executive officers (Drs. Wolfe and Anderson,
                              Messrs. Dishlip, Dreyfous, Holliman, Hart,
                              Littlewood, and Rudin, and Ms. Perz) (Filed as an
                              exhibit to the IPO Filing)

               *10.13         Investor Agreement among the Company and all
                              purchasers of Bridge Notes, together with form of
                              Bridge Note (Filed as an exhibit to the IPO
                              Filing)

               *10.14         Development Agreement between Voxel and General
                              Scanning, Inc. dated August 3, 1994 (Filed as an
                              exhibit to the IPO Filing)

               *10.15         Letter Agreement between General Scanning, Inc.
                              and Voxel dated January 30, 1995 (Filed as exhibit
                              to the Company's 1994 Form 10-K)

               *10.16         Form of Preferred Stock Subscription Agreement
                              (Filed as an exhibit to the January '96 8-K)

               *21.1          List of subsidiaries of the Company (Filed as an
                              exhibit to the IPO Filing)

                27            Financial Data Schedule included herein.

               *99.1          Press Release, dated October 5, 1995 (Filed as an
                              exhibit to the Company's 8-K dated October 5,
                              1995)

               *99.2          Press Release, dated January 15, 1996 (Filed as an
                              exhibit to the January '96 8-K)
</TABLE>


----------

*  Items so noted were previously filed.

+  Indicates management contract or compensation plan or arrangement.

        (b) Reports on 8-K

                There were no reports on Form 8-K filed during the fourth
                quarter ended December 31, 1997.


                                     - 38 -
<PAGE>   41



                                   SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Laguna
Hills, State of California, on March 26, 1998.


                                   VOXEL

                                   By:    /s/ ALLAN M. WOLFE
                                          -------------------------------------
                                          Allan M. Wolfe, M.D.
                                          Chief Executive Officer and President



                                   By:    /s/ MURRAY E. RUDIN
                                          -------------------------------------
                                          Murray E. Rudin
                                          Principal Financial Officer and
                                          Principal Accounting Officer

        Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

        SIGNATURE                            TITLE                   DATE


/s/ ALLAN M. WOLFE
----------------------------
Allan M. Wolfe, M.D.                        Director           March 26, 1998


/s/ ALAN S. DISHLIP
----------------------------
Alan S. Dishlip                             Director           March 26, 1998


/s/ JAMES C. DREYFOUS
----------------------------
James C. Dreyfous                           Director           March 26, 1998


/s/ JOHN M. HOLLIMAN, III
----------------------------
John M. Holliman, III                       Director           March 26, 1998



                                     - 39 -

<PAGE>   42

                                 EXHIBIT INDEX


<TABLE>
<CAPTION>
                EXHIBIT
                NUMBER                         DESCRIPTION
                ------                         -----------

<S>                           <C>
               *3.1           Amended and Restated Articles of Incorporation of
                              the Company, as filed on August 2, 1991 and as
                              amended on May 24, 1993 and June 24, 1994 (Filed
                              as an exhibit to the Company's Registration
                              Statement on Form S-1, Registration #33-81938,
                              which was declared effective on September 27, 1994
                              (the "IPO Filing"))

               *3.2           By-laws of the Company (Filed as an exhibit to the
                              IPO Filing)

               *3.3           Certificate of Amendment to the Amended and
                              Restated Articles of Incorporation of the Company
                              (Filed as an exhibit to the Company's Report on
                              Form 8-K dated January 15, 1996 (the "January '96
                              8-K"))

               *4.1           Specimen Certificate for Common Stock (Filed as an
                              exhibit to the IPO Filing)

               *4.2           Form of Unit Purchase Option (Filed as an exhibit
                              to the IPO Filing)

               *4.3           Form of Warrant Agreement (including Form of Class
                              A Warrant) among the Company, A.R. Baron & Co.,
                              Inc. (the "IPO Underwriter") and American Stock
                              Transfer & Trust Company (Filed as an exhibit to
                              the IPO Filing)

               *4.4           Escrow Agreement among Voxel, the IPO Underwriter
                              and Chemical Bank (Filed as an exhibit to the IPO
                              Filing)

               *4.5           Form of Bridge Warrant (Filed as an exhibit to the
                              IPO Filing)

               *4.6           Certificate of Determination for the Series C
                              Preferred Stock (Filed as an exhibit to the
                              January '96 8-K)

               *10.1          License Agreement between Voxel and Holoplex
                              Systems dated April 11, 1990 (Filed as an exhibit
                              to the IPO Filing)

               *10.2          Agreement between Voxel and Dynamic ReSolutions
                              Inc. dated April 29, 1994 (Filed as an exhibit to
                              the IPO Filing)

               *10.3+         Employment Agreement between Voxel and Dr. Allan
                              M. Wolfe dated June 1, 1994 (Filed as an exhibit
                              to the IPO Filing)

               *10.4+         1992 Stock Plan (Filed as an exhibit to the IPO
                              Filing)

               *10.5+         1994 Executive Stock Option Plan (Filed as an
                              exhibit to the IPO Filing)

               *10.6          Master Lease Agreement between Voxel and Pacific
                              Venture Finance, Inc. dated December 16, 1991
                              (Filed as an exhibit to the IPO Filing)

               *10.7          Amendment No. 1 to Master Lease Agreement between
                              Voxel and MMC/GATX Partnership No. I dated April
                              30, 1993 (Filed as an exhibit to the IPO Filing)

               *10.8          Industrial Lease Agreement between Voxel and
                              Saddleback II Associates dated June 7, 1994
                              regarding 26081 Merit Circle, Suite 116, Laguna
                              Hills, California (Filed as an exhibit to the IPO
                              Filing)

               *10.9          Industrial Lease Agreement between Voxel and
                              Saddleback II Associates dated August 6, 1991
                              regarding 26081 Merit Circle, Suite 117, Laguna
                              Hills, California, together with renewal amendment
                              thereto dated June 7, 1994 (Filed as an exhibit to
                              the IPO Filing)

                10.10         Not Used

               *10.11         Form of Merger and Acquisition Agreement between
                              Voxel and the IPO Underwriter, providing for a fee
                              to the IPO Underwriter upon consummation of
                              certain transactions between the Company and a
                              party introduced to the Company by the IPO
                              Underwriter (Filed as an exhibit to the IPO
                              Filing)
</TABLE>



<PAGE>   43



<TABLE>
<CAPTION>
               EXHIBIT
               NUMBER                          DESCRIPTION
               ------                          -----------

<S>                           <C>
               *10.12         Form of Indemnification Agreement entered into
                              between Voxel and each of its directors and
                              executive officers (Drs. Wolfe and Anderson,
                              Messrs. Dishlip, Dreyfous, Holliman, Hart,
                              Littlewood, and Rudin, and Ms. Perz) (Filed as an
                              exhibit to the IPO Filing)

               *10.13         Investor Agreement among the Company and all
                              purchasers of Bridge Notes, together with form of
                              Bridge Note (Filed as an exhibit to the IPO
                              Filing)

               *10.14         Development Agreement between Voxel and General
                              Scanning, Inc. dated August 3, 1994 (Filed as an
                              exhibit to the IPO Filing)

               *10.15         Letter Agreement between General Scanning, Inc.
                              and Voxel dated January 30, 1995 (Filed as exhibit
                              to the Company's 1994 Form 10-K)

               *10.16         Form of Preferred Stock Subscription Agreement
                              (Filed as an exhibit to the January '96 8-K)

               *21.1          List of subsidiaries of the Company (Filed as an
                              exhibit to the IPO Filing)

                27            Financial Data Schedule included herein.

               *99.1          Press Release, dated October 5, 1995 (Filed as an
                              exhibit to the Company's 8-K dated October 5,
                              1995)

               *99.2          Press Release, dated January 15, 1996 (Filed as an
                              exhibit to the January '96 8-K)
</TABLE>


----------

*  Items so noted were previously filed.

+  Indicates management contract or compensation plan or arrangement.