DYCAM INC, 10KSB40, 1998-04-15

DYCAM INC
10KSB40, 1998-04-15
PHOTOGRAPHIC EQUIPMENT & SUPPLIES

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-KSB

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO ______________

COMMISSION FILE NUMBER 1-13160

DYCAM INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 95-4202424
(STATE OR OTHER JURISDICTION OF (I.R.S. IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)

9414 ETON AVENUE, CHATSWORTH, CALIFORNIA 91311
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER,
INCLUDING AREA CODE (818) 998-8008

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

COMMON STOCK

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO .
--- ---

INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-KSB OR ANY
AMENDMENT TO THIS FORM 10-KSB [X]

AT MARCH 31, 1998, THERE WERE OUTSTANDING 3,120,836 SHARES OF THE COMMON
STOCK OF REGISTRANT, AND THE AGGREGATE MARKET VALUE OF THE SHARES HELD ON THAT
DATE BY NON-AFFILIATES OF THE REGISTRANT, BASED ON THE CLOSING PRICE ($0.19 PER
SHARE) OF THE REGISTRANT'S COMMON STOCK ON THE AMERICAN STOCK EXCHANGE, INC. ON
MARCH 31, 1998, WAS $192,415. FOR PURPOSES OF THIS COMPUTATION, IT HAS BEEN
ASSUMED THAT THE SHARES BENEFICIALLY HELD BY DIRECTORS AND OFFICERS OF
REGISTRANT WERE "HELD BY AFFILIATES"; THIS ASSUMPTION IS NOT TO BE DEEMED TO BE
AN ADMISSION BY SUCH PERSONS THAT THEY ARE AFFILIATES OF REGISTRANT.

DOCUMENTS INCORPORATED BY REFERENCE

PORTIONS OF REGISTRANT'S PROXY STATEMENT RELATING TO ITS 1998 ANNUAL
MEETING OF STOCKHOLDERS ARE INCORPORATED BY REFERENCE IN PART III AND THIS
ANNUAL REPORT.
================================================================================
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PART I

Certain statements made in this Form 10-KSB which are not historic facts
constitute forward looking statements within the meaning of the Securities
Reform Act of 1995. Such forward looking statements involve risks and
uncertainties and, in some cases, are based upon various factors beyond Dycam's
control. These risks and uncertainties include, among other things, the outcome
of Styles on Video's bankruptcy proceedings and its related ability to satisfy
its outstanding indebtedness owed to Dycam, the market reception for digital
cameras in general and Dycam's products specifically, the impact of competition
from other companies in the digital camera industry, developments which may
render Dycam's products and services obsolete or less attractive, Dycam's
ability to finance growth from its working capital, and its ability to obtain
third party financing if its working capital is not sufficient to meet its
needs.

The Company has suffered substantial recurring losses from operations and
has an accumulated deficit as of December 31, 1997. These matters, among
others, raise substantial doubt about the Company's ability to continue as a
going concern. The Company's continuation as a going concern is dependent on
its ability to generate sufficient cash flow to meet its obligations on a timely
basis, to obtain additional financing as may be required, and ultimately to
attain profitable operations. Management's operating plan for calendar year
1998 includes increased sales, higher margins on certain segments of the custom
products and licensing business, reduced expenses as a percentage of revenues
and improved cash flows sufficient to cover the Company's operating needs.
There can be no assurances that the Company will be successful in these regards.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.

During the fourth quarter of 1997, management determined that Goodwill with
a carrying value of $4,471,000 had become impaired as a result of the changes in
Dycam's business strategy and focus. As a result, $4,471,000 of Goodwill has
been written off in full and charged to earnings in 1997.

In the fourth quarter of 1997, Styles on Video ("Styles") filed for
protection under Chapter 11 of the U.S. Bankruptcy Court. Styles owns 61% of
Dycam's outstanding shares of common stock. Styles is in default on
indebtedness owed to Dycam in the amount of approximately $1,100,000. The
indebtedness is collateralized by the shares of Dycam common stock owned by
Styles. Dycam has the right to exercise all voting rights with respect to such
shares as a result of the default. Dycam has entered into an agreement in
principle to recover 78% of the shares held by Styles in exchange for the
indebtedness owed to Dycam. Certain executive officers of Dycam have agreed to
purchase the balance of the Dycam shares for $30,000. These agreements however,
are subject to bankruptcy court approval. The indebtedness owed by Styles had
previously been reflected as an offset to stockholders equity. During the
fourth quarter of 1997, Dycam determined that the Note receivable from Styles
was impaired due to decline in value of the common stock underlying the Note,
and a loss of $800,000 was recorded.

ITEM 1. DESCRIPTION OF BUSINESS.

Dycam Inc. ("Dycam" or the "Company"), a Delaware Corporation formed in
1988, designs, manufactures, distributes, and sells digital cameras and
associated hardware and software

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products primarily for use with personal computers. Dycam also repairs and
maintains certain digital cameras, and offers digital camera training, lease,
rental, trade-in, and extended warranty programs. Ultimately serving the same
purpose as a film camera or camcorder; digital cameras are designed to capture
and preserve digital pictures for future use or reference. These digital
pictures can be displayed, saved, transmitted, printed, or incorporated into
electronic documents by computer. Products currently being sold by Dycam include
battery powered (portable) and stationary digital cameras, digital camera
subsystems and modules, various electronic camera accessories, and both
commercial and proprietary software for digital camera management. Dycam also
offers sophisticated editing, formatting, storage, and printing software, and
provides software integration tools to third parties who wish to utilize Dycam
products in their own systems. Additionally, Dycam provides engineering services
in order to design electronic photography systems that meet a customer's unique
imaging needs, and also licenses the rights to manufacture and sell digital
cameras which use Dycam technology.

Dycam was incorporated in Delaware in 1988 and has been providing
standardized and custom designed digital imaging solutions to a variety of
customers and markets since 1991. Dycam was acquired by Styles in February
1994. Effective June 21, 1994, Dycam effected an underwritten Rights Offering
of 1,000,000 shares of its Common Stock. From and after the close of the Rights
Offering, Styles owned approximately 61% of Dycam's common stock

BUSINESS STRATEGY

As a result of strategic alliances, value added distribution, and its own
continuing research and development efforts, Dycam has developed two distinct
lines of business. In order to more effectively address its opportunities in
the digital photography marketplace and to respond to the increasing rate of
change in said market, Dycam announced in the fourth quarter of 1997 that two
business units had been established; the Products and Services business under
the direction of John Edling, Dycam's Chief Operating Officer, and the
Technology business under the direction of George Ismael, Dycam's Chief
Technology Officer. Simultaneously with the creation of these business units,
Ron Iversen, formerly Dycam's Vice President of Sales and Marketing assumed the
position of Chief Executive Officer of Dycam, and was elected to Dycam's Board
of Directors. Mr. Iversen will continue to manage Dycam's sales and marketing
activities.

The products and services business provides a product line of standard and
custom digital cameras, as well as complementary value added services such as
camera service, maintenance, repair, extended warranty, technical support, trade
in programs, lease and rental programs, and packaging of software and various
accessory products which can be used to augment the capabilities of such
cameras. The technology business provides digital camera design and development
resources, digital camera technology licenses, and contract engineering
services, primarily to Original Equipment Manufacturers (OEM's) and System
Integrators.

The standard product line provides Dycam's customers the opportunity to
select a digital camera and accessory package which is appropriate for the
specific customer's application. Dycam's standard product strategy is to
continue to participate in the growth of this market segment by facilitating the
use of general purpose digital cameras, and selling a range of Dycam branded and
third party digital camera products, software, service programs, and
accessories, packaged to the particular needs of the customer or target market.
In order to economically

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provide a range of digital camera products and value added services suitable for
specific industry applications, Dycam has expanded its support for the resale of
digital camera products manufactured and branded by third parties such as Canon,
Fuji, Kodak, Epson, Olympus, Sony, and others. Dycam is not currently
manufacturing products for this market segment.

The custom product line enables Dycam to work closely with certain
customers (including its strategic partners) to design products that combine
custom built digital cameras with specialized software, hardware, or packaging
in order to satisfy a particular business opportunity. Dycam's custom product
strategy is to design and market application specific digital camera products or
systems that are suited to the needs of customers whose operations benefit from
the capture, storage, and delivery of digital images. Although Dycam intends to
focus its custom product resources on providing these imaging solutions to its
customers and strategic partners, the business criteria for undertaking a custom
product development have been adjusted to more conservative standards based upon
net return on investment in order to more accurately reflect opportunity costs
and the value of the Company's technical resources.

The technology business and its related internal development resources are
largely focused on the provision of specialty imaging solutions, sales of
digital camera engineering services, custom product developments, and technology
licensing agreements. Dycam's technology business strategy is to market its
substantial knowledge and experience in the design and development of digital
cameras to semiconductor, camera, and computer peripheral companies, and to
develop both revenue generating contract engineering work and longer term
sources of recurring revenue through licensing of the Company's intellectual
property and technology.

TECHNOLOGY AND INDUSTRY OVERVIEW

Digital photography combines electronic photography with computer
technology to capture, create, alter, store and display digital images. In
digital photography, the image is created by light passing through the lens of
the digital camera and landing on a photosensitive silicon detector, typically a
charge-coupled device ("CCD"). The CCD is an analog semiconductor device
primarily comprised of discrete pixel elements, the number of which determine
the resolution of the captured image. When a picture is taken, the digital
camera's electronics convert the analog image captured in the CCD to a digital
form which can be adjusted, compressed, and conveyed to the camera's internal
memory, removable memory, or other data storage medium. The digital image can
be downloaded to a personal computer and can be manipulated or enhanced using
imaging software. A hard copy of the image can be printed using any standard
printer attached to the computer.

Although digital cameras are currently used primarily by business
professionals and early technology adopters, it is generally accepted that
digital cameras will become an increasingly common accessory for the personal
computer. Digital cameras eliminate many of the time delays and costs
associated with conventional and instant film photography by eliminating the
need for film purchases, chemical processing, and the costs associated
therewith. Thus, with digital cameras, images can be taken and processed within
seconds and, if desired, retaken on the spot. Moreover, digital photographs can
be easily incorporated into computer generated forms and records, yielding a
more aesthetically pleasing computer generated product and potentially lowering
documentation costs.

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PRODUCTS AND CUSTOM DESIGN

PRODUCTS

Dycam was founded in 1988 to provide improved methods of using electronic
photography with computers and is a leader in the design and development of
digital cameras. Dycam introduced one of the first low cost digital cameras in
1991 and today manufactures, distributes, and markets several models. Most of
Dycam's branded cameras are programmable and contain control software that
allows them to be programmed from the host computer to perform specific
functions. Each camera can also, to varying degrees, be custom-ordered and
configured to the customer's specifications. All of Dycam's internally designed
cameras can be made modem-compatible and can be used with accessory lenses or
custom optics. The ability to use custom optics, accessory lenses, and filters
allows the camera to produce desired results in many different applications.

Each of Dycam's branded portable digital camera models operates in
essentially the same manner. The photographer merely points and shoots at the
image he wishes to capture; exposure, focus and flash are all automatic. Except
for Dycam's modular digital cameras (described below) which can utilize the
power source of the computer to which they are attached or other external power
sources, Dycam's cameras are battery powered and rechargeable. Depending on
desired image quality and memory configuration, up to several hundred pictures
at a time can be captured and stored in the camera. These pictures can be
downloaded immediately or at the convenience of the user to a host computer.
Dycam offers both color and gray-scale cameras. Color cameras are appropriate,
for example, for taking pictures of people and other subjects where color is an
important component of the picture. Where color is not a necessity (or where,
for example, the production of a color hard copy of the image is not possible
due to the lack of a color output device), the gray-scale camera is preferable,
because a gray-scale camera produces a higher resolution image at the same pixel
count than does the color camera. In addition, the cameras are capable of
storing in excess of twice as many gray-scale images as color images, because
gray-scale images may be more efficiently compressed which makes them desirable
for certain applications such as photo ID systems which require large quantities
of images or small file sizes.

Once a picture has been taken, the image can be downloaded into a personal
computer by connecting the camera to one of the computer's standard I/O ports,
typically a serial port. Images can also be downloaded into a computer from a
remote location by modem. Once the necessary software (provided with the
camera) is loaded into the host computer and the image has been downloaded, the
image can be displayed on the computer's monitor. Using image editing and
formatting software, the user can then edit and manipulate the image on the
screen by cropping, enlarging, removing defects and adding text. The resulting
image can be stored and hard copy prints produced using a variety of
commercially available printers.

Dycam also provides software support for its branded cameras, including
basic applications that load, display, edit, print and save images for DOS and
Windows environments. Dycam markets image editing software which has the
ability to resize, balance, and enhance the images produced by its cameras.
Dycam also markets more sophisticated formatting software which allows users to
stitch or add text to the digital photographic image as well as incorporate

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such image in reports and other texts. Additionally, Dycam develops unique
software packages which allow its various cameras to be utilized for
individualized customer-mandated functions.

The Modular Digital Camera. Dycam's first modular digital camera, known as
the Gator, was developed and manufactured as a joint effort by Dycam, IBM and
the University of Florida and introduced in September 1993. See "- Strategic
Alliances." Since that time, Dycam's modular digital camera designs have
evolved considerably, and have become the primary vehicle for Dycam's custom
engineering work. Dycam's modular digital cameras can be easily reconfigured or
adapted for use with a variety of optical systems, computer interfaces, and
power supplies and are versatile enough to stand alone, function as a component
of a system, or attach to notebook, tablet and desktop computers. When attached
directly to a computer the modular cameras can utilize the host computer's power
supplies (or an optional battery pack), display functions, and memories, and can
be externally mounted on or embedded in a notebook or tablet computer. As the
camera is pointed at the desired subject, a smaller-sized image is displayed on
the computer's screen. For standalone applications, a digital to video
subsystem and standard video monitor can be used to preview images. When the
user is satisfied with the image, he or she may take a full size picture. Dycam
manufactures and markets both gray-scale and color versions of the modular
camera, which retail for between $495 and $1,995 depending upon resolution and
features.

The Model 3 Digital Cameras. The Model 3 was introduced in 1992, and
represents the second generation of gray-scale digital camera developed and
manufactured by Dycam. The Model 3XL, which has increased battery capacity and
more image memory than the Model 3, is capable of taking and storing up to 500
pictures on a single battery charge. A color filter system is available for use
with both the Model 3 and Model 3XL, which filter system provides 24 bit color
images with very good quality. However, the color filter system is only
appropriate for capturing still life images using a tripod in that it
essentially operates by taking three separate pictures with red, green and blue
filters, which pictures are then combined by software to create one image. The
Model 3 sells for a list price of approximately $695 and the Model 3XL sells for
a list price of approximately $895; such prices include the camera, Macintosh,
DOS or Windows software, host adapter, cables and battery charger. The Model 3
and Model 3XL cameras are primarily designed for sale to end-users who do not
require a great deal of custom modifications to their cameras. Sales of these
cameras are limited to certain companies that have written software specifically
for the Model 3 or that have integrated the Model 3 into a system level product.

The Model 4 Digital Cameras. The Model 4 was introduced in October 1993,
and represents the second generation of 24 bit color digital cameras developed
and manufactured by Dycam. Like the Model 3 and Model 3XL, the Model 4 and the
Model 4XL are pocket sized and self-contained with a digital image output of 496
by 365 pixels. The Model 4 is capable of taking up to 100 pictures and storing
between 8 and 24 pictures on a single battery charge. The Model 4XL is capable
of taking and storing up to 300 pictures in a single battery charge. The Model
4 sells for a list price of approximately $795 and the Model 4XL sells for a
list price of approximately $995; such prices include the camera, Macintosh, DOS
or Windows imaging software, host adapter, cables and battery charger. This
camera is also designed for and marketed to the end-user who does not require a
great deal of custom modifications to their camera. Sales of these cameras are
limited to certain companies that have written software specifically for the
Model 4 or that have integrated the Model 4 into a system level product.

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Model 10-C Camera. In July 1995, Dycam introduced a 640 X 480 24 bit color
digital camera with power zoom lens and removable flash memory cards
manufactured to the Company's specifications by a third party. This product is
intended to provide a solution for the professional markets requiring the use of
images with documentation such as property appraisal, insurance claims, and law
enforcement, and has been well received. The retail price of the basic camera
is $699 and a variety of accessories are offered. In the February 6, 1996 issue
of PC Magazine, competing against products such as the Kodak DC-40, Logitech
Fotoman Pixtura, Casio QV-10, Chinon ESC-3000, and Apple Quicktake 150, the
Dycam Model 10-C won the prestigious PC Magazine Editors Choice award for
digital cameras selling at less than $1,000. Although production of the Model
10-C has been terminated, Dycam continues to provide service and support for the
installed base of users, as well as sales of used Model 10-C cameras.

Non Dycam Branded Products. Dycam is a Value Added Reseller (VAR) for a
number of popular brands of digital cameras, accessories, and complementary
products such as photo printers which are suitable for business professionals.
Dycam uses both inside and outside sales representatives to market and sell
these products to large corporate accounts, and uses its web site to market and
sell to individual users.

Accessory and Complementary Products. Dycam offers a variety of accessory
and complementary products for both Dycam branded and third party products
designed to fulfill the needs of the digital camera users. These products
include Flash Memory cards, carrying cases, editing software, portable power
supplies, cable adapters , photo printers, a portable desk stand which connects
the camera to the host computer and a complement of lenses. Accessory lenses,
which can be attached to either the standard lens or the variable focus lenses,
include telephoto, wide angle, and close-up lenses. These lenses range in price
from $59 for a wide angle or telephoto lens to $99 for a super close-up lens kit
which includes 3 lenses.

PRODUCT DEVELOPMENT ACTIVITIES

During 1997 Dycam expended approximately $491,000 on product development
and engineering activities. Approximately 10% of such moneys were devoted to
the development of products which were intended to be sold into standard
markets, and approximately 50% of such moneys were devoted to the development
and support of products for use by Dycam's strategic partners. The remaining
product development funds were devoted to the following projects:

Enhanced Modular Camera. Since the first quarter of 1995, Dycam has
devoted its primary modular camera product development activities to software
enhancements, custom versions of the existing products, and the development of
higher resolution models. Development of a 640 X 480 resolution grayscale
modular camera was completed during the fourth quarter of 1996, and Dycam sells
this camera for between $595 and $1,995, depending on the camera's
configuration. Development of a color version of the 640 X 480 modular camera
is in process, and higher resolution grayscale and color versions are in the
planning stages.

Model 5v and Model 6v Cameras. During 1997 Dycam continued development of
enhanced versions of the Model 5 and Model 6 camera platforms to include video
output, allowing images captured by these cameras to be directly displayed on a
television or video monitor. Images (including real time images ) can be
captured and displayed anywhere that a television or video

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monitor is available, with no need for a host computer. Additionally, the images
can be stored either on digital or video recording media. This camera platform
is designed for general purpose and specialty applications, including security
or surveillance purposes, that require both digital and video output capability.
Dycam continues to enhance this platform and completed the development of
certain specialized versions of these cameras in 1997, with initial shipments
commencing in the third quarter of 1997.

ADC Cameras. During 1995 Dycam developed a specialized digital camera
(Agricultural Digital Camera or ADC) and supporting software combination which
allows the user to perform visible and near visible light spectrum band ratio
analysis, an emerging science for determining the relative health of vegetation
and for improving the management of water resources, pesticides, and fertilizers
with agricultural crops. The ADC product was the result of ongoing product
development and research activity with the United States Department of
Agriculture ("USDA") and certain Universities, and the Company continues to
enhance the capabilities of the platform.

Multi-detector cameras. During 1996 Dycam developed a three detector (3
CCD) optical assembly for use with its modular digital camera platforms. The
addition of this capability to the modular camera platforms has expanded the
applications served by Dycam's custom products, particularly where multi-
spectral or high quality digital imaging is required. Dycam is currently
conducting field trials of multi-detector digital cameras with certain customers
and has completed development of a basic design suitable for industrial or
scientific imaging.

iCAM Camera. During the second half of 1997, Dycam developed a special
version of the Model 3 camera which incorporates ibutton technology from Dallas
Semiconductor. This product allows images to be stored in non volatile memory
on a secured rugged container (similar in shape to a watch battery but larger).
This system could potentially be used for driver's licenses, passports, Photo
ID's, and a number of security and medical applications. First shipments of the
iCAM camera started in December 1997.

CUSTOM SERVICES

Dycam believes its primary strength lies in its ability to facilitate the
use of both standard and custom digital cameras in a wide range of digital
imaging applications. This is often accomplished by providing expertise and
engineering services to parties who desire additional features, functions, or
modifications to existing camera designs. Dycam has focused its custom design
work on customers who have the potential to develop new markets, or where the
application yields technology that Dycam's management feels can be leveraged for
long term value. Dycam believes that its custom design work will help to open
new markets for Dycam's products. Past customers have included IBM and the
University of Florida for whom Dycam developed the first version of its modular
digital camera; Northern Telecom for whom Dycam developed software to facilitate
the use of digital images in low cost teleconferencing systems; Insurance Auto
Auctions for which Dycam developed a variable focus optical assembly; and McQue
for which Dycam developed a "ruggedized" (i.e., weather and tamper resistant)
version of the Model 3 Camera for use in McQue's remote surveillance systems.
Dycam is currently engaged or has recently completed custom projects for the
following clients:

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Forever Yours/Hasco. Dycam has developed a digital camera and imaging
system which is designed to be used for taking pictures of newborn babies. This
product is a dedicated digital camera system designed for use in hospital
environments, which produces digital images for transfer to a remote production
site. This system allows the system's operators to rapidly and efficiently
produce low cost customized images on high quality color photographic paper.
See "Related Party Transactions." In the second quarter of 1997, Hasco
International ("Hasco") the leading domestic provider of hospital newborn
photography services, acquired all of the assets of Forever Yours, including the
exclusive rights to use of the newborn imaging system . During 1997 Dycam also
completed development for Hasco of a preview digital camera to be used in
conjunction with certain film cameras owned and operated by Hasco. Production
deliveries of the preview cameras commenced in the third quarter of 1997.
Concurrent to the closing of the asset purchase transaction between Hasco and
Forever Yours, Dycam and Hasco entered into a 3 year agreement under which Dycam
will receive quarterly payments for continuing camera maintenance and
development services, and camera lease payments from certain leased camera
payment obligations assumed by Hasco. This transaction and the continuing
agreement with Hasco may result in substantially lower revenues to Dycam than
would have been realized under the original agreements with Forever Yours.

USDA. Dycam has developed a camera system for the USDA which can be
installed in field equipment, small aircraft, or RPV's (Remotely Piloted
Vehicles) for use with a low cost imaging system designed to augment satellite
images and field data in order to better manage water and agricultural
resources. If this product gains wide scale acceptance it may improve the
quality and timeliness of providing low cost information services to the farming
community.

Aquila Technologies Group, Inc. ("Aquila"). Aquila is a specialty
technology organization that serves the government and defense industry. Dycam
designs and manufactures specialized digital cameras for Aquila.

Other. Dycam has designed and manufactured products for a German company,
which products are primarily used in surveillance and observation activities.
In addition, Dycam has developed software for use with digital cameras for a
major camera manufacturer.

STRATEGIC ALLIANCES

Dycam believes that the opportunities presented by the digital camera
industry warrant the use of strategic alliances. Historically, Dycam has entered
into strategic alliances to help defray Dycam's research and development costs
and to help Dycam market its products. Dycam has established the following
strategic alliances.

Forever Yours/Hasco. Forever Yours was established to provide
competitively priced rapidly produced digital photographic images of newborn
infants. Forever Yours uses digital photography and an on or off site imaging
system to take pictures of newborns in hospitals. Such photographs may be
enhanced with the display of the infant's name, date of birth, birth weight and
any other information the mother desires to include. In the second quarter of
1995, Dycam entered into an agreement with Forever Yours relating to the digital
camera system used in Forever Yours's operations. Under its arrangement with
Forever Yours, Dycam was to receive revenues from camera sales and leases to
Forever Yours, as well as a royalty of 7.5% of Forever

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Yours's sales. During the second quarter of 1997, all of the assets of Forever
Yours were purchased by Hasco. Concurrent to the closing of this asset purchase
transaction, Dycam and Hasco entered into a 3 year agreement under which Dycam
will receive quarterly payments for continuing camera maintenance and
development services, and camera lease payments from certain leased camera
payment obligations assumed by Hasco. Payment of deferred license fees due Dycam
from Forever Yours was satisfied from the proceeds of the Forever Yours sale.
This transaction and the continuing agreement with Hasco may result in
substantially lower revenues to Dycam than would have been realized under the
original agreements with Forever Yours. However, Dycam believes arrangements
such as its Forever Yours agreement and the ongoing agreement with Hasco
International may lead to additional contract engineering revenues and custom
camera sales opportunities.

University of Florida Research Foundation. In June 1993, Dycam entered
into an agreement with the University of Florida, a non-profit, tax-exempt
organization, pursuant to which the University of Florida helped to fund the
development of the first generation of Dycam's modular digital camera. Pursuant
to this agreement, which terminated on August 31, 1993, the University of
Florida paid Dycam a development fee for the development of a mobile computing
camera for use in videoconferencing. Dycam also worked with the University of
Florida in connection with the adaptation of compass information with images
produced by digital cameras. Dycam is obligated to pay the University of Florida
a royalty of 10% of software sales which incorporate the technology developed as
part of this project.

Aquila. Aquila is a specialty technology organization that serves
government and the defense industry. Aquila obtained a license from Dycam to
use and manufacture cameras based upon Dycam's technology for incorporation in
Aquila-manufactured products. Pursuant to this agreement, Aquila is required to
pay Dycam a royalty of $250 for each camera sold. To date, Aquila has not
exercised its technology rights, choosing instead to purchase products which are
manufactured to its specifications by Dycam.

Dycam may from time to time enter into other strategic alliances with these
or new strategic partners. Such strategic alliances may involve the development
of new products or the marketing or distribution of its existing products.

MARKETING AND SALES

Dycam has traditionally focused its marketing efforts primarily on the
licensing of its digital camera technology assets to others, and on direct sales
of digital cameras manufactured by the Company or purchased from third parties
for resale. The Company believes that digital photography is a core enabling
technology that allows visual communication and documentation to be more
efficiently accomplished through both printed and electronic media. However,
effective applications of the technology are dependent upon the successful
marriage of computer and camera technologies in a manner which either improves
an existing system or opens new business opportunities. In order to enhance the
Company's presentation and sales of its products and services, in January of
1997 Dycam hired a new Vice President of Sales and Marketing who has been
chartered with developing markets and customers that the Company can effectively
serve with its technology assets and digital camera products. The Company
believes that it may benefit from the increased demand for digital cameras and
related technology services, and intends to

10
<PAGE>

significantly increase its visibility in the marketplace, with the goal of
realizing increased sales. In 1997, a sales team was put in place to focus on
selling digital cameras and Dycam's support services to large corporate
accounts. Dycam also expanded its web site to include electronic commerce
capability and a much broader range of products.

During 1997, digital cameras achieved a level of maturity and performance
sufficient to facilitate wholesale replacement of film based methods of
capturing images, and the use of digital photography became routine in many
professional and business applications. Approximately 50 new digital cameras
were introduced in 1997 to the business, professional, and consumer markets, and
several large multi-national consumer electronics and photographic products
companies introduced their third or fourth generations of digital cameras.
While Dycam continues to sell Dycam branded products, in order to economically
provide a range of digital camera products suitable for specific industry
applications and avoid competing with companies having far greater financial
resources, the Company has further expanded its product line of non-Dycam
branded products manufactured by companies such as Kodak, Sony, Olympus, Epson,
Ricoh, Canon, Fuji, Minolta, Panasonic, and others. Dycam continues to use its
technical competencies and the additional knowledge gained in 1997 to identify
specific companies which may require its specialty services and to identify new
market opportunities. Although Dycam will continue to provide standard products
and expects such standard product sales to grow, its internal standard product
development resources will be largely focused on the provision of more
specialized imaging solutions and value added uses of standard digital camera
products.

DOMESTIC MARKET

During 1997, Dycam's direct sales of cameras and other products accounted
for approximately $1,998,000 in revenues (approximately 77% of total revenues),
a decrease of 11% over direct sales of $2,236,000 in 1996. Dycam currently
offers for sale the Model 3, Model 3XL, Model 4, and Model 4XL to a select group
of customers, a wide range of standard digital cameras manufactured by third
parties, and various modular cameras that are primarily integrated into systems
by third parties. The Model 3 camera was first sold in the second quarter of
1992. The Model 4 and modular cameras were both introduced in the fourth quarter
of 1993. The Model 3XL and Model 4XL were both introduced in the third quarter
of 1994. Dycam has sold approximately 15,000 digital cameras since the
introduction of the its original digital camera, and licensees have sold
approximately 60,000 additional cameras. In addition to its direct marketing
efforts, Dycam also sells its camera products through resellers and value added
resellers, which sales accounted for approximately $120,000 in revenues
(approximately 6% of total camera sales) in 1997. During 1997, Dycam performed
custom engineering work for several customers, which resulted in revenues of
$333,000 (approximately 13% of Dycam's total revenues), an increase of 64%
compared to such revenues of $203,000 in 1995.

Additionally, Dycam has licensed the right to use its technology to
Logitech, Hasco International, and Forever Yours. Under its arrangement with
Logitech, Dycam granted Logitech the nonexclusive right to manufacture and sell
digital cameras utilizing Dycam's technology. The camera marketed by Logitech as
the Fotoman Plus was Logitech's version of Dycam's Model 3 camera. Under its
arrangement with Forever Yours, Dycam received revenues from camera sales and
leases as well as license fees of 7.5% of Forever Yours's sales. For the year
ended December 31, 1997 Dycam had revenues of approximately $220,000
(approximately 8% of total revenues)

11
<PAGE>

derived from the Forever Yours license arrangement, including $159,000 in
deferred license fees which were paid in 1997. In 1996 there were $16,000 in
recognized revenues related to the Forever Yours arrangement. Subsequent to the
sale of Forever Yours to Hasco International, such fees have been fixed at
$25,000 per quarter for 12 quarters, after which time Dycam's service
obligations expire and no further license fees will be paid by Hasco. However,
Dycam believes arrangements such as its Forever Yours agreement and the ongoing
agreement with Hasco International may lead to additional contract engineering
revenues and custom camera sales opportunities.

INTERNATIONAL MARKETS

International sales accounted for approximately $100,000 and $415,000, or
approximately 4% and 17% of Dycam's revenues respectively, for the years ended
1997 and 1996. The reduction in international sales is primarily due to the end
of production of the Model 10-C product. International sales have resulted
primarily from agreements between Dycam and computer industry resellers located
in Australia, Germany, Japan, Sweden, Denmark, and the United Kingdom. Pursuant
to these agreements, the resellers purchase Dycam's products at a substantial
discount and have no minimum sales requirements.

ADVERTISING AND PROMOTION

Dycam has traditionally relied on word of mouth advertising, press
releases, and favorable reviews of its products in trade publications to promote
its products. During 1997, Dycam substantially expanded its Internet presence
and established a Dycam commercial website with electronic commerce capability.
Dycam also continued to advertise its products and services in various trade
journals and government publications during 1997, and made substantial revisions
to its promotional materials. During 1997, Dycam attended seven trade shows,
primarily targeted at specialized industries. Dycam expended approximately
$83,000 on advertising and promotional activities in 1997, a decrease of 31%
when compared to the $120,000 expended in 1996. This reduction is primarily due
to the shift from marketing and selling a Dycam branded product to reselling
non-Dycam branded products. In 1997, Dycam conducted a number of direct mail
programs to the Dycam and Logitech installed bases promoting various trade-in
and repair programs.

Dycam's current advertising and promotional strategy is directed towards
identifying and developing cooperative marketing programs with potential
customers and/or partners who have a need for specific digital imaging
solutions, although sales of the standard products has indicated that sales
increases may be generated by advertising in selected wide distribution computer
publications, which may be due to the general emergence of the digital camera
market and increased consumer awareness of the technology. Dycam will continue
to leverage its support services capabilities with larger accounts.

MANUFACTURING

Dycam relies on outside contract electronic subassembly manufacturers to
perform the majority of subassembly work related to its in-house produced
cameras Currently, this electronic subassembly work is conducted by a
manufacturer located near Dycam's headquarters. Dycam

12
<PAGE>

believes however, that there are several alternative manufacturers capable of
performing this function to Dycam specifications. Dycam's manufacturing
operations consist of final assembly (including the integration of Dycam's
proprietary software), testing, and quality control. The majority of the
components used in Dycam's cameras are purchased from outside vendors. Certain
digital camera components and assemblies used by the Company, including standard
digital cameras private labeled for the Company, are sole sourced and must be
ordered up to five months in advance to assure timely delivery. A strategic
inventory of such components and assemblies is maintained by the Company,
however, any disruptions in delivery or in the relationships with suppliers of
such components could cause substantial delays in the Company's camera
production activities. The Company believes that its relations with its
strategic suppliers are good.

CUSTOMER SUPPORT, PRODUCT REPAIR, AND SERVICE

Dycam is committed to providing timely, high quality technical support,
which Dycam believes is an important component of maintaining customer
satisfaction. Several staff members who are expert in digital camera functions
are available to provide technical support and customer assistance. Each camera
sold by Dycam comes with a 180 to 365 day standard limited warranty. During
1997 Dycam serviced or replaced less than 5% of its cameras which were under
warranty. Dycam attempts to complete all repairs or send out replacement
products within 72 hours of the receipt of the defective product by Dycam. The
Model 3, Model 3XL, Model 4 and Model 4XL batteries need to be replaced
approximately every 24-36 months.

In 1997, Dycam signed an agreement with Logitech that provides Dycam the
exclusive rights to repair the Logitech Fotoman and Fotoman+ cameras. It is
estimated that there are approximately 70,000 of these cameras in the field, and
Dycam has access to the installed base in order to provide repair and
maintenance services and promote trade-in programs.

COMPETITION

Dycam faces substantial competition in the design, distribution,
manufacture and sale of digital cameras. The market for digital photography
products is only beginning to emerge, and Dycam expects that competitors with
substantially greater financial, technical, distribution and other resources
will attempt to dominate the various segments of this market. Dycam believes
that the digital photography market will be divided into three basic segments:
(i) custom products, (ii) business and consumer products, and (iii) professional
products.

The custom products market segment consists of products which are custom
engineered to meet the unique image capturing needs of specific clients who
generally integrate the camera into a system that provides a total imaging
solution. Dycam believes that its experience in custom designing cameras and
imaging solutions for its customers will allow it to effectively compete in this
market segment. Nevertheless, there can be no assurance that the other
companies who manufacture digital cameras will not establish custom products
divisions or that other specialty camera companies will not emerge.

The business and consumer products (standard products) market segment
consists of products which produce images which offer substantially less
resolution than the images produced

13
<PAGE>

by traditional film cameras. Nevertheless, the images captured by products in
this market segment are constantly improving and of sufficient quality to be
used in lieu of traditional film photographs for documentation (e.g., appraisal
reports, insurance adjusters' reports, personnel records, referring physician
reports, newsletters and general databasing) and snap-shot purposes, and total
industry sales of products designed to serve these markets increased
substantially in 1997. Dycam's competitors in this market segment include Apple,
Canon, Kodak, Casio, Fuji, Olympus, Ricoh, Sony, and Epson, all of which
announced new products with up to 1,000,000 pixels in this market segment during
1997. There can be no assurance that competitive pressures will not result in
further price reductions or other developments in the market segments in which
Dycam competes. Consequently, there can be no assurance that Dycam will continue
to compete effectively or that its products under development will continue to
be competitive in this market segment. In order to continue to effectively serve
the standard products market for digital cameras, Dycam has determined that it
is in the best interests of the Company to either private label commercially
available products or resell products manufactured by third parties. Dycam
branded products will continue to be developed for vertical markets not served
by the general purpose digital cameras.

The consumer market is driven primarily by price and ease of use. This
market has been slower to develop than the business market, and due to intense
competition and low margins Dycam has not specifically addressed this market.

The professional products market segment consists of products which produce
images with resolution comparable or superior to traditional film cameras. The
products in this category are primarily designed to meet the needs of
professional or studio photographers and currently includes Digital SLR products
from Kodak, Canon, Nikon, Fuji, Minolta, and Sony. Kodak's DCS series of
Professional Digital Cameras, which retail for $7,500 to $27,000 and are
currently used primarily by photojournalists and professional photographers, are
capable of quickly capturing high resolution color images and are good examples
of this class of product. Digital Camera Backs such as those offered by Leaf
and Dicomed, attach to the back of a large format camera and produce extremely
high resolution color images; however, due to the lengthy image capture time
required by these devices they are only useful for photographing still images.
While Dycam does not presently intend to internally develop products to compete
in this market segment, it will continue to add value to the above products and
others to satisfy business opportunities in the professional segment.

COMPETING TECHNOLOGIES

Although Dycam believes that digital photography is the wave of the future,
digital cameras today compete with film photography, camcorders, digital
camcorders, and still video cameras. Current competition also comes from
alternative techniques for capturing an image and bringing the image into the
computer such as flatbed scanners and hand scanners. Scanners can be expensive
and complicated to use; however, they are capable of producing very high quality
images. A "frame grabber" or "digitizer" is a board that may be installed in a
computer to digitize a video image produced by a camcorder or still video
camera. The resulting image is typically of relatively poor quality, however
inexpensive versions sell for less than $200. Digital camcorders offer a
combination of motion pictures and the capability of recording digital stills on
magnetic tape or connecting directly to a computer, but they are expensive,
physically large, and complex when compared to digital still cameras. Kodak
produces the Kodak Photo CD system which

14
<PAGE>

provides a mechanism for converting analog images (film) into digital images for
storage on compact discs. Dycam believes that the Photo CD technology presents
too many obstacles for the typical consumer because it requires not only the
time and expense of film processing, but the further problem of locating a photo
processor that has the expensive equipment required to copy the images to the
CD. It is, however, a good solution for the commercial distribution of digital
images, and business use has been increasing. Despite the various disadvantages
of these alternative methods of image capture, there can be no guarantee that
digital photography will gain widespread consumer acceptance.

PATENTS AND PROPRIETARY RIGHTS

Dycam relies on a combination of patent, copyright, trademark protection
and non-disclosure agreements to protect its proprietary rights. Dycam is the
assignee of United States Patent 5,249,053, which covers certain technologies
related to filmless digital cameras with selective image compression. In
addition, Dycam has filed applications for several patents on the design of its
camera, including applications covering camera flash and sequential color
technologies; however, no assurance can be given that any such patents will be
issued. Dycam also has domestic and international protection under copyright
law for certain specialized components and software included in its cameras.
Dycam regards the non-patented and non-copyrighted technology and know-how
related to its products as proprietary trade secrets and attempts to protect
them with confidentiality agreements with its employees and confidentiality
provisions in its employee handbook and its various agreements with licensees
and customers. Confidentiality agreements, however, may be difficult to
enforce, and, despite the precautions Dycam has taken, it may be possible for
third parties to copy aspects of Dycam's products or, without authorization, to
obtain and use information which Dycam regards as proprietary. Dycam believes
that the technical and creative skills and expertise of its technical staff and
marketing and management personnel are more critical to Dycam's success than
patent, copyright or trademark protection.

EMPLOYEES

At December 31, 1997 Dycam employed 16 persons, three of whom were engaged
in management and administration, seven of whom were engaged in research and
development, three of whom were engaged in manufacturing and production and
three of whom were engaged in sales and marketing. None of Dycam's employees
are represented by a collective bargaining agreement. Dycam believes its
relations with its employees are good.

ITEM 2. PROPERTIES.

In April 1995, Dycam moved its principal executive offices and
manufacturing facilities to 9414 Eton Avenue, Chatsworth, California 91311. The
premises are approximately 15,000 square feet and are held under a lease which
expires on January 31, 1999. The rental payments under this lease in 1997 were
approximately $9,000 per month. Dycam believes that its premises are sufficient
for its current needs. For the year ended December 31, 1997, Dycam had net lease
costs of approximately $108,000.

ITEM 3. LEGAL PROCEEDINGS.

15
<PAGE>

As of March 24, 1998, there were no other material pending legal
proceedings to which Dycam was a party or to which any of its properties were
subject.

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

None

16
<PAGE>

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Dycam's Common Stock is traded Over the Counter (OTC:BB), under the symbol,
"DYCA". The following table sets forth the range of high and low last sale
prices per share for the Common Stock as quoted Over the Counter for the periods
indicated.
<TABLE>
<CAPTION>
High Low
----- ----
<S> <C> <C>
Year Ended December 31, 1998
First Quarter 1/4 3/32
Year Ended December 31, 1997
First Quarter 13/16 1/2
Second Quarter 1/2 1/8
Third Quarter 3/8 1/8
Fourth Quarter 5/16 5/64

</TABLE>

At March 24, 1998, there were approximately 79 beneficial holders of record
of Dycam's Common Stock.

Dycam has not paid cash dividends in its Common Stock and does not
anticipate that it will do so in the near future. The present policy of Dycam
is to retain earnings to finance the development of its operations.

17
<PAGE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS

GENERAL

Dycam commenced operations in April 1988, and was incorporated in Delaware
on July 7, 1988. Dycam became a wholly owned subsidiary of Styles on February
7, 1994. Effective June 21, 1994, Dycam effected an underwritten Rights
Offering of 1,000,000 shares of its Common Stock. From and after the close of
the Rights Offering, Styles owned approximately 61% of Dycam's common stock.
During the year ended December 31, 1997, Styles declared Chapter 11 bankruptcy.
Since its inception, Dycam's business has been the design, manufacture and sale
of digital cameras and associated hardware and software products primarily for
use with personal computers. Substantially all of Dycam's revenues are derived
from sales of digital cameras and supporting software and accessory products,
technology licensing fees, and contract engineering work.

The Company has analyzed year 2000 issues with its computer and software
advisors, and has assessed the impact of year 2000 issues on the Company's
operations. The Company has

18
<PAGE>

come to the determination that there are no year 2000 issues to be disclosed
which would have a material adverse effect on the financial condition of the
Company.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996

Dycam's revenues are derived from the sale of digital cameras and
supporting software and accessory products, contract engineering, and technology
licensing fees. Dycam's revenues for the year ended December 31, 1997 were
$2,609,000, an increase of $154,000 or 6% from revenues of $2,455,000 for the
year ended December 31, 1996. The increase in revenue was primarily associated
with increased license revenues and sales of engineering services. Revenues
from camera sales were $1,998,000 (77% of total revenue) in 1997 as compared to
$2,236,000 in 1996 (92% of total revenues). This reduction was primarily due to
the transition from selling the Dycam branded Model 10-C to reselling other
brands of digital cameras. License fees from the now terminated Forever Yours
agreement were approximately $220,000 in 1997, including $159,000 deferred and
accrued under a 12 month revenue deferral agreement entered into in April 1996,
and received in June 1997, as compared to $16,000 in 1996. Revenues from
contract engineering in 1997 were $333,000 (13% of total revenues) as compared
to $203,000 (8% of total revenues) in 1996.

Dycam intends to continue to pursue its standard product strategy by
facilitating the use of general purpose digital cameras, and selling a range of
Dycam branded and third party digital cameras products, software, accessories,
complementary products such as photo printers and film scanners, and support
services to selected targeted markets. Dycam will also continue to increase its
efforts to license its technology to others, sell contract engineering services,
and to exploit opportunities to design products that combine custom built
digital cameras with specialized software, hardware or packaging in order to
satisfy an identified business opportunity.

During 1997, Dycam devoted a substantial portion of its resources to
pursuing custom and contract engineering business with the goal of generating
future sales and licensing business. One example of this strategy is Dycam's
former relationship with Forever Yours and continuing relationship with Hasco
International which purchased substantially all of the assets of Forever Yours.
The core element of the Forever Yours camera system is a specialized digital
camera subsystem engineered and produced by Dycam under an exclusive contract
with Forever Yours. In addition to the sale of cameras to Forever Yours,
Dycam's arrangement with Forever Yours provided that, in exchange for certain
development and maintenance services, Dycam would receive a 7.5% royalty on all
Forever Yours sales. Subsequent to the sale of Forever Yours to Hasco
International, such fees have been fixed at $25,000 per quarter for 12 quarters,
after which time Dycam's service obligations expire and no further license fees
will be paid by Hasco. However, Dycam believes arrangements such as its Forever
Yours agreement and the ongoing agreement with Hasco International may lead to
additional contract engineering revenues and custom camera sales opportunities.

Gross profits are comprised of revenues less direct costs of products and
services. Gross profits as a percentage of revenues increased to 32% in 1997,
compared to 26% in the year ended 1996, primarily due to the receipt of $159,000
in deferred license revenues from 1996 which were fully reserved for. Gross
margins on the standard digital camera products have continued to experience
downward pressure as the market becomes more saturated, and overall camera

19
<PAGE>

margins may continue to remain at the lower levels or decline if Dycam's custom
products business does not substantially increase its contribution to Dycam's
revenues.

Selling, general and administrative expenses consist of administrative
expenses at Dycam headquarters, the salaries of corporate officers and sales
personnel, advertising and promotion, accounting, legal and other professional
expenses, rent, and occupancy costs. Selling, general and administrative
expenses decreased $121,000 for the year ended 1997 to $1,093,000 (42% of
revenues) from $1,214,000 (49% of revenues) for 1996. The decrease resulted
primarily from decreased sales and marketing expenditures in the 1997 period,
and reductions in personnel. Dycam took steps throughout 1997 to control
expenditures.

Dycam had goodwill amortization of $278,000 and had an impairment loss on
goodwill expense of $4,471,000 for the year ended December 31, 1997.

After evaluating the revised business plan of the Company during the fourth
quarter of 1997, management determined that the Company's Goodwill asset related
to the purchase of the Company by Styles, was impaired, and steps were taken to
recognize the impairment. Goodwill was determined to be impaired in its
entirety because of the Company's change in business strategy and focus, and the
Company therefore wrote the goodwill (carrying value of $4,471,000) down to
zero.

Product research and development expenses decreased $60,000 to $491,000
(19% of revenues) in 1997 compared to $551,000 (22% of revenues) in 1996. This
decrease in expenditures is largely attributable to reduced staffing expenses.
Dycam believes that continuing research and development is essential to
maintaining its competitive position, and expects to continue to expend funds in
this area.

Inventories decreased by $322,000 to $72,000 at December 31, 1997 when
compared to December 31, 1996, primarily as a result of continuing sales of
older products from inventory, and inventory write-offs and reserves of
approximately $46,000 related to excess materials and aged products.

The net loss per common share was ($2.03) for the year ended 1997 compared
to net loss of ($0.42) for the year ended 1996.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1997, Dycam had cash and short-term investments on hand of
$249,000, down $341,000 from $590,000 at December 31, 1996.

Accounts receivable, net of allowance for doubtful accounts of $5,000,
increased $286,000 during the year ended December 31, 1997.

Accounts receivable from a subsidiary of Styles decreased $139,000 during
the year ended December 31, 1997.

20
<PAGE>

Camera equipment related to operating leases to Forever Yours which were
subsequently assumed by Hasco, increased by $18,000 during the year ended 1997.
Such camera equipment will be depreciated over the life of the leases.

Current liabilities increased by $14,000 to $251,000, primarily as a result
of increases in accrued expenses and taxes.

Dycam's working capital at December 31, 1997 was $454,000 a decrease of
$570,000 when compared to $1,024,000 at December 31, 1996. Working capital
decrease was primarily the result of cash operating losses of $582,000. The
current ratio at December 31, 1997 was 2.8 to 1 compared to 5.3 to 1 at December
31, 1996.

Dycam does not have any long term indebtedness and does not currently
maintain any credit facilities.

On December 14, 1994, Dycam loaned to Styles $500,000. On January 25, 1995,
Dycam loaned an additional $500,000 to Styles. Styles signed an amended and
restated promissory note (the "Note") dated January 25, 1995 for the full
$1,000,000 note, bearing interest at 2% above a bank's prime rate, interest
payable monthly, with a maturity date of September 1, 1995. Dycam subsequently
extended the maturity date of the Note to December 31, 1998, and fixed the
interest rate at 10%. The interest is payable monthly. The Note is secured by a
pledge of 1,916,667 shares of the common stock of Dycam owned by Styles.
Interest income of $17,000 and $100,000 respectively is included in the
accompanying 1997 and 1996 statements of operations related to the Styles loan.

21
<PAGE>

ITEM 7. FINANCIAL STATEMENTS.

INDEX TO FINANCIAL STATEMENTS
DYCAM INC.

<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report........................................................ 23
Balance Sheet at December 31, 1997.................................................. 24
Statements of Operations for the Years Ended December 31, 1997 and 1996............. 25
Statements of Stockholders' Equity for the Years Ended December 31, 1997 and 1996... 26
Statements of Cash Flows for the Years Ended December 31, 1997 and 1996............. 27
Notes to Financial Statements for the Years Ended December 31, 1997 and 1996........ 28

</TABLE>

22
<PAGE>

INDEPENDENT AUDITORS' REPORT
----------------------------

Board of Directors
Dycam Inc.

We have audited the accompanying balance sheet of Dycam Inc. (the "Company") as
of December 31, 1997, and the related statements of operations, stockholders'
equity and cash flows for each of the years in the two-year period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dycam Inc. as of December 31,
1997, and the results of its operations and its cash flows for each of the years
in the two-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered substantial recurring losses from
operations and has an accumulated deficit as of December 31, 1997. These
matters, among others, 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 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

CORBIN & WERTZ

Irvine, California
March 17, 1998

23
<PAGE>

ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 249,000
Accounts receivable, net of allowance for doubtful accounts
of $5,000 384,000
Inventory, net 72,000
-----------
Total current assets 705,000

Property and equipment, net 234,000

Deposits 18,000
-----------

$ 957,000
===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable $ 130,000
Accrued payroll and related expenses 78,000
Accrued expenses 43,000
-----------
Total current liabilities 251,000
-----------

Commitments

Stockholders' equity:
Preferred stock, par value $0.001, 1,000,000 shares authorized,
no shares issued -
Common stock, par value $0.01, 19,000,000 shares authorized,
3,120,836 shares issued and outstanding 31,000
Additional paid-in capital 10,710,000
Note receivable from Styles (200,000)
Accumulated deficit (9,835,000)
-----------
Total stockholders' equity 706,000
-----------
$ 957,000
===========
</TABLE>
See independent auditors' report and accompanying notes to financial statements

24
<PAGE>

<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
Revenues:
Camera sales $ 1,998,000 $ 2,236,000
Contract engineering 333,000 203,000
License fees 278,000 16,000
----------- -----------
Total revenues 2,609,000 2,455,000
----------- -----------

Costs of revenues, including depreciation and
amortization of $171,000 and $131,000 in 1997
and 1996, respectively:
Camera sales 1,563,000 1,696,000
Contract engineering 215,000 132,000
----------- -----------
Total cost of revenues 1,778,000 1,828,000
----------- -----------

Gross profit 831,000 627,000
----------- -----------

Operating expenses:
Selling, general and administrative 1,093,000 1,214,000
Research and development 491,000 551,000
Depreciation and amortization 330,000 317,000
Impairment loss on goodwill 4,471,000 -
Impairment loss on note receivable 800,000 -
----------- -----------
Total operating expenses 7,185,000 2,082,000
----------- -----------

Loss from operations (6,354,000) (1,455,000)

Interest income 31,000 149,000
----------- -----------

Loss before income taxes (6,323,000) (1,306,000)

Provision for income taxes (1,000) (1,000)
----------- -----------

Net loss $(6,324,000) $(1,307,000)
=========== ===========

Weighted average shares of common stock
outstanding 3,120,836 3,120,836
=========== ===========

Net loss per share $ (2.03) $ (.42)
=========== ===========
</TABLE>
See independent auditors' report and accompanying notes to financial statements
25
<PAGE>

COMMON STOCK ADDITIONAL NOTE
------------------------ PAID-IN RECEIVABLE ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL FROM STYLES DEFICIT EQUITY
----------- --------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 3,120,836 $ 31,000 $ 10,710,000 $ (1,000,000) $ (2,204,000) $ 7,537,000

Net loss - - - - (1,307,000) (1,307,000)
----------- --------- ------------ ------------ ------------ -------------

Balance, December 31, 1996 3,120,836 31,000 10,710,000 (1,000,000) (3,511,000) 6,230,000

Impairment loss on note
receivable - - - 800,000 - 800,000

Net loss - - - - (6,324,000) (6,324,000)
----------- --------- ------------ ------------ ------------ -------------

Balance, December 31, 1997 3,120,836 $ 31,000 $ 10,710,000 $ (200,000) $ (9,835,000) $ 706,000
=========== ========= ============ ============ ============ =============
</TABLE>

See independent auditors' report and accompanying notes to financial statements
26
<PAGE>

DYCAM, INC.

STATEMENTS OF CASH FLOWS

For The Years Ended December 31, 1997 and 1996

<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(6,324,000) $(1,307,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:

Depreciation 223,000 170,000
Amortization of goodwill 278,000 278,000
Impairment loss on goodwill 4,471,000 -
Impairment loss on notes receivable 800,000 -
Provision for inventory obsolescence 46,000 171,000
Changes in operating assets and liabilities:
Accounts receivable (286,000) (15,000)
Accounts receivable from subsidiary of Styles 139,000 (107,000)
Inventory 276,000 133,000
Prepaid expenses and other current assets 40,000 (3,000)
Accounts payable (4,000) 14,000
Accrued payroll and related expenses (1,000) 14,000
Accrued expenses 19,000 10,000
----------- -----------

Net cash provided by (used in) operating activities (323,000) (642,000)
----------- -----------

Cash flows from investing activities:
Purchases of property and equipment (18,000) (157,000)
Deposits - 15,000
----------- -----------

Net cash used in investing activities (18,000) (142,000)
----------- -----------

Net decrease in cash and cash equivalents (341,000) (784,000)

Cash and cash equivalents, beginning of year 590,000 1,374,000
----------- -----------

Cash and cash equivalents, end of year $ 249,000 $ 590,000
=========== ===========

Supplemental disclosure of cash flow information -
Cash paid during the year for:

Interest $ - $ -
=========== ===========
Income taxes $ 1,000 $ -
=========== ===========
</TABLE>
See independent auditors' report and accompanying notes to financial statements
27
<PAGE>

DYCAM, INC.

NOTES TO FINANCIAL STATEMENTS

For The Years Ended December 31, 1997 and 1996

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
- -----------------------------------------------------------------------------

General
- -------

Dycam Inc. (the "Company"), a Delaware corporation, was incorporated in June
1988. The Company maintains its operating facilities in Chatsworth, California.
The Company has historically designed and developed digital cameras and
associated hardware and software products primarily for use with personal
computers. During the year ended December 31, 1997, however, the Company has
changed its business strategy and focused its product business primarily on
reselling of digital cameras and associated service and maintenance contract
agreements, and focused its technology business on the sales of engineering
services and licensing agreements. The Company is owned 61% by Styles on Video,
Inc., a publicly-traded Delaware corporation ("Styles"). During the year ended
December 31, 1997, Styles declared Chapter 11 bankruptcy (see Note 4).

On December 13, 1996, Styles signed a letter of intent to sell substantially all
of the net assets of Forever Yours, the subsidiary of Styles that leased cameras
from the Company. The buyer was Hasco International ("Hasco"), a competitor of
Forever Yours in the newborn hospital photographic business. Effective January
31, 1997, Styles executed definitive agreements with the buyer for the sale,
which closed in June 1997.

At the closing, Forever Yours and the Company terminated their existing
contractual relationships involving the use of the Company's cameras, software,
and other supporting goods and services, and Hasco and the Company entered into
a Master Agreement (the "Master Agreement") with respect to the assumption of
Forever Yours' digital camera lease obligations to the Company, the leasing by
Hasco of additional Dycam digital cameras, and a royalty-free license of certain
digital camera technology by the Company to Hasco, certain hardware and software
support services to be provided by the Company for a three-year period
commencing on the closing date and certain additional terms. Under the Master
Agreement, Hasco is required to pay the Company specified leasehold payments for
leased cameras, a $300,000 fee (payable quarterly over a three-year period) for
the support services, and the cost of certain hardware upgrades.

Styles has delivered to Hasco an option permitting Hasco to purchase from shares
owned by Styles that number of shares of the Company's common stock equal to
4.9% of the outstanding shares of the common stock of the Company on the closing
date (approximately 152,921 shares as of December 31, 1997). The exercise price
of this three year option to be granted to the buyer is $0.25 which is equal to
the average closing price for the Company's common stock during the period from
January 31, 1997 through June 13, 1997.

28
<PAGE>

DYCAM, INC.

NOTES TO FINANCIAL STATEMENTS

For The Years Ended December 31, 1997 and 1996

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION,
- ------------------------------------------------------------------------------
CONTINUED
- ---------

Basis of Presentation
- ---------------------

The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company has suffered
substantial recurring losses from operations and has an accumulated deficit as
of December 31, 1997. These matters, among others, raise substantial doubt
about the Company's ability to continue as a going concern. The Company's
continuation as a going concern is dependent on its ability to generate
sufficient cash flow to meet its obligations on a timely basis, to obtain
additional financing as may be required, and ultimately to attain profitable
operations. Management's operating plan for calendar year 1998 includes
increased sales, higher margins on certain segments of the custom products and
licensing business, reduced expenses as a percentage of revenues and improved
cash flows sufficient to cover the Company's operating needs. There can be no
assurances that the Company will be successful in these regards. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

Use of Estimates
- ----------------

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

Fair Value of Financial Instruments
- -----------------------------------

The Company has financial instruments whereby the fair market value of the
financial instruments could be different than that recorded on a historical
basis in the accompanying balance sheet. The Company's financial instruments
consist of its cash and cash equivalents, accounts receivable, note receivable
from Styles and accounts payable. The carrying amounts of the Company's
financial instruments generally approximate their fair value at December 31,
1997. The fair market value of the note receivable from Styles is not readily
determinable as market comparables are not readily available for like
instruments.

Cash and Cash Equivalents
- -------------------------

The Company considers investments with a maturity of three months or less when
purchased to be cash equivalents.

29
<PAGE>

DYCAM, INC.

NOTES TO FINANCIAL STATEMENTS

For The Years Ended December 31, 1997 and 1996

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION,
- ------------------------------------------------------------------------------
CONTINUED
- ---------

Inventory
- ---------

Inventory is stated at the lower of cost or market (net realizable value), cost
being determined on the first-in, first-out method. Inventory consists of
cameras and camera components, image editing software and camera accessories.
Such net realizable value is based on forecasts for sales of the Company's
products in the ensuing years. The industry in which the Company operates is
characterized by rapid technological advancement and change. Should demand for
the Company's products prove to be significantly less than anticipated, the
ultimate realizable value of the Company's inventories could be substantially
less than the amount shown on the accompanying balance sheet.

Property and Equipment
- ----------------------

Property and equipment are stated at cost. Expenditures for additions and major
improvements are capitalized. Repairs and maintenance costs are expensed as
incurred. When property and equipment are retired or otherwise disposed of, the
related cost and accumulated depreciation are removed from the accounts. Gains
or losses from retirements and disposals are credited or charged to income.
Depreciation is computed using the straight-line method over the estimated
useful lives of the respective assets. The useful lives range from five to
seven years.

Included in property and equipment is camera equipment held under lease in the
amount of $367,000. Equipment under operating leases is recorded at cost, net
of accumulated depreciation. Such camera equipment is being depreciated over
four years.

Management of the Company assesses the recoverability of property and equipment
by determining whether the depreciation of such assets over their remaining
lives can be recovered through projected undiscounted cash flows. The amount of
impairment, if any, is measured based on fair value (projected discounted cash
flows) and is charged to operations in the period in which such impairment is
determined by management.

30
<PAGE>

DYCAM, INC.

NOTES TO FINANCIAL STATEMENTS

For The Years Ended December 31, 1997 and 1996

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION,
- ------------------------------------------------------------------------------
CONTINUED
- ---------

Capitalized Software Development Costs
- --------------------------------------

The Company accounts for software development costs in accordance with Statement
of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed". As a result, software
development costs incurred after the establishment of technological feasibility
are capitalized and later amortized to cost of revenues on a product-by-product
basis at the greater of the amount computed using the ratio of current gross
revenues for a product to the total of current and anticipated future gross
revenues or the straight-line method over the remaining estimated economic life
of the product. Generally, an original estimated economic life of five years is
assigned to capitalized software development costs. During the years ended 1997
and 1996, no software development costs have been capitalized.

Goodwill
- --------

On February 7, 1994, the Company merged with a wholly-owned subsidiary of Styles
and the Company became a wholly-owned subsidiary of Styles. This acquisition
was accounted for under the purchase method with the purchase price allocated
among the assets acquired and on the basis of their estimated fair values. The
excess of $5,554,000 of the total acquisition cost over the net assets acquired
and liabilities assumed was allocated to goodwill. In accordance with Staff
Accounting Bulletin No. 54, the financial statements of the Company as of
February 7, 1994 were adjusted to "push-down" the Styles' cost of acquiring the
common stock of the Company. Accordingly, the goodwill amount was pushed-down
to the Company and the Company's accumulated deficit at the date of merger was
eliminated. The goodwill was amortized on a straight-line basis over the
expected periods to be benefited. The Company assesses the recoverability of
this intangible asset by determining whether the amortization of the goodwill
balance over its remaining life could be recovered through projected
undiscounted future cash flows. The amount of goodwill impairment, if any, is
measured based on fair value (projected discounted future cash flows) and is
charged to operations in the period in which goodwill impairment is determined
by management. Goodwill was being amortized on a straight-line basis over the
expected 20 year life. During each of the years ended December 31, 1997 and
1996, the Company recorded $278,000 of amortization expense. During the fourth
quarter of 1997, management of the Company determined that the goodwill was
impaired in its entirety because of the Company's change in business strategy
and focus (see "General" above) and therefore, wrote the goodwill (carrying
value of $4,471,000) down to zero.

31
<PAGE>

DYCAM, INC.

NOTES TO FINANCIAL STATEMENTS

For The Years Ended December 31, 1997 and 1996

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION,
- ------------------------------------------------------------------------------
CONTINUED
- ---------

Revenue Recognition
- -------------------

Revenue from camera sales is recognized upon shipment of products. Contract
engineering fees are recognized when the services are performed. License fee
revenue is recognized when earned. Revenue from camera equipment leased is
included in camera sales and is recognized when earned (see Note 4).

Stock Options and Warrants
- --------------------------

During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," which defines a fair value based method of accounting for stock-
based compensation. However, SFAS 123 allows an entity to continue to measure
compensation cost related to stock and stock options issued to employees using
the intrinsic method of accounting prescribed by Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." Entities
electing to remain with the accounting method of APB 25 must make pro forma
disclosures of net income and earnings per share, as if the fair value method of
accounting defined in SFAS 123 had been applied. The Company has elected to
account for its stock-based compensation to employees under APB 25.

Advertising
- -----------

The Company reports the costs of all advertising as expense in the period in
which those costs are incurred. Advertising expense was approximately $83,000
and $120,000 for the years ended December 31, 1997 and 1996, respectively.

Income Taxes
- ------------

The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 ("Statement No. 109"), "Accounting for Income
Taxes." Statement No. 109 requires the asset and liability method of accounting
for income taxes. Under the asset and liability method of Statement 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under Statement 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized.

32
<PAGE>

DYCAM, INC.

NOTES TO FINANCIAL STATEMENTS - CONTINUED

For The Years Ended December 31, 1997 and 1996

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION,
- ------------------------------------------------------------------------------
CONTINUED
- ---------

Limitations on Dividends
- ------------------------

Pursuant to state laws, the Company is currently restricted, and may be
restricted for the foreseeable future, from making dividends to its stockholders
as a result of its accumulated deficit as of December 31, 1997.

Loss Per Common Share
- ---------------------

In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 ("SFAS No.128"), "Earnings
Per Share" ("EPS"). SFAS No. 128 requires dual presentation of basic EPS and
diluted EPS on the face of all income statements issued after December 15, 1997
for all entities with complex capital structures. Basic EPS is computed as net
income divided by the weighted average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur from
common shares issuable through stock options, warrants and other convertible
securities. There was no effect on EPS upon the adoption of the provisions of
SFAS No. 128 for all years presented. Loss per common share has been computed
on the weighted average number of common and equivalent shares outstanding.
Basic and diluted net loss per share are approximately the same.

New Accounting Pronouncements
- -----------------------------

In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, and
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 130 requires that an enterprise report, by major
components and as a single total, the change in its net assets during the period
from nonowner sources; and SFAS No. 131 establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas and major customers. Adoption of these
statements will not impact the Company's financial position, results of
operations or cash flows and any effect will be limited to the form and content
of its disclosures. Both statements are effective for fiscal years beginning
after December 15, 1997, with earlier application permitted

33
<PAGE>

DYCAM, INC.

NOTES TO FINANCIAL STATEMENTS - CONTINUED

For The Years Ended December 31, 1997 and 1996

NOTE 2 - CONCENTRATIONS
- -----------------------

Concentration of Credit Risk
- ----------------------------

Financial investments which potentially expose the Company to a concentration of
credit risk as defined by Statement of Financial Accounting Standards No. 105,
consist primarily of cash and cash equivalents, accounts receivable and notes
receivable from Styles. The Company places its cash and cash equivalents with
high credit quality institutions but at times has amounts in one institution
which significantly exceeds the federally insured limit of $100,000.
Concentration of credit risk with respect to trade receivables is limited due to
the diversity of the Company's customer base. Generally, the Company does not
require collateral or other security to support customer receivables.
Management consistently monitors the financial condition of its customers to
reduce the risk of loss.

Major Customers/Vendors
- -----------------------

International sales accounted for approximately $100,000 and $415,000 or
approximately 4% and 17% of Dycam's revenues for the years ended December 31,
1997 and 1996, respectively.

Hasco and one other customer accounted for 20% and 12%, respectively, of camera
sales for the year ended December 31, 1997. No customer accounted for more than
10% of camera sales for the year ended December 31, 1996.

Two customers accounted for 46% and 34%, respectively, of total contract
engineering fees for the year ended December 31, 1997. A former subsidiary of
Styles accounted for 72% of total contract engineering fees for the year ended
December 31, 1996.

A former subsidiary of Styles and Hasco accounted for 79% and 21%, respectively,
of license fee revenues for the year ended December 31, 1997. A former
subsidiary of Styles accounted for 100% of license fee revenues for the year
ended December 31, 1996.

The Company purchased materials from one vendor for $210,000, which represented
14% of all materials purchased during the year ended December 31, 1997. The
Company had accounts payable to three vendors representing 12%, 22% and 24%,
respectively, of total accounts payable as of December 31, 1997.

The Company purchased materials from one vendor for $756,000, which represented
50% of all materials purchased during the year ended December 31, 1996.

34
<PAGE>

DYCAM, INC.

NOTES TO FINANCIAL STATEMENTS - CONTINUED

For The Years Ended December 31, 1997 and 1996

NOTE 3 - INVENTORY
- ------------------

The components of inventory, net of reserve for obsolescence of $282,000, at
December 31, 1997 are as follows:
<TABLE>

<S> <C>
Raw materials $48,000
Work-in-process 20,000
Finished goods 4,000
-------

$72,000
=======

</TABLE>
NOTE 4 - RELATED PARTY TRANSACTIONS
- -----------------------------------

Note Receivable From Styles
- ---------------------------

On December 14, 1994, the Company loaned to Styles $500,000. On January 25,
1995, the Company loaned an additional $500,000 to Styles. The two notes were
memorialized into an amended and restated promissory note dated January 25, 1995
for the full $1,000,000, bearing interest at 2% above a bank's prime rate,
interest payable monthly with the entire principal balance plus any accrued
interest thereon due and payable on September 1, 1995. The Company subsequently
amended the note thereby extending the maturity date to December 31, 1998 and
changing the interest rate to a flat 10%.

The note is secured by a pledge of 1,916,667 shares of the common stock of the
Company owned by Styles. Included in the accompanying 1997 and 1996 statement
of operations under interest income is $17,000 and $100,000, respectively,
related to the Styles loan, all of which was received as of December 31, 1997.
An additional $88,000 of earned interest income has not been recognized by the
Company due to the uncertainty of collectibility. During the fourth quarter of
1997, the Company determined that the note receivable from Styles was impaired
and, therefore, recorded a loss in the amount of $800,000 as shown in the
accompanying 1997 statement of operations. The remaining balance of $200,000
reflects the Company's estimate of the fair market value of the collateral (the
pledged shares of the Company). The note receivable is shown as an offset to
stockholders' equity in the accompanying statements of stockholders' equity.

35
<PAGE>

DYCAM, INC.

NOTES TO FINANCIAL STATEMENTS - CONTINUED

For The Years Ended December 31, 1997 and 1996

NOTE 4 - RELATED PARTY TRANSACTIONS, CONTINUED
- ----------------------------------------------

The settlement of Styles' outstanding indebtedness to the Company has been
delayed pending the outcome of Styles' Chapter 11 bankruptcy proceedings.
Styles currently holds 61% of the Company's common stock, all of which is
pledged as collateral for the note underlying the indebtedness. Until such time
as the indebtedness is satisfied, voting rights for the pledged stock remains
with the Company.

Revenues
- --------

Included in the accompanying 1997 and 1996 statements of operations under camera
sales, are $141,000 and $191,000, respectively, of revenues related to camera
equipment leased to a former subsidiary of Styles.

Included in the accompanying 1997 and 1996 statements of operations under
contract engineering are $0 and $146,000, respectively, of revenues related to
camera equipment leased to a former subsidiary of Styles.

Included in the accompanying 1997 and 1996 statements of operations under
license fees are $220,000 and $16,000, respectively, of revenues related to
camera equipment leased to a former subsidiary of Styles.

NOTE 5 - OPERATING LEASES
- -------------------------

Included in the accompanying 1997 statement of operations under camera sales are
approximately $390,000 of revenues related to the camera equipment leased to
Hasco under the Master Agreement.

The following is a schedule by year of total minimum lease payments estimated to
be received on the Company's operating leases with Hasco:

<TABLE>
<CAPTION>
Years Ending
December 31,
------------
<S> <C>
1998 $283,000
1999 230,000
2000 12,000
--------

Total minimum lease payments
estimated to be received $525,000
========
</TABLE>

36
<PAGE>

DYCAM, INC.

NOTES TO FINANCIAL STATEMENTS - CONTINUED

For The Years Ended December 31, 1997 and 1996

NOTE 6 - PROPERTY AND EQUIPMENT
- -------------------------------

Property and equipment at December 31, 1997 consists of the following:

<TABLE>
<S> <C>
Machinery and equipment $ 292,000
Camera equipment held under lease 367,000
Office equipment 109,000
---------
768,000

Less accumulated depreciation (534,000)
---------

$ 234,000
=========
</TABLE>

NOTE 7 - COMMITMENTS
- --------------------

Facilities Leases
- -----------------

In March 1995, the Company entered into two new operating leases for its
facilities that expired in January 1998. In January 1998, the Company entered
into an agreement to extend the expiration of the operating lease on its
facilities to January 1999.

The minimum annual future rental commitments under the leases and the extension
are as follows:

<TABLE>
<CAPTION>
Years Ending
December 31,
------------
<S> <C>
1998 $107,000
1999 9,000
--------

$116,000
========
</TABLE>

Rent expense for the years ended December 31, 1997 and 1996 was $107,000 and
$102,000, respectively.

37
<PAGE>

DYCAM, INC.

NOTES TO FINANCIAL STATEMENTS - CONTINUED

For The Years Ended December 31, 1997 and 1996

NOTE 7 - COMMITMENTS, CONTINUED
- -------------------------------

Employment Agreement
- --------------------

On December 20, 1996, the Company entered into an employment agreement contract
with one key employee for a three-year term which expires December 31, 1999.
The agreement calls for annual compensation to be paid of $120,000 a year for
each of the three years. Pursuant to the employment agreement, the Company
granted 90,000 stock options during 1997 that vest 8.33% per calendar quarter
starting the first quarter of 1997. Additionally, in 1997, the Company granted
60,000 stock options to the employee that vest 8.33% per calendar quarter
starting the fourth quarter of 1997 and expire ten years after the date of
grant. These options were repriced to $0.25 in October 1997 (see Note 9).

401(k) Plan
- -----------

The Company has a 401(k) plan for its employees which went into effect August 1,
1994. All individuals already employed by the Company on that date were
considered eligible for the plan. Individuals employed subsequent to that date
are eligible upon completing two months of service with the Company. In
accordance with the terms of the plan, employees may contribute up to 15% of
their pretax earnings to the plan, up to the annual maximum. The Company can
make a discretionary contribution of up to 6.0% of the employee's pretax
earnings. The Company's contribution for the years ended December 31, 1997 and
1996 was approximately $21,000 and $27,000, respectively.

NOTE 8 - INCOME TAXES
- ---------------------

The Company's tax provisions for the years ended December 31, 1997 and 1996
represent state minimum taxes only and differ from the amounts computed by
applying the U.S. federal income tax rate of 34 percent to loss before income
taxes as a result of the following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Computed "expected" tax benefit $(1,878,000) $(444,000)

Increase in income taxes resulting from:
Goodwill amortization not deductible for income
tax purposes 1,616,000 95,000
Change in the beginning-of-the-year balance of the
valuation allowance for deferred tax assets
allocated to income tax benefit 262,000 349,000
State income taxes 1,000 1,000
----------- ---------

$ 1,000 $ 1,000
=========== =========
</TABLE>
38
<PAGE>

DYCAM, INC.

NOTES TO FINANCIAL STATEMENTS - CONTINUED

For The Years Ended December 31, 1997 and 1996

NOTE 8 - INCOME TAXES, CONTINUED
- --------------------------------

The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets at December 31, 1997 are presented below:
<TABLE>
<CAPTION>

<S> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance
for doubtful accounts $ 2,000
Warranty reserves 4,000
Inventory reserves 112,000
Compensated absences due to accrual for financial
reporting purposes 17,000
Net operating loss carryforwards 1,060,000
Tax credit carryforwards 71,000
-----------

Total deferred tax assets 1,266,000

Less valuation allowance (1,266,000)
-----------

Net deferred tax assets $ -
===========
</TABLE>

As of December 31, 1997, the Company had net tax operating loss carryforwards of
approximately $2,871,000 for federal tax purposes which expire through 2012. As
of December 31, 1997, the Company had net tax operating loss carryforwards of
approximately $1,429,000 for state tax purposes which expire through the year
2002.

In general, Section 382 of the Internal Revenue Code includes provisions which
may limit the amount of net operating loss carryforwards and other tax
attributes that may be used annually in the event that a greater than 50%
ownership change (as defined) takes place in any three-year period. Such
limitations can result in the loss of net operating loss carryforwards.

NOTE 9 - STOCK OPTIONS
- ----------------------

During 1994, the Company adopted a stock incentive plan (the "1994 Plan")
pursuant to which there are 850,000 shares of common stock reserved for
issuance. Stock options as to 646,000 shares were granted at an exercise price
of $4.00 per share which was at or above the estimated fair market value at the
date of grant and vest 33% per year over a three year period as to 346,000 of
the options and over one year as to 300,000 of the options. These options
expire in the year 2004. On January 25, 1995, the Company repriced its 646,000
options outstanding under the 1994 Plan to $2.31, the estimated fair market
value of the Company's common stock at that date. During 1995, 300,000 of these
options expired upon the resignation of an employee. During 1997, the Company
repriced the remaining 346,000 options to $0.25, the estimated fair value of the
Company's common stock at the time of repricing.
<PAGE>

DYCAM, INC.

NOTES TO FINANCIAL STATEMENTS - CONTINUED

For The Years Ended December 31, 1997 and 1996

NOTE 9 - STOCK OPTIONS, CONTINUED
- ---------------------------------

During 1994, the Company also granted options outside of the 1994 Plan to
purchase 56,079 and 100,000 shares of common stock at $3.21 and $4.00 per share,
respectively. These stock options were granted at or above the estimated fair
market value at the date of grant, vested immediately and expire in the year
2004.

Option activity for the years ended December 31, 1997 and 1996 was as follows:

1994 PLAN OUTSIDE PLAN EXERCISE PRICE
------------ -------------- ---------------
<S> <C> <C> <C>
Options outstanding at
January 1, 1996 346,000 156,079 $ 0.25 - $4.00

Options granted - - -
Options expired - - -
------------ -------------- ---------------
Options outstanding at
December 31, 1996 346,000 156,079 0.25 - 4.00

Options granted 150,000 - 0.25
Options expired - -
------------ -------------- ---------------
Options outstanding at
December 31, 1997 496,000 156,079 $ 0.25 - $4.00
============ ============== ===============
Exercisable at
December 31, 1997 396,000 156,079 $ 0.25 - $4.00
============ ============== ===============
</TABLE>

SFAS 123 Pro Forma Information
- ------------------------------

Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of SFAS 123. The fair value
for these options was estimated at the date of grant using the Black Scholes
option pricing model with the following assumptions for the year ended December
31, 1997; risk free interest rate 7.2%; dividend yield of 0%; expected life of
the option of 3 years; and volatility factor of the expected market price of the
Company's common stock of 100%.

40
<PAGE>

DYCAM, INC.

NOTES TO FINANCIAL STATEMENTS - CONTINUED

For The Years Ended December 31, 1997 and 1996

NOTE 9 - STOCK OPTIONS, CONTINUED
- ---------------------------------

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

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option vesting period. Adjustments are made
for options forfeited prior to vesting. The effect on compensation expense, net
loss, and net loss per common share had compensation costs for the Company's
stock option plans been determined based on a fair value of the date of grant
consistent with the provisions of SFAS 123, for the year ended December 31,
1997, are as follows:

<TABLE>
<S> <C>
Net loss, as reported $(6,324,000)

Adjustment to compensation expense under SFAS 123 (111,000)
-----------

Net loss, pro forma $(6,435,000)
===========

Net loss per common and common equivalent share, as reported $ (2.03)
===========

Net loss per common and common equivalent share, pro forma $ (2.06)
===========

</TABLE>
41
<PAGE>

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT OF DYCAM

Information regarding directors and executive officers of Dycam will
appear in the Proxy Statement of the Annual Meeting of Stockholders and
is incorporated herein by this reference. The Proxy Statement will be
filed with the SEC within 120 days following December 31, 1997.

ITEM 10. EXECUTIVE COMPENSATION

Information regarding executive compensation will appear in the Proxy
Statement for the Annual Meeting of Stockholders and is incorporated
herein by this reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information regarding security ownership of certain beneficial owners
and management will appear in the Proxy Statement for the Annual
Meeting of Stockholders and is incorporated herein by this reference.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding certain relationships and related transactions
will appear in the Proxy Statement for the Annual Meeting of
Stockholders and is incorporated herein by this reference.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS:

See attached Exhibit Index.

(b) REPORTS ON FORM 8-K:

None.

42
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934 the Registrant has caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, this fourteenth day of
April, 1998.

DYCAM INC.
(Registrant)

By: /s/ John A. Edling
-------------------------
John A. Edling
Its: Chief Operating Officer

In accordance with the Exchange Act, this Report has been signed below by
the following persons on behalf of the Registrant and in the capacities
indicated and on the dates indicated.
<TABLE>
<CAPTION>

Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Ronald Iversen Chairman of the Board, Chief April 14, 1998
- ------------------ Executive Officer, President
Ronald Iversen

/s/ John Edling Chief Operating Officer, Chief April 14, 1998
- ------------------ Financial Officer, Treasurer,
John Edling Secretary and Director

/s/ George Ismael Chief Technology Officer April 14, 1998
- ------------------ and Director
George Ismael

</TABLE>

43
<PAGE>

EXHIBIT INDEX

Exhibit Sequential
No. Document Page No.
- ------- -------- ----------
<C> <S> <C>
3.1 Restated Certificate of Incorporation of Dycam Inc.(2)...............

3.2 Amended and Restated Bylaws of Dycam Inc.(2).........................

4.1 Dycam Inc. Specimen Stock Certificate(3).............................

10.3 Development Master Agreement, dated March 11, 1993, by and
between Dycam Inc. and International Business Machines
Corporation; and Task Order Number One, dated March 11, 1993,
and Task Order Number Two, dated June 1, 1993,
related thereto(1)...................................................

10.4 License Agreement, dated December 9, 1990, by and between Dycam Inc.
and Logitech, Inc.(1).................................................

10.5 Restated License Agreement, effective as of June 15, 1993, by and
between Dycam Inc. and Logitech, Inc.(1)..............................

10.6 Research Agreement, dated as of June 30, 1993, by and between
Dycam Inc. and University of Florida Research Foundation(1)...........

10.7 Form of Dycam Inc. Authorized Reseller Agreement(1)...................

10.8 Form of Dycam Inc. Associate Agreement(1).............................

10.9 Form of Dycam Inc. Authorized International Distribution
Agreement(1)..........................................................

10.10 United States Patent No. 4,074,324 for Instant Electronic Camera,
filed July 14, 1975, listing Jon S. Barrett as the Inventor(1)........

10.11 United States Patent No. 5,249,093 for Filmless Digital Camera With
Selective Image Compression, filed August 7, 1992, listing
Jaswant R. Jain as the Inventor(1)....................................

10.12 Letter Agreement, dated August 11, 1993, by and between Styles on
Video, Inc. and Dycam Inc.(1).........................................

10.13 Employment Agreement by and between Dycam Inc. and John Edling(2).....

10.14 Employment Agreement by and between Dycam Inc. and George
Ismael(2).............................................................

10.15 Form of Non-Compete Agreement by and between Styles on Video,
Inc., Dycam Inc. and various stockholders of Dycam Inc.(1)............

10.16 Form of Standstill Agreement by and between Styles on Video, Inc.
and various stockholders of Dycam Inc.(1).............................

10.17 Form of Option Agreement by and between Dycam Inc. and various
Dycam Inc. stockholders(1)............................................

10.18 Letter Agreement, dated November 4, 1993, by and among Styles on
Video, Inc. Dycam Inc. and George Ismael(1)...........................
</TABLE>

44
<PAGE>
<TABLE>

<C> <S>
10.19 Form of Agreement and Certificate of Merger Merging Dycam Acquisition
Corp. with and into Dycam Inc.(2).............................................

10.20 Dycam Inc. Employee Handbook, dated May 25, 1993(2)...........................

10.21 1994 Stock Incentive Plan of Dycam Inc.(2)....................................

10.22 Letter Agreement, dated January 25, 1995, by and between Styles on
Video, Inc. DYCAM, INC.(4)....................................................

10.23 Amended and Restated Promissory Note, dated January 25, 1995, made by
Styles on Video, Inc. in favor of Dycam Inc. (4)..............................

10.24 Sublease Agreement, dated November 15, 1994, by and between Edwards and
Lock Management Corporation as Sublessor and Dycam Inc. as Sublessee for
property located at 9414 Eton Avenue, Chatsworth, California 91311 (4).......

10.25 Lease Agreement, dated December 7, 1994, by and between Northpark
Industrial as Lessor and Dycam Inc. as Lessee for property located at
9414 Eton Avenue, Chatsworth, California 91311 (4)............................

21.1 List of Subsidiaries of Dycam Inc.............................................

23.1 Consent of Corbin & Wertz.....................................................

27 Financial Data Schedule.......................................................
</TABLE>

_______________________

(1) Incorporated by reference from Styles on Video, Inc.'s Registration
Statement on Form S-4 as filed with the SEC on January 4, 1994.
(2) Incorporated by reference from Dycam Inc.'s Registration Statement on
Form SB-2 as filed with the SEC on May 3, 1994.
(3) Incorporated by reference from Amendment No. 3 to Dycam Inc.'s
Registration Statement of Form SB-2 as filed with the SEC on June 17,
1994.
(4) Incorporated by reference from Dycam Inc.'s 1994 form 10-KSB as filed
with the SEC on April 15, 1995.

<PAGE>

EXHIBIT 21.1

LIST OF SUBSIDIARIES OF DYCAM INC.

None

<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS
-------------------------------

The Board of Directors
Dycam Inc.

We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (333-04597) and on Forms S-8 (33-86252, 33-86254 and 33-
86374) of our report dated March 17, 1998 appearing in the Annual Report on Form
10-KSB of Dycam Inc. for the year ended December 31, 1997.

CORBIN & WERTZ

Irvine, California
April 13, 1998

<PAGE>

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 249,000
<SECURITIES> 0
<RECEIVABLES> 389,000
<ALLOWANCES> 5,000
<INVENTORY> 72,000
<CURRENT-ASSETS> 705,000
<PP&E> 768,000
<DEPRECIATION> 534,000
<TOTAL-ASSETS> 957,000
<CURRENT-LIABILITIES> 251,000
<BONDS> 0
0
0
<COMMON> 31,000
<OTHER-SE> 675,000
<TOTAL-LIABILITY-AND-EQUITY> 957,000
<SALES> 2,609,000
<TOTAL-REVENUES> 2,609,000
<CGS> 1,778,000
<TOTAL-COSTS> 1,778,000
<OTHER-EXPENSES> 7,185,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,323,000)
<INCOME-TAX> 1,000
<INCOME-CONTINUING> (6,324,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,324,000)
<EPS-PRIMARY> (2.03)
<EPS-DILUTED> (2.03)

</TABLE>