INNOVACOM INC
10SB12G/A, 1999-03-19
COMPUTER INTEGRATED SYSTEMS DESIGN
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                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                          FORM 10-SB/(Amendment No. 1)
                            (Filed on March 19, 1999)

                 General Form for Registration of Securities of
                             Small Business Issuers
        Under Section 12(b) or (g) of the Securities Exchange Act of 1934


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


               Nevada                                  88-0308568
     (State or other jurisdiction of              (I.R.S. Employer
       incorporation or organization)             Identification No.)


                3400 Garrett Drive, Santa Clara, California 95054
           (Address of principal executive offices including zip code)


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

        None

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

Title of Each Class:

        Common Stock, $.001 par value



<PAGE>2


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

                                     PART I.

Item 1.  Description of Business

                                    BUSINESS


Business Redirection in June 1998

        The following  information  presented in this registration  statement is
made for historical  purposes only.  During May 1998, the Company went through a
personnel  reorganization.  Further,  in June 1998, the Company  reevaluated its
business  and  decided  to  focus  the  Company  in  the  development  of  video
compression technology in the areas of digital television,  communications,  and
digital video disks.  As a result of this emphasis,  the Company  terminated its
chip design  project,  canceled a number of  projects,  reduced  personnel,  and
reduced  other  expenses.  At the same time,  the  Company's  board of directors
decided to immediately discontinue the operations of Sierra Vista Entertainment,
Inc. ("Sierra Vista"), its wholly-owned  subsidiary and entertainment segment of
the business.  These events  occurred  subsequent to the initial  filing of this
registration statement.

        Readers  should review the Company's  Form 10-QSB for the quarters ended
March 31, 1998 and June 30, 1998, and September 30, 1998,  for more  information
about the Company and its current business plans.

Corporate Information

        The Company was originally incorporated in Florida in March of 1993 as a
research and  development  company and was  essentially  dormant  until 1996. In
March of 1996,  the Company  began to  emphasize  the  development  of broadcast
quality encoded video utilizing the Motion Picture Experts Group ("MPEG") second
generation  standard for video and audio  compression  ("MPEG-2") and obtained a
license from  FutureTel,  Inc to utilize  portions of its development of a video
compression chip and related MPEG-2 technology,  termed the "Gecko"  technology.
From 1993 until 1995, Mr. Mark C. Koz, the Company's  founder and Chairman,  was
also a  shareholder  in and an officer and director of FutureTel and assisted in
the development of the Gecko technology.  Mr. Koz terminated his relationship as
an officer,  director and  shareholder of FutureTel and, in connection  with his

<PAGE>3

departure,  FutureTel  licensed the Gecko  technology to the Company in exchange
for royalties,  for a period of seven years and not to exceed $3 million,  based
on sales  of  video  compression  chips  utilizing  or  derived  from the  Gecko
technology.  The Company has applied certain aspects of the Gecko  technology in
its development of its single chip video encoder, the DVImpact Chip.

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

        In May 1997, the Company  acquired Sierra Vista  Entertainment,  Inc., a
Nevada  corporation  ("Sierra  Vista") in a share for share  exchange by issuing
8,514,500 shares of its Common Stock to Sierra Vista shareholders.  Sierra Vista
is a motion picture production  company and as a result of the acquisition,  the
Company  gained  access to  approximately  $3 million of working  capital  and a
credit facility of up to $5 million.

        The Company is  developing  digital  video  compression  and  processing
technology to provide broadcast  quality video encoding and processing  products
and systems utilizing the MPEG-2 standard.  The Company's  development  includes
single chips,  multiple chips,  circuit boards,  software,  and complete digital
video compression and processing  systems.  The Company is currently  developing
digital video  compression and processing  technology using existing third party
three chip compression hardware.  The Company intends to replace this three chip
hardware with its own single chip video encoder, the DVImpact Chip, during 1998.

Certain Considerations

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

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

        Operating Losses. Since its inception,  the Company has incurred losses.
For the nine months ended  September 30, 1997,  and for the year ended  December
31,  1996,  the Company  incurred  net losses of  approximately  $7,760,000  and
$8,193,000 and had an accumulated  deficit of  approximately  $15,956,000  since
inception.  The Company  expects to continue to incur  losses and to continue to

<PAGE>4

accumulate  a deficit  until the  Company  completely  develops  and markets its
products and gains  significant  market  acceptance.  No assurances can be given
that the Company will achieve profitability.

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

        Need For  Additional  Capital and Dilution.  Development of new products
require  substantial  capital.  The Company's future capital  requirements  will
depend  on many  factors,  including  cash  flow from  operations,  progress  in
developing new products,  competing  technological and market developments,  and
the Company's ability to successfully  market its products.  Because the Company
currently does not have significant  revenues,  and will not have revenues until
it begins  to  market  its  products,  the  Company  will be  required  to raise
additional  capital through equity or debt  financings for its  operations.  Any
equity  financings  could  result in  dilution  to the  Company's  then-existing
stockholders.  Sources of debt financing will result in interest expense. If the
Company is unable to raise  additional  funds,  the  Company  may be required to
reduce its operations.

        Litigation  Involving  the  Company The  Company  and its  officers  and
directors  are  involved  in a number  of  legal  proceedings.  Such  litigation
includes an action by the Company  against former  directors and officers of the
Company and  alleged  financial  consultants  to the  Company  for,  among other
things,  breach of fiduciary duty, fraud,  breach of contract and RICO. Three of
these  defendants  have filed  cross-  complaints  against  the  Company and its
officers and directors.  Further,  a former employee of the Company has filed an
action for breach of contract,  and an alleged creditor of the Company has filed
an action for the repayment of monies.  As a result of  litigation,  the Company
will  have to spend a  substantial  amount of time and fees in  prosecuting  and
defending itself in these matters.

        Security Interest in the Company's Assets.  The Company has entered into
a $5 million Credit  Facility and Note which expires on June 30, 1998. As of May
1, 1998,  the amount of  principal  and  interest  outstanding  under the Credit
Facility and Note was  $4,491,621.  The  outstanding  principal  and interest is
secured by all of the assets of the Company. Therefore, in the event the Company
is unable to repay the Credit  Facility,  the holder will hold a  first-priority
security  interest in the Company's assets upon default.  The holder of the Note
has  indicated  that it intends to convert the Note into shares of Common Stock.
However, no assurance can be given that the holder will convert the Note. If the
holder does not convert  the Note,  the Company  will be required to request the
holder  to  extend  the Note or seek some  other  source  to repay the Note.  No
assurances  can be made that the  Company  will be able to repay all amounts due
under the Credit  Facility  and Note when  required  or that a default  will not
occur prior to repayment.

        Conflict  of  Interests.  The  Company  has  previously,  and may in the
future,  enter into  transactions with certain members of the Company's Board of
Directors or with companies that have common  directors  with, or owners who are
directors of, the Company. Therefore, these directors will be subject to various
potential conflict of interests.  Further, in a previous transaction involving a
company  owned by a director  of the Company  and the  Company,  the Company was
required  to record a loss.  The  Company  intends to adopt a policy of having a
related  party  transaction  be  subject  to  approval  by  a  majority  of  the
disinterested directors.

<PAGE>5

        Competition.  The digital video and audio industry is marked by numerous
small as well as large competitors.  Some of the Company's  competitors  include
C-Cube  Microsystems,  Inc., IBM and LSI Logic, Inc.  Additionally,  the Company
competes in an industry segment in which numerous competitors have substantially
greater  resources  than the  Company.  The Company  believes  other single chip
encoder  products may enter the market prior to the  Company's  proposed  single
chip encoder. No assurances can be given that existing or potential  competitors
of the Company will not develop products equal to or better than those developed
by the Company or that such products will not receive greater market acceptance.

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

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

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

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

        Reliance on OEM Customers and Retail Distributors. The Company's success
will depend to a significant  extent upon its ability to develop a  distribution
system with original equipment manufacturers ("OEMs") and retail distributors to
distribute and sell the Company's products in the marketplace. No assurances can
be given that the Company will be  successful in obtaining and retaining the OEM
customers and retail distributors it requires to continue to grow and expand its
marketing and sales efforts.

     Protection of Intellectual  Property.  The Company  currently does not hold
any patents. The Company has a non-exclusive worldwide license from FutureTel to

<PAGE>6

manufacture,  use,  sell and  otherwise  deal with the Gecko  video  compression
technology.  If the Company completes its acquisition of Intelligent Instruments
Corporation,  it may become the holder of a patent for a proprietary set-top box
design  and a pending  patent  for a  proprietary  server  design.  The  Company
currently  holds  certain  trademarks  on the  Company's  name and the  names of
certain products.

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

        Concentration  of Stock Ownership.  The present  directors and executive
officers will  beneficially own a substantial  amount of the outstanding  Common
Stock  of the  Company.  As a result  of  their  ownership,  the  directors  and
executive  officers  will have  substantial  control  of all  matters  requiring
stockholder  approval,  including  the  election of  directors  and  approval of
significant  corporate  transactions.  Such  concentration of ownership may also
have the effect of delaying or preventing a change in control of the Company.

        Possible  Dilution from Debentures,  Warrants,  and a Note. As of May 1,
1998,  there  were  Debentures,   Warrants,   Additional  Warrants  and  a  Note
outstanding to purchase up to an aggregate of 8,104,262  shares of Common Stock,
including up to 5,111,904  shares  underlying  the  Debentures,  500,000  shares
underlying  the Warrants,  250,000  shares  underlying  Additional  Warrants and
2,515,849 shares underlying the Note.  Depending on the current market price per
share of Common Stock, holders of the Debentures,  Warrants, Additional Warrants
and Note may be able to purchase shares of Common Stock at a price less than the
trading price of the Common Stock with a resulting  dilution of the interests to
the  other  stockholders.   Because  of  this  potential  dilutive  effect,  the
Debentures, Warrants, Additional Warrants and Note may have a detrimental impact
on the terms under which the Company may obtain financing  through a sale of its
Common  Stock in the  future.  Any  evaluation  of the  favorability  of  market
conditions for a subsequent stock offering by the Company must take into account
any outstanding Warrants, Additional Warrants and Note.

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

<PAGE>7

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

        Dependence on Key Personnel.  The Company's performance is substantially
dependent on the performance of its executive  officers and key personnel and on
its  ability  to retain  and  motivate  such  personnel.  The loss of any of the
Company's key personnel,  particularly the Company's  founder Mark C. Koz, could
have a material adverse effect on the Company's  business,  financial  condition
and operating  results.  The Company's success will also depend upon its ability
to hire and retain  additional  qualified  personnel.  No assurance can be given
that the Company will be able to hire or retain such qualified personnel.

Digital Video Industry Overview

        In the past,  video  images were  transmitted  and stored  using  almost
exclusively  analog formats.  Digital video technology,  including the Company's
technology,  has been developed more recently and provides several benefits over
analog. For example,  unlike analog, digital video can be compressed,  providing
significant storage and transmission  efficiencies.  Further,  digital video can
generally be duplicated and transmitted without significant loss of quality.

        The Moving Picture  Experts Group ("MPEG") was formed in 1988 to develop
a worldwide  industry  standard for digital  compression of video.  In 1991, the
MPEG committee adopted the first technical standard of digital video compression
for full video motion for personal computers, which is known as "MPEG-1."

        The MPEG  committee  determined  that a  higher  quality  digital  video
standard was needed for broadcast  quality video. The MPEG committee  eventually
adopted the second  generation  standard of MPEG for video and audio compression
("MPEG-2").   The  MPEG-2  video  compression   standard  defines  the  standard
applicable  to broadcast  quality video which may permit  effective  storage and
transmission of digital video.

The Company's Products and Technology

        Currently,  the  Company is  utilizing  existing  third party three chip
compression  hardware  in  development  of its  digital  video  compression  and
processing  technology.  The Company intends to replace this three chip hardware
with its own single chip video encoder,  which has been termed "DVImpact," along
with the  Company's  development  of a circuit  board and software for providing
MPEG-2 video encoding.

<PAGE>8


        The DVImpact Chip and related video  compression  hardware and software,
which is the subject of patent  application  docket  numbers 2056 and 2057,  has
applied certain aspects of the Gecko  technology  which was licensed from Future
Tel in 1996.

        Under  the  License  Agreement,  the  Company  has  the  rights  to use,
duplicate,  distribute,  modify and enhance the technology for the  development,
manufacture and distribution of its products and to sublicense the technology to
others for the  enhancement,  development,  manufacture and  distribution of its
products.  The Company also holds trademarks on the Company's name and the names
of certain products under development.

        The Company  develops core  technologies and  methodologies  for digital
video  compression  and  processing  technology   applications.   The  Company's
adherence to MPEG-2  non-proprietary  "open  standards" is  anticipated  to help
facilitate customers' flexibility in developing solutions based on the Company's
products under development. The Company believes adherence to the open standards
may, therefore, help customers' products meet time-to-market  requirements.  The
following are products currently under development by the Company.

        DVImpact single chip MPEG-2 encoder is currently  under  development and
is  designed  to provide  real time  encoding  of a digital  video  input and to
generate a compressed data stream that  management  believes will be smaller and
of better quality than that of competing  solutions.  With minor  modifications,
the  same  chip  is  designed  to act  as a  high  quality  MPEG-1  encoder  for
applications compliant with MPEG-1 standards.  The Company anticipates using the
DVImpact in its own board and systems level products as well as selling the chip
on a merchant basis into appropriate applications.  Management believes that the
DVImpact will address needs in a variety of different markets and that customers
will perceive  advantages in the DVImpact over competing solutions both included
in the Company's other products and as a stand alone merchant product.

        In connection  with the  development of the DVImpact  single chip MPEG-2
encoder, the Company entered into an agreement with a Company to manufacture the
Company's  chip.  The  agreement  calls for payment of  $225,000  for design and
manufacture of the chip. In June 1997, the Company made a $90,000 non-refundable
deposit to TriTech Electronics, Inc. for the start of design work. The remaining
amounts are due upon shipment of prototypes.

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

        TransPEG(TM)  and  MAVNet(TM)  systems-level  products are  currently in
advanced  stages of  development  and are  designed for  professional  broadcast
markets.  This  includes:  A  line  of  interchangeable   digital  multi-channel
transmissions  products  that  incorporate  compressed  video  and  transmit  on
multiple digital video broadcast standards; a digital broadcast  player/recorder

<PAGE>9

that incorporates MPEG-2 video compression;  and MPEG-2 instrumentation  cluster
for vector  scope and waveform  monitoring;  and MPEG-2  multi-channel  encoding
system; and a corporate DVD authoring system utilizing MPEG-2 video compression.
These products are intended to provide  digital video  processing  technology to
customers  who are  facing  the  conversion  from  analog to  digital  broadcast
technology  while  maintaining the look and feel of the interface that the users
have known on their analog tools. One potential application is a system designed
specifically  for broadcasters  for use in producing,  downloading,  editing and
delivering digitally  compressed  broadcast quality video.  However, the Company
believes that a complete MPEG-2 digital video  compression  system could also be
utilized by end-users in producing a variety of other video and audio programs.

Sales and Marketing

        The Company  intends to market its systems and products  through its own
sales force and through the use of independent sales representatives. Currently,
the Company is emphasizing  the sale of its system based  solutions to the video
broadcast industry through direct sales calls from the Company's sales force and
by attendance at national and international  trade shows.  Because the Company's
systems and products  have been in the  development  stage,  the Company has not
achieved  significant  revenue  from sales and does not  anticipate  significant
sales revenue until its products become available in commercial quantities.

Market for the Company's Products

        The markets for the  Company's  systems and  products  using its digital
video  compression  technology  can be divided into three broad  markets:  video
applications  in   communications,   especially  the  broadcast  market;   video
applications  in computers  and computer  networks;  and video  applications  in
consumer  electronics.  The Company  intends to market its products in all three
broad markets, but will initially emphasize video applications in communications
targeting the analog to digital conversion of television broadcast technology.

        Video Applications in Communications

        Digital video  compression is currently used in several new applications
in the  communications  market,  including the conversion from analog to digital
television,  increase transponder capacity on satellite DBS networks,  and wired
and wireless cable networks.

        The Company intends to initially  emphasize the marketing of its systems
solutions to the analog television broadcast station which desires to convert to
the  transmission  of digital  television in accordance with the mandates of the
Federal Communications Commission.  Most analog television stations must convert
to digital  transmission  within the next six years. The Company is in the final
stages of  development  of a full product line  targeting the video  compression
needs of  television  broadcast  stations  converting  from  analog  to  digital
transmissions.

        The first full-scale digital video transmission  systems to achieve full
deployment  were  a  series  of  DBS  networks   (Direct   Broadcast   Satellite
television).  Through  the  use  of  digital  video  compression  technology  on
high-power  Ku-band  satellites,  DBS  networks  typically  provide  100 or more
channels to large geographical  areas. The Company intends to target this market
once its DVImpact Chip is  commercially  available  through the  development  of

<PAGE>11

video and audio compression and multiplexing  systems which are intended to have
the capability of increasing the number of video channels  available to networks
over existing satellite transponders.

        The  wireless  cable or MMDS  networks  involve a local  "line-of-sight"
broadcast  network which  broadcasts  video over much shorter  distances  from a
stationary  ground-based  antenna directly to small receiving antennas placed at
each subscriber's home. Wireless cable or MMDS systems are typically deployed in
areas where there may not be an existing wired cable system or as an alternative
to existing  wired cable  systems in  high-density  urban  centers.  The Company
intends to target this market once its DVImpact Chip is  commercially  available
through the development of video and audio compression and multiplexing  systems
which are  intended to have the  capability  of  increasing  the number of video
channels available to wireless networks using the same amount of radio spectrum.

        Wired  cable  networks,  which  include  such  varied  architectures  as
switched digital video,  fiber to the curb (FTTC),  HFC and twisted pair schemes
such as ADSL and HDSL,  are  currently  in the early  stages  of  deployment  by
telecommunications  suppliers  and digital  cable  providers.  Switched  digital
networks can provide a much higher level of interactivity compared to either DBS
or MMDS including the potential for full two-way video  communication.  However,
the significant  investment in new  infrastructure,  presents a major barrier to
market  penetration  as the cost of this  infrastructure  is likely to be passed
onto the consumer.  However,  the Company intends to target this market once its
DVImpact Chip is  commercially  available  through the  development of video and
audio  compression  and  multiplexing  systems  which are  intended  to have the
capability of increasing the number of video  channels  available to wired cable
networks using the same amount of bandwidth available over the cable system.

        Video Applications in Computers and Computer Networks

        Manufacturers  and  consumers of computer  technology  are  increasingly
embracing  digital  video  applications  for use in  educational,  entertainment
communication and training applications.  Furthermore, computers are emerging as
the technical  platform of choice for video editing and video  encoding  through
the  integration of dedicated  video-specific  hardware.  The Company intends to
target  this  market as its system  level  solutions  and  DVImpact  Chip become
commercially  available.  Hardware  systems  involving DVD- ROMs may incorporate
some of the Company's video encoding  technology on an OEM basis.  Computers are
commonly  used  as  video   post-production   systems  though  the  addition  of
appropriate capture and encoding hardware and application  software enabling the
system to  provide  digital  editing  and/or  content  encoding.  The  Company's
technology,  especially its digital authoring  software  technology,  would have
applications in this market as well. Finally,  the Company intends to market its
products  and systems for use over local area  networks  and wide area  networks
providing  a cost  effective  solution  for  live  video  streams  over  network
applications.

        Video Applications in Consumer Electronics

        One emerging  growth market for the Company's  technology is in consumer
electronics.  Through  the  use of  MPEG-2  compression,  video  can be  stored,
reproduced and distributed on the same media currently in use for other types of
digital  data,  such as 5-inch (12 cm) CDs that are  commonly  used for  digital
audio.   Emerging   applications   for  digital  video  capture,   playback  and
distribution  at the consumer  level are being advanced by the rapid adoption of
new  consumer-oriented  media  formats  such as VideoCD  Players,  DVD  Players,
Recordable DVD and Consumer Digital Video Cameras. The Company intends to target

<PAGE>11

the consumer market once its DVImpact Chip is commercially available through the
development  of video  and  audio  compression  and  multiplexing  systems  with
specific applications in the consumer electronics market.

Competition

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

        The market for the Company's products is intensely competitive,  subject
to rapid  change and  significantly  affected by new product  introductions  and
other market activities of industry  participants.  The Company faces direct and
indirect  competition  from a broad range of competitors  who offer a variety of
products and solutions to the Company's  current and  potential  customers.  The
Company's  principal  competition comes from: (i) companies  offering  competing
systems;   and  (ii)  companies  offering  competing   technologies  capable  of
addressing certain components of the Company's technology. Many of the Company's
competitors have longer operating histories, including greater experience in the
market, significantly greater financial,  technical and other resources than the
Company, greater name recognition and a larger installed base of customers.

        C-Cube Microsystems ("C-Cube") is a direct competitor to the Company and
is similarly focused on video encoded compression. C-Cube has grown very rapidly
through the sales of its MPEG products,  primarily in the MPEG-1 market, and has
significantly  greater  resources than the Company.  However,  C- Cube generally
sells  components  rather than the complete  hardware and software digital video
compression  and  processing  systems  the  Company  hopes  to  develop  for its
customers.

        IBM was  expected  to compete  with a  single-chip  MPEG-2  encoder  and
decoder, but has not done so yet. The Company and many other market participants
presently  buy a 3-chip  MPEG-2  chipset  from IBM for their own  current  board
products. IBM is expected to release its own single chip encoder in the future.

        Other major potential competitors include companies such as Phillips and
SGS-Thomson,   as  well  as  large,  integrated  Japanese  and  Korean  consumer
electronics  companies,  such as Sony, Hyundai,  Toshiba, NEC and Samsung, which
have their own semiconductor  design and manufacturing  capacity.  In high-level
MPEG-2 decoders as well as MPEG-1  encoders,  LSI Logic has  substantial  market
share. In many of these cases, the Company hopes to be able to work jointly with
these companies to enhance quality encoding and decoding in the mass markets.

        Among the Company's  smaller  competitors is FutureTel,  which primarily
serves the video  authoring  marketplace  with boards and software  toolkits for
encoding  video  sequences  for  television  broadcast  studios.  Minerva  is  a
venture-funded,  fast-growing  system  reseller  using  C-Cube  and  other  chip
sources.   Another   market   participant,    3DO,   started   shipping   MPEG-2
encoder/decoders  for the Apple Macintosh in 1996,  based on IBM's chipset,  and
may decide to compete in the personal  computer market.  Several other companies
develop specialized professional video production boards.

        The  Company's  competitors  can be  expected to continue to improve the
design and performance of their products and to introduce new products with more
competitive prices and performance features.

<PAGE>12

Maintaining the  technological  and other  advantages of the Company's  products
over its competitors' products will require a continued high level of investment
by the Company in both research and development  and  operations.  No assurances
can be given that the Company will be able to continue to make such  investments
and receive the  necessary  capital or that the Company  will be able to achieve
the technological advances necessary to achieve competitive advantages.

Research and Development

        For the past two years, substantially all of the Company's time has been
devoted  toward the research and  development of digital video  compression  and
processing products and systems.  Internal research is supplemented  through the
utilization of consultants who specialize in various areas.  Product development
is  largely   performed  at  the   Company's   headquarters   in  California  by
approximately  20  engineers  who  are  supported  and  assisted  by five to ten
engineer consultants and by one technician. The Company's total expenditures for
research and development  were  approximately  $2,988,000 and $2,711,000 for the
nine months ended September 30, 1997, and for the year ended December 31, 1996.

FutureTel License Agreement

        The  Company  has  entered  into an  agreement  with  FutureTel  whereby
FutureTel has licensed to the Company certain proprietary  technology related to
digital video  compression.  The license  agreement was entered into on March 7,
1996,  and was  exclusive  for a period  of one year  and  became  non-exclusive
thereafter. Under the license agreement, FutureTel granted the Company the right
to develop,  manufacture and distribute  products using the licensed  technology
and derivative works. Under the terms of the license agreement, the Company will
also have the right to sublicense the technology.

        FutureTel's  proprietary  technology is currently subject to patents and
in the event  FutureTel  decides not to continue  to protect  its  patents,  the
Company has the right to enforce  and  protect the patents  which are subject to
the license.

        For its right to use the technology,  the Company shall pay to FutureTel
a  percentage  of gross  revenues  related  from the sale of products  using the
technology by sublicenses  equal to 20% during year one; 15% during year two; 8%
during year three; 5% during year four; 3% during year five; 1% during year six;
and 1% during year seven.  If the Company  makes  product  sales  utilizing  the
technology,  the preceding  percentages will be applied to the Company's foundry
costs.  After the seventh  year,  the Company  will not be  responsible  for any
further  payments.   Further,  the  royalty  payments  are  subject  to  maximum
cumulative amount not to exceed $3 million.

     Sierra Vista Entertainment,  Inc. Sierra Vista Entertainment, Inc. ("Sierra
Vista") was incorporated under the laws of Nevada on April 3, 1996, for purposes
of engaging in the production of television or theatrical feature films.  Sierra
Vista intends to produce  feature  motion  pictures with a production  budget of
between $1 million and $5 million per film.

        The  Company  and Sierra  Vista  entered  into a Plan and  Agreement  of
Reorganization  ("Reorganization")  in which the Company acquired 100% of Sierra
Vista's issued and outstanding  common stock in exchange for 8,514,500 shares of
Common Stock of the Company.  Upon  consummation of the  Reorganization,  Sierra
Vista became a  wholly-owned  subsidiary  of the Company.  As a condition of the
closing of the Reorganization, certain shareholders of Sierra Vista who held, in

<PAGE>13

the  aggregate,  approximately  5.5 million shares of Sierra Vista voting common
stock entered into a voting agreement with Mr. Koz who then owned  approximately
4.9  million  shares of Common  Stock of the  Company.  Pursuant  to the  voting
agreement the parties agreed to nominate six directors of the Company,  three of
which to be  nominated  by Mr. Koz and three of which to be  nominated by Sierra
Vista shareholders.  Currently, Mr. Koz and one other shareholder are subject to
the  voting   agreement.   Further  as  a  condition   of  the  closing  to  the
Reorganization, Sierra Vista was required to raise $3 million, which was used by
the Company for working capital upon consummation of the Reorganization.  Sierra
Vista also arranged for a $5 million Credit  Facility which has been used by the
Company for working capital.

        Sierra Vista employs three full-time  employees and is currently seeking
financing to produce one motion picture.  However,  Sierra Vista is dependent on
the  Company  for its working  capital  and has been  limited in its  production
activities  due to the  financial  constraints  of the  Company.  As the Company
continues to expend  resources on the  development  of its systems and products,
management  anticipates  reevaluating the propriety of continuing Sierra Vista's
production activities.  No assurance can be given that the Company will continue
Sierra Vista's production activities in the future.

China Joint Venture

        The Company  entered into a joint venture  agreement with CRI, a Chinese
corporation  located in Beijing  ("CRI"),  in September  1997. The joint venture
intends to establish an  exhibition  facility in China to display  United States
technology  and  products  and to  provide a forum  for  various  companies  and
individuals  to develop  potential  business  relationships  and  projects.  The
Company  and  CRI are  currently  completing  the  necessary  documentation  for
operation of the joint venture in China. Pursuant to the terms of the agreement,
the  Company  will  contribute  $200,000  to the  joint  venture  and  CRI  will
contribute  $100,000.  The joint  venture  will divide any profits in amounts in
proportion  to their  investment.  As of March 31,  1998,  the  Company  has not
contributed any funds to the joint venture. In connection with entering into the
joint venture with CRI, the Board of Directors  approved the issuance of 100,000
shares of Common Stock to NATV  Marketing,  a consulting fee of $60,000 per year
and the opportunity to receive up to 50% of the Company's joint venture interest
provided that the joint venture achieves certain objectives,  including, but not
limited to, full subscription of all rental facilities at the trading pavilion.

Intelligent Instruments Corporation

        The  Company's  Board of  Directors  has  approved  the  acquisition  of
Intelligent  Instruments  for two million shares of Common Stock of the Company,
subject to review of tax and accounting  consideration and subject to completion
of  negotiations  and final  documentation.  The form of  acquisition  may be by
merger  or  acquisition  of  substantially  all of  the  assets  of  Intelligent
Instruments,  and will be negotiated by Intelligent  Instruments Corporation and
the Company.  Intelligent Instruments holds the patent for a proprietary set-top
box design and has applied for a patent for a proprietary server design, both of
which  management   anticipates  will  be  compatible  with  the  digital  video
compression  and  processing  technology  being  developed by the  Company.  The
proposed  acquisition  price was determined by negotiations  between Mr. Koz and
Mr.  Anderson  on behalf of the  Company.  In  considering  the number of Common
Shares to be issued to Intelligent Instruments, the Company considered the value
to the  Company of the patent and  pending  patent  that may be  utilized in the
Company's  products  and that the  shares of Common  Stock to be issued  will be
restricted.  The primary assets of Intelligent  Instruments  consist of a patent
that will allow the Company to design and build  MPEG-2  decoder  set-top  boxes
that support  more than one  compression  technology  and a  proprietary  server
design that will allow  simultaneous  transmitting  of multiple  video data over

<PAGE>14

digital  subscriber  lines.  Set-top  boxes  are used in cable  connections  for
descrambling special channels. Intelligent Instruments is a company wholly-owned
by Mark C. Koz, the Company's President and Chief Executive Officer.  Subject to
entering  into a  definitive  agreement,  the  acquisition  was  approved by the
Company's Board of Directors with Mr. Koz abstaining from voting.  As of May 15,
1998,  the  Company  and Mr.  Koz have  agreed to  renegotiate  the terms of the
proposed acquisition including seeking a third party appraisal.  Therefore,  the
proposed acquisition is not probable at this time.

Technical Systems Associates, Inc.

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

Innovative Technical Solutions, Inc.

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

MicroTechnology Credit Facility

        The Company has entered into a Credit  Facility and Promissory Note with
MicroTechnology  pursuant  to which the  Company  may borrow up to an  aggregate
principal amount of up to $5 million.  The Note may be converted,  at the option
of the  holder,  into  shares of Common  Stock in an amount  equal to 80% of the
trading  price of a share of Common  Stock on the date an  advance  of funds was
made pursuant to the Credit  Facility.  The Note and Credit  Facility  expire on
June 30, 1998. As of October 31, 1997, the amount of principal outstanding under
the Note and Credit  Facility was $2,835,000 and may convert into  approximately
1,065,789 shares of Common Stock at an average conversion price of $2.66.

Employees

        As of March  31,  1998,  the  Company  had  approximately  45  full-time
employees.

<PAGE>15

Item 2.  Management's Discussion and Analysis or Plan of Operation

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

General

        The Company is a  development  stage  company with a principal  focus in
digital  video  compression  and  processing  technology  compliant  with MPEG-2
standards.  The Company is currently  developing  chips,  boards and systems for
targeted potential  customers.  In 1997, the Company merged with Sierra Vista, a
Nevada  corporation in the development  stages of production and distribution of
feature length films.

        The Company plans to make the transition from development  stage to full
production  and sale of  products  in 1998.  The  Company's  single-chip  MPEG-2
encoder, the DV2100 MPEG-2 encoder board, and numerous system level products are
at advanced stages of development and are expected to begin  significant  volume
shipment in the near future.  Management  anticipates that continuing  operating
losses in 1998  combined  with the  requirements  of increased  inventories  and
accounts  receivable will require  additional funding in 1998. No assurances can
be given that the Company will become profitable or such additional funding will
be  available  or,  if  available,  that it will be on  terms  favorable  to the
Company.

        Product   development   in  1998  is  planned  to   continue   in  areas
complimentary to the Company's pending product sales. These product  development
efforts are expected to include updated versions of previously released products
with enhanced  feature sets and  functionality,  products  that will  compliment
other existing products, and products that will broaden product lines to address
additional market niches.  Management  anticipates  significant increases in the
staffing in its research and development  efforts and in production,  marketing,
sales and administration.

        Management  of Sierra  Vista does not  anticipate  significant  revenues
during the remainder of the fiscal year. No  significant  increases in permanent
employees  and no  significant  purchases of equipment are  anticipated.  Sierra
Vista's  operations  are dependent on receiving  adequate  working  capital from
InnovaCom.

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

Nine Months Ended September 30, 1997 Compared to September 30, 1996

Revenues

        Revenues for the nine months ended  September 30, 1997, were $149,000 as
compared to zero in the nine months ended  September  30,  1996.  The revenue in
1997 was from shipments of developer  systems to five  customers,  who purchased
the systems to begin  development of their own software in  anticipation  of the
Company's commercial release of its board level encoding products. The Company's
products were at an earlier state of development in 1996, and accordingly  there
was no revenue.

<PAGE>16

Gross Margins

        Gross  margins  were  approximately  $96,000 or 64% for the nine  months
ended  September  30,  1997,  as  compared  to zero  for the nine  months  ended
September  30, 1996.  The gross  margin  percentage  in 1997 is not  necessarily
representative  of the margins  that the Company  expects on its  products  when
commercial shipments to customers begin at some time in the future.

Research and Development

        Research and development  expense in the nine months ended September 30,
1997, totaled  approximately  $2,988,000.  This was an increase of approximately
$1,026,000 or 52% from the research and development  expense for the same period
in 1996.  The  change  results  principally  from an  increase  in the number of
employees in the research  and  development  group and an increase in the period
that  these  people  were  working  (activity  in the first half of 1996 was low
because the Company did not  receive  significant  funding  until July of 1996),
which increased cash payroll expense by  approximately  $1,127,000,  and payroll
expense  imputed under APB 25 by  approximately  $286,000.  This was offset by a
reduction  of  $775,000  in the amount of  purchased  research  and  development
expensed in 1997 relative to 1996.

Selling, General and Administrative

        Selling,   general  and   administrative   expenses  were  approximately
$4,292,000 in the nine months ended September 30, 1997,  which was a decrease of
approximately  $12,000 from the same period in 1996.  The total in 1996 included
approximately  $3,396,000 in expense recognized in conjunction with the issuance
of stock  and stock  options  at  prices  below  fair  market  value to  various
consultants for services  rendered.  This expense was approximately  $647,000 in
1997.  Excluding  the  $3,396,000  in 1996 and the  $647,000  in 1997,  selling,
general and administrative  expense in the nine months ended September 30, 1997,
would have been approximately $2,737,000 higher than in the same period in 1996,
an increase of  approximately  301%.  This  increase is related to a substantial
increase in  employees,  an increase in the period of time they were  present in
1997  relative  to 1996,  which  increased  payroll  expenses  by  approximately
$315,000, and increases in marketing,  legal and auditing and travel expenses of
approximately  $336,000,  $335,000,  and $165,000,  respectively.  Additionally,
certain  expenses  were  present  in  1997  but  not  in  1996.  These  included
approximately  $542,000 related to Sierra Vista and  approximately  $300,000 for
the uncompleted acquisition of Technical Systems Associates.

Year Ended December 31, 1996

Revenues

        The  Company had no revenues  in 1996,  and  management  does not expect
significant revenues in 1997. Revenues will become significant only at such time
as the Company's development of significant products is completed.

Research and Development

        Research and development expense for 1996 was approximately  $2,711,000.
This included a charge of $1,275,000 for purchased research and development. The
balance of expense is principally  salaries and other employee related expenses,
supplies and expensed software or tools, and outside consulting expenses.

<PAGE>17

Management  anticipates that research and development  expenses will increase in
the year ended December 31, 1997, from the levels seen in 1996 due in large part
to  increases  in  staffing.  Expenses  in 1997 will  include  the amount of any
research and development  purchased which might be significantly  different than
the amount reported in 1996.

Selling, General and Administrative

        Selling,  general and administrative expenses in 1996 were approximately
$5,473,000.  This included  approximately  $3,411,000  in expense  recognized in
conjunction  with the  issuance of stock and stock  options at prices below fair
market value to various  consultants for services rendered.  The largest part of
the remaining expense is salaries,  related employee expenses and director fees.
Management  expects that selling,  general and  administrative  expenses will be
lower in 1997 than in 1996 as  substantial  increases  in  staffing  and related
spending, and most other expense line items will be more than offset by the fact
that the expense  recognized in 1996 for issuance of stock and stock options for
services rendered will not repeat.

Interest Income

        Interest  income  in 1996 of  approximately  $2,000  was  earned  on the
temporary investment of surplus cash. Management  anticipates that similar small
amounts will be earned in 1997.

Interest Expense

        The Company  recorded  interest  expense in the year ended  December 31,
1996,  of  approximately  $11,000.  The level of  interest  expense in 1997 will
depend on the amount of debt financing incurred by the Company, the periods over
which  this  debt is  outstanding  and the terms of the  indebtedness.  Interest
expense could increase significantly in 1997.

Liquidity and Capital Resources

        As of September 30, 1997 and December 31, 1996, the Company had negative
working capital of approximately  $3,617,000 and $1,244,000,  respectively.  For
the year ended  December 31, 1996,  and for the nine months ended  September 30,
1997, the Company has had no significant  positive cash flow from operations and
has relied on the  placement of capital  stock and debt to fund its  development
stage losses and its investments in capital assets.

        As of  September  30,  1997,  the  Company's  debt  consists of advances
against a $5,000,000  credit facility  granted by a shareholder with a principal
balance of  approximately  $2,125,000  and  accrued  interest  of  approximately
$40,000.  This note  matures  in 1998,  bears  interest  at 10% per annum and is
secured by a first security interest in essentially all of the Company's assets.
The  principal  and  interest on this credit  facility  can be  converted at the
lender's option into common stock of the Company at a 20% discount to the market
price of the stock at the date that individual advances were made to the Company
under this credit facility.  The Company has been advised by the lender that the
lender does intend to convert this debt into common stock.

Impact of the Year 2000  Issue.  The Year 2000 Issue is the  result of  computer
programs  being  written  using  two  digits  rather  than  four to  define  the
applicable year. Any of the Company's, or its suppliers' and customers' computer
programs  that have  date-sensitive  software may recognize a date using "00" as

<PAGE>18

the year 1900 rather than the year 2000. This could result in system failures or
miscalculations causing disruptions of operations including, among other things,
a temporary  inability  to process  transactions,  send  invoices,  or engage in
similar normal business activities.

        The majority of the Company's operations are based on PC application and
the Company  believes that its software is year 2000 compliant.  The Company has
not yet  identified  any year 2000  problem  but will  continue  to monitor  the
issues.  No  assurances  can be given that the year 2000  problem will not occur
with respect to the Company's computer systems.

        Neither  the  Company  nor  its   subsidiary   have   initiated   formal
communications  with significant  suppliers and large customers to determine the
extent to which  those  third  parties'  failure  to remedy  their own Year 2000
Issues would materially effect the Company and its subsidiaries. The Company has
not received any indication from its suppliers and large customers that the Year
2000 Issue may  materially  effect  their  ability to conduct  business  and the
Company has no current plans to formally undertake such an assessment.

Item 3.  Description of Property.

        The Company is currently  renting  approximately  22,000  square feet of
space in Santa Clara, California, which includes offices and research space. The
Company has entered into a five (5) year lease agreement effective January 1998,
with an option to extend for an additional  three (3) year term, for the leasing
of new offices of  approximately  18,000  square feet.  The monthly base rent is
$28,800 for 1998,  increasing by $900 per month for each year  thereafter,  plus
operating  expenses  for the  common  areas of the entire  complex  equal to the
Company's  pro-rata  square  footage of the  complex  (approximately  47% of the
building,  27% of the  project).  Approximately  4,000 square feet is also being
rented  pursuant to a sublease  agreement  which expires on June 30, 1998, and a
monthly payment of $9,000.

        The offices are used primarily for engineering, software development and
administrative  purposes. The Company does not maintain its own manufacturing or
production facilities.

        Sierra  Vista  entered into a three (3) year lease  agreement  effective
October 1, 1997. The lease is for approximately 2,800 square fee of office space
in Beverly  Hills,  California.  The  monthly  base rent is $5,882 for the first
eighteen months and $6,162 thereafter.

        Sierra  Vista is also  currently  leasing a single  family  residence of
approximately 2,500 square fee in Beverly Hills, California. The monthly rent is
currently approximately $7,000 per month, increasing to $7,300 in October 1998.

        Sierra  Vista's  offices  are used  primarily  for its  film  and  video
production business.

<PAGE>19

Item 4.  Security Ownership of Certain Beneficial Owners and Management.

                             PRINCIPAL STOCKHOLDERS

        The following table sets forth, as of May 1, 1998,  certain  information
with respect to the  beneficial  ownership of the Company's  Common Stock by (i)
each stockholder known by the Company to be the beneficial owner of more than 5%
of the Company's  Common  Stock,  (ii) each officer and director of the Company,
and (iii) directors and executive  officers of the Company and its subsidiary as
a group.

        As of  May 1,  1998,  there  were  20,561,897  shares  of  Common  Stock
outstanding.

Common Stock


                                                            Percentage
                                            Number of      Beneficially
Name and Address                            Shares(1)          Owned
- ----------------                            ---------      ------------

Mark C. Koz                              5,463,000(2)         26.55%
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054

507784 BC Ltd.                           5,463,000(3)         26.55%
10th Fl., Four Bentall Centre
P.O. Box 49333
1055 Dunsmuir Street
Vancouver BC V7X 1L4
Canada

Thomas E. Burke                            333,334(4)          1.6%
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054

Rand E. Shrader                            402,000(5)          1.9%
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054

Stanton Creasey                            200,000(6)            *
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054

John Champlin, MD                          100,000(7)            *
4373 Meadow Circle
Rescue, CA 95672

<PAGE>20

James Anderson                                 -0-              -0-
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054

Simone Anderson                                -0-              -0-
Sierra Vista Entertainment
9350 Wilshire Blvd., Suite 100
Beverly Hills, CA 90212

Robert Sibthorpe                               -0-              -0-
6311 E. Naumann Dr.
Paradise Valley, AZ 85253

Tony Low                                       -0-              -0-
The Saatchi Entertainment Group
37 26th Avenue
Venice, CA 90291

Peter J. Sprague                           100,000(8)            *
InnovaCom, Inc.
3400 Garrett Drive
Santa Clara, CA 95054

All officers and directors as a group    6,598,334(9)         30.39%
(10 persons)                           

*Less than one percent

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

(2)     Includes  1,000,000  shares of Common  Stock owned by 507784 BC Ltd. and
        4,463,000  shares  beneficially  owned by Mark C. Koz,  all of which are
        subject to a Voting  Agreement by and between 507784 BC Ltd. and Mark C.
        Koz,  wherein Mr. Koz has the right to nominate three (3) members of the
        six (6) member  board of  directors  of the Company and 507784 BC Ltd, a
        former Sierra Vista shareholder, has the right to nominate the remaining
        three  (3)  members  of the six (6)  member  board of  directors  of the
        Company,  and all the shares subject to the voting  agreement shall vote
        in favor of the six (6) nominees.  The voting  agreement is for a period
        of five years ending on February 27, 2002.  The voting  agreement may be
        extended for an additional five years.  The owners of 507784 BC Ltd. are
        unaffiliated  with either the Company or Mr. Koz. Also includes  options
        to purchase  15,000  shares of Common Stock at $0.50 per share  expiring
        August 7, 2001, held by Mr. Koz's wife.

(3)     Includes  1,000,000  shares of Common  Stock owned by 507784 BC Ltd. and
        4,478,000  shares  beneficially  owned by Mark C. Koz,  all of which are
        subject to a Voting  Agreement by and between 507784 BC Ltd. and Mark C.
        Koz,  wherein Mr. Koz has the right to nominate three (3) members of the
        six (6) member board of directors of the Company and 507784 BC Ltd.,

<PAGE>21

        a  former  Sierra  Vista  shareholder,  has the  right to  nominate  the
        remaining  three (3) members of the six (6) member board of directors of
        the Company,  and all the shares subject to the voting  agreement  shall
        vote in favor of the six (6) nominees.

(4)     Includes options to purchase 333,334 shares of the Company's Common 
        Stock expiring on March 23, 2008.

(5)     Includes options to purchase 400,000 shares of the Company's Common
        Stock at $2.75 per share, expiring May 27, 2002.

(6)     Includes options to purchase 200,000 shares of the Company's Common
        Stock at $1.75 per share, exercisable within sixty days.

(7)     Includes options to purchase 100,000 shares of the Company's Common 
        Stock at $3.375 per share, exercisable within sixty days.

(8)     Includes warrants to purchase 100,000 shares of the Company's Common 
        Stock expiring on May 1, 2005.

(9)     Includes 1,148,334 options and warrants to acquire shares of Common 
        Stock and 1,000,000 shares subject to a voting agreement discussed in 
        footnotes (2) through (8).


Item 5.  Directors, Executive Officers, Promoters and Control Persons


Executive Officers and Directors

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

                                                                Held Position
      Name               Age              Position                  Since
      ----               ---              --------              -------------

Thomas E. Burke          58       President, Chief Executive       May 1998
                                  Officer, Director

Mark C. Koz              43       Senior Vice President, Chief     March 1993
                                  Technical Officer and
                                  Chairman of the Board

F. James Anderson        49       Secretary, Executive Director,   May 1997
                                  Corporate Strategy and
                                  Finance, Director

Rand E. Shrader          43       Chief Operating Officer          May 1997

Stanton Creasey          44       Chief Financial Officer          April 1997

Simone Anderson          34       President, Sierra Vista          May 1997

Tony Low                 44       Director                         October 1996

Robert Sibthorpe         48       Director                         May 1997

John Champlin, M.D.      42       Director                         October 1997

Peter J. Sprague         58       Director                         May 1998

<PAGE>22

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

        Thomas E. Burke (age 58) has been President and Chief Executive  Officer
of the  Company  and as a member of the Board of the  Directors  of the  Company
since May 1, 1998.  For the past 17 years,  Mr. Burke has been  employed by TRW,
most currently as Director of Strategic  Requirements  which is responsible  for
identifying  and evaluating  major trends and issues that can affect TRW's Space
and Electronics  Group. Prior to being Director of Strategic  Requirements,  Mr.
Burke was with TRW's  automotive  group where he was vice  president of advanced
products and systems for the Automotive  Electronic Group. From 1981 to 1991 Mr.
Burke held positions with TRW's Space and Technology and the Electronic  Systems
Groups in Los  Angeles.  Mr. Burke  received a doctorate  in chemistry  form the
California  Institute of Technology and his  bachelor's  degree in chemistry for
the University of Minnesota.

        Mark Koz (age 43) has been  Chairman  of the Board  since March 3, 1993,
and Senior Vice President and Chief  Technical  Officer since 1998. From 1993 to
1998,  Mr. Koz served as President and Chief  Executive  Officer of the Company.
Mr. Koz was also Chief Executive Officer, Chief Technical Officer and a Director
of  FutureTel  from  1993 to  1995,  and has been  Chief  Executive  Officer  of
Intelligent  Instruments  Corporation  since  1993.  Mr.  Koz has five  years of
technical education at Florida Technological  University  (University of Central
Florida).  In  addition,  he is a voting  member of the Moving  Picture  Experts
Group, the international standards-setting body for MPEG.

        F.  James  Anderson  (age 49) has been  Secretary,  Executive  Director,
Corporate Strategy and Finance,  and Director of the Company since May 1997. Mr.
Anderson is also and has been a director of Sierra  Vista  since  January  1997.
Prior to forming  Sierra  Vista in January  1997,  Mr.  Anderson  was engaged in
reviewing and pursuing business opportunities. From January 1993 to the present,
Mr.  Anderson  served  as  Director  General  of  the  Moscow  Country  Club,  a
Russian-American  joint  venture  formed to  develop a country  club in  Moscow,
Russia,  and from  February  1992 to May 1995 Mr.  Anderson  was  President  and
Chairman of the Board of the Moscow Country Club,  Inc.("MCCI" ) which owned 50%
of that joint venture.  From December 1991 to April 1993 Mr Anderson was CEO and
Director of Brush Creek Mining and Development, Co., Inc., a Nevada corporation,
which was engaged in exploration and development of precious mineral  properties
in the US and other countries. Mr. Anderson is the spouse of Simone Anderson.

        As  previously  discussed,  Mr.  Anderson was an  executive  officer and
Chairman of the Board of MCCI which entered into joint venture with an agency of
the Russian  Government  ("Russian  Partner").  MCCI  believes  that the Russian
Partner  illegally seized the assets of the joint venture which is currently the
subject of an arbitration  proceeding in accordance  with the terms of the joint
venture  agreement.  As a result of the Russian  Partner's  seizure of the joint
venture's  assets,  MCCI was unable to pay its obligations  when they became due
and, as a result,  certain  creditors  of MCCI filed an  involuntary  bankruptcy
action  against MCCI (Case No.  95-22770-C-7  and  95-24391-C-11  United  States
Bankruptcy  Court Eastern  District of  California).  The  Bankruptcy  Court has
approved a plan of  reorganization  for MCCI allowing all creditors to be repaid
from the potential judgment proceeds in the arbitration proceeding.

        Rand E.  Shrader  (age 43) has been Chief  Operating  Officer  since May
1997. Prior to joining the Company, Mr. Shrader was employed with ITT Automotive
(now part of ITT Industries) for 12 years.

<PAGE>23

Mr.  Shrader  was  Quality  Manager  at one of  Dayton-Walther's  (now  part  of
Lucas-Varity) plants for 6 years before joining ITT.

        Stanton Richard Creasey (age 44) has been Chief Financial  Officer since
April 1997.  From March 1996 through April 1997,  Mr. Creasey was an independent
consultant  and from September 1994 through March 1996, he was at Purus Inc. Mr.
Creasey was Chief Financial Officer and President of Sixty-Eight Thousand,  Inc.
from  September 1989 through March 1994, and left that company in April 1994. In
June 1994, Sixty-Eight Thousand, Inc., a company which made Macintosh compatible
workstations, filed for bankruptcy protection in San Jose, California (Case No.:
94-54123).  Mr.  Creasey is a CPA with 19 years of experience in finance,  first
with  Arthur  Andersen  &  Co.,  and  then  with a  number  of  high  technology
manufacturing companies,  including National Semiconductor  Corporation.  He has
served as chief financial  officer of several Silicon Valley start-up  companies
during the past ten years.

        Simone  Anderson (age 34) was a Director of the Company from May 1997 to
March 1998,  and has been the  Marketing  Director and President of Sierra Vista
since  January  1997.  She has been a director and officer of MCCI from February
1992 until May 1995 and was previously a director and chief financial officer of
Brush Creek Mining and  Development  Co., Inc. from April 1989 to February 1993.
Prior to forming Sierra Vista,  Ms. Anderson,  along with her husband,  F. James
Anderson,  was engaged in the review and pursuit of new business  opportunities.
As discussed above,  certain  creditors of MCCI filed an involuntary  bankruptcy
action against MCCI. MCCI is still currently in bankruptcy.

        Tony Low (age 44) has been a Director of the Company since October 1996.
Since July 1997, Mr. Low has been Chief Operating  Officer of Darwin Digital,  a
newly  formed  Saatchi  &  Saatchi   Vision  Company   involved  in  interactive
advertising  and media  buying.  Prior to that,  from  January 1996 through June
1997, Mr. Low was director of business  affairs at the Los Angeles based Saatchi
Entertainment  Group,  a  division  of  Saatchi  &  Saatchi,  the  multinational
advertising  agency.  From June 1993 through  January  1996 he was  President of
Tercer Mundo, Inc., a company marketing sound recordings,  and from October 1983
through June 1993 he was Partner and Business Manager of Oberman, Tivoli, Miller
and Low, an accounting company specializing in the entertainment industry.

     Robert Alan Sibthorpe (age 49) has been a Director of the Company since May
1997. Mr. Sibthorpe has been owner of Mag South Research, Inc., a geological and
financial  consulting firm since October 1996. From June 1986 through April 1996
Mr. Sibthorpe was with Yorkton  Securities,  Inc. involved in investment banking
Mr.  Sibthorpe has an MBA in Finance and a Bachelor of Science in Earth Sciences
both from the University of Toronto.

     John  Joseph  Champlin,  M.D.  (age 42) has been a Director  of the Company
since October  1997.  He has been owner and president of the Med Center  Medical
Clinic in  Carmichael,  California,  since 1993.  Prior to  founding  Med Center
Medical Clinic,  he was a medical  director of Madison Center from 1988 to 1993.
He is also associate clinical professor,  family practice,  at the University of
California at Davis since 1986. Mr.  Champlin  earned his M.D. at the University
of Florida.

        Peter J. Sprague  (age 58) has been a director of the Company  since May
1, 1998. Mr. Sprague has been Chairman of the Board and Chief Executive  Officer
since  1988  of  Wave   Systems   Corp,   a  public   company   engaged  in  the
commercialization of electronic content (data, graphic software, video and audio
sequence that can be digitally transmitted)  distribution networks. From 1965 to
May 1995,  Mr.  Sprague  was  Chairman  of the Board of  National  Semiconductor
Corporation. He is currently a director of EnLighten

<PAGE>24

Software  and  Pantepee  International  and  Trustee of the Strang  Clinic.  Mr.
Sprague is also a member of the academy of Distinguished  Entrepreneurs,  Babson
College.

Committees of the Board.

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

        The primary functions of the Audit Committee are to review the scope and
results of audits by the Company's independent auditors,  the Company's internal
accounting  controls,  the  non-audit  services  performed  by  the  independent
accountants, and the cost of accounting services.

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

     The board has also  established  a litigation  committee  consisting of Mr.
Anderson, who serves as chairman, and Messrs. Low and Sibthorpe.

Item 6. Executive Compensation

Executive Compensation.

        The  following  table  sets  forth  the  Compensation  of the  Company's
president and chief  executive  officer  during 1996. No other officer  received
annual compensation in excess of $100,000 during 1996.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>

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

                                                     Other                              
                                                    Annual               Restricted     Securities
                                                   Compensa-                Stock       Underlying           LTIP        All Other
Name and Principal                                   tion                 Award(s)        Options           Payouts      Compensa-
Position                  Year        Salary          ($)                    ($)            (#)               ($)          tion
- ----------------------------------------------------------------      --------------------------------  -------------------------
<S>                       <C>      <C>                <C>                    <C>       <C>                    <C>           <C>
Mark C. Koz               1996     $120,000           $0                     $0        2,000,000(1)           $0            $0
President and CEO
</TABLE>


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

        On May 15,  1997,  the  Company  and Mr.  Koz  entered  into a five year
employment contract.  Under the terms of Mr. Koz's employment contract,  Mr. Koz
shall  receive a salary of  $240,000  per annum  subject  to a 7% cost of living
increase  and  other  increases  as  determined  by the Board of  Directors.  In
addition,  pursuant to Mr. Koz's employment contract,  in the event that Mr. Koz
is terminated in connection with a change in control,  Mr. Koz shall be entitled
to  receive a lump sum  payment  equal to three  times his then  annual  salary.
Finally,  pursuant to his contract,  Mr. Koz shall be indemnified by the Company
for serving as an officer and director.

<PAGE>25

        On May 15, 1997, the Company and Mr.  Anderson  entered into a five year
employment contract.  Under the terms of Mr. Anderson's employment contract, Mr.
Anderson  shall serve as Director of  Strategic  Planning  and  President of the
Company's  Entertainment  Division  and his salary  shall be $180,000  per annum
subject to a 7% cost of living increase and increases as determined by the Board
of Directors.  In addition,  pursuant to Mr. Anderson's  employment contract, in
the  event  that Mr.  Anderson  is  terminated  in  connection  with a change in
control,  Mr.  Anderson shall be entitled to receive a lump sum payment equal to
three times his then annual  salary.  Finally,  pursuant  to his  contract,  Mr.
Anderson  shall be  indemnified  by the  Company  for  serving  as  Director  of
Strategic Planning and President of The Company's Entertainment Division.

Future President and Chief Executive Officer

        On March 23, 1998,  the Company  hired Thomas E. Burke as President  and
Chief  Executive  Officer  of the  Company  and as a member  of the Board of the
Directors  of the Company to  commence  May 1, 1998.  As  discussed  below,  Mr.
Burke's employment is subject to certain conditions.  For the past 17 years, Mr.
Burke  has been  employed  by TRW,  most  currently  as  Director  of  Strategic
Requirements  which is responsible for  identifying and evaluating  major trends
and issues that can affect  TRW's Space and  Electronics  Group.  Prior to being
Director of Strategic  Requirements,  Mr. Burke was with TRW's  automotive group
where he was vice president of advanced  products and systems for the Automotive
Electronic  Group.  From 1981 to 1991 Mr. Burke held  positions with TRW's Space
and  Technology  and the  Electronic  Systems  Groups in Los Angeles.  Mr. Burke
received a doctorate in chemistry  form the  California  Institute of Technology
and his bachelor's degree in chemistry for the University of Minnesota.

        Pursuant to his employment contract, Mr. Burke shall receive a salary of
$250,000  per year,  a  signing  bonus  equal to  $200,000  net of taxes,  a car
allowance  equal to $1,000 per month net of taxes, a housing  allowance equal to
$7,500 per month net of taxes, a life insurance policy equal to $1,500,000,  and
other benefits  granted to employees of the Company.  Mr. Burke's  employment is
for a term of five years and, upon each anniversary date, shall be automatically
extended by an  additional  one year term unless either party gives prior notice
not to extend.  Mr.  Burke shall be eligible to receive an annual bonus of up to
two times Mr.  Burke's  annual  salary  based on  achieving  certain  targets as
mutually  agreed upon by Mr. Burke and the Board of  Directors.  Mr. Burke shall
also receive options to acquire during a ten year term up to 1,000,000 shares of
Common Stock of the Company at an exercise  price equal to $1.75 per share.  The
options  shall  vest  in  one-third   increments  with  one  increment   vesting
immediately  and  the  remaining  two  increments  on  each   anniversary   date
thereafter.  In the event of a change of  control,  all the  options  shall vest
immediately.

        Mr.  Burke's  employment  contract  may be  terminated  for cause by the
Company  or for good  reason by Mr.  Burke.  In  general,  the term "for  cause"
includes the conviction of a felony, consistent willful failure to substantially
perform stated duties,  a willful act of fraud,  or a willful act of misconduct.
In general, the term good reason includes assignment of duties inconsistent with
Mr. Burke's position, failure to comply with or breach of Mr. Burke's employment
agreement,  relocation of principal  place of employment,  failure to extend the
employment  term,  or an  occurrence  of a change  of  control.  In the event of
termination without cause or for good reason, the Company shall pay Mr. Burke an
amount  equal to his salary due for the  remaining  term of his contract and any
bonuses  due,  such an amount not to exceed  $1,000,000  unless the  Company has
earnings before deduction of any interest, taxes, depreciation,  amortization in
excess of $2,000,000.  In addition, all unvested options shall immediately vest.
In the event Mr. Burke  employment  contract is terminated  for cause or without
good reason,  Mr. Burke shall be entitled to all accrued but unpaid  amounts and
unvest options shall be forfeited.

        Mr. Burke's  obligations under the employment contract are contingent on
the Company  obtaining  financing in an amount of not less than $5,000,000 on or
before  April 15, 1998.  The failure of the Company to secure such  financing or
the  occurrence  of any material  adverse  changes in the  business  affairs and


<PAGE>26

financial  prospects  of the  Company,  prior to May 1,  1998,  could  result in
termination of the employment contract by Mr. Burke.  Further,  the Company must
secure its performance  under the employment  contract for a period of two years
by the issuance of a letter of credit in the aggregate  amount of $1,000,000 for
the benefit of Mr. Burke.

Director Compensation.

        Directors do not receive cash compensation for serving as such. However,
during the year ended  December 31, 1997,  Messrs.  Sibthorpe,  Low and Champlin
each received  options to acquire  200,000 shares of Common Stock at $2.59 which
represented  the  closing  price of the  Company's  Common  Stock at the date of
grant.  The  options  are for a  period  of five  years  and  vest in  one-third
increments beginning on November 18, 1998.

Item 7.  Certain Relationships and Related Transactions

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

        As of May 1,  1998,  the  aggregate  amount  of  principal  and  accrued
interest  outstanding  on the Credit  Facility  was  $4,491,621  million with an
average  conversion  price of $2.23 per share.  Through  the merger  with Sierra
Vista and a subsequent  transaction,  Micro Technology received 2,500,000 shares
of  Common  Stock  which,  at the time of the  merger,  would  have  represented
approximately a 12% interest in the Company. Prior to their investment in Sierra
Vista,  the owners of Micro Technology were  unaffiliated  with Sierra Vista and
the Company.

        Acquisition  of  Intelligent  Instruments  Corporation.   The  Board  of
Directors  has  agreed  to  acquire  Intelligent  Instruments  Corporation,   an
intellectual  property  holding  company  owned by Mark Koz, in exchange for two
million  shares of the Company's  Common Stock.  The  acquisition of Intelligent
Instruments  Corporation may take the form of the  acquisition of  substantially
all of its assets.  The actual  structure will be based on negotiations  between
the  parties.  Intelligent  Instruments  Corporation  holds  the  patent  for  a
proprietary  set-top box design and has  applied for a patent for a  proprietary
server  design,  both of which  complement  and  enhance  the  technology  being
developed  by the  Company.  The  acquisition  of the  intellectual  property of
Intelligent  Instruments  Corporation  is  subject  to  both  parties  analyzing
structure,  tax and accounting issues and entering into a definitive  agreement.
In  determining  the value of  Intelligent  Instruments  Corporation,  the board
considered  the  patents  owned  and  pending  which  are  held  by  Intelligent
Instruments  the  potential  markets in which  products may be  developed  using
Intelligent  Instruments  Corporation's  patents and that the Common Stock to be

<PAGE>27


issued will be restricted.  The proposed  purchase price was negotiated  between
Mr. Koz and Mr.  Anderson on behalf of the Company.  Subject to entering  into a
definitive  agreement,  the  acquisition was approved by the Board of Directors,
with Mr. Koz abstaining from voting.

        As of May 15, 1998, the parties have agreed to renegotiate  the terms of
the proposed acquisition, including seeking an independent third party appraisal
as to the value of the  assets.  Therefore,  at this time,  the  acquisition  of
Intelligent Instruments is not probable.

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

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

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

        Digital  Hollywood,  Inc.  Beginning  in March 1996,  the  Company  made
advances to Digital  Hollywood,  Inc. in the aggregate  amount of  approximately
$139,000.  Digital  Hollywood  is a  corporation  owned by Mr. Mark C. Koz,  the
Company's  president,  and was  formed to make and  distribute  a musical  video
recorded on a digital video disk ("DVD") utilizing MPEG-2 compliant  compression
technology.  Digital  Hollywood  was unable to sell its video and because all of
Digital Hollywood's assets were secured by another lender, the Company set up an
allowance as to collectibility of its advances. Digital Hollywood, Mark Koz, the
Company  and  Decorah   Company  are   currently  in   litigation.   See  "Legal
Proceedings."

     Consultant  Contract with Mr.  Sprague.  Effective May 1, 1998, the Company
entered into a one year consulting  services  contract with Peter J. Sprague,  a
director of the Company.  Mr. Sprague will assist the Company in the development
and marketing of its video compression and processing  technology,  to assist in
the  development  of the  Company's  business  operations,  and to assist in the

<PAGE>28


implementation  of  production  methods for existing and new  business.  For his
services,  Mr. Sprague shall  received  $10,000 per month and options to acquire
100,000 shares of Common stock at $2.00 per share.

        With respect to each transaction between the Company and an affiliate of
the Company,  the Company believes that such transactions were on terms at least
as  favorable  to the Company as they would have been had they been  consummated
with  unrelated  third parties under similar  circumstances.  The Company has no
formal policy  regarding  entering into future  transactions  with an affiliate.
However, in general, any transaction  involving an affiliate will be approved by
the disinterested directors with the interested director abstaining from voting.

Item 8.  Description of Securities

        InnovaCom's  authorized  capital stock consists of 50,000,000  shares of
Common Stock,  par value $0.001.  As of December 8, 1997, there were outstanding
22,328,587 shares of Common Stock held of record by stockholders.

Common Stock

        Each  stockholder is entitled to one vote for each share of Common Stock
held on all matters  submitted to a vote of stockholders.  Each holder of Common
Stock has the right to cumulate his votes, which means each share shall have the
number of votes equal to the number of  directors to be elected and all of which
votes may be cast for any one nominee.  Subject to such preferences as may apply
to any  Preferred  Stock  outstanding  at the time,  the holders of  outstanding
shares of Common Stock are entitled to receive  dividends out of assets  legally
available  therefor at such times and in such  amounts as the Board of Directors
may from time to time determine.  The Common Stock is not entitled to preemptive
rights and is not subject to conversion  or  redemption.  Upon the  liquidation,
dissolution,  or winding up of the Company,  the holders of Common Stock and any
participating  Preferred  Stock  outstanding  at that time would be  entitled to
share ratably in all assets  remaining  after the payment of liabilities and the
payment of any liquidation preferences with respect to any outstanding Preferred
Stock.  Each outstanding  share of Common Stock now is, and all shares of Common
Stock that will be outstanding  after  completion of the offering will be, fully
paid and non-assessable.

<PAGE>29

                                           PART II

Item 1.  Market Price of and Dividends on the Registrants' Common Equity and 
         Other Shareholder Matters

        The Company's Common Stock began trading on the OTC Bulletin Board under
the  symbol  "MPEG"  on  July  15,  1996.  The  following   quotations   reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual  transactions.  The high and low prices of the Company's Common
Stock on a quarterly basis for the past two fiscal years are as follows:

Quarter                               High               Low
- --------                             -----              -----
September 30, 1996                   $8.13              $1.25
December 31, 1996                    $9.25              $4.25
March 31, 1997                       $6.19              $1.63
June 30, 1997                        $5.06              $2.44
September 30, 1997                   $4.38              $2.38
December 31, 1997                    $3.63              $2.38


Item 2.  Legal Proceedings.

Jettson Realty Development  Corporation.  On November 10, 1997,  InnovaCom filed
suit against Michael D. Haynes,  David S. Jett,  Manhattan West, Inc., Marketing
Direct Concepts,  Inc., Checkers Foundation,  Atlas Stock Transfer  Corporation,
Arun Pande,  Edwin  Reedholm,  and others in the Superior Court of the County of
San Francisco  (Case Number  990965).  The complaint  alleges that in connection
with the reverse merger of Jettson Realty  Development  Corporation  ("Jettson")
and InnovaCom, a Florida corporation,  the Company issued shares of Common Stock
to Michael D.  Haynes and David S. Jett and  entities  controlled  by them based
upon  fraudulent  misrepresentations.  Further,  the  Company is  alleging  that
Manhattan West and Marketing Direct Concepts and Checkers Foundation,  an entity
alleged to be controlled by Messrs.  Haynes and Jett,  were issued fees,  Common
Stock,   and   options   to   acquire   shares  of  Common   Stock   based  upon
misrepresentations,  including  that they  could  raise  capital  to assist  the
Company  in its  business.  The  Company  has  received  monies in the amount of
approximately $665,000 in connection with a stock purchase agreement between the
Company and Checkers  Foundation,  but will not issue the shares of Common Stock
until this  litigation  involving  Checkers  Foundation has been  resolved.  The
Company is also  alleging  that  Atlas  Stock  Transfer,  the  Company's  former
transfer agent, breached its contract in issuing shares of Common Stock in these
transactions.  In addition,  the Company is alleging  that Mr.  Pande,  a former
director and officer of  InnovaComm,  violated his  fiduciary  duty by receiving
shares of InnovaComm Common Stock based upon  misrepresentations  and inadequate
or no consideration,  and made  inappropriate  and unauthorized  expenditures on
behalf of the Company for his personal benefit,  and that Mr. Reedholm, a former
director of the Company,  received shares of Common Stock of the Company without
the  payment  of  adequate  consideration.  The  Company is also  alleging  RICO
(Racketeer Influenced Corrupted  Organizations Act) against all defendants.  The
Company is seeking damages in excess of $26 million plus punitive damages.

     In  response  to  InnovaCom's   lawsuit,   certain  defendants  have  filed
cross-claims  against the Company.  Mr. Pande filed a  counterclaim  against the
Company,  and its  directors,  officers  and  attorneys  for breach of contract,
fraud, negligent  misrepresentation and other claims. Mr. Pande is alleging that

<PAGE>30

the Company breached his employment  contract,  failed to recognized Mr. Pande's
ownership in InnovaComm,  failed to acknowledged Mr. Pande's stock options,  and
failed to reimburse  Mr. Pande for expenses  made on behalf of the Company.  Mr.
Pande is requesting damages of $11 million plus punitive damages. The Company is
disputing each of Mr. Pande's claims. In addition, Marketing Direct Concepts has
filed a  counter-claim  against the Company and  Manhattan  West for damages for
breach of a financial consultant contract requesting damages of approximately $1
million.  Manhattan  West has also filed a  counter-claim  against  the  Company
alleging breach of its consulting contract with InnovaCom.  Further, Atlas Stock
Transfer has filed a claim against the Company and all other defendants  seeking
indemnity.

        A number of defendants have defaulted,  including Michael Haynes,  David
Jett and  Checkers  Foundation.  InnovaCom  will be seeking an entry of judgment
against the defaulting  defendants including that the Common Stock that they own
may be canceled,  and with regards to Checkers  Foundation that no monies is due
to it. The Jettson  litigation is in its initial stage and limited discovery has
been conducted.

        In  February  1998,  the Staff of the  Division  of  Enforcement  of the
Securities and Exchange  Commission advised the Company that they are performing
an informal inquiry  surrounding the  circumstances  of the reverse  acquisition
involving Jettson and subsequent  litigation and has requested certain documents
related  to these  transactions.  The  Company  has  complied  with the  Staff's
request.

Japan Tobacco,  Masato Hata,  FutureTel,  et al. On July 25, 1996,  Mark C. Koz,
Intelligent  Instruments  Corporation  and the Company  filed suit against Japan
Tobacco,  Masato Hata,  FutureTel,  et al., in the Santa Clara  County  Superior
Court (Case No. CV 759582).  The Company and the other  plaintiffs  are claiming
fraud by the  defendants  in the formation of a business  venture  involving the
development  and marketing of multimedia  technology.  On or about  September 5,
1996,  FutureTel filed a cross-complaint  against the Company alleging breach of
contract by the Company for failure to pay FutureTel for salaries, payroll taxes
and insurance  for certain  personnel,  rental  equipment  expenses  incurred by
FutureTel,  and legal fees all  representing,  in the  aggregate,  approximately
$123,000. They have agreed (except Japan Tobacco) to settle their dispute. Under
the  settlement  agreement,  the  Company,  Mark  Koz,  Intelligent  Instruments
Corporation,  Masato Hata and FutureTel settled their claims against each other,
the Company paid FutureTel  $100,000,  and the Company and FutureTel amended the
Company's license to manufacture,  use, distribute, sell and otherwise deal with
the video compression  technology from FutureTel to make it irrevocable.  At the
time of litigation, neither Mr. Koz nor Intelligent Instruments Corporation were
associated with FutureTel. Further, the Company and Japan Tobacco have agreed in
principle to dismiss with  prejudice  each claim  against each other  subject to
entering into a definitive  settlement  agreement.  The settlement  agreement is
anticipated to be finalized and executed soon.

Maturi. On October 7, 1996,  InnovaCom filed a complaint for declaratory  relief
in Santa Clara County  Superior  Court (Case No. CV 761218)  against  Gregory V.
Maturi, a former employee.  The complaint seeks clarification that Mr. Maturi is
not entitled to any further payments or benefits under his employment  agreement
with the Company, and that certain payments amounting to approximately  $150,000
made by InnovaCom to Mr.  Maturi  should be returned to the Company.  On October
18, 1996, Mr. Maturi filed a  cross-complaint  against the Company for breach of
contract, fraud and deceit, and breach of the implied covenant of good faith and
fair  dealing,  seeking  damages  in  excess of $5  million.  The  parties  have
conducted limited discovery. No trial date has yet been set.

Decorah  Company.  On June 9, 1997, the Decorah  Company and Edwin  Reedholm,  a
former director of the Company, filed a complaint against Digital Hollywood, the

<PAGE>

Company and Mark C. Koz in the Circuit  Court of Cook  County,  Illinois  County
Department,  Law Division, Case No. 97L06866.  Plaintiffs are alleging breach of
contract in the approximate amount of $80,000 for interest,  directors' fees and
cost reimbursements.  In addition,  Decorah Company is alleging that it has lent
funds to Digital  Hollywood which has yet to be repaid and is seeking damages of
approximately $900,000.  Further, Decorah Company is seeking damages against Mr.
Koz because he guaranteed  the  repayment of the monies by Digital  Hollywood to
Decorah  Company  secured by a portion of Mr. Koz's Common Stock in the Company.
Discovery  has yet to begin in this  proceeding.  In  addition,  the Company has
recently  filed suit against Mr.  Reedholm  for breach of fiduciary  duty in the
Jettson Realty litigation.

Item 3.  Changes in and Disagreements with Accountants

        Subsequent  to the reverse  merger  between  InnovaCom,  Inc., a Florida
corporation,  and Jettson,  on June 4, 1997,  the  Company's  Board of Directors
approved  to  retain  Hein  +  Associates  LLP  as  the  Company's   independent
accountants and Michael Hoffer,  Jettson's former accountant,  was not retained.
During the  relationship  between  Jettson  and  Michael  Hoffer,  there were no
disagreements  regarding  any matters with respect to  accounting  principles or
practices,  financial statement disclosure,  or audit scope or procedure,  which
disagreements,  if not resolved to the  satisfaction  of the former  accountant,
would have caused  Michael Hoffer to make reference to the subject matter of the
disagreement  in  connection  with  its  report.  Michael  Hoffer's  report  for
Jettson's financial position as of December 31, 1995, July 9, 1996, and July 31,
1996,  and the results of its operations and cash flows for the periods July 10,
1996,  to July 31, 1996,  January 1, 1996,  to July 9, 1996,  for the year ended
December 31, 1995,  and from October 3, 1990  (inception)  to July 31, 1996, are
not a  part  of the  financial  statements  of  the  Company  included  in  this
Prospectus.  Such report did not  contain an adverse  opinion or  disclaimer  of
opinion or  qualification  of  modifications  as to uncertainty,  audit scope or
accounting principles under generally accepted auditing standards. However, such
report includes comments by the former accountant that cast substantial doubt on
Jettson's  ability to continue as a going  concern.  Prior to  retaining  Hein +
Associates  LLP,  the  Company  had not  consulted  with Hein +  Associates  LLP
regarding accounting principles.

Item 4.  Recent Sales of Unregistered Securities

        On  December  22,  1997,  the  Company  sold  to JNC,  an  institutional
investor,  7%  Convertible  Debentures in the aggregate  principal  amount of $5
million and warrants to purchase  250,000  shares of Common Stock at an exercise
price of $3.00 per share and warrants to purchase 250,000 shares of Common Stock
at an exercise  price of $4.00 per share.  At the same time,  the Company issued
warrants  to  purchase  250,000  shares  of  Common  Stock at $2.43 per share to
Cardinal Capital Management,  Inc., an institutional  investor, in consideration
for  investment  advisory  services  provided  in  connection  with the  private
placement.  In addition,  the Company  commissions  in the  aggregate  amount of
$300,000 to Cardinal Capital Management,  Inc. The transactions were exempt from
registration  upon reliance of Section 4(2) and  Regulation D of the  Securities
Act.

        In June 1997,  Patrick  Johnson,  Esq.  received  7,003 shares of Common
Stock in  consideration  for  approximately  $17,000  worth  of  legal  services
previously rendered.  The transaction was exempt from registration upon reliance
of Section  4(2) and  Regulation  D  promulgated  under the  Securities  Act. No
commissions were paid.

        On May 12, 1997, the Company issued  8,514,500 shares of Common Stock to
approximately  65  purchasers in exchange for all of the  outstanding  shares of
Sierra Vista. No commission was paid by the Company,  and the Company  shares of

<PAGE>32

Common Stock were not registered  with the  Commission  upon reliance of Section
3(a)(10) of the  Securities  Act. The shares were issued  pursuant to a fairness
hearing held by the California Department of Corporations.

        On February 19, 1997,  the Company  sold to the Checkers  Foundation,  a
foundation located in Vaduz,  Liechtenstein,  229,310 shares of Common Stock for
an aggregate purchase price of $665,000. No commission was paid. The transaction
was exempt from registration upon reliance upon Section 4(2) and Regulation D of
the Securities Act.

        In January 1997,  the Company  issued  100,000 shares of Common Stock to
Dr. Paul Kim, an  unaffiliated  third  party,  in exchange  for an MPEG-1  board
design. The trading price of a share of Common Stock on the date of the exchange
was $5.00 per share. The transaction was exempt from  registration upon reliance
of Section  4(2) and  Regulation  D  promulgated  under the  Securities  Act. No
commissions were paid.

        On November 19, 1996, the Company issued approximately 240,000 shares of
Common  Stock in exchange  for  $1,200,000  at $5.00 per share.  Manhattan  West
received one option to acquire one share of Common Stock for every $2.00 raised.
The  exercise  price was $3.00 per  option.  The  transaction  was  exempt  from
registration  upon reliance of Section 4(2) and  Regulation D of the  Securities
Act.

        In July 1996,  the  Company  issued  approximately  5,028,215  shares of
Common Stock in exchange for  approximately  $819,142 at approximately  $.16 per
share. No commission was paid. The transaction was exempt from registration upon
reliance of Section 3(b) and Regulation D of the Securities Act.

Item 5.  Indemnification of Directors and Officers

        InnovaCom  has  adopted  Section  78.751  of the  Domestic  and  Foreign
Corporation Laws of the State of Nevada in its bylaws. Section 78.751 states:

               1. A  corporation  may indemnify any person who was or is a party
        or is  threatened  to be  made a party  to any  threatened,  pending  or
        completed  action,   suit  or  proceeding,   whether  civil,   criminal,
        administrative or investigative,  except an action by or in the right of
        the  corporation,  by reason  of the fact that he is or was a  director,
        officer,  employee or agent of the corporation,  or is or was serving at
        the request of the corporation as a director, officer, employee or agent
        of  another  corporation,  partnership,  joint  venture,  trust or other
        enterprise,  against  expenses,  including  attorneys' fees,  judgments,
        fines and amounts paid in settlement actually and reasonably incurred by
        him in  connection  with the action,  suit or  proceeding if he acted in
        good faith and in a manner which he reasonably  believed to be in or not
        opposed to the best interests of the  corporation,  and, with respect to
        any criminal  action or proceeding,  had no reasonable  cause to believe
        his  conduct  was  unlawful.  The  termination  of any  action,  suit or
        proceeding by judgment, order, settlement, conviction, or upon a plea of
        nolo  contendere  or its  equivalent,  does  not,  of  itself,  create a
        presumption  that the  person  did not act in good faith and in a manner
        which  he  reasonably  believed  to be in or not  opposed  to  the  best
        interests  of the  corporation,  and that,  with respect to any criminal
        action  or  proceeding,  he had  reasonable  cause to  believe  that his
        conduct was unlawful.

<PAGE>33

               2. A  corporation  may indemnify any person who was or is a party
        or is  threatened  to be  made a party  to any  threatened,  pending  or
        completed  action  or  suit by or in the  right  of the  corporation  to
        procure a judgment  in its favor by reason of the fact that he is or was
        a director,  officer, employee or agent of the corporation, or is or was
        serving  at the  request  of the  corporation  as a  director,  officer,
        employee or agent of another  corporation,  partnership,  joint venture,
        trust or other enterprise  against  expenses,  including amounts paid in
        settlement and attorneys'  fees actually and reasonably  incurred by him
        in connection with the defense or settlement of the action or suit if he
        acted in good faith and in a manner which he  reasonably  believed to be
        in  or  not  opposed  to  the  best   interests   of  the   corporation.
        Indemnification  may not be made for any  claim,  issue or  matter as to
        which  such  a  person  has  been  adjudged  by  a  court  of  competent
        jurisdiction, after exhaustion of all appeals therefrom, to be liable to
        the  corporation  or for amounts paid in settlement to the  corporation,
        unless and only to the extent that the court in which the action or suit
        was brought or other court of  competent  jurisdiction  determines  upon
        application  that  in view of all the  circumstances  of the  case,  the
        person is fairly and reasonably  entitled to indemnity for such expenses
        as the court deems proper.

        InnovaCom has entered into indemnification  agreements with its officers
and directors.  Pursuant to the  agreements,  InnovaCom has agreed to defend and
indemnify  such  officers and  directors  for all expenses and  liabilities  for
acting as such.

        In  addition,  InnovaCom  carries  directors'  and  officers'  insurance
pursuant to  authority  in its Bylaws to maintain a liability  insurance  policy
which insures  directors or officers  against any liability  incurred by them in
their capacity as such, or arising out of their status as such.

                                    PART F/S

        The Company's financial  statements for the year ended December 31, 1996
and for  the  nine  months  ended  September  30,  1997,  are  attached  to this
Registration Statement.

                                    PART III

Item 1.  Index to Exhibits

        Part III - Item 2.

Item 2.  Description of Exhibits

        2.1  Certificate  of  Incorporation,  as amended,  of the Company(1) 2.2
             Amended and Restated Bylaws of the Company(1)
        5.1  Voting Agreement of InnovaCom, Inc., dated February 27, 1997, and
             amended as of April 1, 1997,  May 14, 1997,  June 10,  1997,  and
             December 1, 1997, between Mark Koz and 507784 BC Ltd.(1)
        6.1  Plan and Agreement of Reorganization, dated February 27, 1997, as
             amended  April 1, 1997 and May 14, 1997,  between the Company and
             Sierra Vista(1)
        6.2  License Agreement,  dated as of March 7, 1996,  between the Company
             and FutureTel (1) 
        6.3  Employment Agreement with Mark C. Koz, dated as of May 15, 1997(1)

<PAGE>34

        6.4    Employment Agreement with F. James Anderson, dated as of May 15, 
               1997(1)
        6.5    Escrow Agreement and Instructions between the Company, Sierra 
               Vista and Bartel Eng Linn & Schroder, dated as of February 27, 
               1997(1)
        6.6    Lease between Cooperage-Rose Properties II and the Company(1)
        6.7    Credit   Facility   Agreement   between  the  Company  and  Micro
               Technology S.A., dated as of July 1, 1997(1)
        6.8    Security Agreement between the Company and Micro Technology S.A.,
               dated as of July 1, 1997(1)


        (1) Previously filed with the Company's Form 10-SB on December 12, 1997.

<PAGE>35


                                   SIGNATURES


        In accordance  with Section 12 of the  Securities  Exchange Act of 1934,
the registrant  caused this amendment no. 1 to the registration  statement to be
signed on its behalf by the undersigned, thereunto duly authorized.


                                            InnovaCom, Inc.



Dated: March 19, 1999                        Frank Alioto         
                                            -----------------------------
                                            By: Frank Alioto, President


<PAGE>

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

                              Financial Statements
                               For the Years Ended
                           December 31, 1995 and 1996,
                            For the Nine Months Ended
                     September 30, 1996 and 1997 (unaudited)
                               and For the Period
                        From March 3, 1993 (inception) to
                         September 30, 1997 (unaudited)


<PAGE>F-1

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS





                                                                            PAGE

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

Consolidated Balance Sheets - December 31, 1996 
     and September 30, 1997 (unaudited)......................................F-3

Consolidated  Statements of  Operations - For the Years Ended
    December 31, 1995 and 1996, for the Nine Months Ended 
    September 30, 1996 and 1997  (unaudited) and for the Period 
    from March 31, 1993  (inception)  to  September  30, 1997 
    (unaudited)..............................................................F-4

Consolidated  Statement of Stockholders'  Equity (Deficit) - 
    For the Period From March 3, 1993  (inception) to 
    September 30, 1997 (The period from January 1, 1997 to 
    September 30, 1997 is unaudited).........................................F-5

Consolidated  Statements  of Cash Flows - For the Years Ended  
    December 31, 1995 and 1996, for the Nine Months Ended 
    September 30, 1996 and 1997  (unaudited) and for the Period  
    from March 3, 1993  (inception)  to  September  30, 1997
    (unaudited)..............................................................F-7

Notes to Consolidated Financial Statements..................................F-10

<PAGE>F-2

                          INDEPENDENT AUDITOR'S REPORT


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


We have audited the accompanying  consolidated balance sheet of InnovaCom,  Inc.
(a Development  Stage  Enterprise) and subsidiaries as of December 31, 1996, and
the  related  consolidated   statements  of  operations,   stockholders'  equity
(deficit), and cash flows for the years ended December 31, 1995 and 1996 and the
period from March 3, 1993  (inception)  to December  31, 1996.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the 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 consolidated  financial statements referred to above present
fairly, in all material respects, the financial position of InnovaCom,  Inc. and
subsidiaries (a Development  Stage  Enterprise) as of December 31, 1996, and the
results of their  operations  and their cash flows for the years ended  December
31, 1995 and 1996 and for the period from March 3, 1993  (inception) to December
31, 1996 in conformity with generally accepted accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
financial statements,  the Company has negative working capital of $1,243,756, a
stockholders'  deficit of $1,040,467,  and has suffered  significant losses from
operations that raise  substantial doubt about the Company's ability to continue
as a going  concern.  Management's  plans in  regard to these  matters  are also
described in Note 3. The financial  statements  do not included any  adjustments
relating to the  recoverability  and classification of reported asset amounts or
the amounts and classification of liabilities that might result from the outcome
of this uncertainty.

As discussed in the last paragraph of Note 11 to the financial  statements,  the
company  has  restated  certain  financial  statement  amounts  related  to  the
acquisition of Sierra Vista, Inc., which occurred in May 1997.


/s/ HEIN + ASSOCIATES LLP
HEIN + ASSOCIATES LLP
Certified Public Accountants

Orange, California
October 15, 1997, except for the last paragraph of Litigation,  Note 8, which is
as of November 10, 1997 and Note 11 which is as of March 10, 1999.

<PAGE>F-3




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

                                    CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>


                                                                   DECEMBER 31,         SEPTEMBER 30,
                                                                      1996                   1997
                                                                ---------------         -------------
                                                                                         (unaudited)
<S>                                                           <C>                    <C>

                                                  ASSETS
CURRENT ASSETS:
     Cash                                                       $             -        $      88,082
     Cash - restricted                                                    9,507                8,480
     Other receivables                                                    3,200               12,594
     Prepaid expenses                                                         -              132,995
                                                                ---------------        -------------
         Total current assets                                            12,707              242,151

PROPERTY AND EQUIPMENT, net                                             183,991              650,063

FILM RIGHTS                                                                   -              250,000
GOODWILL, net                                                                 -              939,000
DEPOSITS                                                                 19,298               63,662
                                                                ---------------        -------------
TOTAL ASSETS                                                    $       215,996        $   2,144,876
                                                                ===============        =============

                              LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES:
     Bank overdraft                                             $        38,574        $           -
     Notes payable                                                        6,678            2,172,976
     Accounts payable                                                   394,286              593,199
     Accrued liabilities                                                816,925            1,093,094
                                                                ---------------        -------------
          Total current liabilities                                   1,256,463            3,859,269
                                                                ---------------        -------------

COMMITMENTS AND CONTINGENCIES (Notes 3, 8 and 11)                             -                    -

STOCKHOLDERS' EQUITY (DEFICIT):
     Common stock, $.001 par value, 50,000,000 shares
        authorized, 12,211,084 and 21,061,897 (unaudited)
        shares issued and outstanding                                    12,211               21,062
     Additional paid-in capital                                       7,143,117           14,220,160
     Deficit accumulated during development stage                    (8,195,795)         (15,955,615)
                                                                ---------------        -------------
          Total stockholders' equity (deficit)                       (1,040,467)          (1,714,393)
                                                                ---------------        -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)            $       215,996        $   2,144,876
                                                                ===============        =============

</TABLE>


See accompanying notes to these consolidated financial statements.


<PAGE>F-4



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

                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>

                                                                                                           MARCH 3, 1993
                                  FOR THE YEARS ENDED                   FOR THE NINE MONTHS              (INCEPTION) TO
                                     DECEMBER 31,                       ENDED SEPTEMBER 30,                SEPTEMBER 30,
                                1995               1996               1996               1997                  1997
                           --------------     --------------     --------------     --------------        --------------
                                                                   (unaudited)        (unaudited)            (unaudited)

<S>                        <C>                <C>                <C>                <C>                   <C>           
REVENUES                   $            -     $            -     $            -     $      149,000        $      149,000
                           --------------     --------------     --------------     --------------        --------------

COSTS AND EXPENSES:
  Cost of Goods Sold                    -                  -                  -             52,538                52,538
  Research and development              -          2,711,028          1,961,914          2,987,715             5,698,743
  Selling, general and
    administrative                    300          5,472,578          4,304,058          4,291,866             9,764,444
                           --------------     --------------     --------------     --------------        --------------
  Total costs and expenses            300          8,183,606          6,265,972          7,332,119            15,515,725
                           --------------     --------------     --------------     --------------        --------------

OPERATING LOSS                       (300)        (8,183,606)        (6,265,972)        (7,183,119)          (15,366,725)
                           --------------     --------------     --------------     --------------        --------------

OTHER INCOME (EXPENSE):
  Interest income                       -              1,622                  -              5,641                 7,263
  Interest expense                      -            (10,611)            (5,080)          (580,742)             (591,353)
                           --------------     --------------     --------------     --------------        --------------
                                                      (8,989)            (5,080)          (575,101)             (584,090)
                           --------------     --------------     --------------     --------------        --------------
LOSS BEFORE INCOME TAX
  EXPENSE                            (300)        (8,192,595)        (6,271,052)        (7,758,220)          (15,950,815)

INCOME TAX EXPENSE                    800                800                800              1,600                 4,800
                           --------------     --------------     --------------     --------------        --------------

NET LOSS                   $       (1,100)    $   (8,193,395)    $   (6,271,852)    $   (7,759,820)       $  (15,955,615)
                           ==============     ==============     ==============     ==============        ==============
                   
BASIC AND DILUTED LOSS 
  PER SHARE                $         (.00)    $         (.98)    $         (.88)    $         (.47)
                           ==============     ==============     ==============     ==============        

WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING           5,122,869          8,361,597          7,100,597         16,455,744
                           ==============     ==============     ==============     ==============        
</TABLE>


See accompanying notes to these consolidated financial statements.


<PAGE>F-5

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

            CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)


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

<S>                                              <C>           <C>           <C>              <C>                   <C>    
Common stock issued to form company at
  $0.0017 per share (March 1993)                     5,100,000  $     5,100   $     3,400       $          -          $      8,500
Net loss                                                     -            -             -               (800)                 (800)
                                                  ------------  -----------   -----------       ------------          ------------  
BALANCES, December 31, 1993                          5,100,000        5,100         3,400               (800)                7,700
  Net loss                                                   -            -             -               (800)                 (800)
                                                  ------------  -----------   -----------       ------------          ------------  
BALANCES, December 31, 1994                          5,100,000        5,100         3,400             (1,600)                6,900
  Net loss                                                   -            -             -               (800)                 (800)
                                                  ------------  -----------   -----------       ------------          ------------  
BALANCES, December 31, 1995                          5,100,000        5,100         3,400             (2,400)                6,100
  Issuance of common stock at $0.50 per share to
    directors for services performed (March
    1996)                                              900,000          900       449,100                  -               450,000
  Acquisition of Jettson Realty Development, Inc.
    at $0.30 per share (June 1996)                     561,069          561       168,184                  -               168,745
  Sale of common stock, net of expenses at $0.16
    per share (July 1996)                            4,620,015        4,620       715,380                  -               720,000
  Issuance of common stock at $0.50 per share to
    employees for services performed (July 1996)       500,000          500       249,500                  -               250,000
  Issuance of common stock at $1.36 per share
    for consulting services performed (July 1996)      250,000          250       388,960                  -               389,210

                                           (Continued)

<PAGE>F-6

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

            CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
                                   (Continued)


                                                                                                   DEFICIT
                                                                                                 ACCUMULATED
                                                                               ADDITIONAL           DURING                TOTAL
                                                          COMMON STOCK          PAID-IN          DEVELOPMENT          STOCKHOLDERS'
                                                       SHARES      AMOUNT       CAPITAL             STAGE           EQUITY (DEFICIT)
                                                       ------      ------      ----------        -----------        ---------------
Sale of common stock at $5.00 per share, net
  of expenses (October 1996)                            280,000          280     1,399,720                -              1,400,000
Compensation recognized upon issuance of
  stock options                                               -            -     2,493,873                -              2,493,873
Contribution of Product License                               -            -     1,275,000                -              1,275,000
  Net loss                                                    -            -             -       (8,193,395)            (8,193,395)
                                                   ------------  -----------  ------------     ------------           ------------

BALANCES, December 31, 1996                          12,211,084       12,211     7,143,117       (8,195,795)            (1,040,467)
Issuance of common stock in exchange for
  technology at $5.00 per share (January 1997)
  (unaudited)                                           100,000          100       499,900                -                500,000
Sale of common stock, net of expenses at
  $2.90 per share (February 1997) (unaudited)           229,310          229       664,771                -                665,000
Acquisition of Sierra Vista at
  $.50 per share (May 1997) (unaudited)               8,514,500        8,515     4,248,735                -              4,257,250
Issuance of common stock at $2.43 per share
  for legal services rendered (June 1997)
  (unaudited)                                             7,003            7        16,976                -                 16,983
Allocation of proceeds from notes payable due
  to beneficial conversion features (unaudited)               -            -        541,349               -                541,349
Compensation recognized upon issuance of
  stock options (unaudited)                                   -            -      1,105,312               -              1,105,312
Net loss (unaudited)                                          -            -              -      (7,759,820)            (7,759,820)
                                                   ------------  -----------  -------------    -------------          ------------
BALANCES, September 30, 1997 (unaudited)             21,061,897  $    21,062  $  14,220,160    $ (15,955,615)         $ (1,714,393)
                                                   ============  ===========  =============    =============          ============

</TABLE>

See accompanying notes to these consolidated financial statements.

<PAGE>F-7



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

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                                     MARCH 3, 1993
                                                     FOR THE YEARS ENDED              FOR THE NINE MONTHS           (INCEPTION) TO
                                                         DECEMBER 31,                  ENDED SEPTEMBER 30,            SEPTEMBER 30,
                                                    1995            1996              1996             1997              1997
                                                 ---------      ------------     -------------    ------------      ------------- 
                                                                                  (unaudited)      (unaudited)        (unaudited)
<S>                                            <C>             <C>              <C>              <C>              <C>    
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                       $   (1,100)    $  (8,193,395)   $  (6,271,852)   $  (7,759,820)    $  (15,955,615)
                                                 ----------     -------------    -------------    -------------     -------------- 
  Adjustments to reconcile net loss to 
    net cash used in operating activities:
      Depreciation and amortization                       -            21,175            9,602          255,234            276,409
      Compensation costs recognized upon
        issuance of stock or stock options                -         3,648,083        3,502,763        1,122,294          4,770,377
      Interest related to beneficial
        conversion feature of notes payable               -                 -                -          541,349            541,349
      Contribution of product license                     -         1,275,000        1,275,000                -          1,275,000
      Write down of purchased incomplete
        research and development                          -                 -                -          500,000            500,000
      Write-off of related party receivable               -            94,062           45,290           24,711            118,773
  Changes in operating assets and liabilities:
      Cash - restricted                                   -            (9,507)               -            1,027             (8,480)
      Other receivables                                   -             5,300                -           (9,394)           (12,594)
      Prepaid Expenses                                    -                 -                -         (132,995)          (132,995)
      Deposits                                            -           (19,298)         (11,954)         (44,364)           (63,662)
      Accounts payable                                    -           394,286          256,787          198,913            593,199
      Accrued liabilities                             1,100           814,100          579,759          276,170          1,092,670
                                                 ----------     -------------    -------------    -------------     -------------- 
      Net adjustments                                 1,100         6,223,201        5,657,247        2,732,945          8,950,046
                                                 ----------     -------------    -------------    -------------     -------------- 

                                   (Continued)


<PAGE>F-8


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

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                  (Continued)
                                                                                                                     MARCH 3, 1993
                                                     FOR THE YEARS ENDED              FOR THE NINE MONTHS           (INCEPTION) TO
                                                         DECEMBER 31,                  ENDED SEPTEMBER 30,            SEPTEMBER 30,
                                                    1995            1996              1996             1997              1997
                                                 ---------      ------------     -------------    ------------      ------------- 
                                                                                  (unaudited)      (unaudited)        (unaudited)

    Net cash used in operating activities                 -        (1,970,194)        (614,605)      (5,026,875)        (7,005,569)

CASH FLOWS FROM INVESTING ACTIVITIES:
  Cash received in acquisition of Sierra 
    Vista Entertainment                                   -                 -                -        2,916,798          2,916,798
  Advance to related party                                -           (94,062)         (45,290)         (24,711)          (118,773)
  Purchases of property and equipment                     -          (205,166)         (82,812)        (569,854)          (775,020)
                                                 ----------     -------------    -------------    -------------     -------------- 
    Net cash used in investing activities                 -          (299,228)        (128,102)       2,322,233          2,023,005
                                                 ----------     -------------    -------------    -------------     -------------- 

CASH FLOWS FROM FINANCING ACTIVITIES:
  Bank overdraft                                          -            38,574                -          (38,574)                 -
  Proceeds from sale of common stock                      -         2,224,170          824,170          665,000          2,897,670
  Proceeds from notes payable                             -           106,478          106,478        2,166,298          2,272,776
  Principal payments on notes payable                     -           (99,800)         (44,920)               -            (99,800)
                                                 ----------     -------------    -------------    -------------     -------------- 

    Net cash provided by financing activities             -         2,269,422          885,728        2,792,724          5,070,646
                                                 ----------     -------------    -------------    -------------     -------------- 

NET INCREASE IN CASH AND CASH EQUIVALENTS                 -                 -          143,021           88,082             88,082

CASH AND CASH EQUIVALENTS, beginning of
  period                                                  -                 -                -                -                  -
                                                 ----------     -------------    -------------    -------------     -------------- 

CASH AND CASH EQUIVALENTS, end of period         $        -     $           -    $     143,021    $      88,082     $       88,082
                                                 ==========     =============    =============    =============     ============== 


                                   (Continued)


<PAGE>F-9


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

                      CONSOLIDATED STATEMENTS OF CASH FLOW
                                   (Continued)

                                                                                                                     MARCH 3, 1993
                                                     FOR THE YEARS ENDED              FOR THE NINE MONTHS           (INCEPTION) TO
                                                         DECEMBER 31,                  ENDED SEPTEMBER 30,            SEPTEMBER 30,
                                                    1995            1996              1996             1997              1997
                                                 ---------      ------------     -------------    ------------      ------------- 
                                                                                  (unaudited)      (unaudited)        (unaudited)

SUPPLEMENTAL CASH FLOW INFORMATION:
  Cash payments for:

    Interest                                     $        -     $       9,079    $       5,080    $       2,091     $       11,170
                                                 ----------     -------------    -------------    -------------     -------------- 
    Income taxes                                 $        -     $           -    $           -    $       4,800     $        4,800
                                                 ----------     -------------    -------------    -------------     -------------- 
  Non-cash investing and financing 
    transactions:
    Net assets acquired, net of cash,
      through acquisition of Sierra Vista
      Entertainment                              $        -     $           -    $           -    $   1,340,452     $    1,340,452
                                                 ----------     -------------    -------------    -------------     -------------- 
    Acquisition of technology for stock          $        -     $           -    $           -    $     500,000     $      500,000
                                                 ==========     =============    =============    =============     ============== 

</TABLE>

See accompanying notes to these consolidated financial statements.


<PAGE>F-10


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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Information subsequent to December 31, 1996 is unaudited)


1.   NATURE OF OPERATIONS:

InnovaCom, Inc. ("the Company") was formed to develop, manufacture and/or supply
Very Large Scale Integrated Circuits ("VLSI") and other related products for the
specific  application  of  broadcast  quality  encoded  video  using the  Second
Generation  Standard of the Moving Picture  Experts Group standard for video and
audio  compression  ("MPEG-2").  The  Company  employs  VLSI to create an MPEG-2
digital video encoding system on a chip.

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

On May 14, 1997, the Company acquired 100% of the issued and outstanding  shares
of Sierra  Vista  Entertainment,  Inc. a Nevada  Corporation  ("Sierra  Vista"),
solely in exchange for common stock of the Company.  Sierra Vista was originally
incorporated under the name of Simone Anderson Productions under the laws of the
state of Nevada on April 3, 1996. Simone Anderson  Productions  changed its name
to Sierra  Vista  Entertainment,  Inc. on February  21,  1997.  Sierra Vista was
formed to produce, acquire, and distribute low-budget feature films. The Company
agreed to acquire all of the issued and  outstanding  shares of common  stock of
Sierra Vista for 8,514,500 previously unissued common shares of the Company. The
agreement  between the Company and Sierra Vista obligates the Company to use its
best efforts to register the shares issued in the acquisition  with the SEC. The
agreement  calls for the Board of Directors to consist of six members;  three to
be nominated by the Company and three to be nominated by Sierra  Vista,  and the
nominations approved by all shareholders. The transaction was accounted for as a
purchase.  The fair  market  value per share of the common  stock  issued in the
transaction  was  $0.50.  The  resulting  purchase  price  was  $4,257,250  with
$1,090,452  being allocated to goodwill.  Sierra Vista had no material  activity
prior to the merger,  therefore,  the statements  presented for the period ended
September  30,  1997   resemble   those  that  would  be  shown  in  a  proforma
presentation.

2.   SIGNIFICANT ACCOUNTING POLICIES:

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

<PAGE>F-11

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Information subsequent to December 31, 1996 is unaudited)


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

Restricted  Cash - Restricted  cash consists of amounts in an escrow account for
equity  transactions.  The  Company's  attorney has control over the account and
disburses funds according to agreements entered into.

Property and Equipment - Property and equipment are stated at cost. Depreciation
is calculated using the straight-line  method over the estimated useful lives (3
years) of the respective  assets.  The cost of normal maintenance and repairs is
charged to operations as incurred. Material expenditures which increase the life
of an asset are capitalized and depreciated over the estimated  remaining useful
life of the asset. The cost of fixed assets sold, or otherwise  disposed of, and
the related  accumulated  depreciation  or  amortization  are  removed  from the
accounts, and any gains or losses are reflected in current operations.

Film  Rights - Film  rights  are  stated at the fair  market  value of the stock
issued  upon  contribution  to the  Company,  which has  become  the cost of the
assets, and consists of screen plays, foreign films, and other materials related
to the film  industry.  Such  amounts  will be  amortized  to expense over their
estimated useful lives.

Goodwill - Goodwill,  representing  the excess of the cost over the net tangible
and identifiable  intangible assets of the acquired business,  is stated at cost
and is amortized on a straight-line  basis,  over the future  recoverability  of
goodwill based  primarily upon an analysis of  undiscounted  cash flows from the
acquired  business.  Amortization  expense  was  $151,452  for the period  ended
September 30, 1997.

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

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

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

The  Company's  financial  statements  are based  upon a number  of  significant
estimates,  including  the  estimated  useful  lives  selected  for property and
equipment,  amortization  of  goodwill  and  film  rights  and the  adequacy  of
valuation  allowances.  Due  to the  uncertainties  inherent  in the  estimation

<PAGE>F-12


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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Information subsequent to December 31, 1996 is unaudited)


process, it is at least reasonably possible that these estimates will be further
revised in the near term and such revisions could be material.

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

Stock-Based  Compensation - In October, 1995, the Financial Accounting Standards
Board  (FASB)  issued  a  new  statement  titled   "Accounting  for  Stock-Based
Compensation"  (FAS 123) which the  Company  adopted  January  1, 1996.  FAS 123
encourages,  but does not require,  companies to recognize  compensation expense
for grants of stock,  stock  options and other equity  instruments  to employees
based on fair value. Companies that do not adopt the fair value accounting rules
must  disclose  the  impact  of  adopting  the new  method  in the  notes to the
financial statements.  Transactions in equity instruments with non-employees for
goods or services must be accounted  for on the fair value  method.  The Company
has elected  not to adopt the fair value  accounting  prescribed  by FAS 123 for
employees, but is subject to the disclosure requirements prescribed by FAS 123.

Concentrations  of Credit Risk - Credit Risk represents the accounting loss that
would be recognized at the reporting date if counterparties failed completely to
perform as contracted.  Concentrations of credit risk (whether on or off balance
sheet) that arise from  financial  instruments  exist for groups of customers or
groups of counterparties  when they have similar economic  characteristics  that
would  cause  their  ability to meet  contractual  obligations  to be  similarly
effected  by changes in  economic  or other  conditions.  The  Company  does not
believe it has any significant concentrations.

Fair Value of Financial  Instruments - The  estimated  fair values for financial
instruments  under FAS  Statement  No.  107,  Disclosures  about  Fair  Value of
Financial  Instruments,  are  determined  at  discrete  points in time  based on
relevant market information. These estimates involve uncertainties and cannot be
determined with precision.  The estimated fair values of the Company's financial
instruments,  which includes all cash,  accounts  payable,  long-term  debt, and
other  debt,  approximates  the  carrying  value in the  consolidated  financial
statements at December 31, 1996.

Earnings Per Share - In February  1997,  the FASB issued  Statement of Financial
Accounting  Standards No. 128, "Earnings per Share" (FASB128).  FASB128 provides
for the  calculation of "basic" and "diluted"  earnings per share versus primary
and fully diluted earnings per share. Basic earnings per share excludes dilution
and is computed by  dividing  income  available  to common  stockholders  by the
weighted  average number of shares of common stock  outstanding  for the period.
Diluted  earnings per share reflects the potential  dilution that could occur if
securities or other  contracts to issue common stock were exercised or converted
into common  stock or resulted in the  issuance of common stock that then shared
in the earnings of the entity.  The Company has  implemented  this statement for

<PAGE>F-13


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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Information subsequent to December 31, 1996 is unaudited)


the current year and has  appropriately  reflected the adoption in the statement
of operations.  The results of operations and financial position were unaffected
by this implementation.

Impact  of  Recently  Issued  Accounting  Standards  -The FASB  recently  issued
Statement of Financial Accounting Standards 130 "Reporting Comprehensive Income"
and Statement of Financial  Accounting Standards 131 "Disclosures About Segments
of an Enterprise and Related  Information."  Statement 130 establishes standards
for  reporting  and  display  of  comprehensive   income,   its  components  and
accumulated balances.  Comprehensive income is defined to include all changes in
equity except those resulting from  investments by owners and  distributions  to
owners. Among other disclosures,  Statement 130 requires that all items that are
required to be recognized  under current  accounting  standards as components of
comprehensive income be reported in a financial statement that displays with the
same  prominence  as  other  financial  statements.   Statement  131  supersedes
Statement of Financial Accounting Standards 14 "Financial Reporting for Segments
of a Business  Enterprise."  Statement 131 establishes standards on the way that
public companies report financial information about operating segments in annual
financial  statements  and  requires  reporting  of selected  information  about
operating segments in interim financial statements issued to the public. It also
establishes   standards  for  disclosures   regarding   products  and  services,
geographic areas and major customers.  Statement 131 defines operating  segments
as  components  of a company  about  which  separate  financial  information  is
available that is evaluated  regularly by the chief operating  decision maker in
deciding how to allocate resources and in assessing performance.

Statements  130  and  131 are  effective  for  financial  statement  for  period
beginning  after  December  15, 1997 and  require  comparative  information  for
earlier years to be restated. Because of the recent issuance of these standards,
management has been unable to fully  evaluate the impact,  if any, the standards
may have on the future financial  statement  disclosures.  Results of operations
and financial position,  however,  will be unaffected by implementation of these
standards.

Unaudited  Information  - The  balance  sheet as of  September  30, 1997 and the
statements of operations for the nine month periods ended September 30, 1996 and
1997 were taken from the Company's books and records without audit.  However, in
the opinion of management, such information includes all adjustments (consisting
only of normal accruals),  which are necessary to properly reflect the financial
position of the Company as of September  30, 1997 and the results of  operations
for the nine months ended September 30, 1996 and 1997. The results of operations
for the  interim  periods  presented  are not  necessarily  indicative  of those
expected for the year.


3.   BASIS OF PRESENTATION:

The financial  statements  have been prepared on a going  concern  basis,  which
contemplates, among other things, the realization of assets and the satisfaction
of liabilities in the normal course of business.  However,  there is substantial
doubt about the Company's  ability to continue as a going concern because of the
magnitude of its loss of $8,193,395  for the year ended  December 31, 1996,  its


<PAGE>F-14


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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Information subsequent to December 31, 1996 is unaudited)


negative  working  capital  of  $1,243,756  and  its  stockholders'  deficit  of
$1,040,467  as of December  31,  1996.  The  Company's  continued  existence  is
dependent upon its ability to raise  substantial  capital,  to generate revenues
and to significantly improve operations.

Management  has taken several  actions in response to these  conditions.  In May
1997,  the Company  acquired  Sierra  Vista in exchange for shares of its common
stock (See Note 1). As a condition of completing the  transaction,  Sierra Vista
raised  approximately  $3,000,000 in a private placement of its common stock, of
which in excess of $2,000,000  was allocated  for the Company's  operations.  In
June 1997, the Company  obtained a $5,000,000  convertible  debt facility from a
shareholder (See Note 6). The Company has also retained an investment advisor to
assist in raising capital through a private  placement (See Note 7).  Management
believes  that these  actions  will allow the  Company  to  continue  as a going
concern.

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


4.   PROPERTY AND EQUIPMENT:

Property and equipment consists of the following:

                                         DECEMBER 31,           SEPTEMBER 30,
                                             1996                   1997
                                         ------------           -------------
                                                                 (Unaudited)

Computer and equipment                   $    176,537           $     715,126

Office equipment and furniture                 28,629                  59,894
                                         ------------           -------------
                                              205,166                 775,020
     Accumulated depreciation                  21,175                 124,957
                                         ------------           -------------
                                         $    183,991           $     650,063
                                         ============           =============

<PAGE>F-15


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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Information subsequent to December 31, 1996 is unaudited)


5.   ACCRUED LIABILITIES:

            Accrued liabilities consists of the following:

                                         DECEMBER 31,           SEPTEMBER 30,
                                             1996                   1997
                                         ------------           -------------
                                                                 (Unaudited)

Accrued payroll and benefits             $    421,367           $     340,955

Accrued consulting                            164,094                 216,402

Payable for agreement termination                   -                 122,000

Other                                         231,464                 413,737
                                         ------------           -------------
                                         $    816,925           $   1,093,094
                                         ============           =============


6.          NOTES PAYABLE:

                                                   DECEMBER 31,
                                                      1996
                                                  -------------
Note payable-related party in the original 
amount of $50,000 bearing interest at
18%, collateralized by certain stock of the
Company, due on demand (See Note 8)               $      6,678
                                                  ============



In June 1997, the Company obtained a $5,000,000 convertible debt facility from a
shareholder with interest at 10%, secured by all assets of the Company. The debt
is convertible into common stock at 80% of the market price for shares of common
stock at the time a draw is funded.  At  September  30,  1997 the  balance  due,
including accrued interest totaled $2,165,398 and is shown in notes payable. The
Company has recorded  interest  expense and additional paid in capital  totaling
$541,349 equal to the intrinsic  value of the beneficial  conversion  feature of
the debt. The principal and interest are due June 1998.


7. STOCKHOLDERS' EQUITY:

In March  1996,  the  Company  granted  900,000  shares of  common  stock to two
directors for services performed in 1996. The Company has recognized $450,000 in
compensation  expense  related to their services for the year ended December 31,
1996.  The shares were valued by the Board of Directors,  and the 900,000 shares
of common stock are the subject of current litigation. (See Note 8)

<PAGE>F-16


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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Information subsequent to December 31, 1996 is unaudited)


In March 1996, a company  controlled  by the Company's  president  contributed a
license to the Company. The Company recorded the license at the cost recorded by
the   contributing   company  of  $1,275,000.   (See  Note  8,  Commitments  and
Contingencies, Product License.)

In July 1996,  the  Company  issued  500,000  shares of common  stock to certain
officers and directors of JRD for services rendered.  The Company has recognized
$250,000 in  compensation  expense  related to these services for the year ended
December 31,  1996.  The shares were valued by the Board of  Directors,  and the
500,000 shares of common stock are the subject of current  litigation  (See Note
8).

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

During 1996,  the Company  issued  250,000 shares of common stock and options to
purchase  1,099,500 shares of common stock to consultants for services rendered.
The 250,000  shares of common stock were valued at $389,210  which was the value
of the services provided.  The options were granted with exercise prices ranging
from $0.001 to $3.00 per share,  vesting  throughout 1999 and expire from one to
five years after the date of grant.  The majority of these  options were granted
as a form of  compensation  to the  consultants,  and  the  exercise  price  was
determined by the then Board of Directors. Of the options granted,  369,500 were
granted  under the 1996 Plan and 700,000 were  granted for services  rendered in
connection with a private  placement of the Company's  common stock.  Certain of
these  options  are the  subject of  litigation  (See Note 8). The  Company  has
recognized  $2,292,406 in compensation expense related to these services for the
options for the year ended December 31, 1996. The 369,500  options  granted were
foreited during 1997.

In October 1996,  the Company  granted  non-plan  options to purchase  3,500,000
shares of common stock to three  individuals  who are  officers,  directors  and
shareholders of the Company.  The options were granted with an exercise price of
$3.00  per share and  expire in  October  2001.  The  options  vest as  follows:
1,166,666  vest if fiscal 1997 revenue  exceeds  $5,000,000,  1,166,667  vest if
fiscal  1998  revenue  exceeds  $25,000,000  and  1,166,667  vest if fiscal 1999
revenue exceeds $50,000,000.  These options are the subject of litigation.  (See
Note 8)

In January  1997,  the  Company  purchased  the  rights to  certain  proprietary
technology  from a third party in exchange for 100,000  shares of the  Company's
common stock.  This  technology  was valued at $500,000 or $5.00 per share which
was the current  market value of the Company's  common  stock.  At September 30,
1997,  the  $500,000  of  the  technology  cost  is  included  in  research  and
development costs.

<PAGE>F-17


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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Information subsequent to December 31, 1996 is unaudited)


During  1997 and  1996,  the  Company  granted  options  under  the 1996 Plan to
purchase  1,278,640  shares of common stock to employees  who were hired in 1997
and 1996.  The options were granted with exercise  prices  ranging from $0.50 to
$3.75 per share, expire in 2002 and vest over three years from the date of hire.
The Company has recognized $458,536 and $201,467 in compensation expense related
to the services  provided for the nine months ended  September  30, 1997 and the
year  ended  December  31,  1996,  respectively.  During the nine  months  ended
September 30, 1997, 142,750 options were forfeited.

In April 1997, the Company granted options to purchase  100,000 shares of common
stock for $3.375 per share for a term of three years in exchange for  consulting
services.  Compensation  expense in the amount of $272,480 was recognized during
the nine months ended September 30, 1997 for the services provided.

In May 1997, the Company granted options to purchase  1,000,000 shares of common
stock under the 1996 Plan to an officer.  The options were granted with exercise
prices ranging from $2.75 to $4.75 per share. 200,000 options vested upon grant,
the remainder vest upon attainment of certain performance criteria.

In July 1997, the Company  granted  122,160 options to purchase common stock for
prices ranging from $0.50 to $3.00 per share for consulting  services  rendered.
Consulting  expense in the amount of $374,295  was  recorded for the nine months
ending September 30, 1997.

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

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

                                                            AVERAGE
                                                        EXERCISE PRICE
                                         NUMBER            PER SHARE
                                        --------        --------------
Outstanding, from inception
  through December 31,1995                     -        $          -
Granted                                  369,500                1.62
Forfeited                                      -                   -
Exercised                                      -                   -
                                       ---------        ------------
Balance, December 31, 1996               369,500                1.62
Granted                                2,678,640                2.55
Forfeited                               (512,250)               1.62

<PAGE>F-18


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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Information subsequent to December 31, 1996 is unaudited)

                                                            AVERAGE
                                                         EXERCISE PRICE
                                         NUMBER            PER SHARE
                                        --------        --------------



Exercised                                      -                   -
                                       ---------        ------------
Balance, September 30, 1997            2,535,890        $       2.60
                                       =========        ============

Presented  below is a comparison  of the  weighted  average  exercise  price and
market  price of the  Company's  common  stock on the  measurement  date for all
options granted under the Plan during 1996 and through September 30, 1997.

                                                         1996
                                        NUMBER          
                                          OF             EXERCISE        MARKET
                                        SHARES            PRICE          PRICE  
                                        ------           --------        ------
Market price equal to exercise
  price                                       -         $        -      $     -
Market price greater than
  exercise price                        369,500               1.62      $  6.39
Exercise price greater than
  market price                                -         $        -      $     -


                                                         1997

                                        NUMBER          
                                          OF             EXERCISE        MARKET
                                        SHARES            PRICE          PRICE  
                                        ------           --------        ------
Market price equal to exercise
  price                                 738,300         $     3.04      $  3.04
Market price greater than
  exercise price                      1,201,390         $     2.00      $  3.29
Exercise price greater than
  market price                          600,000         $     3.67      $  2.85

At December 31, 1996 and  September  30, 1997,  options to purchase  169,500 and
500,857 shares, respectively,  were exercisable at prices ranging from $.001 per
share to $2.75.  The remaining  2,035,033  options  outstanding at September 30,
1997 become exercisable as follows:

<PAGE>F-19


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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Information subsequent to December 31, 1996 is unaudited)


                                                                   WEIGHTED
                                              NUMBER OF             AVERAGE
      YEAR ENDING DECEMBER 31,                 SHARES           EXERCISE PRICE
      ------------------------                ---------         --------------
              1997                              318,200           $     2.39
              1998                            1,122,767                 3.03
              1999                              375,786                 1.69
              2000                              218,280                 3.22
                                             ----------           ----------
                                              2,035,033           $     2.70
                                             ==========           ==========

If not previously exercised,  all options outstanding at September 30, 1997 will
expire during the year ended December 31, 2002.

The following is a summary of activity  during the year ended  December 31, 1996
and the period ended September 30, 1997 for all non-plan options:

                                                                   WEIGHTED
                                              NUMBER OF             AVERAGE
                                               SHARES           EXERCISE PRICE
                                              ---------         --------------
Outstanding from inception through
  December 31, 1995                                   -           $        -
    Vested options granted to 
      consultants                               730,000                 2.90
    Performance options granted to 
      officers                                3,500,000                 3.00
    Vested options exercised by
      consultants                               (30,000)                 .50
                                             ----------           ----------
Outstanding, December 31, 1996                4,200,000                 3.00
    Vested options granted to
      consultants                               222,160                 2.84
    Options granted to directors                 60,000                 3.00
                                             ----------           ----------
Outstanding, September 30, 1997               4,482,160           $     2.99
                                             ==========           ==========
 
Presented  below is a comparison  of the  weighted  average  exercise  price and
market  price of the  Company's  common  stock on the  measurement  date for all
non-plan options granted during 1996 and the period ended September 30, 1997:

<PAGE>


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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Information subsequent to December 31, 1996 is unaudited)


                                                        1996

                                       NUMBER                 
                                         OF             EXERCISE        MARKET
                                       SHARES            PRICE          PRICE
                                       ------           --------        ------

Market price equal to
  exercise price                        30,000          $   .50        $  .50
Market price greater than
  exercise price                       700,000          $  3.00        $ 6.25
Exercise price greater than
  market price                       3,500,000          $  3.00        $  .50


                                                        1997

                                       NUMBER                 
                                         OF             EXERCISE        MARKET
                                       SHARES            PRICE          PRICE
                                       ------           --------        ------


Market price equal to
  exercise price                       102,500           $ 3.30        $ 3.30
Market price greater than
  exercise price                       179,660           $ 2.62        $ 5.09
Exercise price greater than
  market price                               -           $    -        $    -



As stated in Note 2, the  Company  has not  adopted  the fair  value  accounting
prescribed by FAS 123 for  employees.  Had  compensation  cost for stock options
issued to employees  been  determined  based on the fair value at grant date for
awards in 1996 and for the period ended  September 30, 1997  consistent with the
provisions  of FAS 123, the Company's net loss and net loss per share would have
been adjusted to the proforma amounts indicated below:

                                            DECEMBER 31,       SEPTEMBER 30,
                                                1996               1997
                                            -----------        -------------

Net loss                                  $  (8,229,908)      $  (9,397,221)
                                          =============       =============
Net loss per common share                 $        (.98)      $        (.57)
                                          =============       =============

The fair  value of each  option  is  estimated  on the date of grant  using  the
present  value of the exercise  price and is  pro-rated  based on the percent of
time from the grant date to the end of the vesting period. The  weighted-average
fair value of the options on the grant date was $3.22 per share.  The  following
assumptions  were used for  grants in 1996:  risk-free  interest  rate of 6.17%;
expected lives of three years;  dividend yield of 0%; and expected volatility of
0%.

<PAGE>F-21


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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Information subsequent to December 31, 1996 is unaudited)



8.   COMMITMENTS AND CONTINGENCIES:

In June 1997, the Company  entered into an agreement  with a foundry  company in
anticipation of  manufacturing  the Company's  single chip MPEG-2  encoder.  The
agreement  calls for payment of $225,000 for design and manufacture of the chip.
As of September 30, 1997, the Company made a $90,000  non-refundable  deposit to
this entity for the start of design  work.  The  remaining  amounts are due upon
shipment of the prototypes.

In July 1997,  the board of  directors  approved  the Company  entering  into an
agreement to obtain a 66% interest in a joint  venture with China  International
Radio Development.  As part of this agreement,  the Company will have to fund up
to  $200,000  of  expenses.  The  purpose of the joint  venture is to develop an
exhibition center in China to display new high-tech products. In connection with
obtaining the joint venture interest, the Company will be issuing 100,000 shares
of common stock to a third party as a finder's fee upon close of the  agreement.
As of September 30, 1997, the Company had not made this investment.


                                     LEASES

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

            YEARS ENDING DECEMBER 31,                    AMOUNT
            -------------------------                    ------

                  1997                              $     150,402
                  1998                                     41,052
                                                    -------------
                                                    $     191,454
                                                    =============

Rent expense was $55,728 and $0 for 1996 and 1995, respectively.


                              EMPLOYMENT AGREEMENT

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


<PAGE>F-22


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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Information subsequent to December 31, 1996 is unaudited)


                              CONSULTING AGREEMENTS

The  Company has  entered  into  non-cancelable  consulting  agreements.  Future
minimum payments under these agreements are as follows:

          YEARS ENDING DECEMBER 31,
          -------------------------
                    1997                         $     167,000
                    1998                                60,000
                    1999                                25,000
                                                 -------------
                                                 $     252,000
                                                 =============

The Company recorded $141,000 in expense related to these contracts for 1996.

                                   LITIGATION

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

On June 18, 1997,  the Decorah  Company and Edwin  Reedholm,  a shareholder  and
former director and officer, commenced a lawsuit seeking to recover in excess of
$900,000 on a  promissory  note given to the  plaintiffs  by Digital  Hollywood,
Inc., a company controlled by the Company's  president.  The Company's president
allegedly  guaranteed the note through the pledging of approximately six million
shares of the  Company's  stock.  In addition to the original  note amount,  the
Decorah Company and Edwin Reedholm seek to recover the pledged shares as well as
a $7,225 balance on a promissory note,  including accrued interest,  and $69,746
in accrued  wages and other  expenses  both of which are accrued as of September
30, 1997. Management believes,  based on current information,  that this lawsuit
will have no additional material adverse impact on the Company.

October 7, 1996, the Company filed a complaint for declaratory  relief against a
former  employee.  The  lawsuit  states  that  the  person  breached  a  written
employment  agreement  between the two parties.  In response to the action,  the
employee filed a similar  cross-complaint,  which was subsequently amended after
an unsuccessful  mediation process. The amended cross complaint seeks damages in
excess of $5,000,000 and 2% of the company's stock outstanding as of April 1996.
Management  intends to pursue and defend this lawsuit  vigorously  and believes,
based on current  information,  that no material  adverse impact will arise as a
result of the litigation.

Future Tel,  Inc.,  filed claims  amounting to $123,000  against the Company for
recovery  of unpaid  lease  payments  and wages  under an alleged  reimbursement


 
<PAGE>F-23


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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Information subsequent to December 31, 1996 is unaudited)


agreement.  The parties have  participated in a voluntary  mediation,  which has
resulted in a tentative  agreement  of  $100,000.  The Company has accrued  this
amount as of December 31, 1996.

On November  10, 1997 the  Company  filed a suit  against  former  officers  and
directors of the Company for breach of fiduciary duty and third parties who were
involved  in  the  initial   merger  between  the  Company  and  Jettson  Realty
Development  as well as private  placements  of the Jettson  Realty  Development
stock.  The  suit  claims  fraud,   breach  of  fiduciary  duty  and  negligence
surrounding the acquisition.  As part of this lawsuit, a director of the Company
has  filed  a  counterclaim  asserting  approximately  $11,000,000  damages.  In
addition,  the suit  also  seeks to  remove  restrictive  legends  on the  stock
currently  owned.  The  Company  has  accrued  $75,000  for  unpaid  wages as of
September 30, 1997. Management believes, based on current information, that this
lawsuit will not have any material adverse impact on the Company. The litigation
is in its initial stages and no discovery has commenced.  Management  intends to
pursue this lawsuit vigorously and believes that no material adverse impact will
arise as a result of the litigation.

                                 PRODUCT LICENSE

In March 1996, a company  controlled  by the Company's  president  contributed a
license  to the  Company.  The  Company  has  recorded  the  license at the cost
recorded by the  contributing  company of  $1,275,000.  The  license  grants the
Company  rights to use and grant  sublicenses to use  proprietary  technology to
develop  the  MPEG-2  video  encoding  systems  on a chip.  In  accordance  with
Statement of Financial  Accounting Standards 2, the cost of intangibles that are
acquired from others for a particular  research and development project and that
have no alternative  future use are research and  development  costs at the time
the costs are incurred.  As stated in Note 2, research and development costs are
charged  to  operations  in the  period  incurred.  Consequently,  the  cost  of
acquiring  the license was charged to research and  development  expense  during
1996.

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

YEAR 1    YEAR 2    YEAR 3    YEAR 4    YEAR 5    YEAR 6    YEAR 7
- ------    ------    ------    ------    ------    ------    ------
  20%      15%        8%        5%        3%        1%        1%

The maximum  amount of royalties  to be paid under the license  shall not exceed
$3,000,000. No royalties have been earned or paid through September 30, 1997.


<PAGE>F-24


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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Information subsequent to December 31, 1996 is unaudited)


9.   RELATED PARTY TRANSACTION:

During 1996, the Company made advances to a company  controlled by the Company's
president  totaling $94,062.  Management does not believe that the advances made
are realizable  and, as a result,  has written off the receivable as of December
31, 1996.

10.  INCOME TAXES:

Income tax expense is comprised of the following:

                               FOR YEAR           MARCH 3,1993
                                 ENDED           (INCEPTION) TO
                              DECEMBER 31,        DECEMBER 31,
                                 1996                1996
                              -----------        ------------
Current
  Federal                    $         -         $        -
  State                              800               3,200
                             -----------         -----------
                                     800               3,200
                             -----------         -----------
Deferred
  Federal                              -                   -
  State                                -                   -
                             -----------         -----------
                                       -                   -
                             -----------         -----------
Income tax expense           $       800         $     3,200
                             ===========         ===========


<PAGE>F-25

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Information subsequent to December 31, 1996 is unaudited)


Deferred  income tax assets  (liabilities)  are  comprised  of the  following at
December 31, 1996:

Deferred income tax assets:
  Net operating loss carryforward       $  1,588,893
  Accrued vacation                            11,183
  Accrued wages                              106,827
  Notes receivable, allowance                 37,755
  Accrued settlement                          20,069
  Accrued expenses                            54,186
  Stock based compensation                 1,021,060
  Research and development credit            137,805
  Other                                        3,877
                                        ------------
                                           2,981,655
Valuation allowance                        2,981,655
                                        ------------
  Net deferred income tax asset
    (liability)                         $          -
                                        ============

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

                                                FOR YEAR
                                                  ENDED
                                               DECEMBER 31,
                                                  1996
                                               -----------

Total benefit computed by applying
the U.S. statutory rate                          (34.0%)
Non-deductible license cost                        5.3
Effect of valuation allowance                     28.7
                                                 ------
                                                     - %
                                                 ======

At December  31,  1996,  the Company had net  operating  loss  carryforwards  of
approximately  $3,656,985 available to offset future federal taxable income. The
carryforward   expires  in  2011.  The  Company  also  had  net  operating  loss
carryforwards of approximately  $3,715,244 to offset future  California  taxable
income. The carryforward expires in 2001.

<PAGE>F-26


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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Information subsequent to December 31, 1996 is unaudited)


11.  SUBSEQUENT EVENTS:

In July 1997,  the Company  entered into an interim  agreement to acquire all of
the issued and  outstanding  shares of Technical  Systems  Associates  ("TA") in
exchange  for  100,000  shares of common  stock.  In October  1997,  the Company
rescinded  the  interim  agreement  and entered  into an Option to Purchase  and
Mutual Release Agreement. Under the new agreement, the Company had the option to
purchase TA under the terms of the interim  agreement  through November 30, 1997
in exchange  for  $300,000.  In  addition,  the Company  agreed to provide up to
$150,000 in debt  financing if TA obtained a certain  purchase  order.  The debt
financing  was never  provided.  In January  1998,  the Company  entered into an
Accord and  Satisfaction  and Release  Agreement  which  stated that the Company
would make a final  payment in the amount of $58,000 to TA for full release from
any prior agreements entered into.

In October 1997,  the Company agreed to acquire  certain  patents from a company
controlled by the Company's president in exchange for 2,000,000 shares of common
stock. As of March 10, 1999 the exchange had not taken place.

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

In November  1997,  the Company  granted  options to purchase  105,000 shares of
common stock to employees  under the 1996 Plan. The options were granted with an
exercise  price equal to market,  $2.5938 per share.  The options expire in 2002
and vest over three years or upon a specific date.

In November 1997, the Company  granted  non-plan  options to purchase  1,500,000
shares of common stock to  directors  of the  Company.  The options were granted
with an exercise price equal to market,  $2.5938 per share,  and expire in 2002.
The options vest evenly over three years.

In December 1997, the president of the Company returned 500,000 shares of common
stock  originally  issued at par  value.  The stock was  returned  to settle any
potential  claims the Company may hold  against him relating to the November 10,
1997  legal  action  described  in Note 8. The  return of these  shares  will be
recorded based on their original issue cost.

On December  10,  1997,  certain  employees  filed suit  against the Company for
compensation  and waiting time penalties.  The parties have reached an agreement
whereby the Company will pay $34,370.

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

<PAGE>F-27


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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Information subsequent to December 31, 1996 is unaudited)


In January 1998,  the Company  established  the  InnovaCom,  Inc.  401(K) Profit
Sharing Plan (the Plan)  covering  substantially  all of its  employees  and the
employees of its subsidiaries.  Management  determines,  at its discretion,  the
amount of any matching or other contributions to the Plan.

In February 1998, the Company  granted  142,500  options to employees  under the
1996 Plan. The options were granted at market of $2.50 per share,  and vest over
3 years at 30% for the first year, 30% for the second year, and 40% in the third
year.

In February 1998, the Company  established a Gecko Chip Release Bonus whereby if
a porototype of the Gecko chip is functioning by April 30, 1998, the design team
will be eligible for a cash payment of $60,000  plus 100,000  options,  with the
distribution to be determined by the design team manager.

In  February  1998,  the  Company  established  a bonus pool for the design team
working on the Gecko chip. The team members employed on January 1, 1998 would be
eligible  for 2% of the 1998  revenue  generated by the Gecko chip and 1% of the
1999  revenue  generated  by the Gecko  chip.  The 1999  bonus  shall not exceed
$600,000. Eligibility will be determined based on employment status.

On March 23, 1998, the Company hired a new individual to become President, Chief
Executive  Officer  and a  member  of the  Board  of  Directors  of the  Company
effective May 1, 1998. The Company has entered into an employment agreement with
this  individual  which  provides for a signing  bonus of $200,000 and an annual
salary of  $250,000  and other  incentives  including  options to purchase up to
1,000,000 shares of the Company's common stock for $1.75 per share and severance
payments up to $1,000,000 for termination  without cause.  The options expire in
ten years. One third of the options vest immediately, one third vest in one year
and the  remainder  vest  in two  years.  The  initial  term  of the  employment
agreement  is five years.  The  employment  agreements  is  contingent  upon the
Company's  obtaining  $5,000,000  in  financing  on or before April 15, 1998 and
securing  its  performance  under the  agreement by the issuance of a $1,000,000
letter of credit.

On June 5, 1998, the new president  resigned and filed a claim with the American
Arbitration  Association  and  subsequently  with  the  California  State  Labor
Commissioner.  In December 1998, the Company and this  individual  settled their
respective  claims  against each other  including a payment by each party to the
other. The amount of these payments was not material to the Company.

In June 1998,  the Company  reevaluated  its  business  and decided to focus the
Company  on the  development  of video  compression  technology  in the areas of
digital  television,  communications  and digital video disks. As a result,  the
Company terminated its single chip encoder design project,  canceled a number of
other projects, and reduced personnel and other expenses.

On June 15, 1998, the Company  decided to  discontinue  the operations of Sierra
Vista.

In June 1998,  all debt  under the  Company's  $5,000,000  credit  facility  was
converted  into  2,962,970  shares of the Company's  common stock and the credit
facility was cancelled.

<PAGE>F-28

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (Information subsequent to December 31, 1996 is unaudited)



From  December  1997  through  January  1999,  the  Company  issued  a total  of
$9,750,000 in 7% convertible debentures with detachable warrants. The Company is
out of compliance  with certain  covenants  under the terms of these  debentures
making them callable.

In March 1999, the Company borrowed $600,000 under a 13% note due on demand.

InnovaCom,  Inc.  filed a  Registration  Statement on Form 10-SB with the United
States Securities and Exchange Commision on December 12, 1997.  Included in that
registration statement were the Company's September 30, 1997 unaudited financial
statements.  Subsequent  to the  issuance  of those  financial  statements,  the
Company  re-evaluated  the accounting for the  acquisition of Sierra Vista which
occured in May 1997. As a result,  the Company has increased the total  purchase
price relative to the acquisition of Sierra Vista by $1,090,452 which amount was
allocated  to  goodwill.  The  goodwill is being  amortized  over the three year
period subsequent to the acqusition on a straight line basis.  Accordingly these
financial  statements  have been  restated to reflect the  addition to the above
mentioned goodwill with a corresponding decrease in stockholders'  (deficit), as
well as recognizing  $151,452 of amortization  expense for the nine month period
ended September 30, 1997. The additional amortization expense increased net loss
per share by $0.01.


<TABLE> <S> <C>


<ARTICLE>                     5
<LEGEND>
     THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FORM 10-SB FOR THE PERIOD ENDED DECEMBER 31, 1996, FOR INNOVACOM, INC. AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
       
<S>                             <C>
<PERIOD-TYPE>                   12-MOS
<FISCAL-YEAR-END>                              DEC-31-1996
<PERIOD-START>                                 DEC-31-1996
<PERIOD-END>                                   DEC-31-1996
<CASH>                                         0
<SECURITIES>                                   0
<RECEIVABLES>                                  0
<ALLOWANCES>                                   0
<INVENTORY>                                    0
<CURRENT-ASSETS>                               12,707
<PP&E>                                         205,166
<DEPRECIATION>                                 (21,175)
<TOTAL-ASSETS>                                 215,996
<CURRENT-LIABILITIES>                          1,256,463
<BONDS>                                        0
                          0
                                    0
<COMMON>                                       12,211
<OTHER-SE>                                     (1,052,678)
<TOTAL-LIABILITY-AND-EQUITY>                   215,996
<SALES>                                        0
<TOTAL-REVENUES>                               0
<CGS>                                          0
<TOTAL-COSTS>                                  8,183,606
<OTHER-EXPENSES>                               0
<LOSS-PROVISION>                               0
<INTEREST-EXPENSE>                             8,989
<INCOME-PRETAX>                                (8,192,595)
<INCOME-TAX>                                   800
<INCOME-CONTINUING>                            (8,193,395)
<DISCONTINUED>                                 0
<EXTRAORDINARY>                                0
<CHANGES>                                      0
<NET-INCOME>                                   (8,193,395)
<EPS-PRIMARY>                                  (.98)
<EPS-DILUTED>                                  (.98)
        

</TABLE>


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