Laser Pacific Media Corp – ‘10-K’ for 12/31/97

As of:  Wednesday, 4/15/98   ·   For:  12/31/97   ·   Accession #:  875738-98-9   ·   File #:  0-19407

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Annual Report   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        1997 10-K                                             30    178K 
 2: EX-27       Financial Data Schedule                                1      6K 

10-K   —   1997 10-K
Document Table of Contents

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 UNITED STATES
SECURITIES
 AND EXCHANGE COMMISSION
Washington, D.C. 20549

 FORM 10-K
[Mark one]
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) of the SECURITIES EXCHANGE ACT
OF 1934 
 For the fiscal year ended December 31, 1997
OR
 [ ] 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 0-19407

 LASER-PACIFIC MEDIA CORPORATION
(Exact name of registrant as specified in its charter)

Delaware                        95-3824617
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

809 N. Cahuenga Blvd., Hollywood, California 90038
 (Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (213) 462-6266

 Securities registered pursuant to Section 12(b) of the Act:
None

 Securities registered pursuant to section 12(g) of the Act:
 Common Stock ($.0001 par value)
Preferred Stock ($.0001 par value)
Series A Preferred Stock
(Title of Class)

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

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant  on March  31,  1998  (based  upon the  closing  price on the  NASDAQ
Small-Cap Market System on that date was $3,564,086).                           

Number of shares of Common Stock, $.0001 par value,  outstanding as of March 31,
1998: 7,128,172.                                                                

DOCUMENTS  INCORPORATED  BY REFERENCE  Registrant's  Notice of Annual Meeting of
Shareholders  and  definitive  Proxy  Statement,  which  will be filed  with the
Securities and Exchange Commission pursuant to Regulation 14A not later than 120
days after the close of the Registrant's fiscal year Parts I and III            

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 LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES

 Table of Contents

                                                                          Page

Item 1      Business                                                       1    
Item 2      Properties                                                     4    
Item 3      Legal Proceedings                                              4    
Item 4      Submission of Matters to a Vote of Security Holders            4    
Item 5 Market for Registrant's  Common Stock and Related Security               
           Holder Matters                                              5
Item 6      Selected Financial Data                                        6    
Item 7      Management's Discussion and Analysis of Financial                   
           Condition and Results of Operations                         7
Item 8      Financial Statements and Supplementary Data                    10   
Item 9      Changes in and Disagreements with Accountants on                    
            Accounting and Financial Disclosure                         10
Item 10     Directors and Executive Officers of the Registrant             33   
Item 11     Executive Compensation                                         33   
Item 12     Security Ownership of Certain Beneficial Owner and                  
            Management                                                  33
Item 13     Certain Transactions                                           33   
Item 14     Exhibits, Financial Statement Schedules, and                        
            Reports on Form 8-K                                         34

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                                                  PART I

ITEM 1.  BUSINESS                                                               

A.  General                                                                     

     Laser-Pacific   Media  Corporation   ("Laser-Pacific"   or  the  "Company")
primarily provides  post-production  services to producers of prime-time network
television  series and  television  movies  made in North  America.  The Company
believes it is a leading  provider  of these  services.  Through its  Electronic
LaboratoryTM , and other related  operations the Company  provides all technical
aspects of processing  picture and sound after  principal  photography  has been
completed, known as post-production. The Electronic LaboratoryTM , for which the
Company  received  an  Emmy  award  in  1989  for  Outstanding   Achievement  in
Engineering  Development was the first facility  specifically  designed to apply
electronic  post-production technology to filmed television programs and its use
has led to  significant  savings of time and money for  producers.  The  Company
believes that the Electronic LaboratoryTM , and the systems approach utilized in
its  development,  differentiates  the  Company  from other  film and  videotape
post-production  companies  and has  resulted in an  industry  model for merging
video and film technologies.                                                    

     The Company offers a full range of  post-production  services to television
producers at its facilities in Hollywood and Burbank,  California and Vancouver,
Canada. These services,  which begin immediately after completion of photography
and  end  with  the  delivery  of  a  videotape   master  ready  for  television
broadcasting,  include film processing,  film to videotape transfer,  electronic
editing of the videotape (including the addition of special effects and titles),
color correction, sound editing and mixing, and duplication.                    

     The Company also developed and leases a transportable  computerized editing
systems called Spectra System,  which uses proprietary laser disc technology for
editing filmed or videotaped  programs.  In 1988,  the Company  received an Emmy
Award  for  Outstanding  Achievement  in  Engineering  Development  for the D220
dual-headed laser disc player, which is part of the Spectra System.             

     In addition to its primary  business  activities,  the Company (i) provides
traditional  post-production  services to producers of  videotaped  shows,  (ii)
leases  mobile  studio  units for  videotaped  productions,  (iii)  offers  film
processing  and sound  editing,  mixing  services to the producers of theatrical
motion pictures, and provides digital video compression.                        

     Both Laser-Pacific  Media Corporation  (formerly Spectra Image) and Pacific
Video (which merged with the Company in September  1990) were organized in 1983.
Spectra  Image began by building  its  post-production  service  capability  and
facilities primarily focused on the post-production of filmed situation comedies
(sitcoms)  produced for prime-time  network  television.  In addition,  it began
developing the Spectra System  electronic  editing system in 1985 and introduced
it in late 1986. Pacific Video,  targeting the post-production market for filmed
dramatic television series, introduced the Electronic LaboratoryTM in 1985. Both
Pacific  Video  and  Spectra  Image  focused  on the  post-production  of filmed
television  programs,  as  approximately  80% of prime-time  network  television
series are shot on film as opposed to videotape.  In addition,  it was believed,
and management  still  believes,  that film will remain the medium of choice for
these  television  programs  because  of  viewer  preference  for  the  look  of
television  programming  shot on film and numerous other film advantages such as
lower equipment cost,  greater  availability of skilled camera operators working
on film and greater  portability of film cameras.  Beginning in the  mid-1980's,
management  recognized that the Company could obtain a significant customer base
and  become  the  leader in the  post-production  of filmed  prime-time  network
television  programs  by offering  producers  the speed and cost  advantages  of
electronic post-production at a fully-integrated facility.                      

     In January 1988,  Pacific Video  acquired a 75% equity  interest in Pacific
Video Canada,  Ltd.,  ("PVC"),  formerly known as Tegra Industries,  Inc., whose
film processing and post-production facilities are located in Vancouver, Canada.
Pacific  Video sought a presence in the Vancouver  market  because an increasing
number of television  producers  shooting programs in Canada intended for United
States network  television were having their  post-production  work performed in
Canada. The Company's  Vancouver presence has generated  additional business for
its Hollywood  facilities.  At the present time, the Company owns  approximately
77% of the outstanding capital stock of PVC.                                    

     It is anticipated  the future growth of the Company's  business will be the
result of the  expansion of its services  offered to theatrical  motion  picture
producers,  digital compression and digital video services,  electronic graphics
and effects,  and the  continued  development  and  enhancement  of  proprietary
post-production systems by its engineering staff.                               

B.  Post-Production Services                                                    

     Industry Background. Post-production services comprise all of the technical
functions  and  operations   necessary  to  complete  a  television  program  or
commercial advertisement after the principal photography has been completed. The
photography  is  completed  on film or  videotape  depending  upon  the  desired
characteristics  of the visual images needed for the program or  commercial.  In
general, movies, mini-series and dramatic shows produced for television are shot
on film. During the last 20 years, many producers of television programming have
chosen to contract for many post-production  services rather than doing the work
themselves  because  of the high  fixed  overhead  cost,  high  level of capital
investment  and  the  expertise  required  to  provide  quality  post-production
services.                                                                       

     Post-production   services  include  film   processing,   film-to-videotape
transfer,  film or videotape  editing,  addition of special effects,  titles and
credits, addition of music and sound effects, sound mixing, color correction and
duplication of completed master videotapes. The Company provides a full range of
these post-production services to its clients.                                  

     Videotape  Editing.  The  editing  process at the  Company  begins with the
developed  negative  with  respect  to filmed  programs  and with the  delivered
videotape as to shows shot on videotape,  since videotape can be played back and
viewed immediately after recording without any processing.                      

     Post production services with respect to filmed programming continue in the
Company's  Electronic  LaboratoryTM  where  the  Company  performs  all  of  the
post-production  services required after negative  development of the film up to
the delivery of high-quality  duplicates of the final color-corrected  videotape
master  for   television   broadcasting.   The  first  step  in  the  Electronic
LaboratoryTM  process is to transfer the developed negative images to videotape,
a process called telecine, for subsequent electronic editing and processing.  In
addition,  the  magnetic  tape  containing  the sound,  which is recorded as the
camera is  capturing  the  images,  is  converted  to  digital  information  and
transferred to digital audio cassette for  synchronization to the negative.  The
digital audiotape is subsequently  transferred onto a computer for sound editing
and mixing. See "Sound Editing and Mixing" below.                               

     After completion of the film-to-tape  transfer,  the initial editing of the
videotape is usually performed at the customers'  premises by their employees on
electronic  editing  machines  rented from the Company or another  manufacturer.
This editing is typically called "offline  editing" and the process is performed
on  lower-cost  recordings,  which  are made  from the  high-quality  videotapes
created in the film-to-tape transfer. The offline editing uses a time-code-based
computer control system to record all of the basic editing decisions.           

     After the  completion of the offline  editing  process,  the resultant edit
decision  list is returned to the Company's  facilities  where the final "online
editing"  is  completed.  The goal of online  editing  is to  produce a finished
broadcast-quality  videotape  master,  including  all special  optical  effects,
titles  and  credits.  The online  editing  rooms are  equipped  with all of the
broadcast-quality  equipment  needed  to  complete  the  visual  elements  of  a
television program, and as such these rooms are expensive to build and equip and
result in a high hourly rental rate.  The Company has four online  editing rooms
at its Hollywood facility, four in Burbank, and two in Canada.                  

     In November  of 1993 the  Company  introduced  its  SuperComputer  Assembly
system.  Installed in its Hollywood facility,  the SuperComputer Assembly system
enables the Company to online assemble  television  programs three to four times
faster than  conventional  techniques.  The proprietary  system has been used on
dozens of series and movies for  television,  reducing the Company's labor costs
and providing its clients with faster service at highest quality.               

     Feature Film Mastering. Utilizing the newly acquired Philips Data Cine film
scanner,  the company entered the Feature Film Mastering business in November of
1997.  Feature  Film  mastering  is the process in which a  videotape  master is
created from film  elements of a  theatrical  motion  picture.  Then the Company
typically  creates  several  versions of each film so that it can be used in the
two common world  standards - NTSC and PAL, as well as for the emerging  digital
television High Definition standard.                                            

     Digital Graphics and Effects. Utilizing digital workstation technology, the
Company creates and designs  graphical  elements,  special  effects,  titles and
other  specialized work on television and motion  pictures.  The tools used have
the  capability  of  very  high  quality  film   resolution  for  combining  and
manipulation of images digitally.                                               

     Digital Compression  Services.  Using SuperComputer and other digital media
technology,  the Company provides  digital  compression and other services which
results in the creation of recordings  that can be used in CD-ROM,  digital file
servers and Video-on  Demand  applications.  The company also  provides  digital
compression services for the new Digital Video Disc (DVD) format. In addition to
compression,  the company provides the services  necessary to "author" DVD discs
which entail the creation of a master  element  including  disc  navigation  and
interactivity,  DVD menu  design  and  formatting  so that this  element  can be
replicated onto DVD discs.                                                      

     Color Timing.  Color timing is a  post-production  step, which is generally
required on  dramatic  programs  whether the program  editing is done on film or
videotape.  The Company has  designed and  assembled a  customized  color timing
system  for final  balance  of color  contrast  and  brightness  which  produces
cost-effective  color  corrections  on a basis  significantly  faster  than  the
traditional  film  laboratory  equivalent.  At the present time, the Company has
three rooms equipped with electronic color correction capabilities.             

     Sound Editing and Mixing. Sound editing and mixing is one of the last steps
in  the  post-production  process.  To  be  in  a  position  to  offer  complete
post-production   services  and  facilities  to  its   customers,   the  Company
established  Pacific Sound  Services in September,  1989,  which  provides sound
editing and mixing  services for both  television and theatrical  motion picture
producers.  This is a unique  all-digital,  tapeless  sound  editing  and mixing
facility includes sound studios for the original  recording of sound effects and
dialogue  and,  for the final  mixing of complex  programs  shot on film and for
mixing videotaped programs, plus digital sound editing systems.                 

     Release  Services.  After the  videotape  master  is in its final  form for
delivery, including color correction, finished soundtrack and title and credits,
videotape  copies are made in any format  required  for  broadcast  or  archival
storage in limited quantities by the Company.                                   

C.  Film Production Services                                                    

     Film  Processing.  After film  photography is completed,  the film negative
must be developed in a processing  laboratory before it can be exposed to light.
Then, either the negative is electronically transferred to videotape or positive
film prints are struck from the developed negative for subsequent viewing daily.
Dailies are processed for delivery by early the following day for viewing by the
production staff. The acquisition of certain assets of United Color Laboratories
in 1988 enabled the Company to expand its  services  and increase its  operating
hours and efficiency.                                                           

     A subsidiary of the Company,  Pacific Film Laboratories,  has four negative
film developing  machines with a capacity of approximately  210,000 feet of film
per day. The filming of an average one-hour dramatic  television show results in
the exposure of  approximately  5,000 to 6,000 feet of film daily.  In addition,
the facility has two positive developing machines, several  negative-to-positive
printers,  preparation  and color value  machines  and other  support  equipment
necessary to perform the tasks required for high-quality film processing.       

     Alpha Cine Service,  PVC's processing laboratory division, has two negative
film developing  machines with a capacity of approximately  100,000 feet of film
per day, In addition, the facility has one positive developing machine,  several
negative-to-positive  printers,  preparation  and color value machines and other
support equipment.                                                              

D. Production Services                                                          

     A subsidiary of the Company,  PDS Video Productions,  Inc., leases complete
videotape  production  equipment to producers of television shows. The Company's
three mobile studios are typically used to record  multiple-camera  sitcom shows
and can be used in a studio  or on  location.  The  Company  currently  provides
production service to shows such as "Kelly, Kelly" and "Wayan's Brothers."      

E. Employees                                                                    

     At  December  31,  1997,  the  Company  had   approximately  235  employees
(including  employees  of PVC).  Many of the  Company's  employees  are  skilled
technicians and the Company's future success will depend,  in large part, on its
ability to continue to attract, retain and motivate highly qualified persons.   

     Approximately 30 employees are represented by the International Alliance of
Theatrical and Stage Employees  pursuant to a collective  bargaining  agreement,
which expires in the year 2000 (which  included a supplemental  memorandum  that
expired in February  1998).  The Company has never  experienced a work stoppage,
and considers its relations with its employees to be excellent.                 

F.    Competition                                                               

     The Company experiences  competition in all phases of its business. Some of
the Company's competitors have been in one or more of the same lines of business
for a longer period of time, have established reputations and often have greater
financial  resources  than the  Company.  Moreover,  the Company does have a few
competitors  which  are also  fully  integrated  and offer a  complete  range of
post-production  services.  The Company  believes it is  distinguished  from its
competition  through  the  Electronic  Laboratory,  which  combines  proprietary
technology and software with the Company's marketing and organizational approach
to  post-production.  There can be no assurance that the Company will be able to
maintain its competitive advantage as rapid technological change takes place.   

ITEM 2.  PROPERTIES                                                             

     The Company owns a 29,000 square foot  building  located on a 39,000 square
foot lot in Hollywood,  California  where its film  processing and sound editing
and mixing services are provided. In addition,  the Company leases approximately
24,700 square feet in six buildings in Hollywood, California, which contains its
executive offices and the balance of its Hollywood  post-production  facilities.
Lease terms expire in 1998, with renewal options in most instances.  The Company
also  leases  approximately  23,000  square  feet at two  locations  in Burbank,
California on a  month-to-month  basis. The Company believes that its facilities
are adequate for its operations as now conducted and for the foreseeable future.
Pacific Video Canada owns an 11,000 square foot building in Vancouver  where its
processing services are located. In addition,  PVC leases  approximately  12,000
square feet which contains its post-production facilities.                      

     The Company believes that its facilities,  some of which include the use of
chemical products,  substantially  comply with all applicable  environmental and
other laws and regulations.                                                     

ITEM 3.  LEGAL PROCEEDINGS                                                      

     The  Company  may  have  certain  contingent   liabilities  resulting  from
litigation and claims  incident to the ordinary  course of business.  Management
believes that the probable  resolution of such contingencies will not materially
affect the  financial  position,  results of  operations,  or  liquidity  of the
Company.                                                                        

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

     No matters were  submitted to a vote of security  holders during the fourth
quarter of 1997.                                                                

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 PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER       
MATTERS.                                        

     The Company's Common Stock trades on The NASDAQ SmallCap Market tier of the
NASDAQ Stock Market under the symbol LPAC.                                      

                                                      High             Low
1996                                                                            
  First Quarter                                    $1.125           $0.625
   Second Quarter                                   $2.50            $0.6875
   Third Quarter                                    $1.625           $0.5625
  Fourth Quarter                                   $1.4375          $0.625

1997                                                                            
    First Quarter                                    $0.90625         $0.53125
  Second Quarter                                   $0.8125          $0.375
   Third Quarter                                    $0.50            $0.3125
  Fourth Quarter                                   $0.4375          $0.125

1998                                                                            
  First Quarter                                    $0.98            $0.125

     The Company had 266  stockholders  of record on April 1, 1998.  This number
does not include the several hundred  stockholders holding their stock in street
name. On April 1, 1998, 4,453,094 shares were held by CEDE & Company.           

     The  Company has never paid a cash  dividend on its shares of Common  Stock
and currently intends to retain its earnings,  if any, for use in its operations
and the expansion of its business.  Consequently,  it does not anticipate paying
any cash dividends in the foreseeable future. In addition,  the Company's Credit
Agreement  with the CIT Group  prohibits  the payment of cash  dividends  on its
Common Stock without bank  approval.  The Company does not  anticipate  that the
restriction  on  the  payment  of  cash  dividends  will  be  eliminated  in the
foreseeable future.                                                             

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ITEM 6.  SELECTED FINANCIAL DATA                                                

     The following table summarizes  selected  financial data of the Company and
its  consolidated  subsidiaries  for each of the last  five  fiscal  years:  (in
thousands except for per share data.)                                           

                                                        [Enlarge/Download Table]
                                                                                                                  
                                                 1993(1)       1994(1)          1995          1996           1997 
Statement of Operations Data:                                                                                     
  Revenues                                       $30,064       $30,244       $28,693       $28,878        $28,291 
  Operating expenses:                                                                                             
      Direct                                      20,862        17,545        18,022        18,847         18,343 
      Depreciation and amortization                6,464         5,295         4,983         5,318          4,207 
      Loss on restructuring charge                 2,550             0             0             0              0 
                                            -------------  ------------  ------------  ------------  -------------
                                                  29,876        22,840        23,005        24,165         22,550 
                                            -------------  ------------  ------------  ------------  -------------
  Gross profit                                       188         7,404         5,688         4,713          5,741 
  Selling, general and administrative              6,210         4,874         4,978         4,678          4,279 
       expense                                                                                                    
  Severance costs                                  1,770             0             0             0              0 
  Write off property and equipment                 2,168             0             0           148              0 
                                            -------------  ------------  ------------  ------------  -------------
  Income (loss) from operations                   (9,960)        2,530           710          (113)         1,461 
  Interest expense                                (1,949)       (1,891)       (1,813)       (1,563)        (1,563)
  Other income                                       105           103           404            42             41 
  Minority interest income (loss                      51          (119)          (59)          (53)           (54)
  Income tax expense                                  55           142           291           165            232 
                                            -------------  ------------  ------------  ------------  -------------
  Net income (loss) before litigation                                                                             
      settlement                                 (11,808)           481       (1,049)       (1,852)          (347)
  Litigation settlement                                0             0         3,209             0              0 
                                            =============  ============  ============  ============  =============
  Net income (loss)                              (11,808)          481         2,160        (1,852)          (347)
                                            =============  ============  ============  ============  =============

  Basic net income (loss) before                                                                                  
      litigation settlement per share             ($1.84)        $0.07        ($0.16)       ($0.26)        ($0.05)

  Basic net income (loss) per share               ($1.84)        $0.07         $0.33        ($0.26)        ($0.05)
                                            -------------  ------------  ------------  ------------  -------------

  Weighted average common                                                                                         
     shares outstanding                            6,418         6,493         6,568         7,061          7,128 
                                            =============  ============  ============  ============  =============

Balance Sheet Data:                                                                                               

  Working capital (deficiency)                  ($13,951)      ($6,720)      ($2,099)       (2,498)        (2,332)
  Total assets                                    28,776        26,009        28,172        22,304         22,488 
  Current installments of notes payable,                                                                          
     notes payable to related parties, and                                                                        
     and long-term debt                           13,235         7,746         6,521         5,278          5,894 
  Long-term debt, excluding current                                                                               
     installments                                  2,284         5,794         7,893         7,959          8,139 
  Net stockholders' equity                         4,789         5,298         7,458         6,101          5,772 


     (1) Certain prior year balances have been  reclassified to conform with the
current year's presentation.                                                    

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

Results of Operations                                                           

1997 Compared to 1996                                                           

     Company revenues during 1997 were $28.3 million compared with $28.9 million
in 1996,  a decrease of $587,000 or 2.0%.  The  decrease in revenue is comprised
primarily of a decrease in Film Production Services of $452,000,  an increase of
$272,000 in Post Production  Services,  and a decrease of $407,000 in Production
Services.  At our  United  States  facilities  revenues  were down  $703,000,  a
decrease of 3.0% and revenues from International  operations  increased $116,000
or 2.3%.  The decline in revenues at our United  States  facilities  was brought
about  by the  continued  decline  in  revenues  associated  with the use of the
Spectra Edit System,  decline in  production  services  and our  elimination  of
positive film  services.  These  declines were offset by growth and  significant
increases in other services offered by the company such as Digital  Compression,
Special Effects and Graphics and Movie Mastering.                               

     Direct operating  expenses  excluding  depreciation  and amortization  were
$18.3  million in 1997 as  compared  with $18.8  million in 1996,  a decrease of
$504,000  or 2.7%.  The  decrease  is the  result of a  decrease  in the cost of
materials and lower bad debt expense which were partially  offset by an increase
in health  insurance costs and occupancy costs. The decrease in material cost is
the result of the changing mix of services provided by the company which require
lower material costs.                                                           

     Depreciation and  amortization  expense was $4.2 million for the year ended
December 31, 1997,  compared to $5.3 million for 1996, a decrease of  $1,111,000
or 20.9% The decrease is the result of the Company  purchasing less  depreciable
capital  equipment in 1996 and 1997,  than the amount of  equipment  that became
fully depreciated during the same period.                                       

     Consolidated  gross profit was $5.7  million in 1997 as compared  with $4.7
million in 1996,  a $1,027,000  increase or 21.8%.  The  Company's  consolidated
total  operating  expenses for 1997 were $22.6  million,  as compared with $24.2
million in 1996, a decrease of  $1,615,000  or 6.7%.  As a  percentage  of total
revenues,  total operating expenses were 79.7% in 1997 versus 83.7% in 1996. The
increase in gross profit is due to the combined  effects of decreased  operating
costs and  decreased  depreciation  expense,  offset by lower sales as explained
above.                                                                          

     The Company's selling, general and administrative (SG&A) expenses were $4.3
million  during 1997 as compared to $4.8 million in 1996, a decrease of $547,000
or  11.3%.  The  decrease  in  SG&A is  attributable  to  cost  savings  in many
categories,  including advertising,  office supplies,  accounting, legal, travel
and promotions.  The cost savings are attributable to the Company's  emphasis in
containing  and reducing  expenses.  Also,  there was a write-off of $148,000 in
equipment in 1996 with no corresponding write-offs in 1997.                     

     In 1997,  there was no provision for U.S. Federal Income Tax as a result of
the net operating loss incurred.  The Income Tax expense of $232,000 in 1997 was
comprised  of foreign  income tax expense in the amount of $227,000  relating to
Canadian income tax imposed on the pre-tax income of the Canadian  subsidiary in
the amount of  $462,000  and State  income  tax  expense in the amount of $5,000
composed of the minimum Franchise tax.                                          

     The Company had no significant  change in interest  expense in 1997, it was
$1.6  million  versus $1.6 million in 1996.  Although the  borrowing in 1997 was
higher than 1996, the effective interest rate on the loans was lower.           

     As a consequence of the above factors,  the Company  reported a net loss of
$347,189 or a loss of $0.05 per share in 1997 versus a net loss of $1,852,550 or
a loss of $0.26 per share in 1996.                                              

     As of December 31,  1997,  the Company has recorded net deferred tax assets
of $5.6 million and a related valuation allowance of $5.6 million (see note 6 to
the  consolidated  financial  statements).  In assessing  the  realizability  of
deferred  tax assets,  management  considers  whether it is more likely than not
that some portion or all of the  deferred  tax assets will not be realized.  The
ultimate  realization of deferred tax assets is dependent upon the generation of
future  taxable income during the periods in which those  temporary  differences
become deductible.  Management considers the projected future taxable income and
tax  planning  strategies  in making  this  assessment.  Based upon the level of
historical  taxable income  (losses) and  projections  for future taxable income
over the periods in which the  deferred  tax assets are  deductible,  management
believes  it is more  likely  than not the  Company  may not  realize all of the
benefits of these deductible differences.                                       

1996 Compared to 1995                                                           

     Company revenues during 1996 were $28.9 million compared with $28.7 million
in 1995,  an increase of $185,000 or 0.6%.  The increase in revenue is comprised
of an increase in Film Production Services of $355,000 an increase of $42,000 in
Post Production Service, and a decrease of $212,000 in Production Services.  The
increase in revenues is a consequence of higher levels of activity at our United
States  facilities  where  revenues were up $420,000,  an increase of 1.8%.  The
revenues from International operations decreased $235,000 or 4.8%. The continued
decline  in  Spectra  Edit  System  rentals  was  offset  by  increases  in Film
Productions  Services,  Sound  Services  and revenues  from Special  Effects and
Graphics.                                                                       

     Direct operating  expenses  excluding  depreciation  and amortization  were
$18.8  million in 1996 as compared  with $18.0  million in 1995,  an increase of
$825,000 or 4.6%. The Company's  direct operating  expenses for U.S.  operations
increased by $533,000 while the direct operating  expenses increased $292,000 in
our  international  operations.  The increase  for both U.S.  and  International
operations is the result of increased  labor costs.  In the U.S. the increase in
labor costs was partially offset by a reduction in health insurance costs.      

     Depreciation and  amortization  expense was $5.3 million for the year ended
December 31, 1996,  compared to $5.0 million for 1995. The increase is primarily
the  consequence  of accelerated  depreciation  due to the  obsolescence  of the
Spectra Systems.                                                                

     Consolidated  gross profit was $4.7  million in 1996 as compared  with $5.7
million in 1995, a $1.0  million  decrease.  The  Company's  consolidated  total
operating  expenses for 1996 were $24.2 million,  as compared with $23.0 million
in 1995, an increase of $1.2 million or 5.2%. As a percentage of total revenues,
total  operating  expenses were 83.7% in 1996 versus 80.2% in 1995. The increase
is due to  the  combined  effects  of  increased  labor  costs  and  accelerated
depreciation explained above.                                                   

     The Company's selling, general and administrative (SG&A) expenses were $4.7
million  during 1996 as compared to $5.0 million in 1995, a decrease of $300,000
or 6.0%.                                                                        

     Other income was $42,000 in 1996 versus  $404,000 in 1995.  The decrease is
the result of the settlement of obligations  with an equipment  supplier  during
1995 where the supplier provided the Company with equipment valued at $300,000. 

     There  was  income  resulting  from a  litigation  settlement  in  1995  of
approximately $3.2. There was no revenue from litigation settlement in 1996.    

     In 1996,  there was no provision for U.S. Federal Income Tax as a result of
the net operating loss incurred.  The Income Tax expense of $165,000 in 1996 was
comprised  of foreign  income tax expense in the amount of $160,000  relating to
Canadian income tax imposed on the pre-tax income of the Canadian  subsidiary in
the amount of  $369,000  and State  income  tax  expense in the amount of $5,000
entirely composed of the minimum Franchise tax.                                 

     The Company's interest expense in 1996 was $1.6 million versus $1.8 million
in 1995.                                                                        

     As a consequence of the above factors,  the Company  reported a net loss of
$1,852,550  or a loss of  $0.26  per  share in 1996  versus  a net  loss  before
litigation  settlement of  $1,049,000 or a loss of $0.16 per share in 1995.  The
net  profit for 1995 after  taking  into  consideration  income  resulting  from
litigation settlements was $2.16 million or $.33 per share in 1995.             

     As of December 31,  1996,  the Company has recorded net deferred tax assets
of $5.6 million and a related valuation allowance of $5.6 million (see note 6 to
the  consolidated  financial  statements).  In assessing  the  realizability  of
deferred  tax assets,  management  considers  whether it is more likely than not
that some portion or all of the  deferred  tax assets will not be realized.  The
ultimate  realization of deferred tax assets is dependent upon the generation of
future  taxable income during the periods in which those  temporary  differences
become deductible.  Management considers the projected future taxable income and
tax  planning  strategies  in making  this  assessment.  Based upon the level of
historical  taxable income  (losses) and  projections  for future taxable income
over the periods in which the  deferred  tax assets are  deductible,  management
believes  it is more  likely  than not the  Company  may not  realize all of the
benefits of these deductible differences.                                       

Seasonality and Variation of Quarterly Results                                  

     The Company's business is subject to substantial  quarterly variations as a
result of seasonality,  which the Company  believes is typical of the television
post-production  industry.  Historically,  revenues  and net  income  have  been
highest during the first and fourth quarters,  when the production of television
programs  and  consequently  the demand  for the  Company's  services  is at its
highest.  Revenues  have been  substantially  lower  during the second and third
quarters, when the Company historically has incurred operating losses.          

Liquidity and Capital Resources                                                 

     The Company and its  subsidiaries are operating under a loan agreement with
The CIT Group/Credit Finance with a maturity date of August 3, 2000. The maximum
credit under the agreement is $9 million.  The amended loan  agreement  provides
for  borrowings  up to $5.4  million  under  the term  loan  (limited  to 85% of
eligible  equipment  appraisal  value) and $3.6 million under the revolving loan
(limited  to  85% of  eligible  accounts  receivable)  and at  March  31,  1998,
$1,000,000 was available under the revolving  loan. The  outstanding  balance of
the term loan was  $3,281,000  at December  31,  1997.  It is payable in monthly
installments  of $106,000 plus interest at prime plus 2% through August 3, 2000.
Principal  payments are not required in June, July or August. The revolving loan
had an outstanding balance of $1,905,000 at December 31, 1997. It bears interest
at prime plus 2%, which is payable monthly.  The loan contains automatic renewal
provisions for successive terms of two years thereafter  unless terminated as of
August 3, 2000 or as of the end of any  renewal  term by either  party by giving
the other party at least 60 day written notice.                                 

     The Company has an outstanding  real estate loan with Bank of America which
was amended  February  29, 1996.  The loan is secured by the building  where the
Company provides film processing and sound services.  The loan agreement matures
December 31, 1998 with an option to extend the maturity an additional  year upon
payment to the Bank of America of a $25,000 loan extension fee prior to December
31, 1998. The outstanding balance as of December 31, 1997 was $1,294,000.       

     In July 1997,  the Company  issued  $1,000,000  of  short-term  Installment
(Fixed Rate) Line of Credit Notes,  Series 1997 to 35 Lake Avenue,  a California
limited partnership.  James R. Parks, the Company's, Chief Executive Officer, is
a partner in 35 Lake Avenue.  The principal  balance of the Notes bears interest
at the rate of fourteen  percent  (14%) per annum.  The accrued  interest on the
outstanding  principal  was payable on September  30,  1997,  December 31, 1997,
January  30,  1998,  February  28,  1998 and March  30,  1998.  The  outstanding
principal  balance  was to be paid in three  equal  installments  on January 30,
1998,  February 28, 1998 and March 31, 1998. The Company  granted 35 Lake Avenue
warrants to purchase one (1) share of the Company's common stock at the exercise
price of $1.00 per share,  for each $4.00 of original  principal  amount of debt
loaned.  250,000 warrants were issued. The warrants originally expired two years
from the date of grant. The Company's obligations under the Notes are secured by
a pledge of 2,424,488  shares of the Common  Stock of Pacific  Video Canada Ltd.
and a third deed of trust against the building  where the Company  provides film
processing  and sound  services.  In January 1998 35 Lake Avenue agreed to amend
the terms of the short-term Installment Line of Credit Notes from March 30, 1998
until  November  30,  1998.  Under the  amendment,  principal  payments  reflect
approximately $400,000 due in the first quarter of 1998, $200,000 due at the end
of the third quarter of 1998 and remaining  payments of $300,000 due  throughout
the fourth quarter of 1998. In consideration  for the extension of the principal
payments the expiration date of the warrants  originally issued was extended for
two additional years. At March 31, 1998 the outstanding principal balance on the
notes was $500,000.                                                             

     The Company's principal source of funds is cash generated by operations. On
an annual  basis,  the Company  anticipates  that  existing  cash  balances  and
availability  under existing loan  agreements and cash generated from operations
will be  sufficient  to service  existing  debt.  The  Company is  currently  in
negotiations  with its principal  lender to restructure its term loan to provide
additional  financing  for the remainder of 1998.  Additionally,  the Company is
attempting to secure other sources of financing and with the  possibility of the
sale of certain  assets.  Management  is of the opinion that the Company will be
able to meet its  obligations  on a  timely  basis  and  sustain  operations  by
obtaining  such  additional  financing  or by  selling  assets,  and  eventually
achieving profitable operations.  There is no assurance that these uncertainties
will be settled or that management's plan will be achieved.                     

Recent Accounting Pronouncements                                                

     In February 1997, the Financial Accounting Standards Board issued Statement
No. 128,  "Earnings  per  Share".  Statement  No. 128  replaced  the  previously
reported  primary and fully  diluted  earnings  per share with basic and diluted
earnings  per share and became  effective  for both  interim and annual  periods
ending after  December 15, 1997.  All earnings per share amounts for all periods
for all periods have been presented, and where necessary, restated to conform to
the Statement No. 128  requirements..  The Company does not anticipate  that the
adoption  of  Statement  No.  128 will have a material  effect on the  Company's
results of operations.  However,  the ultimate  resolution of the implementation
issues  referred to above,  or additional  issues not yet raised or addressed by
the AICPA, could change the Company's expectation.                              

     In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" effective for fiscal years beginning after
December 15, 1997. Statement No. 130 established standards for the reporting and
display of comprehensive income and its components  (revenues,  expenses,  gains
and losses) in a full set of general-purpose financial statements. The Statement
requires  that all items that are  required to be  recognized  under  accounting
standards  as  components  of  comprehensive  income be  reported in a financial
statement  that is  displayed  with  the  same  prominence  as  other  financial
statements.  The Company will adopt Statement No. 130 effective January 1, 1998.
The Company does not anticipate that the adoption of Statement No. 130 will have
a material effect on the Company's results of operations.  However, the ultimate
resolution of the implementation  issues referred to above, or additional issues
not  yet  raised  or  addressed  by  the  AICPA,   could  change  the  Company's
expectation.                                                                    

     In June 1997, the Financial Accounting Standards Board issued Statement No.
131,  "Disclosures  about  Segments of an  Enterprise  and Related  Information"
effective for financial  statements  for periods  beginning  after  December 15,
1997.  Statement No. 131 establishes  standards for the way that public business
enterprises  report  financial  and  descriptive  information  about  reportable
operating segments in annual financial  statements and interim financial reports
issued  to  shareholders.   Statement  No.  131  supersedes  Statement  No.  14,
"Financial  Reporting  for Segments of a Business  Enterprise."  But retains the
requirement to report information about major customers.  The Company will adopt
Statement No. 131  effective  January 1, 1998.  The Company does not  anticipate
that the  adoption  of  Statement  No.  131 will have a  material  effect on the
Company's  results  of  operations.  However,  the  ultimate  resolution  of the
implementation  issues referred to above, or additional issues not yet raised or
addressed by the AICPA, could change the Company's expectation.                 

Year 2000                                                                       

     The Company has  reviewed  its  systems  and  communicated  with all of its
significant  suppliers and equipment and software providers.  All of the systems
tested  and the  majority  reviewed  with  third  parties  to date are year 2000
compliant.  Year 2000 costs are not  expected  to have a material  impact on the
Company's operations.                                                           

Subsequent Events                                                               

     On April 10, 1998, the Company announced the sale of their 2,848,000 shares
of Pacific Video Canada,  Ltd.  (PVC).  When the sale is completed,  the Company
expects to realize cash consideration of approximately $3,900,000.              

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                            

     See Page 11 for an index to all the consolidated  financial  statements and
supplementary financial information which are attached hereto.                  

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

None.                                                         

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 LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES

Index to Consolidated Financial Statements and
Financial Statement Schedule

Consolidated Financial Statements:                                         Page 

Independent Auditors' Report                                                12  
Consolidated Balance Sheets - December 31, 1996 and 1997                    13  
Consolidated Statements of Operations - Years Ended December - 31, 1995,        
   1996 and 1997                                                          15
Consolidated Statements of Stockholders Equity - Years Ended                    
   December 31, 1995, 1996 and 1997                                       16
Consolidated Statements of Cash Flows - Years Ended December 31, 1995,          
   1996 and 1997                                                          17
Notes to Consolidated Financial Statements                                  19  

Consolidated Financial Statement Schedule - Valuation and Qualifying            
Accounts - Years Ended December 31, 1995, 1996 and 1997                     32  

     All other  schedules  are omitted  because they are not  applicable  or the
required information is shown in the Company's consolidated financial statements
or the related notes thereto.                                                   

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INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders                                         
Laser-Pacific Media Corporation:                                                

     We have  audited the  accompanying  consolidated  financial  statements  of
Laser-Pacific  Media  Corporation and subsidiaries as listed in the accompanying
index. In connection with our audits of the consolidated  financial  statements,
we  also  have  audited  the  financial  statement  schedule  as  listed  in the
accompanying  index. These consolidated  financial  statements and schedules are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated  financial statements and schedule based on our
audits.                                                                         

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of Laser-Pacific Media
Corporation and subsidiaries as of December 31, 1997 and 1996 and the results of
their  operations  and their cash flows for each of the years in the  three-year
period ended December 31,  1997 in conformity with generally accepted accounting
principles.  Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole,  presents  fairly,  in all material  respects,  the information set forth
therein.                                                                        

/s/KPMG Peat Marwick LLP                                                        

Los Angeles, California                                                         
March 20, 1997                                                                  

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 LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES

 Consolidated Balance Sheets

December 31, 1996 and 1997

                                                        [Enlarge/Download Table]
                                                                                          
                          Assets                            1996               1997       
                                                      ------------------  ----------------
Current assets:                                                                           
    Cash                                            $        283,082             367,363  

    Receivables (note 5):                                                                 
      Trade                                                4,854,214           5,303,582  
      Other                                                  289,384             382,403  
                                                      ------------------  ----------------
                                                           5,143,598           5,685,985  
      Less allowance for doubtful receivables                810,130           1,087,058  
                                                      ------------------  ----------------
                                                           4,333,468           4,598,927  
                                                      ------------------  ----------------

    Inventory (note 5)                                       325,073             300,532  
    Prepaid expenses and other current assets                337,163             455,999  
                                                      ------------------  ----------------

              Total current assets                         5,278,786           5,722,821  
                                                      ------------------  ----------------

Property and equipment, at cost (notes 3 and 5)           41,082,754          44,399,036  
    Less accumulated depreciation and amortization        24,708,192          28,204,538  
                                                      ------------------  ----------------

              Net property and equipment                  16,374,562          16,194,498  
                                                      ------------------  ----------------
Other assets, net                                            650,580             570,472  
                                                      ------------------  ----------------

                                                    $     22,303,928          22,487,791  
                                                      ==================  ================

                                                                     (Continued)

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LASER-PACIFIC MEDIA CORPORATION 
AND SUBSIDIARIES
 Consolidated Balance Sheets
December 31, 1996 and 1997
 (Continued)

                                                        [Enlarge/Download Table]
                                                                                                    
           Liabilities and Stockholders' Equity                      1996                1997       
                                                               ------------------  -----------------
Current liabilities:                                                                                
    Current installments of notes payable to bank and       $                                       
      long-term debt (note 5)                                       5,278,339           4,994,308   
    Notes payable to related parties (note 4)                               0             900,000   
    Accounts payable                                                1,150,661           1,028,381   
    Accrued expenses                                                1,195,766             988,736   
    Income taxes payable                                              152,460             143,545   
                                                               ------------------  -----------------

              Total current liabilities                             7,777,226           8,054,970   
                                                               ------------------  -----------------
Notes payable to bank and long-term debt, less current                                              
    installments (note 5)                                           7,958,554           8,139,042   

Minority interest (note 10)                                           467,370             521,440   

Commitments and contingencies (notes 5 and 9)                                                       

Stockholders' equity (notes 7 and 8):                                                               
    Preferred stock, $.0001 par value.  Authorized                                                  
      3,500,000 shares; none issued                                         0                   0   
    Common stock, $.0001 par value.  Authorized 25,000,000                                          
      shares; issued and outstanding 7,128,172 shares at                                            
      December 31, 1996 and 1997                                          713                 713   
    Additional paid-in capital                                     19,753,690          19,772,440   
    Accumulated deficit                                           (13,653,625)        (14,000,814)  
                                                               ------------------  -----------------

              Net stockholders' equity                              6,100,778           5,772,339   
                                                               ------------------  -----------------

                                                            $      22,303,928          22,487,791   
                                                               ==================  =================

See accompanying notes to consolidated financial statements.                    

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 LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES

 Consolidated Statements of Operations
Years ended December 31, 1995, 1996 and 1997

                                                        [Enlarge/Download Table]
                                                                                                               
                                                           1995                1996                1997        
                                                     ------------------  ------------------  ------------------

Revenues                                          $      28,693,047          28,878,422          28,290,924    
                                                     ------------------  ------------------  ------------------
Operating expenses:                                                                                            
    Direct                                               18,022,097          18,847,361          18,343,474    
    Depreciation and amortization                         4,983,001           5,317,862           4,206,915    
                                                     ------------------  ------------------  ------------------

                                                         23,005,098          24,165,223          22,550,389    
                                                     ------------------  ------------------  ------------------

           Gross profit                                   5,687,949           4,713,199           5,740,535    

Selling, general and administrative expenses              4,977,824           4,826,155           4,279,026    
                                                     ------------------  ------------------  ------------------

           Income  from operations                          710,125            (112,956)          1,461,509    

Interest expense                                         (1,813,428)         (1,563,559)         (1,563,316)   
Litigation settlement (note 11)                           3,208,830                   0                   0    
Other income                                                404,258              41,952              40,688    
Minority interest in net  income of consolidated                                                               
    subsidiary (note 10)                                    (58,850)            (52,987)            (54,070)   
                                                     ------------------  ------------------  ------------------

           Income (loss) before income taxes              2,450,935          (1,687,550)           (115,189)   

Income tax expense                                          291,000             165,000             232,000    
                                                     ------------------  ------------------  ------------------

           Net income (loss)                      $       2,159,935          (1,852,550)           (347,189)   
                                                     ==================  ==================  ==================

Basic and diluted net income (loss) per share     $             .33                (.26)               (.05)   

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

Weighted average shares outstanding                       6,568,172           7,061,061           7,128,172    
                                                     ==================  ==================  ==================


See accompanying notes to consolidated financial statements                     

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 LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES

 Consolidated Statements of Stockholders' Equity
 Years ended December 31, 1995, 1996, and 1997

                                                        [Enlarge/Download Table]
                                                                                                                       
                                             Common Stock                                                              
                               -----------------------------------                                                     
                                                                       Additional                             Net      
                                  Number of                             paid-in         Accumulated      stockholders' 
                                   shares             Amount            capital           deficit           equity     
                               ----------------   ----------------  -----------------  ---------------  ---------------

Balance at  December 31, 1994        6,568,172    $           657         19,258,746      (13,961,010)       5,298,393 

Net income                                   0                  0                  0        2,159,935        2,159,935 
                               ----------------   ----------------  -----------------  ---------------  ---------------

Balance at  December 31, 1995        6,568,172                657         19,258,746      (11,801,075)       7,458,328 

Stock issuances and warrants           560,000                 56            494,944                0          495,000 

Net loss                                     0                  0                  0       (1,852,550)      (1,852,550)
                               ----------------   ----------------  -----------------  ---------------  ---------------

Balance at  December 31, 1996        7,128,172                713         19,753,690      (13,653,625)       6,100,778 

Warrant issuance                             0                  0             18,750                0           18,750 

Net loss                                     0                  0                  0         (347,189)        (347,189)
                               ----------------   ----------------  -----------------  ---------------  ---------------

Balance at December 31, 1997         7,128,172    $           713         19,772,440      (14,000,814)       5,772,339 
                               ================   ================  =================  ===============  ===============

See accompanying notes to consolidated financial statements.                    

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 LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
 Consolidated Statements of Cash Flows
Years ended December 31, 1995, 1996 and 1997

                                                        [Enlarge/Download Table]

                                                                                                                  
                                                                    1995              1996              1997      
                                                               ----------------  -----------------  --------------

Cash flows from operating activities:                                                                             
    Net income (loss)                                       $        2,159,935        (1,852,550)        (347,189)
    Adjustments to reconcile net income (loss) to net cash                                                        
       provided by operating activities:                                                                          
          Depreciation and amortization of property and                                                           
             equipment                                               4,983,001         5,317,862        4,206,915 
          Provision for doubtful accounts receivable                   539,000           447,354          279,848 
          Write-off of property and equipment                                0           148,569                0 
          Gain on Sale of plant, property and equipment                      0                 0          (27,670)
          Other                                                         71,751            76,334           32,057 
          Change in assets and liabilities:                                                                       
             (Increase) decrease in:                                                                              
                Accounts receivable                                 (3,076,993)        3,045,103         (545,308)
                Inventory                                               15,023            15,005           24,541 
                Prepaid expenses and other current assets                2,864            (3,943)        (118,836)
                Other assets                                           719,818            38,456           77,258 
             Increase (decrease) in:                                                                              
                Accounts payable                                    (2,257,842)           90,896         (122,280)
                Accrued expenses                                     1,662,804        (1,862,245)        (207,030)
                Accrued severance                                     (461,803)         (391,451)               0 
                Deferred revenue                                         2,000          (160,123)               0 
                Income taxes payable                                   318,616          (228,798)          (8,915)
                                                               ----------------  -----------------  --------------

              Net cash provided by operating activities     $        4,678,174         4,680,469        3,243,391 

                                                               ----------------  -----------------  --------------

Cash flows from investing activities:                                                                             
    Purchases of property and equipment                             (2,114,185)       (4,470,045)      (3,989,513)
    Proceeds from disposal of property and equipment                    44,000            31,500           33,946 
    Purchase of subsidiary common stock                               (114,495)                0                0 
                                                               ----------------  -----------------  --------------

              Net cash used in investing activities         $       (2,184,680)       (4,438,545)      (3,955,567)
                                                               ----------------  -----------------  --------------

                                                                   (Continued)

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LASER-PACIFIC MEDIA CORPORATION 
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued

                                                        [Enlarge/Download Table]
                                                                                                               

                                                                   1995             1996             1997      
                                                              ----------------  --------------  ---------------

Cash flows from financing activities:                                                                          
    Net (repayment) and proceeds of notes payable to bank                                                      
     and Long-term debt                                     $      (1,908,985)       (856,831)        (103,543)
    (Repayments) borrowings of notes payable to related                                                        
       Parties                                                        (55,000)       (320,000)         900,000 
    Proceeds from stock issuance                                            0         405,000                0 
                                                              ----------------  --------------  ---------------

              Net cash provided by (used in)                                                                   
                  financing activities                      $      (1,963,985)       (771,831)         796,457 
                                                              ----------------  --------------  ---------------

                       Net increase (decrease) in cash                529,509        (529,907)          84,281 

Cash at beginning of year                                             283,480         812,989          283,082 
                                                              ----------------  --------------  ---------------

Cash at end of year                                        $          812,989         283,082          367,363 
                                                              ================  ==============  ===============

Supplementary disclosure of cash flow information:                                                             
    Cash paid during the year for:                                                                             
       Interest                                            $        1,800,000       1,600,000        1,600,000 
       State income taxes                                               1,200           1,200            1,200 
                                                              ================  ==============  ===============

Supplemental disclosure of noncash investing and financing activities:          

     The Company purchased property and equipment of $1,722,000,  $2,112,535 and
$2,226,841  during 1995, 1996 and 1997,  respectively,  financed through capital
lease obligations.                                                              

     In 1995, the Company  received  equipment  valued at $300,000 as settlement
from an equipment supplier.                                                     

     In May 1996, the Company converted a promissory note receivable and related
accrued  interest due from PVC totaling  approximately  $579,000 in exchange for
526,000  shares  of common  stock.  This  transaction  increased  the  Company's
ownership of PVC from 72% to 77%.                                               

     In 1996 the Company issued 75,000  warrants in connection  with the renewal
of its credit  facility.  Accordingly,  such warrants were accounted for as debt
issuance  costs of $90,000 and will be  amortized  to interest  expense over the
term of the related credit facility.                                            

     In 1997,  the  Company  issued  250,000  warrants  in  connection  with the
issuance of $1,000,000 in short-term notes to 35 Lake Avenue. Accordingly,  such
warrants  were  accounted  for as debt  issuance  costs of  $18,750  and will be
amortized to interest expense over the term of the related credit facility.     

See accompanying notes to consolidated financial statements.                    

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 1996 and 1997

(1)    Basis of Presentation                                                    

     The accompanying  consolidated financial statements include the accounts of
Laser-Pacific Media Corporation and subsidiaries (altogether,  the Company). All
significant  inter-company  accounts and  transactions  have been  eliminated in
consolidation.                                                                  

Liquidity                                                             

     The Company's  financial  statements  for the year ended  December 31, 1997
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 incurred a net loss of $347,189 for the year ended December 31, 1997 and
as of December 31, 1997 had an accumulated deficit of $14,000,814, and a working
capital deficiency of $2,332,149.  The Company's working capital at December 31,
1997 plus other sources of revenue generated by operations may not be sufficient
to meet its business objectives as presently structured.  Therefore,  management
arranged  financing  with a related  party  lender to provide the Company with a
lending  commitment,  in addition to pursuing other sources of financing,  which
will  enable the Company to continue as a going  concern  through  December  31,
1998.                                                                           

(2)    Summary of Significant Accounting Policies                               

Depreciation and Amortization                                         

     Depreciation  and amortization of property and equipment is provided by use
of the  straight-line  method  over the  estimated  useful  lives of the related
assets as follows:                                                              

Buildings                                 30 years                
Building improvements                     10 years                
Technical equipment                       4 to 7 years            
Furniture and fixtures                    5 to 6 years            
Automobiles                               3 to 5 years            
      Leasehold improvements                    Remaining life of the lease or
                                        the estimated useful
                                                  life, whichever is the shorter

Inventory                                                             

     Inventory consisting primarily of tape stock is valued at the lower of cost
(determined on the first-in, first-out basis) or market (net realizable value). 

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 1996 and 1997 (continued)

Income (Loss) per Share                                               

     Statement of Financial  Accounting  Standards (SFAS) No. 128, "Earnings per
Share",  is effective for financial  statements  issued for periods ending after
December 15, 1997. SFAS 128 replaces  Accounting  Principles Board Opinion (APB)
No. 15 and simplifies  the  computation of earnings per share (EPS) by replacing
the  presentation  of primary EPS with a  presentation  of basic EPS.  Basic EPS
includes no dilution  and is computed  by dividing  income  available  to common
shareholders by the weighted average number of common shares outstanding for the
period.  Diluted EPS reflects the potential  dilution from securities that could
share in the earnings of the Company, similar to fully diluted EPS under APB No.
15.  The  statement  requires  dual  presentation  on basic and  diluted  EPS by
entities with complex capital  structures.  The Company adopted SFAS No. 128 for
the financial  statements ended December 31, 1997. All years presented have been
restated to reflect basic and diluted net income (loss) per share. Stock options
issued  under  the  Company's  Stock  Option  Plans  were  not  included  in the
computation of diluted EPS because to do so would have been antidilutive.       

Revenue Recognition                                                   

Revenues are recognized as services are performed.                    

     The Company had one  significant  customer  in 1995,  1996 and 1997,  which
accounted for approximately 11%, 16% and 14% of revenues, respectively.         

Foreign Currency Translation                                          

     Assets and liabilities of the foreign operations are translated at the rate
of exchange at the balance  sheet date.  Expenses  have been  translated  at the
weighted   average  rate  of  exchange  during  the  period.   Foreign  currency
translation  adjustments  were  immaterial  to  the  accompanying   consolidated
financial statements.                                                           

Credit Risk                                                           

     The Company  sells  services to  customers in the  entertainment  industry,
principally  located  in  Southern   California.   Management  performs  regular
evaluations concerning the ability of its customers to satisfy their obligations
and records a provision for doubtful accounts based upon these evaluations.     

Long-Lived Assets                                                     

     The Company  adopted the  provisions of SFAS No. 121,  "Accounting  for the
Impairment of Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed Of,"
during 1995.  This  Statement  requires that  Long-Lived  assets be reviewed for
impairment  whenever  events  or  changes  in  circumstances  indicate  that the
carrying amount of the asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying  amount of an asset
to future net cash flows  expected to be generated by the asset.  If such assets
are  considered to be impaired,  the  impairment to be recognized is measured by
the amount by which the carrying  amount of the assets exceeds the fair value of
the assets.  Adoption of this  Statement  did not have a material  impact on the
Company's financial position, results of operations or liquidity.               

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 1996 and 1997 (continued)

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 consolidated
financial  statements and the reported  amounts of revenues and expenses  during
the reporting period. Actual results could differ from those estimates.         

Reclassifications                                                     

     Certain  prior year  balances  have been  reclassified  to conform with the
current year's presentation.                                                    

Accounting for Stock Options                                          

     Prior to January 1, 1996,  the Company  accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees", and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying  stock  exceeded the exercise  price.  On
January 1, 1996, the Company  adopted SFAS No.123,  "Accounting  for Stock-Based
Compensation",  which permits  entities to recognize as expense over the vesting
period  the  fair  value  of all  stock-based  awards  on  the  date  of  grant.
Alternatively,  SFAS No.  123 also  allows  entities  to  continue  to apply the
provision  of APB  Opinion No. 25 and provide pro forma net income and pro forma
earnings per share  disclosures  for employee  stock option grants made in 1995,
and 1996 and future years as if the fair-value-based  method defined in SFAS No.
123 had been  applied.  The  Company  has  elected  to  continue  to  apply  the
provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions
of SFAS No. 123.                                                                

Reporting Comprehensive Income                                        

     In June  1997,  the FASB  issued  SFAS No.  130,  "Reporting  Comprehensive
Income". This statement which establishes standards for reporting and disclosure
of comprehensive  income,  is effective for interim and annual periods beginning
after   December   15,   1997,   although   earlier   adoption   is   permitted.
Reclassification  of financial  information  for earlier  periods  presented for
comparative purposes is required under SFAS 130. As this statement only requires
additional disclosure in the Company's  consolidated  financial statements,  its
adoption  will not have  any  impact  on the  Company's  consolidated  financial
position  or result of  operations.  The  Company  expects to adopt SFAS No. 130
effective January 1, 1998.                                                      

Disclosures about Segments of an Enterprise                           

     In June 1997, the FASB issued SFAS No. 131,  "Disclosure  about Segments of
an Enterprise.  This statement,  which  establishes  standards for reporting and
disclosures of certain  information about operating segments in complete sets of
financial  statements,  is effective  for interim and annual  periods  beginning
after   December   15,   1997,   although   earlier   adoption   is   permitted.
Reclassifications  of financial  information for earlier  periods  presented for
comparative purposes is required under SFAS No. 131 if it is practical to do so.
The Company expects to adopt SFAS No. 131 effective January 1, 1998.            

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 1996 and 1997 (continued)

(3)   Property and Equipment                                                  

Property and equipment is comprised of the following:             

                                         1996                 1997
                                         -----------------    ------------------

      Land                              $       1,135,123            1,237,690
      Buildings and improvements                4,226,630            4,330,064
      Technical equipment                      33,875,483           36,835,628
      Furniture and fixtures                      545,372              634,146
      Automobiles                                  39,283               25,092
      Leasehold improvements                    1,260,863            1,336,416
                                         -----------------    ------------------

                                        $      41,082,754           44,399,036
                                         =================    ==================

     The Company  leases  technical  equipment  under  capital  leases  expiring
through  2003.   Equipment  under  capital  leases  aggregated   $7,950,354  and
$7,199,619,  and related  accumulated  amortization  aggregated  $2,024,833  and
$1,537,697 at December 31, 1996 and 1997, respectively.                         

(4)  Notes Payable to Related Parties                                           

     The Company has a note payable to a related party, 35 Lake Avenue,  secured
by a third Trust Deed on the land,  buildings,  and the capital stock of Pacific
Video Canada, Ltd. (PVC), a majority-owned  subsidiary of the Company.  The note
bears interest at 14%, with scheduled interest payments due on September 30, and
December 31, 1997,  January 30,  February 28 and March 30, 1998.  The  principal
payments are due in three equal  installments  at month-end for January  through
March 1998. The remaining outstanding balance at December 31, 1997 was $900,000.

     On January 28, 1998, the notes payable to a related party,  35 Lake Avenue,
were amended extending the term of the notes from March 30, 1998 to November 30,
1998. Under the amendment, principal payments reflect approximately $400,000 due
in the first  quarter of 1998,  $200,000 due at the end of the third  quarter of
1998 and remaining  payments of $300,000 due  throughout  the fourth  quarter of
1998.  Interest is payable monthly.  Concurrent with the extension of the notes,
the  expiration  date of the  warrants  issued in  connection  with the debt was
extended for a two-year period.                                                 

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LASER-PACIFIC MEDIA CORPORATION 
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 1996 and 1997 (continued)

(5)       Notes Payable to Bank and Long-Term Debt              

Notes payable to bank and long-term debt are summarized as follows:   

                                                        [Enlarge/Download Table]
                                                                                                           
                                                                               1996              1997      
                                                                          ----------------  ---------------
Advances under a $9,000,000 credit agreement, secured by eligible      $       1,672,926         1,905,610 
    accounts receivable, inventory and property and equipment, as                                          
    defined, bearing interest at the bank's prime rate (8.5% at                                            
    December 31, 1997) plus 2.0%, expiring August 3, 2000, (1)                                             

Term notes payable to bank of up to $5,400,000 under the $9,000,000            4,320,894         3,281,210 
    credit agreement, secured by eligible accounts receivable,                                             
    inventory, and property and equipment, as defined, and guarantees                                      
    of certain stockholders, payable in nine monthly installments per                                      
    year of $106,000 plus interest at prime (8. 5% at December 31,                                         
    1997) plus 2% through August 3, 2000 (1)                                                               

Note payable to bank, secured by a first Trust Deed on land and                1,507,490         1,294,154 
    buildings, bearing interest at 11.71%, interest and principal                                          
    payable in nine monthly installments per year of $26,667 through                                       
    December 31, 1998.                                                                                     

Term notes payable to bank, secured by certain property and equipment            508,941         1,510,313 
    as defined, bearing interest at 8%, payable monthly, in arrears,                                       
    with installments of $8,700 through March 31, 2004                                                     

Capital lease obligations (note 9)                                             5,140,129         5,102,412 
Other                                                                             86,513            39,651 
                                                                          ----------------  ---------------
                                                                              13,236,893        13,133,350 

Less current installments                                                      5,278,339         4,994,308 
                                                                          ----------------  ---------------

                                                                       $       7,958,554         8,139,042 
                                                                          ================  ===============

     (1) This  agreement  provides for a facility fee of $90,000 per year, to be
paid by the Company on each anniversary of the closing.               

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 1996 and 1997 (continued)

     The aggregate future maturities of notes payable to bank and long-term debt
are summarized as follows:                                            

December 31:                                                      
1998                      4,994,308                       
1999                      3,576,240                       
2000                      2,330,341                       
2001                      1,257,032                       
2002                        540,605                       
Thereafter                  434,824                       
  ------------------
$      13,133,350     
  ==================

(6)   Income Taxes                                                            

     The  Company  accounts  for  income  taxes  under  Statement  of  Financial
Accounting  Standards  Board No.  109,  "Accounting  for  Income  Taxes,"  which
requires the asset and liability  method of accounting  for income taxes.  Under
the asset and liability  method,  deferred  income taxes 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  taxes  of a change  in tax  rates is
recognized in income in the period that includes the enactment date.            

A summary of income tax expense is as follows:                    

                               1995                 1996                1997
                      -----------------    -----------------    ----------------
Current:                                                                        
Federal            $          35,000                    0                    0
State                         13,000                5,000                5,000
Foreign                      348,000              166,000              204,000
                      -----------------    -----------------    ----------------
                             396,000              171,000              209,000
                      -----------------    -----------------    ----------------
Deferred:                                                                       
Federal                            0                    0                    0
State                              0                    0                    0
Foreign                     (105,000)              (6,000)              23,000
                      -----------------    -----------------    ----------------
                            (105,000)              (6,000)              23,000
                      -----------------    -----------------    ----------------

                   $         291,000              165,000              232,000
                      =================    =================    ================

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 1996 and 1997 (continued)

     The provision for income taxes at the Company's effective tax rate differed
from the provision for income taxes at the U.S. Federal tax rate as follows:    

                                             1995          1996         1997
                                           ----------  ------------  -----------
Federal income tax expense (benefit) at                                         
       "expected rate"                     $ 833,000      (574,000)     (41,000)
(Utilization) expiration of net operating                                       
          loss carryforward                (618,000)            0       54,000
Deductile expenses                          580,000        58,000            0
Other                                       (88,000)      (21,000)      19,000
State taxes, net of Federal effect           13,000         2,000        4,000
Impact of foreign taxation at different                                       
 rates                                       43,000        35,000      150,000
Minority interest                            20,000        24,000       18,000
Valuation allowance for deferred tax                                          
 assets                                    (492,000)      641,000       28,000
                                           ----------  ------------  -----------
                                          $ 291,000       165,000      232,000
                                           ==========  ============  ===========

     The tax  effect of  temporary  differences  that  give rise to  significant
portions of deferred tax assets and liabilities at December 31, 1996 and 1997 is
presented below:                                                                
                                                 1996                 1997
                                          -----------------    -----------------
Deferred tax assets and liabilities:                                            
Net operating loss carryforwards        $       5,378,000            5,334,000
Income tax credit carryforwards                   773,000              803,000
Vacation pay                                            0              135,000
Reserve for bad debts                             231,000              349,000
 Property and equipment                           (786,000)            (997,000)
 Less valuation allowance                       (5,596,000)          (5,624,000)
                                          -----------------    -----------------
Net deferred tax assets                  $               0                    0 
                                          =================    =================

     At December 31, 1997, the Company had net operating loss  carryforwards for
Federal  and  state  income  tax  purposes  of  approximately   $14,800,000  and
$4,800,000,  respectively,  which expire principally from 2004 through 2012. The
Company also has  approximately  $240,000  and  $500,000 of unused  research and
development tax credits and investment tax credit  carryforwards,  respectively,
expiring through 2004.                                                          

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 1996 and 1997 (continued)

     The  ultimate  realization  of deferred  tax assets is  dependent  upon the
generation of future taxable income during the periods in which those  temporary
differences become deductible. Management considers the projected future taxable
income and tax planning  strategies  in making this  assessment.  Based upon the
level of historical  taxable income  (losses) and projections for future taxable
income  over the  periods  in which the  deferred  tax  assets  are  deductible,
management  believes it is more likely than not the Company will not realize all
of the benefits of these deductible differences.                                

(7)   Stockholders' Equity                                                    

     The Company has authorized  3,500,000  shares of $.0001 par value preferred
stock,  and  designated  1,400,000  shares as Series A  preferred  stock.  As of
December 31, 1996 and 1997, no preferred stock was outstanding.                 

     Warrants to purchase 100,000 shares of common stock at amount approximating
the closing bid price for the Company's common stock on the grant date of $0.563
per share are  outstanding  at December  31,  1996 and 1997.  The  warrants  are
exercisable through August 2004.                                                

     Warrants to purchase  80,000  shares of common  stock at $0.50,  and 80,000
shares of common stock at $1.13, amounts that approximate the closing bid prices
of the Company's  common stock on grant date,  were  outstanding at December 31,
1996.  The warrants for 80,000  shares of common stock at $0.50 expired on March
31, 1997. The warrants for the remaining  80,000 shares of common stock at $1.13
expire on August 31, 1998.                                                      

     In January  1996,  in connection  with the  settlement of additional  lease
commitments  related to the closure of its facilities the Company issued 500,000
shares of common stock valued at $.75 per share.  In November  1996, the Company
issued  60,000  shares of common  stock  valued at $0.50 to  related  parties in
exchange for $30,000.                                                           

     In June 1996 the  Company  issued  warrants to  purchase  75,000  shares of
common stock to its principal lender in connection with a loan renewal. The fair
value of the warrants was  determined  in  accordance  with SFAS No. 123 and was
recorded as debt issuance costs.                                                

     In June 1997,  the Company  issued  warrants to purchase  250,000 shares of
common stock to a related party, 35 Lake Avenue, in connection with a short-term
debt financing arrangement.  The fair value of the warrants was determined using
Black-Scholes option pricing model and was recorded as debt issuance. Subsequent
to December 31, 1997, the expiration date of the warrants issued during 1997 was
extended to July 2001.                                                          

(8)    Stock Option Plans and Other Option Grants                               

     The Company has four stock  option  plans (the Stock  Option  Plans)  which
provide for  1,115,029 of incentive or  nonqualified  stock options to officers,
directors  and key  employees at prices equal to or greater than the fair market
value at the date of grant. Options currently expire no later than 10 years from
the grant date and  generally  vest at date of grant.  All  options  outstanding
under the four plans are fully vested at December 31, 1997.                     

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 1996 and 1997 (continued)

     Activity  under the Plans for the years ended  December 31, 1995,  1996 and
1997 follows:                                                                   

                             Shares         Weighted           Options
                                              average          exercisable
                         price
                               -----------   ----------------   ----------------

Outstanding options at 12/31/94   373,908    $          4.12            373,908 

Options issued                          0                                       
Options exercised                       0                                       
Options expired and terminated   (134,257)              4.72                    
                               -----------   ----------------   ----------------

Outstanding Options at 12/31/95   239,651               3.78            239,651 

Options issued                          0                                       
Options exercised                       0                                       
Options expired and terminated    (40,915)              2.86                    
                               -----------   ----------------   ----------------

Outstanding Options at 12/31/96   198,736               3.97            198,736 

Options issued                    459,400                .22                    
Options exercised                       0                                       
Options expired and terminated    (40,220)              5.94                    
                               -----------   ----------------   ----------------

Outstanding Options at 12/31/97   617,916    $          1.05            617,916 
                               ===========   ================   ================

     The following table summarizes  information about options outstanding under
the Plans at December 31, 1997:                                                 

             Outstanding Options
                 ---------------------------------------------------------------
                           Shares             Remaining             Weighted
                       outstanding and          weighted             average
                           exercisable            average            exercisable
                                           contractual             price
                     life (in years)
                     -----------------    -----------------    -----------------
Range of Exercisable prices:                                                  
 $0.22                    459,400                   10.00     $            .22
 $0.50                     30,000                    0.80                  .50
 $2.50                     67,781                    4.80                 2.50
 $5.16 to $12.00           60,735                     .08                 6.01
                     =================    =================    =================
Total                      617,916                    6.20     $           1.05 
                     =================    =================    =================

     Under all plans,  all options are  exercisable  and 40,600 shares  remained
available for future grant, at December 31, 1997.                     

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 1996 and 1997 (continued)

     Activity of  non-qualified  stock options for the years ended  December 31,
1995, 1996 and 1997 follows:                                                    

                                Shares        Weighted             Options
                                              average price        exercisable
                                 ---------    --------------   -----------------
Outstanding options at 12/31/94    222,222    $         1.22           222,222  

Options issued                     222,222              1.22                    
Options exercised                        0                                      
Options expired and terminated    (222,222)             1.22                    
                                 ---------    --------------   -----------------

Outstanding Options at 12/31/95    222,222              1.22           222,222  

Options issued                      20,000               .50                    
Options exercised                        0                                      
Options expired and terminated           0                                      
                                 ---------    --------------   -----------------

Outstanding Options at 12/31/96    242,222              1.16           242,222  

Options issued                           0                                      
Options exercised                        0                                      
Options expired and terminated    (242,222)             1.16                    
                                 ---------    --------------   -----------------

Outstanding Options at 12/31/97          0    $            0                  0 
                                 =========    ==============   =================

Pro Forma Information                                             

     The Company has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees" in accounting for its employee stock options. Under APB No.
25, if the exercise  price of the  Company's  employee  stock option  equals the
market price of the underlying  stock on the date of grant,  no  compensation is
recognized in the Company's financial statements.                               

     Pro Forma  information  regarding  net  income  and  earnings  per share is
required by SFAS No. 123.  This  information  is required to be determined as if
the Company had accounted for its employee stock options (including employee and
director  shares  issued under the Plan  collectively  called  options)  granted
during fiscal years 1995, 1996 and 1997 reported below has been estimated at the
date of grant using a  Black-Scholes  option  pricing  model with the  following
weighted average assumptions:                                                   

                            1995                 1996                 1997
                     -----------------    -----------------    -----------------
Expected life (in years)         2.00                 3.00                10.00 
Risk-free interest rate          5.22                 6.04                 5.87 
Volatility                        .50                  .50                  .50 
Dividend yield                   0.00                 0.00                 0.00 
Fair value - grant date           .63                  .30                  .15 

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 LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 1996 and 1997 (continued)

     The  Black-Scholes   option  valuation  model  was  developed  for  use  in
estimating  the fair value of traded  options that 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  options have  characteristics  significantly
different  from those of trade  options,  and because  changes in the subjective
input assumptions can materially affect the fair value estimate,  in the opinion
of management,  the existing models do not necessarily provide a reliable single
measure of the fair value of its options.                                       

     Had the Company determined compensation cost based on the fair value at the
grant date for its stock  options  under SFAS No. 123, the  Company's net income
(loss) and earnings (loss) per share would have been as indicated below:        

                  Year ended December 31
                  --------------------------------------------------------------
                        1995                  1996                  1997
                  -----------------    -------------------   -------------------
Net Income (loss):                                                              
As reported      $       2,159,935           (1,852,550)             (347,189)
Pro Forma                2,067,627           (1,858,550)             (416,100)
                  =================    ===================   ===================

Basic and diluted net income (loss) per share:                                  
As reported      $             .33                 (.26)                 (.05)
Pro Forma                      .32                 (.26)                 (.06)
                  =================    ===================   ===================

     Pro Forma  income  reflects  only options  granted in 1995,  1996 and 1997.
Therefore,  the full impact of calculating  compensation  cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income  (loss)  amounts
presented above because  compensation cost is reflected over the options vesting
period and compensation cost for options granted prior to January 1, 1995 is not
considered.                                                                     

     Further,  the effects of applying SFAS No. 123 for disclosing  compensation
costs may not be representative of the effects on reported net income for future
years.                                                                          

(9)   Commitments and Contingencies                                           

Leases                                                            

     The Company leases certain  technical  equipment  under capital leases that
expire through 2003.                                                            

     The Company also leases corporate offices, certain operating facilities and
equipment under non-cancelable operating leases that expire through 2002.       

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 LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 1996 and 1997 (continued)

     The present  value of future  minimum  capital  lease  payments  and future
minimum  lease  payments  under  non-cancelable  operating  leases,  principally
facility leases, are as follows:                                                

                                          Capital leases      Operating leases
                                         ------------------   ------------------
Year ending December 31:                                                    
 1998                                  $      1,838,962              229,164
 1999                                         1,535,995              172,089
 2000                                         1,389,989              164,408
 2001                                         1,008,964              148,344
 2002                                           526,913              145,245
Thereafter                                      77,295                    
                                         ------------------   ------------------

Total minimum lease payments                    6,378,118    $         859,250  
                                                              ==================
Less amount representing interest               1,275,706                       
                    ------------------

Present value of minimum lease payments  $      5,102,412                       
                    ==================

     Rent expense amounted to $1,127,162,  $924,747 and $1,029,329 for the years
ended December 31, 1995, 1996 and 1997, respectively.                           

Legal Matters                                                                   

     The  Company  may  have  certain  contingent   liabilities  resulting  from
litigation and claims  incident to the ordinary  course of business.  Management
believes that the probable  resolution of such contingencies will not materially
affect the  financial  position,  results of  operations,  or  liquidity  of the
Company.                                                                        

Employment Agreements                                                           

     The Company has employment  agreements  with certain  officers that require
written notices of termination ranging from one to five years.                  

(10)   Minority Interest in Subsidiary                                          

     In January 1988,  Pacific Video  acquired a 75% equity  interest in Pacific
Video Canada,  Ltd.,  ("PVC"),  formerly known as Tegra Industries,  Inc., whose
film processing and post-production facilities are located in Vancouver, Canada.
In  1990,  PVC  issued  common  stock  to a third  party  in  connection  with a
three-party  licensing  agreement  with the Company.  This reduced the Company's
holdings to  approximately  58% of the common  shares  outstanding.  In December
1995, the Company purchased 350,000 additional shares of common stock of Pacific
Video  Canada  Ltd.  (PVC),  in exchange  for  approximately  $114,000,  thereby
increasing  the  Company's  ownership  of PVC from 58% to 72%. In May 1996,  the
Company  converted a promissory note receivable and related accrued interest due
from PVC  totaling  approximately  $579,000  in exchange  for 526,000  shares of
common stock of Pacific  Video,  Inc.  (PVC).  This  transaction  increased  the
Company's  ownership of PVC from 72% to 77%. The amounts in minority interest at
December 31, 1997 represent the 23% ownership of PVC's outstanding capital stock
held by the minority stockholders of PVC.                                       

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 LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 1996 and 1997 (continued)

(11)   Litigation Settlement                                                    

     The Company was involved in a lawsuit  against its former patent lawyer and
insurance  carrier in connection with prior  settlements of lawsuits relating to
the Company's  patent for  high-resolution  transfer of images.  This matter was
settled  during the year ended  December 31, 1995 resulting in a net recovery of
$3,208,830.                                                                     

(12)   Business Segment Data                                                    

     The  following  table  shows  revenues,   operating   earnings  (loss)  and
identifiable assets by geographic segment for the years 1995, 1996 and 1997:    

                        1995                 1996                   1997
                  ------------------   ------------------    -------------------
Revenues:                                                                       
U.S.             $      23,309,444           23,729,024            23,025,270 
International            5,383,603            5,149,398             5,265,654 
                  ------------------   ------------------    -------------------
                $      28,693,047           28,878,422            28,290,924
                  ==================   ==================    ===================
Operating earnings (loss):                                                      
U.S.             $        (640,750)            (569,068)              747,150 
International            1,350,875              456,112               714,359 
                  ------------------   ------------------    -------------------
                $         710,125             (112,956)            1,461,509
                  ==================   ==================    ===================
Identifiable assets:                                                            
U.S.             $      21,954,986           17,188,781            16,667,222 
International            6,217,233            5,115,147             5,820,569 
                  ------------------   ------------------    -------------------
                $      28,172,219           22,303,928            22,487,791
                  ==================   ==================    ===================

(13) Pension Plan                                                               

     The Company has a defined  contribution  Profit Sharing 401(k) Savings Plan
that covers  substantially  all of its employees.  The plan became  effective on
March 1, 1996.  Under the terms of the plan,  employees can elect to defer up to
15%  of  their  wages,   subject  to  certain  Internal  Revenue  Service  (IRS)
limitations,  by making voluntary contributions to the plan.  Additionally,  the
Company,  at the discretion of management,  can elect to match up to 100% of the
voluntary contributions made by its employees.                                  

     For the  years  ended  December  31,  1996  and 1997  the  Company  did not
contribute to the plan on behalf of its employees.                              

(14) Subsequent Events (Unaudited)                                              

     On April 10, 1998, the Company announced the sale of their 2,848,000 shares
of Pacific Video Canada,  Ltd.  (PVC).  When the sale is completed,  the Company
expects to realize a cash consideration of approximately $3,900,000.            

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 LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Schedule II 
 Valuation and Qualifying Accounts
Years ended December 31, 1995, 1996 and 1997

                                                        [Enlarge/Download Table]

                                                                                                                    
         Column A                  Column B              Column C             Column D               Column E       
----------------------------  --------------------  -------------------  --------------------  ---------------------
Description                        Balance at         Charged to costs       Deductions            Balance at end   
                                   beginning of          and expenses       write-offs (1)           of period      
                                      period                                                                        
----------------------------  --------------------  -------------------  --------------------  ---------------------

Allowance for bad debts:                                                                                            
     1995                     $     687,000               539,000              (373,000)              853,000       
                              ====================  ===================  ====================  =====================

     1996                     $     853,000               448,000              (491,000)              810,000       
                              ====================  ===================  ====================  =====================

     1997                     $     810,000               280,000                (3,000)            1,087,000       
                              ====================  ===================  ====================  =====================

(1) Uncollectible accounts written off, net of recoveries.                      

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                                          PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                    

     The response to this Item is incorporated by reference to the  Registrant's
definitive  proxy statement for its 1998 Annual Meeting of  Stockholders,  to be
filed on or before April 30, 1998.                                              

Item 11.  EXECUTIVE COMPENSATION                                                

     The response to this Item is incorporated by reference to the  Registrant's
definitive  proxy statement for its 1998 Annual Meeting of  Stockholders,  to be
filed on or before April 30, 1998.                                              

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS                       

     The response to this Item is incorporated by reference to the  Registrant's
definitive  proxy statement for its 1998 Annual Meeting of  Stockholders,  to be
filed on or before April 30, 1998.                                              

ITEM 13.   CERTAIN TRANSACTIONS                                                 

     The response to this Item is incorporated by reference to the  Registrant's
definitive  proxy statement for its 1998 Annual Meeting of  Stockholders,  to be
filed on or before April 30, 1998.                                              

                                           PART IV

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

(a) The following documents are filed as part of this report:                 

     1 and 2. Financial  Statements  and Financial  Statement  Schedules:  These
documents are listed in the Index to the Consolidated  Financial  Statements and
Financial Statement Schedules.                                                  

3. Exhibits:                                                          

3.1 Certificate of Incorporation of the Company. (1)                            

3.2  Certificate  of Amendment to Certificate  of  Incorporation  of the Company
filed August 29, 1990. (2)                                                      

3.3  Certificate  of Amendment to Certificate  of  Incorporation  of the Company
filed August 14, 1991. (4)                                                      

3.4 By-Laws of the Company. (1)                                                 

4.1 Form of Common Stock Certificate. (2)                                       

10.1 1990 Stock Option Plan. (1)                                                

10.5 Employment Agreement dated as of May 15, 1990 between the Company and Emory
Cohen. (1).                                                                     

10.7 Credit Agreement dated as of September 28, 1990 between the Company and The
Bank of California,  N.A., as amended by the First Amendment to Credit Agreement
dated as of October 12, 1990 and as further  amended by the Second  Amendment to
Credit Agreement dated as of June 3, 1991. (1)                                  

10.7A Letter of Agreement  dated August 7, 1991 between the Company and The Bank
of California,  N.A.,  further  amending the Credit  Agreement  filed as Exhibit
10.7. (3)                                                                       

10.7B  Commitment  Letter dated April 8, 1992 from The Bank of California,  N.A.
(4)                                                                             

10.7C Fourth Amendment to Credit Agreement Signed on June 18, 1992. (5)         

10.7D Fifth Amendment to Credit Agreement Signed July 31, 1992. (5)             

10.7E Amended and Restated Credit Agreement  between the Company and The Bank of
California dated March 1, 1995. (Filed herewith)                                

10.8 CIT Credit Agreement signed on August 3, 1992. (5)                         

10.8A Amended Loan  Agreement  between CIT and the Company dated April 12, 1995.
(7)                                                                             

10.8B  Amended Loan  Agreement  between CIT and the Company  dated June 6, 1996.
(Filed herewith)                                                                

10.9 Opinions of Cooper & Dunham,  patent counsel to the Company,  dated June 4,
1991 and June 6, 1991. (2)                                                      

10.10  Lease  Agreement  dated as of May 14, 1987 by and between the Company and
Morton La Kretz, Trustee, Cross Roads Trust, UTD April 28, 1982. (2)            

10.11 Lease  Agreement  dated as of July 18, 1983 by and between the Company and
Title House. (2)                                                                

10.12 Lease  Agreement  dated as of February 13, 1984 by and between the Company
and Morton La Kretz, Trustee, Cross Roads Trust, UTD April 28, 1982. (2)        

10.13 Robert E. Seidenglanz  Employment  Severance  Agreement signed October 20,
1993. (6)                                                                       

10.14 Bank of America Amended Loan Agreement dated February 29, 1996. (7)       

10.15  Employment  Agreement  dated as of July 24, 1995  between the Company and
Randolph Blim. (7)                                                              

10.16 Settlement  Agreement between 305 E. 45th Associates and the Company dated
January 12, 1996. (7)                                                           

10.17 Settlement Agreement between the Company and Gregory L. Biller dated March
31, 1996. (8)                                                                   

22.1 List of Subsidiaries. (4)                                                  

24.4 Consent of Cooper & Dunham, patent counsel (4).                            

(1) Previously filed on June 7, 1991, with the Company's  Registration Statement
on Form S-1 (File No.  33-41085)                                                

(2) Previously filed on July 23, 1991, with the                                 
Company's  Registration Statement on Form S-1 (File No. 33-41085)               

(3) Previously  filed  on  August  8,  1991,  with the  Company's  Registration 
Statement on Form S-1 (File No. 33-41085)                                       

(4) Previously filed on April 10, 1992 with the Company's Form 10-K.            

(5) Previously filed on August 12, 1992 with the Company's Form 10-Q.           

(6) Previously filed on May 13, 1994 with the Company's Form 10-Q.              

(7) Previously filed on April 14, 1996 with the Company's Form 10-K.            

(8) Previously filed on April 11, 1997 with the Company's Form 10-K.            

(b)  Reports  on Form  8-K                                                      

     There were no reports on Form 8-K filed by the  Registrant  during the last
quarter of the period covered by this report.                                   

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SIGNATURES                                                                      

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the  undersigned,  thereunto duly  authorized,  in the City of Los
Angeles, State of California, on April 10, 1997.                                

 LASER-PACIFIC MEDIA CORPORATION

By: /s/ James R. Parks                                                          
Chairman of the Board and                                                       
Chief Executive Officer                                                         

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

                                           Signature
                                          Title Date

/s/ James R. Parks                                                              
James R. Parks                                                   April 10, 1998 
Chairman of the Board and                                                       
Chief Executive Officer (Principal Executive Officer)                           

/s/ Emory M. Cohen                                                              
Emory M. Cohen                                                   April 10, 1998 
President, Chief Operating Officer and Director                                 

/s/ Robert McClain                                                              
Robert McClain                                                   April 10, 1998 
Vice President and Chief Financial Officer                                      

/s/ Ronald Zimmerman                                                            
Ronald Zimmerman                                                 April 10, 1998 
Director                                                                        

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘10-K’ Filing		Date		First		Last			Other Filings
		3/31/04		19
		8/3/00		6		19
		12/31/98		6		19			10-K,  DEF 14A
		11/30/98		6		18
		8/31/98		22
		4/30/98		29
Filed on:		4/15/98
		4/10/98		6		30
		4/1/98		4					NT 10-K
		3/31/98		1		6			10-Q
		3/30/98		6		18
		2/28/98		6
		1/30/98		6
		1/28/98		18
		1/1/98		6		17
For Period End:		12/31/97		1		28			DEF 14A,  NT 10-K
		12/15/97		6		17
		9/30/97		6					10-Q
		4/11/97		29
		4/10/97		30
		3/31/97		22					10-Q
		3/20/97		8
		12/31/96		6		28			10-K,  DEF 14A,  NT 10-K
		6/6/96		29
		4/14/96		29
		3/31/96		29					10-Q,  10-Q/A,  NT 10-Q
		3/1/96		27
		2/29/96		6		29
		1/12/96		29
		1/1/96		17
		12/31/95		7		28
		7/24/95		29
		4/12/95		29
		3/1/95		29
		1/1/95		25
		5/13/94		29
		10/20/93		29
		8/12/92		29
		8/3/92		29
		7/31/92		29
		6/18/92		29
		4/10/92		29
		4/8/92		29
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