<PAGE>   1

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

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                   FORM 10-KSB
                       -----------------------------------

              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

     FISCAL YEAR ENDED                            COMMISSION FILE NUMBER:
     DECEMBER 31, 1999                                   333-49279


                          NEXT GENERATION NETWORK, INC.
        (Exact name of small business issuer as specified in its charter)

        DELAWARE                                         41-1670450
(State or other jurisdiction of                        (I.R.S. employer
incorporation or organization)                         identification no.)


                      11010 PRAIRIE LAKES DRIVE, SUITE 300
                        MINNEAPOLIS, MINNESOTA 55344-3854
                    (Address of principal executive offices)

                                 (612) 944-7944
                           (Issuer's telephone number)

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

Securities registered under Section 12(b) of the Exchange Act: None


Securities registered under Section 12(g) of the Exchange Act: None



         Check whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
                                               Yes  X     No
                                                  ----      ----

         Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. Not applicable

         State issuer's revenues for its most recent fiscal year. $5,501,269
                                                                  ----------
         State the market value of common equity held by non affiliates: Not
         applicable Number of shares of Common Stock outstanding as of March 22,
         2000: 8,410,396
         Transitional Small Business Disclosure Format  (Check one):

                                              Yes         No  X
                                                  ----      ----
================================================================================



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                           FORWARD-LOOKING STATEMENTS

     This annual report and the documents included or incorporated by reference
in this report may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Forward looking statements are not statements of
historical fact but rather reflect our current expectations, estimates and
predictions about future results and events. These statements may use words such
as "anticipate," "believe," "estimate," "expect," "intend," "predict," "project"
and similar expressions as they relate to us or our management. When we make
forward-looking statements, we are basing them on our management's beliefs and
assumptions, using information currently available to us. These forward-looking
statements are subject to risks, uncertainties and assumptions, including but
not limited to, risks, uncertainties and assumptions discussed in this report.

         The forward-looking statements in this report involve known and unknown
risks, uncertainties and other important factors that could cause the actual
results, performance or achievements of the Company, or industry results, to
differ materially from any future results, performance or achievements expressed
or implied by such forward-looking statements. Such risks, uncertainties and
other important factors include, among others: advertising rates; the ability to
secure new sites for Ebillboards; the loss of key existing site agreements;
changes in the political and regulatory climate; out-of-home advertising
industry trends; competition; changes in business strategy or development plans;
availability of qualified personnel; changes in, or the failure or inability to
comply with, government regulations; and other factors referenced in this
report.

                                     PART I

ITEM 1.  BUSINESS

COMPANY OVERVIEW

         We are the leader in the emerging digital out-of-home advertising
industry. We are currently implementing a rapid build-out of the world's largest
network of digital video advertising displays, which we call E*billboards.
E*billboards are high resolution digital monitors, located in high traffic,
frequently-visited places, that offer sequences of advertising and up-to-date
programming such as news, weather, financial data, sports, trivia and community
service announcements. All of our E*billboards are connected to a central hub in
Minneapolis which enables us to manage and transmit our advertising and
programming on a continuous basis. As of December 31, 1999, we have installed
E*billboards in 5,031 sites and secured long-term site rights for an additional
5,000 sites that are pending installation. Our E*billboards are currently seen
by an audience of more than 39 million people each week in 17 major U.S.
markets, including eight of the ten largest markets in the country.

         Our strategy is to increase our leadership position by continuing to
amass a significant E*billboard footprint both nationally and internationally.
We intend to accomplish this by targeting major operators who control multiple
sites in high traffic venues such as elevators, fast food restaurants, transit
hubs, movie theatres, pharmacies, gas stations, ATM kiosks, convenience stores
and lobby shops where customers wait in line. We have established agreements
with site operators such as 7-Eleven, Inc. (5,327 sites), Cumberland Farms (934
sites) and the New Jersey Transit Authority (203 sites). Consistent with our
global expansion strategy, in January 2000, we formed an alliance with Otis
Elevator Company. Currently, Otis has agreements to maintain more than 1.2


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million elevators worldwide. Initially, Otis will focus its E*billboard
marketing efforts on the largest media markets such as London, New York, Paris
and Sydney. As we expand our network of E*billboards, we believe that we will
increase our ability to attract a broad range of advertisers.

         We were founded to capitalize on the dramatic impact digital technology
is expected to have on the out-of-home advertising industry. To date, we have
raised more than $96 million, including a $30 million equity investment made by
a subsidiary of Otis' parent, United Technologies Corporation, in January 2000.
We have used the proceeds of these financings to develop our proprietary
technology delivery platform, establish our sales and marketing organization and
begin installation of our network of E*billboards.


RECENT DEVELOPMENTS

         On March 1, 2000, we filed a Registration Statement on Form S-1 with
the Securities and Exchange Commission to effect an initial offering of our
common stock to the public ("Offering"). We anticipate our Registration
Statement becoming effective and commencing the sale of our common stock by the
end of the second quarter of 2000.

         Equity Investment. On January 28, 2000, we entered into an agreement
with Nevada Bond Investment Corp. II (NBIC), a wholly-owned subsidiary of United
Technologies Corporation (UTC), the parent company of Otis. Under the agreement,
NBIC acquired 3,025,017 newly-issued shares of our common stock for
approximately $30 million in cash. Prior to the closing of the investment, all
of the shares of our series B and series C senior preferred stock were converted
into common stock and our founders and their family members converted all of
their shares of series A preferred stock into common stock. As a result, we no
longer have any shares of series B and series C senior preferred stock
outstanding.

         Otis Alliance. Also, in January 2000, we formed an alliance with Otis.
The agreement provides that Otis has the exclusive right to secure agreements to
place E*billboards in elevators, escalators, moving walkways and shuttles
throughout the world. Currently, Otis has agreements to maintain more than 1.2
million elevators worldwide. Otis is responsible for the negotiation of
contracts, processing payments, arranging for the purchase, installation and
maintenance of the E*billboards and determining the pricing for E*billboards. As
consideration, Otis receives a percentage of the advertising revenues that we
derive from each E*billboard on a site by site basis, a portion of which Otis
remits to the relevant site operator. The agreement also provides Otis with
incentive payments upon the attainment of certain installation goals.

         Under the Otis agreement, we are not responsible for any capital
expenditures related to the E*billboards in any elevator site. However, we are
responsible for ongoing network operations, including content generation and
advertising sales.

         The term of the Otis agreement is for a period of ten years and is
automatically renewable for successive one year periods. Under the agreement,
either we or Otis may terminate operations in a particular market if, among
other things, the operation of the agreement within a market is no longer
consistent with their respective business requirements. Either party may
terminate the entire agreement if, among other things, operations are terminated
in more than four markets during any calendar year or based on a deadlock in the
steering committee. In addition, Otis may terminate the entire agreement if a
competitor of Otis acquires more than 19% of our voting equity.



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INDUSTRY OVERVIEW

         The advertising industry is large and growing. Approximately $400
billion was spent on worldwide advertising in 1998, including nearly $200
billion in the U.S. alone. The out-of-home industry is defined as radio
broadcasting, billboard advertising, transit advertising, stadium signage,
wallscapes on urban buildings, and other forms of advertising that primarily
reach consumers when they are out of their homes. The out-of-home advertising
industry generated revenues of more than $19 billion in 1998. The outdoor
advertising industry is comprised of several large outdoor advertising and media
companies with operations in multiple markets, as well as many smaller and local
companies operating a limited number of structures in local markets. The Outdoor
Advertising Association of America estimated that, as of 1998, there were
approximately 396,000 traditional outdoor advertising billboards in the U.S.

         Outdoor media has a number of strengths as an advertising medium,
including its ability to reach large audiences with repetitive impact at a
relatively low cost as compared to other media, including television, radio,
newspapers, magazines and direct mail marketing. However, traditional outdoor
advertising has a number of limitations, including minimal targetibility, high
cost of production, long lead times, inflexibility and significant zoning
restrictions.

         In recent years, the advertising industry has undergone significant
transformations. Digital technology is ushering in an era of dramatic change by
providing advertisers with new forums and formats by which they can connect with
and impact their target audience. Industry analysts believe that the relative
importance of traditional advertising media will diminish as advertisers look
for more creative solutions in response to new technologies. In addition,
digital technology addresses many of the problems faced by traditional in-home
and out-of-home advertising formats such as high production and labor costs,
long lead times, restrictions on location and difficulty in updating stale
information.

OUR MARKET OPPORTUNITY

         Through our network, we have created a new advertising distribution
channel that allows advertisers to more effectively target their audience in an
out-of-home environment. By providing advertisers with a new forum and format to
reach their targeted audiences, we intend to capture an increasing share of the
total advertising market. We believe our network is appealing to both
traditional in-home and out-of-home advertisers who today employ a range of
advertising formats including television, radio, newspaper and traditional
outdoor. We believe that we will be able to attract national, regional and local
advertisers to our digital network because of the unique benefits we are able to
offer them.

         Ability to precisely target audiences. Our network offers advertisers
the ability to target specific demographics on a site by site basis. We place
our E*billboards in high traffic venues, including fast food restaurants,
transit hubs, lobby shops, gas stations and convenience stores. Unlike
traditional billboards, we are not constrained by real estate zoning or other
site restrictions. As a result, we are able to target hard to reach upscale
demographic sites which are highly appealing to advertisers. E*billboards are
individually addressable and programmable and are profiled based on specific
characteristics of their audience, including age, gender, race and income. This
allows us to appeal to both local advertisers targeting a small geographic area
within a major city, as well as national advertisers targeting a wide range of
demographic groups.



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         High impact appeal. Our network allows advertisers to reach audiences
in new and more appealing out-of-home environments. The effectiveness of
E*billboards is enhanced by positioning them in prominent locations where people
are waiting or standing in line and by offering relevant and interesting
programming. Programming is specifically developed for each market or region in
which we have a presence, providing local relevancy and appeal to viewers. In
addition, our technology allows us to deliver high resolution, full video
advertisements and programming content. As a result, E*billboards have
demonstrated a high level of impact and recall rates with little or no
competition from other media.

         Speed and flexibility. Our technology and operating platform have the
ability to support a global network for selling, creating, distributing and
tracking digital advertisements and content. Through our network, advertisers
can quickly purchase, create, place or change advertisements down the block or
across the country. Whereas traditional outdoor advertising takes days or weeks
to update, our technology reduces the lead times for advertising and programming
changes to hours or minutes. Our clients are, therefore, able to modify their
daily advertising to target specific parts of the day and feed in advertising
updates at any time, which provides them with the ability to enhance the
timeliness of their message with little incremental cost.

         Low cost. Based on traffic counts at our installed base of E*billboard
sites, the present cost to our advertisers of approximately $3.50 per thousand
impressions is substantially less than television, radio and print advertising
which generally range from $7 to $20. Although our network is marginally more
expensive, on a cost per thousand impressions basis, than most forms of outdoor
advertising, E*billboards have no physical production requirements. Therefore,
advertisers can put more of their advertising budget into acquiring additional
advertising space rather than into the relatively high production charges
associated with traditional outdoor advertisements. In addition, the speed and
flexibility with which E*billboard advertisers can adjust their advertising
format and program, at little or no incremental cost, provides significant
advantages over traditional advertising media.

         We believe the strength of our network and its appeal to advertisers
will increase as we expand our U.S. and global footprint. Our strategy is to
rapidly expand the scale and breadth of our network. In addition to installing
E*billboards throughout our current backlog of 5,000 secured but uninstalled
sites, we will continue to broaden our presence in the U.S. by securing and
installing additional sites in multiple locations and types of venues in order
to increase the likelihood that viewers will encounter E*billboards several
times each day. In this fashion, we intend to position our product as a common
feature within the daily lives of our audiences and provide our advertisers the
ability to target their audience on the basis of demographics, such as age,
ethnicity, gender and income, as well as geography.

E*BILLBOARD SITES

         Our domestic geographic expansion is currently focused on the ten
largest U.S. markets, with the intention of having a significant presence in the
25 largest U.S. markets by 2002. Our site growth strategy is to enter into
exclusive alliances with three types of site owners or organizations owning,
representing or having a relationship with:

         -   multiple national and international sites (for example, our
             agreements with 7-Eleven, Otis, Cumberland Farms and the Korean
             American Grocers Association of America);

         -   multiple regional sites (for example, New Jersey Transit Authority
             and franchisees of McDonald's, Taco Bell or Subway restaurants);
             and



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         -   local or single site operators with desirable demographic and
             location attributes.

         Our recently formed alliance with Otis will provide us with the
opportunity to develop the largest digital out-of-home advertising presence in
elevators across the globe. The agreement provides that Otis has the exclusive
right to secure agreements to place E*billboards in elevators, escalators,
moving walkways and shuttles throughout the world. Currently, Otis has
agreements to maintain more than 1.2 million elevators worldwide.

         We also have an agreement with the Korean American Grocers Association
of America under which we are the designated exclusive provider of video-based
information, entertainment and advertising to E*billboards installed in stores
owned or operated by members of the association.

         We intend to expand internationally by developing E*billboard networks
in the Americas, Europe, Asia and Australia. We intend to use our alliance with
Otis as the cornerstone of our global expansion strategy. In addition, we may
also form alliances with local partners or independently develop our
international network in other non-elevator venues.

         7-Eleven Agreement. We have an agreement with 7-Eleven which, as of
December 31, 1999, covered 3,262 of the sites at which we have installed
E*billboards and 2,065 of the additional sites for which we have agreements to
install E*billboards. Under the agreement, we are the designated exclusive
provider of video-based information, entertainment and advertising to all
7-Eleven stores and have the right to install, maintain and repair or replace
the E*billboards at each participating store in accordance with an agreed upon
rollout schedule. As a part of this agreement, we agreed to pay 7-Eleven the
greater of a program fee equal to a percentage of the operating revenues from
the sales of our advertisements which are broadcast on E*billboards in 7-Eleven
stores or an annual minimum of $3.3 million per year until 2003, based on
E*billboards installed as of December 31, 1999.

        Under the agreement as amended, we are required to complete the
installation of E*billboards in at least 4,800 7-Eleven stores by November 30,
2000. If these installations are not completed by the deadline, then we must pay
7-Eleven liquidated damages of $150,000 on or before December 31, 2000.
Furthermore, 7-Eleven has the right to terminate the agreement on 30 days notice
if we do not have 4,800 E*billboards installed in 7-Eleven stores by May 30,
2001.

PROGRAMMING

         The advertising and programming loops for each E*billboard are created
and controlled from our central hub in Minneapolis, allowing us to quickly and
cost-effectively custom-tailor both the advertising and programming content on a
regional or micro-targeted basis. We are able to customize programming
information for local markets through our network management software.

         Our programming content is primarily comprised of national, regional
and local topics of interest such as local weather, sports, trivia, news
headlines and financial information. The network is designed so that programming
information, such as weather and sports information, can be provided to us via
an electronic feed from providers of such information, such as Reuters,
Accu-Weather and Associated Press. Once the feed is received at our facilities,
it is processed and distributed to relevant E*billboards across our network. As
our footprint expands, we intend to develop our content production capabilities
to maintain and further enhance the local relevancy and appeal of our digital
content. We may do so by establishing relationships with new local or national
content providers.



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THE NETWORK

         Operations. Our E*billboards are installed in over 5,000 high traffic
locations throughout the U.S. In each location, E*billboards present repeating
sequences, or loops, of advertising and programming. As currently configured,
the loops consist of twelve, ten-second advertising slots and six to eight,
six-second programming slots. Programming slots include information such as
local weather, sports, trivia, news headlines and financial information, as well
as NGN-sponsored promotional content. For example, a Baltimore, Maryland
7-Eleven customer waiting in line may view the three-day Baltimore forecast, the
Baltimore Orioles' baseball score and local news headlines interspersed with
advertisements for Haagen-Dazs ice cream, a Chrysler dealership and a local
dentist, among other messages. Our technology allows us to deliver high
resolution, full motion video ads and editorial content with animation effects
intended to capture audience attention while they are waiting or standing in
line.

         We manage our E*billboards network using proprietary software that we
developed expressly for an out-of-home advertising application. Our software
technology incorporates Internet-enabled systems for selling, creating,
distributing and tracking digital advertisements and content. From our central
hub facility, we create programming and advertising that is transmitted to
E*billboard sites in multiple locations. Because each E*billboard is
individually addressable and profiled based on the demographic characteristics
of its audience, advertisers can select a customized package of E*billboard
locations that match their demographic objectives. Our digital network and
central operating capability also allows our clients to feed in advertising
updates at any time which provides them with flexibility to enhance the
timeliness of their message, promote daily events and adjust formats with little
incremental cost. The lead time for updating advertisements on E*billboards is
faster than any traditional out-of-home media advertising format.

         Assembly, Installation and Maintenance. The E*billboard installation
process is relatively quick and simple and typically requires no investment by
site operators. We have a contractual arrangement with an independent contractor
for the nationwide installation and maintenance of most of our E*billboards. The
independent contractor has a network of offices throughout the U.S. and has been
able to adequately satisfy all of our installation and maintenance needs to
date. Under our agreement with the independent contractor, we pay a fee for each
installation and a fixed monthly maintenance fee based on the number of existing
E*billboard installations. The independent contractor maintains an inventory of
spare parts for E*billboards at local warehouses within the vicinity of
E*billboard sites.

         Network Infrastructure. Our network is built around the Internet
protocol TCP/IP, allowing us to use various transmission methods. Currently, we
use standard telephone lines to transmit our digital advertising and programming
content. However, we have the ability to use Internet, satellite or wireless
transmission solutions. In addition, we use a client server architecture, which
Microsoft awarded the First Place Prize in the Comdex 1999 Windows World Open
Competition. Our discrete server banks provide some redundancy protection in the
case of system failures. We also have a diesel-powered generator as a backup
power source at our central hub. Furthermore, we have implemented encryption,
anti-virus and hub lock-out software to provide network security.



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MARKET PORTFOLIO

     As of December 31, 1999, we operated our E*billboards in 17 major markets
as follows:

<TABLE>
<CAPTION>

             DMA                                     MARKET         NO. OF          ESTIMATED
             RANK           MARKET(1)              POPULATION        SITES       WEEKLY VIEWERS
             ----    ----------------------------  ----------      --------      --------------
          <S>      <C>                           <C>                <C>          <C>
              1      New York                      14,643,600         1,317        10,400,000
              2      Los Angeles                   11,522,935           578         4,600,000
              3      Chicago                        6,543,815           172         1,400,000
              4      Philadelphia                   5,511,985           307         2,400,000
              5      San Francisco                  4,952,195           245         1,900,000
              6      Boston                         4,529,755           241         1,900,000
              7      Dallas                         3,818,990           306         2,400,000
              8      Washington, DC                 4,012,095           519         4,000,000
              14     Tampa                          2,804,345           165         1,300,000
              16     Miami                          2,888,755           117           900,000
              20     Sacramento                     2,508,585            64           500,000
              22     Orlando                        2,107,275           257         2,000,000
              24     Baltimore                      2,034,360           204         1,600,000
              26     San Diego                      2,081,930           157         1,200,000
              40     Norfolk                        1,308,230           237         1,900,000
              44     West Palm Beach                1,175,090            67           500,000
              81     Ft. Myers                        746,188            54           400,000
                     Developmental Markets(2)                            24
                                                   ==========         =====        ==========
                     TOTALS                        73,190,128         5,031        39,300,000
          </TABLE>

     (1)  In contiguous markets, such as Washington, D.C. and Baltimore, San
          Francisco and Sacramento, Miami and West Palm Beach and Tampa and Ft.
          Myers, we have a single sales office that supports both markets.
     (2)  Developmental markets consist of markets in which we have installed 10
          or less E*billboards.


ADVERTISING, SALES AND MARKETING

         Historically, we established our network on a market by market basis in
the U.S. As we expand our network, we expect to attract more national and
regional advertisers to complement our local advertisers. In 1999, we developed
a diverse portfolio of over 500 advertising clients with varying demographic and
geographic objectives. While our advertisers continue to be predominantly local,
in the last quarter of 1999, we began attracting national advertisers including
AT&T Wireless, Business Week, El Sitio and Fox Television. For all of our
advertisers, we develop customized packages to meet their demographic
requirements and geographic targets.

         As the geographic diversity of our sites increases, we believe that
additional national advertisers will be increasingly attracted to E*billboards.
Therefore, organizing our sales force around national product categories and
their respective agencies will be a key initiative. By using the reach,
flexibility and targetibility of our network, we can match specific packages
against the needs of national advertisers.

         No single advertiser generates advertising revenues that are greater
than 10% of our total advertising revenues on an annual basis.


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         For local sales, we direct a significant portion of our sales effort on
helping potential customers develop a targeted and effective advertising
strategy using E*billboards. While price and availability are important
competitive factors, service and customer relationships are also critical
components of local sales. We currently have 13 local sales offices serving 17
DMAs. Generally, each office is staffed with a general manager and four to ten
salespersons. The size of the sales staff depends on various factors, including
the physical size of the DMA and the number of E*billboard sites within the DMA.
In early 1997, we realized our first operating revenues from advertising sales
in markets where we have a dedicated sales force.

         All graphic design, network management, billing and other functions are
handled from our corporate headquarters. We have developed local links to ensure
that our local sales offices are able to access our central information systems
and monitor the status of our network at any time. In addition, we provide our
local sales agents with modem-equipped laptop computers so that they always have
current information on the status of the network and can access our dedicated
technical and creative staff to support local selling efforts. We developed this
software to allow a salesperson to customize advertising proposals instantly to
accommodate the stated preferences of the advertiser. For example, a salesperson
can generate proposals based on a location within a specified radius, or site by
site purchases. The proposals can specify cost (as well as other schedule
information) and can prepare maps and location lists to show the exact
E*billboard locations on which an advertisement will appear. In the future, we
intend to allow our advertisers to manage their advertising program for
E*billboards in-house, over the Internet. We are currently developing software
that will enable advertisers to review advertising slots available on a site by
site basis, develop national, regional or local advertising programs, generate
automatic quotes and submit orders in an online and interactive environment.

         We are planning to develop and implement a national marketing and media
plan to further build awareness and understanding of our E*billboard product. We
will do this through a targeted media plan followed by a coordinated promotional
calendar of national, regional and local levels.


COMPETITION

         The media industry is intensely competitive. We compete for advertising
dollars directly with broadcast and cable television, the Internet, radio,
magazines, newspapers, traditional billboards and direct mail marketers. In
addition, we also compete with a wide variety of out-of-home advertising,
including highway logo signs, advertising in shopping centers and malls,
airports, stadiums, movie theaters and supermarkets, as well as on taxis,
trains, buses and subways. We believe that the out-of-home advertising industry
is attracting numerous alternative media products, many of which will compete
directly or indirectly with us. These products may be offered by companies with
greater resources and with greater industry recognition than us, such as Clear
Channel Communications and Infinity Broadcasting. We are aware of other
companies that place displays that look similar to E*billboards in specific
locations for commercial purposes, such as in stores, elevators, airports and
subways. While we believe that we are favorably differentiated from existing
media in competing for advertising, we are aware of other media that are more
established and recognized by potential advertisers and advertising agencies.

PROTECTION OF TECHNOLOGY

         We view the computer software technology that we have developed as
proprietary, and we attempt to protect our technology and trade secrets through
the use of confidentiality and non-disclosure agreements and by other security
measures. Trade secret law and confidentiality



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<PAGE>   10


agreements offer protection that is limited in comparison to patent protection.
Confidentiality and non-disclosure agreements may be difficult to enforce, and
our products might be subject to reverse engineering. Consequently, our
competitors may be able to develop or obtain technology similar to ours and
produce products similar to those we are utilizing.

         We do not have patent or registered copyright protection on any of our
proprietary software technology, and such technology might not be eligible for
patent protection. We believe that significant portions of our software are
entitled to copyright protection in the U.S. If we seek and obtain federally
registered copyright protection for any of our software in the future, no
assurance can be given that the copyright application would be accepted or that
a capable and adequately financed competitor could not lawfully develop software
that would perform the same function.

         We do not believe that we are infringing on the patent rights of any
other person. A company has sent us a letter calling our attention to a patent
they have relating to displays in elevators. They have not alleged that we have
violated or infringed their patents. We believe that there is no basis for any
claim that we would be liable for infringing their patent.

         We have received several federal registrations of service marks,
including "NGN," "Next Generation Network," and "Out of Home That's In Your
Face." In addition, we have applied for several additional federal registrations
of service marks, including "E*billboard," "Proposal Machine," "Look Up and
Win," and "In-Line TV." While no assurance can be given that the service marks
will be issued on the pending applications, we are not aware that the service
marks for which federal registration is sought infringe on existing service
marks.

GOVERNMENT REGULATION

         We are not aware of any material legal or other regulatory restrictions
which may adversely affect our business, other than those that affect businesses
generally. The furnishing of in-store marketing services is subject to
compliance with the Robinson-Patman Act. In general, the Robinson-Patman Act
prohibits price discrimination and discriminatory promotional allowances and
services between different purchasers of commodities of like grade and quality,
the effect of which may be substantially to lessen competition in any line of
commerce.

         Our use of telephone lines to transmit messages to our E*billboards
subjects us to regulation by the Federal Communications Commission as well as
laws and regulations affecting the advertising industry generally. While we have
not sought determination on the issues, the FCC may attempt to prohibit us from
transmitting tobacco advertisements on our E*billboards. In addition, certain
state statutes restrict advertising of alcoholic beverages on our E*billboards.

         One of our competitive advantages over other forms of out-of-home
advertising, such as billboards, is that in many desirable locations, zoning
laws and regulations prohibit the erection of billboards. These zoning laws and
regulations do not apply to our E*billboards. In the future, it is possible that
zoning laws and regulations and building codes could be expanded to limit or
prohibit our E*billboards.

EMPLOYEES

         As of December 31, 1999, we had 182 employees, of which 29 were
involved in engineering, purchasing, corporate development and field operations,
25 were involved in network operations, marketing and creative service, 12 were
involved in management and administration, 26



                                       9

<PAGE>   11


were involved in management information systems and accounting, and 90 were
employed in regional sales offices. Our employees are not represented by a
collective bargaining agreement. We believe that our relationship with our
employees is good.

RISK FACTORS


RISKS RELATED TO OUR BUSINESS

We have a history of net losses and may not be profitable in the future.

         We have incurred significant losses and have experienced substantial
negative cash flow from operations. For the fiscal years ended December 31,
1999, 1998 and 1997, we incurred net losses of $(29,995,247), $(19,662,977) and
$(6,388,484), respectively, and we expect losses to continue in the future. We
had an accumulated deficit of $(68,655,777) as of December 31, 1999,
representing the effect of losses incurred since our inception. Our ability to
incur debt, if necessary to fund our operations or a continued build-out of our
network, may depend significantly on our ability to generate cash-flow from
operations. Furthermore, our inability to generate positive cash flow in the
future would have a material adverse effect on us and could adversely affect the
market price of our common stock.

E*billboards are a new product that may not achieve market acceptance from
advertisers or generate sufficient revenue to support us.

         Although the out-of-home advertising industry is over 125 years old,
digital advertising such as our E*billboards is a relatively new method of
providing out-of-home advertising. Because we are using new technology and the
market is rapidly developing, the ultimate level of demand for and continued
market acceptance of our network and our E*billboards are uncertain.
Technological change and trends in the out-of-home advertising industry may lead
to the emergence of other new cost-effective advertising products and services
which may make our E*billboards less attractive to the public and to
advertisers. If a market for advertising on E*billboards does not develop as we
expect, our business, financial condition and operating results will be
materially adversely affected.

We are dependent on our agreements with site operators.

         We have agreements with operators representing approximately 10,000
sites. Our profitability and the success of our growth plans will be
significantly affected by our ability to renew these agreements and enter into
new contracts for high traffic sites for the installation of E*billboards. Site
operators who currently have or in the future will have E*billboards installed
may not retain them at their sites beyond the expiration of existing agreements
or we may not be able to continue to increase the number of sites in which
E*billboards are installed or for which commitments have been made. We are
especially dependent on our agreements with each of 7-Eleven and Otis.

         As of December 31, 1999, the 7-Eleven agreement covered 3,262 of the
5,031 sites at which we have installed E*billboards and 2,065 of the
approximately 5,000 additional sites for which we have agreements (representing,
in the aggregate, approximately 53% of the sites currently covered by
agreements). If we fail to complete installations of E*billboards in at least
4,800 7-Eleven stores by November 30, 2000, we are required to pay them
liquidated damages of $150,000 on or before December 31, 2000. Furthermore,
7-Eleven has the right to terminate the agreement on 30 days notice if we do not
have 4,800 E*billboards installed in 7-Eleven stores by May 30, 2001.



                                       10

<PAGE>   12

         In addition, our agreement with Otis provides that Otis will secure
rights to place E*billboards in elevators of major buildings throughout the
world. Otis currently has agreements to maintain more than 1.2 million elevators
in such buildings. Under the agreement, either we or Otis may terminate
operations in a particular market if, among other things, the operation of the
agreement within a market is no longer consistent with their respective business
requirements. Either party may terminate the entire agreement if, among other
things, operations are terminated in more than four markets during any calendar
year or based on a deadlock in the steering committee. In addition, Otis may
terminate the entire agreement if a competitor of Otis acquires more than 19% of
our voting equity.

Because we are highly leveraged, we may not be able to obtain additional capital
to fund our operations and finance our growth on terms acceptable to us or at
all.

         As of February 25, 2000, we had outstanding total face amount of
indebtedness of $40.5 million, including $38.4 million of senior secured PIK
notes (reflected in our financial statements net of related discounts for GAAP),
and our net interest expense for the fiscal year ended December 31, 1999 was
$7.7 million. This high level of debt and our debt service obligations could
have material adverse consequences, including:

         -    increasing our vulnerability to general adverse economic and
              industry conditions;
         -    requiring us to dedicate a substantial portion of our future cash
              flow, if any, to the servicing of debt;
         -    making it difficult for us to obtain additional financing for
              working capital, capital expenditures, acquisitions and general
              corporate purposes in the future;
         -    limiting flexibility in planning for, or reacting to, changes in
              our business and industry; and
         -    being disadvantaged when compared to those of our competitors
              which have less debt.

         Beginning on February 1, 2001, we will be required to make semi-annual
cash interest payments on our senior secured notes in the amount of $2.4 million
until the notes mature in 2003, assuming all interest payments through August
2000 are paid in additional notes. Timely payment of the interest on and
principal of our senior secured notes will require positive cash flow from
operations. Our cash flow depends upon our future performance and financial,
economic and other factors, some of which are beyond our control. Unless we
realize these increases, we may be unable to meet obligations under our senior
secured notes.

         If we are unable to generate cash flow from operations in amounts
sufficient for us to be able to pay our debts as they become due, we may be
required to refinance all or a portion of our debt, sell some or all of our
assets or sell additional equity securities at prices that may be dilutive to
existing investors. We may not be able to refinance all or a portion of our debt
or sell our equity securities or assets on a timely basis, on acceptable terms
or at all.

         We anticipate incurring additional debt in the future to fund the
expansion, maintenance and upgrade of our systems. If new debt is added to our
current debt levels, the related risks that we now face could intensify. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources".

Our outstanding debt and restrictive terms of our indenture may make it more
difficult for us to implement our strategy.



                                       11

<PAGE>   13


         Our business strategy will likely require us to incur additional debt
to support our growth. This strategy may not be achievable because of our high
level of debt and the restrictions imposed by the indenture governing our senior
secured notes. The indenture restricts our ability to incur debt, make
distributions, sell assets, create liens, make investments or engage in mergers
and acquisitions. The indenture also restricts our ability to sell a minority
interest in our subsidiaries or operate through joint ventures. These
restrictions reduce our operating flexibility and may prevent us from expanding
our existing business or developing or acquiring new businesses.

         Banks or other financial institutions may not be willing to lend to us,
particularly in light of the significant amount and terms of our senior secured
notes. Further, they may not be willing to lend on terms that are acceptable to
us. Our inability to obtain bank or other financing could negatively affect our
ability to meet our cash needs and could limit our ability to implement our
business strategy.

We may be unable to generate sufficient revenue from the sale of advertising on
our E*billboards.

         All or substantially all of our revenue for the foreseeable future is
expected to be derived from the sale of advertising on E*billboards. To date, we
have not achieved sufficient revenue from this source to achieve overall
profitability. Accordingly, our success is dependent on our efforts to increase
advertising sales. Because the utility and the ultimate attractiveness of
E*billboards to advertisers is in large part dependent on our ability to offer
advertising in a wide array of local, regional and national markets, a
significant reduction in the number of our installed E*billboards or our
inability to install E*billboards in such locations in a rapid and orderly
manner may significantly affect our revenue generation potential.

         In addition, advertising revenue can be adversely affected by many
conditions that are beyond our control, including:

             -  a general decline in economic conditions;
             -  a decline in economic conditions in particular markets where we
                conduct business; or
             -  a reallocation of advertising expenditures to other available
                media by significant users of our E*billboards.

         We may be unable to maintain our existing advertisers or attract
additional advertisers in the future. A decrease in demand for advertising space
or our inability to generate revenue from the sale of advertising on our
E*billboard sites would materially and adversely affect us.

We rely on outside sources to assemble, install and maintain our E*billboards.

         All of our E*billboards are assembled and tested by a third party
contractor. In addition, we have an agreement with an independent contractor for
the nationwide installation and maintenance of most of our E*billboards.
However, we do not have any arrangements with contractors for the installation
and maintenance of E*billboards outside of the U.S. Because we employ third
parties to assemble and install our E*billboards, the success of our business
and the expected growth of our network is dependent on, among other things, the
work of these third parties. Our failure to maintain suitable arrangements with
third parties, and the failure of these third parties to perform, may have a
material adverse effect on us. The failure of our outside sources to sustain
production



                                       12

<PAGE>   14


and satisfy demand for the installation and maintenance of finished E*billboards
would have a material adverse effect on our business, financial condition and
results of operations.

If we cannot retain our key personnel and hire additional qualified management
and technical personnel, we may not be able to successfully manage our
operations and pursue our strategic objectives.

         We are highly dependent on the services of certain key executives and
technical employees and on our ability to recruit, retain and motivate high
quality executive, sales and technical personnel. Competition for such personnel
is intense, and the inability to attract and retain additional qualified
employees required to expand our activities or the loss of current key employees
could materially and adversely affect us.

Our continued growth could place strains on our management, which may adversely
impact our business and the value of your investment.

         Over the past several years, we have experienced significant growth and
change in our business activities and operations, including expansion in the
number of E*billboard sites. Our past expansion has placed, and any future
expansion will place, significant demands on our administrative, operational,
financial and other resources. Any failure to manage growth effectively could
seriously harm our business. To be successful, we will need to continue to
implement management information systems and improve our operating,
administrative, financial and accounting systems and controls. We will also need
to train new employees and maintain close coordination among our executive,
accounting, finance, marketing, sales and operations organizations. These
processes are time consuming and expensive, will increase management
responsibilities and will divert management attention.

Our competitors may have greater resources and name recognition than us.

         Many of our competitors in the media business are larger, possess
significantly greater financial resources, have greater name recognition and
have longer operating histories than us. Moreover, many of our competitors have
more extensive customer bases, broader customer relationships and industry
alliances that they can use to their advantage in competitive situations. An
increase in competition could result in price and revenue reductions and lower
profit margins as a result of a loss of clients. We may fail, therefore, to
compete effectively against other media companies. Our failure to successfully
compete would have a material adverse effect on us.

We will face risks inherent in international operations as we expand abroad.

         As we expand our operations internationally, we face the risks
associated with general economic conditions and regulatory uncertainties
inherent in conducting business abroad. Potential foreign government regulation
of our technology, political and economic instability, as well as changes in
foreign countries' laws affecting our international operations generally may
have a material adverse effect on us. Exchange controls or other currency
restrictions imposed by foreign governmental authorities may restrict our
ability to convert local currency into U.S. dollars or other currencies, or to
take those dollars or other currencies out of those countries. Fluctuations in
currency exchange rates, including possible currency devaluations, may adversely
affect our revenue stream from those countries. We may experience substantial
losses due to these and other risks related to international operations.



                                       13

<PAGE>   15


We depend on the proper functioning and security of our network and computer
systems.

         Our business depends on providing our clients with uninterrupted
service. Therefore, we must protect the infrastructure of our system against
damage from human error, physical or electronic security breaches, fire,
earthquakes, floods and other natural disasters, power outages, sabotage,
vandalism, technological failures beyond our control and other similar events.
The occurrence of any system failure, service interruption or breach of security
could cause:

             -  an inability to meet our obligations under our advertising
                agreements;
             -  decreased revenues from advertising; and
             -  harm to our reputation.

         A significant degradation, service interruption or failure of our
network and computer systems or telephone lines or breach of security could
affect our ability to transmit information to E*billboards and lead to a
substantial decrease in our advertising revenues and erosion in our client base.
Despite all precautions we have taken, the occurrence of any event described
above could have a material adverse effect on us.

Possible infringement of intellectual property rights could harm our business.

         We view the computer software technology that we have developed as
proprietary and attempt to protect our technology and trade secrets through the
use of confidentiality and non-disclosure agreements and by other security
measures. Trade secret law and confidentiality agreements, however, offer only
limited protection in comparison to patent protection. Confidentiality and
non-disclosure agreements may be difficult to enforce, and our products might be
subject to reverse engineering. If substantial unauthorized use of our software
technology were to occur, our results of operations could be negatively
affected. We cannot assure you that our means of protecting our proprietary
rights will be adequate or that our competitors will not independently develop
similar software technology. In addition, we cannot assure you that third
parties will not claim that our technology infringes on the propriety rights of
others.

The out-of-home advertising industry may be subject to increased government
regulation.

         Our operations may be subject to increased federal, state and local
government regulation of the out-of-home advertising business. Currently, our
in-store advertising is subject to compliance with the Robinson-Patman Act,
which prohibits price discrimination, discriminatory promotional allowances and
services between different purchasers of commodities of like grade and quality,
the effect of which may be substantially to lessen competition in any line of
commerce. In addition, the use of telephone lines to transmit messages to our
E*billboards subjects us to regulation by the Federal Communications Commission,
as well as laws and regulations affecting the advertising industry in general.
The FCC may attempt to prohibit us from transmitting tobacco or other kind of
advertisements to our E*billboards. Moreover, certain state laws restrict
advertising of alcoholic beverages on our E*billboards. Additional regulations
or changes in the current laws regulating and affecting out-of-home advertising
at the federal, state or local level, such as zoning regulations or building
code, may have a material adverse effect on us.



                                       14

<PAGE>   16


ITEM 2.  PROPERTIES

         Our headquarters is located in Eden Prairie, Minnesota, a suburb of
Minneapolis. We also lease warehouse space in Minneapolis. In addition, we have
a regional sales office in each of New York, New York; Los Angeles, California;
Philadelphia, Pennsylvania; San Francisco, California; San Diego, California;
Boston, Massachusetts; Dallas, Texas; Washington, D.C.; Norfolk, Virginia;
Orlando, Florida; Fort Lauderdale, Florida; Chicago, Illinois; and Tampa,
Florida. Our leases expire on various dates, ranging from April 30, 2000 to
December 31, 2006, and many provide for renewal options.


ITEM 3.  LEGAL PROCEEDINGS.

         Although we may be subject to litigation from time to time in the
ordinary course of our business, we are not party to any pending legal
proceedings that we believe will have a material adverse impact on our business.


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

         In January 2000, we solicited the consent of registered holders of our
outstanding 12% Senior Secured PIK Notes due 2003 (the "Notes") to amend certain
provisions of our Indenture governing such Notes, including to carve-out from
the restriction on the definition of affiliate transactions for the agreements
which we entered into and amended in connection with the NBIC Equity Investment.

         In addition, we solicited waivers from registered holders of
outstanding Notes of any and all notice requirements under the Indenture with
respect to the Otis Agreement and NBIC's acquisition of common stock pursuant to
the Stock Purchase Agreement.

         We received consents and waivers from holders of $53,293,000 in
aggregate principal amount of Notes, representing 99.9% of the $53,294,000
aggregate principal amount of Notes outstanding.




                                       15
<PAGE>   17


                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         There is no public trading market for the Company's common equity. The
approximate number of holders of the Company's Common Stock is 59.

         The Company has not paid cash dividends on its Common Stock since
inception, and does not anticipate paying dividends on its common stock in the
foreseeable future. The Company is restricted from paying dividends under its
Indenture covering the Series B Notes, as well as under its Certificate of
Designation for its 8.25% Series A Cumulative Preferred Stock ("Series A
Preferred Stock").









                                       16
<PAGE>   18


ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

GENERAL

         We are the leader in the emerging digital out-of-home media industry.
We are currently implementing a rapid build-out of the world's largest network
of digital video advertising displays, which we call E*billboards. Since our
inception, we have developed our proprietary technology platform to deliver
digital advertising and other media across our growing network of E*billboards
in the U.S.

         We have organized our network rollout strategy on a market by market
basis, concentrating on major U.S. advertising markets. As of December 31, 1999,
we have installed E*billboards at 5,031 sites and we have secured long-term site
rights covering approximately 5,000 additional sites that are pending
installation. The historic build-out of our network is illustrated in the
following table.

                        INSTALLED E*BILLBOARD SITES

<TABLE>
<CAPTION>

DMA                             MARCH 31,     JUNE 30,   SEPT. 30,  DEC. 31,   MARCH 31,  JUNE 30,   SEPT. 30,  DEC. 31,
RANK         MARKET(1)            1998          1998       1998       1998       1999       1999       1999       1999
----         ---------          ---------     --------   ---------  --------   --------   --------   ---------  --------
<S>    <C>                       <C>          <C>        <C>       <C>         <C>         <C>      <C>       <C>
  1      New York                      -         241        340       447         633         882      1,102     1,317
  2      Los Angeles                   -         407        490       490         490         500        515       578
  3      Chicago                       -           -          -        71         120         130        142       172
  4      Philadelphia                  -           -        244       247         269         286        291       307
  5      San Francisco                 -           -        191       197         198         202        215       245
  6      Boston                       21          21        154       179         177         189        217       241
  7      Dallas                      226         228        257       263         280         281        279       306
  8      Washington DC               505         506        509       510         507         509        517       519
  14     Tampa                       135         139        140       141         150         158        159       165
  16     Miami                        86          86         86        86          91          88         98       117
  20     Sacramento                    -           -         58        62          62          62         63        64
  22     Orlando                     238         239        243       243         248         251        257       257
  24     Baltimore                   204         205        204       202         203         204        204       204
  26     San Diego                     -           -        113       133         134         140        141       157
  40     Norfolk                     237         236        236       238         241         240        240       237
  44     West Palm Beach              63          63         63        63          64          65         65        67
  83     Ft. Myers                    45          45         46        46          51          51         52        54
         Developmental                11          12         12        12          16          16         18        24
                                   -----       -----      -----     -----       -----       -----      -----     -----
         Markets(2)

         TOTAL SITES               1,771       2,428      3,386     3,630       3,934       4,254      4,575     5,031
                                   =====       =====      =====     =====       =====       =====      =====     =====
</TABLE>

         (1)  In contiguous markets, such as Washington, D.C. and Baltimore, San
              Francisco and Sacramento, Miami and West Palm Beach and Tampa and
              Ft. Myers, we have a single sales office that supports both
              markets.
         (2)  Developmental markets consist of markets in which we have
              installed 10 or less E*billboards.

         Our current geographic expansion is primarily focused on the ten
largest U.S. markets, with the intention of having a significant presence in the
25 largest U.S. markets by 2002.

         We generate revenues principally through the sale of advertising on our
network. E*billboards present repeating sequences, or loops, of advertising and
programming. As currently configured, the loops consist of twelve ten-second
advertising slots and six to eight six-second programming slots, which currently
provide our network with more than 60,000 advertising slots available for sale
on a daily basis. We charge a fixed daily rate for advertising slots which,
during 1999, averaged approximately $4.00. Advertising rates are based upon the
availability of space on the network for the desired location, the size and
demographic makeup of the market served by the E*billboards and the availability
of alternative advertising media in the area. Most advertising contracts are
short-term, typically for periods of one to three months, and are with local and
regional advertisers. As the number and geographic diversity of our sites
increases, we believe we




                                       17

<PAGE>   19


will be able to attract more national advertisers to our network, thereby
increasing the contribution of national advertising revenue to our total
advertising revenue in the future.

         We recognize advertising revenues at the time the advertisement appears
on our network. We bill advertisers monthly for contracts that exceed one month
in length, and on the first day of the month during which the advertisement
appears on our network for contracts for shorter periods. When advertising
agencies are involved, they deduct a commission, which typically is 15% of gross
revenue, and remit only the net amount to us.

         Prior to and during 1997, we sold E*billboards in selected markets to
local media companies with which we had agreements and they independently
obtained advertising clients in their local and regional areas. In addition to
receiving revenues on equipment sales to these companies, we also received
royalties on advertising sales and network operating fees. In 1997, we
reacquired the equipment and terminated these agreements with the local media
companies. Network equipment and operating revenues were not significant during
1998 and 1999, and we do not expect them to be significant in the future.

         Installation costs for a new site include the cost of acquiring
hardware and the cost to install the equipment, which are capitalized and
depreciated over five years. The fully installed average per site cost for a
typical site with a single E*billboard is approximately $2,500. At some sites,
more than one E*billboard is installed; at those sites, we may receive higher
advertising rates.

         Network operating expenses are costs associated with the daily
operation, maintenance and depreciation of E*billboards, as well as the site
agreement fees paid to site owners. Most network operating expenses generally
increase proportionally with the number of installed sites. On a site by site
basis, telecommunication and maintenance costs remain relatively fixed,
averaging approximately $55 to $65 per month. Accordingly, we expect that these
telecommunication and maintenance expenses as a percentage of advertising
revenues will decrease as our advertising revenues increase. In addition, site
agreements generally provide the site operator with a percentage of the
advertising revenues (typically 10% per site) derived from the E*billboards at
the particular site. Some site agreements provide for a minimum annual site fee.
Based on the number of E*billboards installed on December 31, 1999, we are
committed to minimum site agreement fees of approximately $3.3 million annually
through 2003. We incur network operating expenses in connection with the
E*billboards prior to generating revenues from the sites.

         Selling expenses include all costs associated with operating our sales
offices. The majority of these expenses are related to compensation and related
benefits for sales personnel. We pay our sales personnel fixed salaries and
sales commissions. During 1998 and 1999, the commission portion of the
compensation was 10.7% and 13.2% of net revenues, respectively.

         General and administrative expenses include rent for our headquarters
and compensation and related benefits for personnel involved in corporate
development, field operations, network operations, marketing, creative services,
management information systems and accounting.

         Corporate overhead includes compensation and related benefits for
senior management and administrative personnel, legal, accounting and other
professional fees, travel, insurance and telecommunications.


                                       18

<PAGE>   20


         Costs of acquiring hardware and installing it in new sites are
capitalized and depreciated over five years. Other equipment and furnishings are
depreciated over their lives of three to seven years. Leasehold improvements are
amortized over the terms of the respective leases.

         Consistent with our expansion strategy, we formed an alliance with Otis
in January 2000. The agreement provides that Otis has the exclusive rights to
place E*billboards in elevators, escalators, walkways and shuttles throughout
the world. Currently, Otis has agreements to maintain more than 1.2 million
elevators in such buildings. Otis is responsible for the negotiation of site
agreements and the installation and maintenance of E*billboards. We are not
responsible for any capital expenditures related to the installation of
E*billboards at any of these sites because Otis may either sell the equipment to
the site owner or may fund those expenditures. As consideration, Otis receives a
percentage of the advertising revenues that we derive from each E*billboard on a
site by site basis, a portion of which Otis may remit to the relevant site
operator. The agreement also provides Otis with incentive payments upon the
obtainment of certain installation goals. We are responsible for on-going
network operations, including advertising sales and content generation.
Typically, we intend to place an E*billboard in every elevator at each site and
as a result, we expect to charge a higher advertising rate per site than we
currently receive for a typical site with only one E*billboard.

RESULTS OF OPERATIONS

Year Ended December 31, 1999 compared to Year Ended December 31, 1998

         Net Revenues. Net revenues increased to approximately $5.5 million for
the fiscal year ended December 31, 1999, from approximately $2.6 million for the
fiscal year ended December 31, 1998, or 112.4%. The increase was attributable to
an increase in the average number of sites operating during the year (4,285 in
1999 compared to 2,598 in 1998), an increase in the average daily advertising
rate and increased occupancy levels of advertising slots sold.

         Network Operating Expenses. Network operating expenses increased to
approximately $6.9 million for the fiscal year ended December 31, 1999, from
approximately $4.1 million for the fiscal year ended December 31, 1998, or
67.5%. The increase was due primarily to the increase in the average number of
installed E*billboard sites, which increased 65.0% from 1998 to 1999. Major
components of network operating expenses for the respective periods are:

<TABLE>
<CAPTION>


                                                  Year Ended December 31,
                                                 ------------------------
                                                  1998              1999
                                                  ----              ----
<S>                                         <C>               <C>
Site agreement expense                        $2,088,000        $3,465,000
Telecommunications expense                     1,570,000         2,425,000
Maintenance expense                              483,000         1,047,000
</TABLE>

         Selling Expenses. Selling expenses increased to approximately $9.0
million for the fiscal year ended December 31, 1999, from approximately $6.1
million for the fiscal year ended December 31, 1998, or 48.1%. The increase
resulted primarily from the addition of sales office staff (average 1999
headcount of 86 compared to 1998 average of 61), increased commissions due to
increased sales and costs associated with opening additional regional sales
offices during the second half of 1998 to support the increase in E*billboard
site installations as noted above.




                                       19

<PAGE>   21


         General and Administrative Expenses. General and administrative
expenses increased to approximately $5.4 million for the fiscal year ended
December 31, 1999, from approximately $3.6 million for the fiscal year ended
December 31, 1998, or 49.6%. The increase was primarily attributable to employee
compensation and related costs, the largest component of general and
administrative expense, which increased to $5.1 million in 1999 compared to $3.1
million in 1998. The increases were due to the additional administrative staff
in computer operations and graphic creation to support the sales offices and
larger installed network and increased corporate development staff to assist in
securing additional venues and increased rent associated with the relocation of
our headquarters ($541,000 in 1999 compared to $220,000 in 1998). Research and
development costs decreased to $233,000 in 1999 compared to $430,000 in 1998.
The decrease in research and development costs was due to the substantial
completion of our network technology platform during 1999. We capitalized
$139,000 of software costs developed or obtained for internal use during 1999.
Prior to 1999, these costs were expensed.

         Billboard Cash Flow. Billboard cash flow was $(15.9) million for the
fiscal year ended December 31, 1999 and $(11.3) million for the fiscal year
ended December 31, 1998 as a result of the above factors.

         Corporate Overhead. Corporate overhead increased to approximately $3.6
million for the fiscal year ended December 31, 1999, from approximately $2.1
million for the fiscal year ended December 31, 1998, or 72.9%. This increase was
primarily due to increased legal, accounting, and other professional fees
($782,000 in 1999 compared to $329,000 in 1998), increased compensation and
related benefits ($1.7 million in 1999 compared to $922,000 in 1998) and
increased travel expenses ($494,000 in 1999 compared to $220,000 in 1998).

         EBITDA. EBITDA was $(19.5) million for the fiscal year ended December
31, 1999 and $(13.4) million for the fiscal year ended December 31, 1998 as a
result of the above factors.

         Depreciation and Amortization. Depreciation and amortization increased
to approximately $2.8 million for the fiscal year ended December 31, 1999, from
approximately $1.4 million for the fiscal year ended December 31, 1998, or
101.5%. Depreciation expense relating to our E*billboard equipment was $2.2
million in 1999 compared to $1.1 million in 1998.

         Operating Loss. As a result of the above factors, operating loss
increased to approximately $22.2 million for the fiscal year ended December 31,
1999, from approximately $14.7 million for the fiscal year ended December 31,
1998, or 51.0%.

         Net Interest Expense. Net interest expense increased to approximately
$7.7 million for the fiscal year ended December 31, 1999, from approximately
$4.9 million for the fiscal year ended December 31, 1998, or 55.8%. The increase
was primarily attributable to a full year of interest on our 12% senior secured
PIK notes as well as the increased principal amount.

         Net Loss. As a result of the above factors, the net loss increased to
approximately $32.9 million for the fiscal year ended December 31, 1999, from
approximately $22.2 million for the fiscal year ended December 31, 1998, or
48.2%.

Year Ended December 31, 1998 compared to Year Ended December 31,1997

         Net Revenues. Net revenues increased to approximately $2.6 million for
the fiscal year ended December 31, 1998, from approximately $1.8 million for the
fiscal year ended December 31,




                                       20

<PAGE>   22


1997, or 41.7%. The increase was attributable to the shift in our business from
owner-operator network operating fees to sales of advertising on our own
E*billboards and the opening of local sales offices. Three offices were opened
in former owner-operator markets during the first quarter of 1998 and five new
offices were opened in the remainder of 1998. Advertising revenues from newly
opened markets were minimal since efforts were concentrated on staff hiring and
training.

         Network Operating Expenses. Network operating expenses increased to
approximately $4.1 million for the fiscal year ended December 31, 1998, from
approximately $2.3 million for the fiscal year ended December 31, 1997, or
83.5%. The increase was due primarily to the increase in the average number of
sites, which increased 64.6% from 1997 to 1998. Major components of network
operating expenses for the respective periods are:

<TABLE>
<CAPTION>


                                                   Year Ended December 31,
                                              ----------------------------
                                                    1997             1998
                                                    ----             ----
<S>                                         <C>                <C>
Site agreement expense                        $1,120,000         $2,088,000
Telecommunications expense                       888,000          1,570,000
Maintenance expense                              248,000            483,000
</TABLE>

         The increase in site agreement expense was due to the repurchase of
equipment in former owner-operator markets in August 1997, and also due to the
installation of additional E*billboards. Site agreement expense was recorded net
of reimbursement from owner-operators so our expense increased when the
owner-operators forfeited their territorial rights.

         Selling Expenses. Selling expenses increased to approximately $6.1
million for the fiscal year ended December 31, 1998, from approximately $1.8
million for the fiscal year ended December 31, 1997, or 245.0%. The increase
resulted primarily from the addition of sales office staff (average 1998
headcount of 61 compared to 1997 average headcount of 17), increased commissions
due to increased sales and costs associated with opening additional regional
sales offices during the second half of 1998 to support the increase in site
installations as noted above.

         General and Administrative Expenses. General and administrative
expenses increased to approximately $3.6 million for the fiscal year ended
December 31, 1998, from approximately $1.9 million for the fiscal year ended
December 31, 1997, or 96.8%. The increase was primarily attributable to employee
compensation and related costs, the largest component of general and
administrative expense, which increased to $3.1 million in 1998 compared to $1.8
million in 1997. The increases were due to additional administrative staff in
computer operations and graphic creation to support the sales offices and our
larger installed network and increased corporate development staff to assist in
securing additional venues. Research and development costs increased to $430,000
in 1998 compared to $363,000 in 1997.

         Billboard Cash Flow. Billboard cash flow was $(11.3) million for the
fiscal year ended December 31, 1998 and $(4.1) million for the fiscal year ended
December 31, 1997 as a result of the above factors.

         Corporate Overhead. Corporate overhead increased to approximately $2.1
million for the fiscal year ended December 31, 1998, from approximately $1.4
million for the fiscal year ended December 31, 1997, or 48.6%. This increase was
primarily due to increased legal, accounting, and other professional fees
($329,000 in 1998 compared to $177,000 in 1997), increased compensation and
related benefits ($922,000 in 1998 compared to $674,000 in 1997) and increased
travel expenses ($220,000 in 1998 compared to $160,000 in 1997).



                                       21

<PAGE>   23


         EBITDA. EBITDA was $(13.4) million for the fiscal year ended December
31, 1998 and $(5.5) million for the fiscal year ended December 31, 1997 as a
result of the above factors.

         Depreciation and Amortization. Depreciation and amortization increased
to approximately $1.4 million for the fiscal year ended December 31, 1998, from
approximately $714,000 for the fiscal year ended December 31, 1997, or 92.2%.
Depreciation expense relating to our E*billboard equipment was $1.1 million in
1998 compared to $543,000 in 1997.

         Operating Loss. As a result of the above factors, operating loss
increased to approximately $14.7 million for the fiscal year ended December 31,
1998, from approximately $6.2 million for the fiscal year ended December 31,
1997, or 136.8%.

         Net Interest Expense. Net interest expense increased to approximately
$4.9 million for the fiscal year ended December 31, 1998, from $168,000 for the
fiscal year ended December 31, 1997, or 2,839%. The increase was due to the
issuance of $45 million of senior secured notes in February 1998. Interest
income increased to $1.6 million in 1998 compared to $113,000 in 1997. The
increase was due to investing the unused proceeds from the issuance of the
notes.

         Net Loss. As a result of the above factors, the net loss increased to
approximately $22.2 million for the fiscal year ended December 31, 1998, from
approximately $8.0 million for the fiscal year ended December 31, 1997, or
176.6%. We expect to incur additional costs to install additional E*billboards
and for operating costs to expand our network. As we continue to build-out our
network, we expect to operate at a loss for the foreseeable future.

LIQUIDITY AND CAPITAL RESOURCES

         Through December 31, 1999, our primary source of liquidity has been
proceeds from the sale of equity and debt securities.

         As of December 31, 1999, total cash and cash equivalents were $403,000
compared to $24.7 million as of December 31, 1998. The decrease in cash was a
result of $18.4 million of cash used in operating activities (due to the loss
from operations) and $5.9 million of cash used in investing activities
(primarily for capital expenditures related to the expansion of our network). We
expect that increasing sales volume will require the use of additional cash. In
January 2000, a subsidiary of United Technologies Corporation, the parent
company of Otis, invested approximately $30 million in cash in us and increased
our cash balance to $27.1 million as of January 31, 2000.

         Interest on the senior secured notes is payable either in cash or
additional senior secured notes, at our option, through August 1, 2000. On
February 25, 2000, we purchased $18.1 million aggregate face amount of senior
secured notes from a note holder for $2.9 million, leaving an aggregate face
amount of senior secured notes outstanding of $38.4 million. We expect to pay
interest through August 1, 2000, by issuing additional senior secured notes.
Thereafter, our semi-annual cash interest requirements will be $2.4 million
until the notes mature on February 1, 2003.

         Our primary uses of cash are capital expenditures for E*billboards and
for our working capital requirements. We anticipate capital expenditures of at
least $30 million related to the purchase and installation of our E*billboards
over the next two years. To the extent we are successful at securing more sites
than anticipated, our capital expenditures and working capital requirements
could be significantly larger than anticipated. Our cash flow is dependent on
our



                                       22

<PAGE>   24


ability to increase advertising revenues and is subject to financial, economic
and other factors, some of which are beyond our control. If we are unable to
increase revenues as anticipated or operating expenses are higher than
anticipated, we may need to raise additional capital to satisfy our obligations.
We cannot assure you that the additional funds will be available, or if
available, will be available on terms acceptable to us.

SEASONALITY

         Our business is in a growth phase as we continue to expand our
footprint. Consequently, we have not experienced any material seasonal factors
which have affected our advertising revenues to date. We do expect, however,
that seasonal revenue fluctuations caused by variations in advertising
expenditures by local, regional and national advertisers, may effect our
revenues in the future as we achieve a larger installed base of E*billboard
sites.

MARKET RISK AND IMPACT OF INFLATION

         We do not believe we have any significant risk related to interest rate
fluctuations since we have only fixed rate debt. We believe that inflation has
not had a material impact on our results of operations for each of our fiscal
years in the three-year period ended December 31, 1999. We cannot assure you
that future inflation will not have an adverse impact on our operating results
and financial condition.

YEAR 2000 COMPLIANCE

         The Year 2000 issue is the result of computer systems and programs
using two digits rather than four to identify a given year. As a result,
computer systems or programs that are not Year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000, which could result in a variety of
failures and other errors. Our business is dependent on the Year 2000 compliance
of our own computer systems and software including the software that we supply
to our customers, as well as that of third parties, such as major content
providers, and the infrastructure that supports the Internet.

         In preparation for the Year 2000, we tested our software and hardware
and performed minor remedial work on our software to ensure Year 2000
compliance. Because we are a relatively new business, the majority of our own
hardware and software has been acquired or developed within the last two years,
during which time there was a high awareness of Year 2000 issues.

         To date, we have not experienced any material difficulties associated
with the Year 2000 issue. To our knowledge, no third party upon which we depend
has experienced a material Year 2000 problem. However, it is still possible that
errors or defects may remain undetected, or that dates other than January 1,
such as February 29, 2000, may trigger Year 2000 problems. If this occurs with
respect to our software or computer systems, or those of third parties on which
we rely, our reputation, business, operating results and financial condition
could suffer.

         As of December 31, 1999, we estimate that we incurred and expensed
approximately $30,000 on matters related to addressing Year 2000 issues. We
estimate further Year 2000 expenses to be no more than $10,000 during the fiscal
year 2000.




                                       23

<PAGE>   25


ITEM 7.  FINANCIAL STATEMENTS.

         The financial statements follow Item 13 in this report.


ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

         None.





























                                       24
<PAGE>   26

                               PART III

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

        The following table sets forth the name, age and positions of each of
our executive officers and directors:
<TABLE>
<CAPTION>
                      NAME                    AGE                 POSITION
     ------------------------------------     ---       ----------------------------
     <S>                                      <C>       <C>
     Gerard P. Joyce.....................     48        Chairman of the Board of Directors and President
     Thomas M. Pugliese..................     37        Vice Chairman of the Board of Directors, Chief Executive
                                                         Officer and Secretary
     Stephen Nesbit......................     48        Executive Vice President of Operations, Corporate Development
                                                         and MIS
     Tracy Crocker.......................     40        Executive Vice President of Sales and Marketing
     Michael J. Kolthoff.................     47        Vice President, Treasurer and Assistant Secretary
     Anthony Bonacci.....................     36        Director
     Ari Bousbib.........................     39        Director
     Thomas J. Davis.....................     52        Director
     J. William Grimes...................     59        Director
     Malcolm Lassman.....................     61        Director
     Michael J. Marocco..................     41        Director
     Susan Molinari .....................     41        Director
     David Pecker........................     48        Director
     Alejandro Zubillaga.................     31        Director
</TABLE>


        Gerard P. Joyce. Mr. Joyce founded NGN, together with Thomas Pugliese,
in 1990 and has served as our Chairman of the Board of Directors since inception
and as our President since December 1991. Prior to 1990, Mr. Joyce was Chairman
and Chief Executive Officer of the Patrick Media Group, Inc., a successor to a
company he formed in 1969. The Patrick Media Group, Inc. became the largest
out-of-home advertising company in the U.S. Mr. Joyce sold his controlling
interest in the Patrick Media Group, Inc. in September 1989. Mr. Joyce is Thomas
Davis' brother-in-law.

        Thomas M. Pugliese. Mr. Pugliese founded NGN, together with Gerard
Joyce, in 1990 and has served as our Vice Chairman of the Board of Directors,
Chief Executive Officer and Secretary since our inception. From 1988 to 1990,
Mr. Pugliese was President of Thomas More & Company, Inc., a private investment
banking firm. From 1984 through 1988, Mr. Pugliese was an investment banker with
Shearson, Lehman, Hutton Inc. and its predecessor firm, E. F. Hutton & Company,
Inc. where he held various positions in New York and London, including as
American representative for



                                       25
<PAGE>   27

the firm's international investment banking operations. Mr. Pugliese is Anthony
Bonacci's brother-in-law.

         Stephen Nesbit. Mr. Nesbit was appointed as our Executive Vice
President of Operations, Corporate Development and MIS in 1999. He has over 25
years experience in high technology in the computer, networking and software
industries. Prior to joining NGN, he served as CEO and founder of NetCard
Systems, Inc., an Internet e-commerce start-up company from 1998 to 1999. From
1994 to 1997, he was a Vice President for Sandia Imaging Systems, Inc. Mr.
Nesbit has held various general management, marketing, sales and board of
directors positions with various companies, including IBM, Wang Labs and BBN
Communications, the original networking architect of the Internet.

         Tracy Crocker. Mr. Crocker was appointed as our Executive Vice
President of Sales and Marketing in January 2000. Mr. Crocker served in various
positions with the world's leading brand marketers, including Procter & Gamble,
Pepsi and Nabisco. From 1996 to 1999, he served as Vice President for Nabisco's
Western Division, with nearly a billion dollars in sales and 2,500 employees.
From 1988 to 1996, he held various positions at PepsiCo, the last of which was
Vice President of National Sales and Marketing.

         Michael J. Kolthoff. Mr. Kolthoff currently serves as our Vice
President, Treasurer and Assistant Secretary. From 1993 until he joined us in
July 1995, Mr. Kolthoff was Chief Financial Officer for ONYX Real Estate
Services. From May 1985 until November 1992, he was Chief Financial Officer of
Maico Hearing Instruments. Mr. Kolthoff is a Certified Public Accountant in the
State of Minnesota.

         Anthony Bonacci. Mr. Bonacci was elected as a director in February
2000. Mr. Bonacci is a shareholder of Colombo & Bonacci, P.C., a Phoenix,
Arizona law firm, a position he has held since 1992. Prior to that time, he was
an attorney with the law firm of Brown & Bain, P.A. Mr. Bonacci is Mr.
Pugliese's brother-in-law.

         Ari Bousbib. Mr. Bousbib was elected as a director in January 2000.
Since April 1997, Mr. Bousbib has been a Vice President of United Technologies
Corporation responsible for strategic planning and corporate development
functions. From 1995 to 1997, he was Managing Director of The Strategic Partners
Group. Prior to that time, he was a partner at the consulting firm, Booz, Allen
& Hamilton. In addition, he serves as a director for Techmetrics, International
Fuel Cells, Dow-UT and MyAircraft.com.

         Thomas J. Davis. Mr. Davis has been one of our directors since 1996.
Mr. Davis is an executive with Piaker & Lyons, P.C., a New York accounting firm
where he has been employed since 1972. Mr. Davis specializes in auditing,
financial reporting and planning for closely-held businesses in the
communications and other industries. Mr. Davis is a Certified Public Accountant
in the State of New York. Mr. Davis is Gerard Joyce's brother-in-law.

         J. William Grimes. Mr. Grimes was elected as a director in February
2000. Since 1996, Mr. Grimes has been a member of BG Media Investors LLC, a
company he founded. BG Media Investors LLC is a private equity capital firm
specializing in investments in media and telecommunications companies. From 1994
until 1996, Mr. Grimes was the Chief Executive Officer of Zenith Media, a media
services agency. Mr. Grimes serves on the board of directors of InterVU, Inc.,
i3 Mobile Inc., Versaware and American Media Inc. and is an Executive Director
of the New School University's Media Management Program.




                                       26
<PAGE>   28

         Malcolm Lassman. Mr. Lassman has been one of our directors since 1998.
Mr. Lassman is a managing partner of the Washington office of Akin, Gump,
Strauss, Hauer & Feld, L.L.P., a leading international law firm, a position he
has held since 1970.

         Michael J. Marocco. Mr. Marocco has been one of our directors since
1996. Mr. Marocco is a managing director of Sandler Capital Management, which he
joined in 1989. Sandler is a communications specific capital management firm,
managing approximately $2 billion invested in both public and private companies.
He is a general partner at the firm with primary responsibility for private
investment activities. He also serves as a director for Source Media Inc., which
is a public company listed on Nasdaq, and Convergent Communications Inc.

         Susan Molinari. Ms. Molinari was elected as one of our directors in
1999. Since 1998, Ms. Molinari has been a senior public affairs consultant with
Fleishman-Hillard Inc. Ms. Molinari is a prominent Republican political figure
whose political career began with her election to the New York City Council
where she served from 1986 to 1990. She also served as a member of the United
States House of Representatives from 1990 to 1997 and hosted the CBS Morning
Show from 1997 to 1998.

         David Pecker. Mr. Pecker was elected as a director in September 1999.
Since 1999, Mr. Pecker has been the Chairman, Chief Executive Officer, President
and a director of American Media, Inc. Prior to that time, Mr. Pecker had been
the Chief Executive Officer since 1992, and President since 1991, of Hachette
Filipacchi Magazines, Inc. Mr. Pecker has over 20 years of publishing industry
experience, having worked as the Director of Financial Reporting at CBS, Inc.
Magazine Group and as the Vice President and Controller of Diamandis
Communications Inc.

         Alejandro Zubillaga. Mr. Zubillaga has been one of our directors since
1998. He is the founder of Veninfotel, L.L.C., a leading provider of broad band
communications services and, since 1995, has been the Chairman. Mr. Zubillaga is
also the Chief Executive Officer of E Quest Partners, Ltd., a Latin American
internet venture capital fund based in New York City.


ITEM 10.  EXECUTIVE COMPENSATION

     The following table sets forth the annual and long-term compensation for
each of the last three fiscal years for our chief executive officer and
president. These individuals are referred to as the named executive officers.

<TABLE>
<CAPTION>

                                            ANNUAL COMPENSATION                   LONG-TERM COMPENSATION
                                    ------------------------------------  --------------------------------------
                                                                                    AWARDS            PAYOUTS
                                                                          ------------------------  ------------
                                                                                        SECURITIES
                                                                OTHER                     UNDER-
                                                               ANNUAL      RESTRICTED     LYING                    ALL OTHER
    NAME AND PRINCIPAL                                         COMPEN-       STOCK       OPTIONS/       LTIP         COMPEN-
         POSITION           YEAR      SALARY       BONUS       SATION       AWARD(S)       SARS        PAYOUTS      SATION(1)
-------------------------  ------   ----------   ---------   -----------  ------------  ----------  ------------  -----------
<S>                      <C>      <C>          <C>         <C>            <C>           <C>         <C>         <C>
 Gerard P. Joyce.........   1999    $ 251,741    $ 150,000                           -           -             -  $    21,975
   Chairman of the          1998      251,741       60,000                           -           -             -            -
   Board and President      1997      251,741       60,000                           -           -             -            -

 Thomas M. Pugliese......   1999      250,000      150,000                           -           -             -        6,150
   Vice Chairman, Chief     1998      250,000       50,000   $    17,710             -           -             -            -
   Executive Officer,       1997      212,587                                        -           -             -            -
   Secretary
</TABLE>

--------
(1) Represents the dollar value of life insurance premiums that we have paid for
    the benefit of the individual.


OPTION GRANTS IN LAST FISCAL YEAR



                                       27
<PAGE>   29

     The following table sets forth certain information concerning the option
grants to the named executive officers during 1999. The options were granted
pursuant to our 1998 non-qualified stock option plan.

<TABLE>
<CAPTION>
                                            INDIVIDUAL GRANTS
                           ----------------------------------------------------
                                         % OF TOTAL
                              NUMBER      OPTIONS                                  POTENTIAL REALIZABLE VALUE
                          OF SECURITIES  GRANTED TO   EXERCISE                        AT RATES OF STOCK PRICE
                            UNDERLYING    EMPLOYEE    OF BASE                              APPRECIATION
                              OPTIONS    IN FISCAL      PRICE       EXPIRATION       FOR OPTION TERM ($)(2)
                            GRANTED(#)    YEAR(1)     ($/SHARE)       DATE             5%              10%
                            ----------    -------     ---------       ----             --              ---
<S>                        <C>           <C>          <C>          <C>            <C>             <C>
Gerard P. Joyce              100,000        12.3        $7.70        1/1/09         424,523         1,045,620
Thomas M. Pugliese           100,000        12.3        $7.70        1/1/09         424,523         1,045,620
Stephen Nesbit                68,000         8.3        $7.70        1/1/09         288,675           711,021
Tracy Crocker                 68,000         8.3        $7.70        1/1/09         288,675           711,021
Michael J. Kolthoff           10,000         1.2        $7.70        1/1/09          42,452           104,562
</TABLE>

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

(1)  Options to purchase a total of 815,000 shares of our common stock at an
     exercise price of $7.70 per share were granted in 1999.

(2)  In accordance with the rules of the SEC, the amounts shown on this table
     represent hypothetical gains that could be achieved for the respective
     options if exercised at the end of the option term. These gains are based
     on the assumed rates of stock appreciation of 5% and 10% compounded
     annually from the date the respective options were granted to their
     expiration date and do not reflect our estimates or projections of the
     future price of our common stock. The gains shown are net of the option
     exercise price, but do not include deductions for taxes or other expenses
     associated with the exercise. Actual gains, if any, on stock option
     exercises will depend on the future performance of our common stock, the
     option holder's continued employment through the option period, and the
     date on which the options are exercised.

OPTION EXERCISES IN LAST FISCAL YEAR

     The following table sets forth certain information concerning all
unexercised options held by the named executive officers as of December 31,
1999.

<TABLE>
<CAPTION>
                                                      NUMBER OF UNEXERCISED         VALUE OF UNEXERCISED IN-THE-
                              SHARES                        OPTIONS AT                     MONEY OPTIONS AT
                             ACQUIRED                    FISCAL YEAR-END(#)                 FISCAL YEAR-END
                                OR       VALUE           ------------------                 ---------------
         NAME                EXERCISE   REALIZED    EXERCISABLE   UNEXERCISABLE    EXERCISABLE      UNEXERCISABLE
         ----                --------   --------    -----------   -------------    -----------      -------------
<S>                          <C>        <C>         <C>           <C>              <C>              <C>
 Gerard P. Joyce...........     --         --          --            100,000           --                --
 Thomas M. Pugliese........     --         --          --            100,000           --                --
 Stephen Nesbit............     --         --          --             68,000           --                --
 Tracy Crocker.............     --         --          --             68,000           --                --
 Michael J. Kolthoff.......     --         --         4,000           10,000           --                --
-------------------------
</TABLE>

         Non-employee directors of the Company receive a director's fee of $1500
for each Board of Directors meeting attended in person, and for each separate
committee meeting attended in person.

EMPLOYMENT AGREEMENTS

         On January 1, 2000, we entered into employment agreements with each of
Gerard P. Joyce and Thomas M. Pugliese, effective through January 31, 2004. The
compensation for each employee



                                       28
<PAGE>   30

is comprised of an annual salary of $300,000, an annual bonus, as determined by
the board, and additional benefits, including stock options upon the
consummation of this offering and a life insurance policy with benefits of $10
million. If either Mr. Joyce or Mr. Pugliese is terminated without cause, he is
entitled to a severance payment equal to the greater of double the amount of the
lesser of his base salary and one-half of any bonuses for the preceding 24
months (Current Annual Compensation), or $500,000 and his Current Annual
Compensation multiplied by the number of years remaining in the term. However,
if either Mr. Joyce or Mr. Pugliese is discharged for cause, we no longer have
any obligation to pay either of them any compensation, except for any
compensation and benefits accrued prior to the date of such discharge.


         Each employment agreement contains a non-competition provision that
prevents Mr. Joyce and Mr. Pugliese from engaging or associating with a
competing business during a period of 24 months from the date of termination.
Mr. Joyce and Mr. Pugliese are also subject to non-solicitation and
non-disclosure obligations effective for two and three years, respectively, from
the date of termination.

401 (K) PLAN

         We maintain a retirement plan established in conformity with Section
401(k) of the Internal Revenue Code of 1986, as amended, covering all of our
eligible employees. Pursuant to the 401(k) plan, employees may elect to defer up
to 15% of their current pre-tax compensation and have the amount of such
deferral contributed to the 401(k) plan. The maximum elective deferral
contribution was $10,000 in 1999, subject to adjustment for cost-of-living in
subsequent years. Some highly compensated employees may be subject to a lesser
limit on their maximum elective deferral contribution. The 401(k) plan permits,
but does not require, matching contributions and non-matching (profit sharing)
contributions to be made by us up to a maximum dollar amount or maximum
percentage of participant contributions, as determined annually by us. We
presently do not match employee contributions. The 401(k) plan is qualified
under Section 401 of the Code so that contributions by the employees and
employer, if any, to the 401(k) plan, and income earned on plan contributions,
are not taxable to employees until withdrawn from the 401(k) plan, and so that
contributions by us, if any, will be deductible by us when made.

STOCK OPTION PLANS AND OTHER EMPLOYEE INCENTIVE PLANS

         We have adopted four stock option plans for the purpose of advancing
our interests and the interests of the stockholders by strengthening our ability
to attract and retain competent employees, to make service on the board of
directors more attractive to present and prospective non-employee directors and
to provide a means to encourage stock ownership and proprietary interest in us
by officers, non-employee directors and valued employees and other individuals
upon whose judgment, initiative and efforts affect our financial growth. The
plans are currently, and have been since their adoption, administered by the
board of directors and the compensation committee of the board.

         2000 Stock Incentive Plan. The purpose of this plan is to provide
directors, officers, employees, consultants and independent contractors with
additional performance incentives by increasing their ownership interest in us.
Individual awards under the plan may take the form of one or more of: (i) either
incentive stock options, known as ISOs, or non-qualified stock options, known as
NQSOs; (ii) stock appreciation rights, known as SARs; (iii) restricted or
deferred stock; (iv) dividend equivalents; and (v) other awards not otherwise
provided for, the value of which is based in whole or in part upon the value of
our common stock. The compensation committee will administer the plan and
generally select the individuals who will receive awards and the terms and
conditions of those awards.



                                       29
<PAGE>   31

         We have reserved 1,300,000 shares of common stock for use in connection
with the plan. Shares of common stock which are attributable to awards which
have expired, terminated or been canceled or forfeited are available for
issuance or use in connection with future awards.

         The plan will remain in effect until terminated by the board of
directors. The plan may be amended by the board of directors without the consent
of the stockholders, except that any amendment, although effective when made,
will be subject to stockholder approval if required by any federal or state law
or regulation or by rules of any stock exchange or automated quotation system on
which our common stock may then be listed or quoted.

         In connection with the Offering, ISOs to purchase an aggregate of
666,000 shares of our common stock will be granted to members of management. The
grants of these options will be effective as of the date of the Offering and
each option will have an exercise price equal to the initial public offering
price per share in the Offering. These options will vest in three equal annual
installments starting with the first anniversary of the grant, and will expire
ten years from the date of grant or three months following termination of
employment.

         ISOs may be granted only to our officers and key employees.
Nonqualified stock options may be granted to such officers and employees as well
as to agents and directors and consultants, whether or not otherwise employees.
In determining the eligibility of an individual for grants under the plans, as
well as in determining the number of shares to be optioned to any individual,
the board takes into account the position and responsibilities of the individual
being considered, the nature and value of his or her service or accomplishments
to us, his or her accomplishments, his or her present or potential contribution
to our success and such other factors as the board may deem relevant.

         1998 Non-Qualified Stock Option Plan. The total number of shares with
respect to which options may be granted under the 1998 Non-Qualified Stock
Option Plan is 820,000. As of December 31, 1999, options for an aggregate of
697,000 shares were outstanding. No ISOs may be granted under the plan. The
option price may not be less than the greater of the fair market value per share
of the common stock at the time of the grant of such option or $7.70 per share.
No further options may be granted under the plan after December 31, 2005, and
all options granted under the plan become void and may not be exercised after
January 1, 2009. Upon the exercise of an option, the holder must make payment of
the full exercise price. Such payment may be made under certain circumstances in
shares of common stock. The plan may be terminated at any time by the board of
directors, which may also amend the plan.

         1994 Stock Option Plan. The 1994 Stock Option Plan provides for the
granting of ISOs to purchase our common stock at not less than the fair market
value on the date of the option grant and the granting of nonqualified options
with any exercise price. The total number of shares with respect to which
options may be granted under the plan is 80,000. As of December 31, 1999,
options for an aggregate of 40,000 shares were outstanding. To date, all options
issued under the plan have been nonqualified options. The plan contains certain
limitations applicable only to grants of ISOs. To the extent that the aggregate
fair market value, as of the date of grant, of the shares to which ISOs become
exercisable for the first time by an optionee during the calendar year exceeds
$100,000, the option will be treated as a nonqualified option. In addition, if
any optionee owns more than 10% of the total voting power of our stock at the
time the individual is granted an ISO, the option price per share cannot be less
than 110% of the fair market value per share and the term of the ISO cannot
exceed five years. No further options may be granted under the plan after



                                       30
<PAGE>   32

December 31, 1999, and all options granted under the plan become void and may
not be exercised after January 1, 2005. Upon the exercise of an option, the
holder must make payment of the full exercise price. Such payment may be made
under certain circumstances in shares of common stock. The plan may be
terminated at any time by the board of directors, which may also amend the plan.

         1993 Stock Option Plan. The 1993 Stock Option Plan provides for the
granting of ISOs to purchase our common stock at not less than the fair market
value on the date of the option grant and the granting of nonqualified options
with any exercise price. The total number of shares with respect to which
options may be granted under the plan is 40,000. As of December 31, 1999,
options for an aggregate of 24,810 shares were outstanding. To date, all options
issued under the plan have been nonqualified options. The plan contains certain
limitations applicable only to grants of ISOs. To the extent that the aggregate
fair market value, as of the date of grant, of the shares to which ISOs become
exercisable for the first time by an optionee during the calendar year exceeds
$100,000, the option will be treated as a nonqualified option. In addition, if
any optionee owns more than 10% of the total voting power of our stock at the
time the individual is granted an ISO, the option price per share cannot be less
than 110% of the fair market value per share and the term of the ISO cannot
exceed five years. No further options may be granted under the plan after
December 31, 1998, and all options granted pursuant to the plan become void and
may not be exercised after January 1, 2004. Upon the exercise of an option, the
holder must make payment of the full exercise price. Such payment may be made
under certain circumstances in shares of common stock. The plan may be
terminated at any time by the board of directors, which may also amend the plan.

         All of our directors, other than Malcolm Lassman, Susan Molinari and
Anthony Bonacci have been granted non-qualified stock options to purchase 5,000
shares of our common stock at an exercise price of $10.00 per share and 10,000
shares at an exercise price per share equal to the price per share in the
Offering. All these options vest in equal installments over the next three
years. Mr. Lassman and Ms. Molinari each has been granted non-qualified stock
options to purchase 10,000 shares of our common stock at an exercise price of
$7.70 per share, of which 4,000 options vested in January 2000, 2,000 vest in
January 2001, 2,000 vest in January 2002 and 2,000 in January 2003. Each of Mr.
Lassman and Ms. Molinari also have been granted non-qualified stock options to
purchase 5,000 shares of our common stock at an exercise price per share equal
to the price per share in the Offering. Mr. Bonacci was granted options to
purchase 25,000 shares of our common stock at an exercise price of $7.70 per
share. Five thousand of these options vest on June 1, 2002 and 2003 and 15,000
vest in June 2004.

ITEM 11.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth information with respect to the
beneficial ownership of our common stock as of March 15, 2000 by:

    (1)  each person who is known by us to own beneficially more than 5% of our
         common stock;

    (2)  each current director;

    (3)  each of the named executive officers; and

    (4)  all directors and executive officers as a group.

         Beneficial ownership is determined in accordance with the SEC's rules.
In computing percentage ownership of each person, shares of common stock subject
to options, warrants or convertible preferred stock held by that person that are
currently exercisable or convertible, or exercisable or convertible within 60
days of March 15, 2000, are deemed to be beneficially owned.


                                       31
<PAGE>   33
These shares, however, are not deemed outstanding for the purpose of computing
the percentage ownership of each other person.

         Except as indicated in this table and pursuant to applicable community
property laws, each stockholder named in the table has sole voting and
investment power with respect to the shares set forth opposite such
stockholder's name. Percentage of ownership is based on 8,410,396 shares of our
common stock outstanding on March 15, 2000.

<TABLE>
<CAPTION>

                                            NUMBER OF               PERCENTAGE OF SHARES
                                             SHARES                   BENEFICIALLY OWNED
                                           BENEFICIALLY             --------------------
NAME OF BENEFICIAL OWNER                     OWNED
------------------------                     -----
<S>                                        <C>                          <C>
Gerard P. Joyce..................             1,610,436                     19.2%
Thomas M. Pugliese(1)............               703,222                      8.4
Thomas J. Davis(2)...............                19,564                    *
David Pecker.....................                28,053                    *
Malcolm Lassman(3)...............                 4,000                    *
Michael J. Marocco(4)............             1,239,802                     14.7
Susan Molinari(3)................                 4,000                    *
Alejandro Zubillaga(5)...........               179,282                      2.1
Tracy Crocker....................                     -                    *
Stephen Nesbit...................                     -                    *
Ari Bousbib(6)...................                     -                    *
J. William Grimes................                     -                    *
Anthony Bonacci(7)...............                17,060                    *
Michael Kolthoff.................                 4,000                    *
Nevada Bond Investment
     Corp. II ...................
     One Financial Plaza                      3,025,017                     36.0
     Hartford, CT  06101
John Strauss(8)..................
     200 Crescent Court                         458,872                      5.3
     Dallas, Texas 75201

</TABLE>


                                       32

<PAGE>   34



<TABLE>
<CAPTION>

                                            NUMBER OF               PERCENTAGE OF SHARES
                                             SHARES                   BENEFICIALLY OWNED
                                           BENEFICIALLY             --------------------
NAME OF BENEFICIAL OWNER                     OWNED
------------------------                     -----
<S>                                         <C>                           <C>
All directors and executive officers
     as a Group (14 persons)............      3,809,419                      45.2
</TABLE>

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

*      Less than 1%
(1)    Includes shares held in trust for the benefit of Mr. Pugliese, his spouse
       and children.
(2)    Includes 2,000 shares issuable upon exercise of warrants. (3) Includes
       4,000 shares of our common stock issuable upon exercise of stock options.
(4)    Represents shares of our common stock owned by affiliates of 21st Century
       Communications Partners, each of which is a limited partnership of which
       Sandler Investment Partners, L.P. is a general partner. Mr. Marocco is a
       general partner of Sandler Investment Partners, L.P. Mr. Marocco
       disclaims beneficial ownership of these shares.
(5)    Represents shares of our common stock owned by Elektra Investments
       A.V.V., which is controlled by Mr. Zubillaga.
(6)    Mr. Bousbib is a Vice President of United Technologies Corporation, whose
       wholly-owned subsidiary, Nevada Bond Investment Corp. II, beneficially
       owns 3,025,017 shares of our common stock.
(7)    Represents shares of our common stock owned by his wife, Caroline
       Bonacci.
(8)    Includes 131,854 shares of our common stock issuable upon exercise of
       warrants held by Mr. Strauss and 150,018 shares issuable upon exercise of
       warrants held by trusts of which Mr. Strauss is the sole trustee. These
       warrants were issued in connection with the senior secured notes.



ITEM 12.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         On February 25, 2000, we purchased $18.1 million aggregate face amount
of our senior secured notes from John Strauss, one of our shareholders, for $2.9
million. We purchased the notes from Mr. Strauss for a sum equal to the amount
he paid plus $150,000. In addition, Mr. Strauss has retained the warrants that
were associated with the notes.

         Anthony Bonacci, who was appointed as one of our directors in February
2000, is a partner of Colombo & Bonacci, P.C. Colombo & Bonacci has represented
us in various matters and will continue to represent us. For the year ended
December 31, 1999, we incurred fees of $198,000.

         David Pecker has been one of our directors since September 1999 and is
affiliated with American Media Operations, Inc. For the year ended December 31,
1999, we recognized revenues of $240,133 from American Media.

         We invested $100,000 in Next Generation Network International, LLC (NGN
International) for the purpose of researching the development of markets for
E*billboards in several countries



                                       33
<PAGE>   35

outside of the U.S. We own 50% of NGN International and one of our directors,
Alejandro Zubillaga, controls the remaining 50%.

         Malcolm Lassman, who has been one of our directors since 1998, is a
partner of Akin, Gump, Strauss, Hauer & Feld, L.L.P. Akin, Gump, Strauss, Hauer
& Feld, L.L.P. is representing us in the Offering.

         On September 15, 1993, Gerard P. Joyce, our Chairman and President,
loaned us $2,375,000 in return for a security interest in all of our assets. On
August 29, 1997, we issued 6,494 shares of series C preferred stock to Mr. Joyce
in return for a reduction in our debt to him of $500,038. These shares of series
C preferred stock were converted into 92,242 shares of common stock in January
2000. In February 1998, we repaid the balance of the indebtedness to him with
the net proceeds of the offering of our senior secured notes and warrants and
his security interest in our assets was terminated.




ITEM 13.      EXHIBITS, LISTS AND REPORTS ON FORM 8-K:

<TABLE>

<S>           <C>
                a) Exhibits
3.1(a)          Amended and Restated Certificate of Incorporation (5)
3.2(a)          Amended and Restated By-Laws (5)
4.1(a)          Indenture dated February 18, 1998 between the Company and the Trustee (1)
4.1(b)          Amendment No. 1 dated as of January 28, 2000 to indenture dated as of February 1,
                1998 (5)
4.1(c)          Warrant  Agreement dated as of February 18, 1998 by and between the Company and
                United States Trust
                Company of New York as Warrant Agent (5)
4.1(d)          Amendment No. 1 dated January 28, 2000 to the Warrant Agreement dated February 18,
                1998 (5)
4.1(e)          Exchange and Registration Rights Agreement dated February 18, 1998 between the
                Company and the Initial Purchaser (1)
4.1(f)          Pledge Agreement dated February 18, 1998 between the Company and the Initial
                Purchaser (1)
4.1(g)          Security Agreement dated February 18, 1998 between the Company and the Initial
                Purchaser (1)
4.1(h)          Amendment No. 1 dated January 28, 2000 to the Security Agreement dated February
                18, 1998 (5)
4.1(i)          Purchase Agreement dated February 18, 1998 between the Company and the
                Initial Purchaser (1)
4.1(j)          Unit Agreement dated February 18, 1998 between the Company and the
                Initial Purchaser (1)
4.1(k)          Form of Co-Investment Agreement relating to issuances of Preferred Stock in 1997 (1)
4.1(l)          Stock Purchase Agreement dated January 28, 2000 between the Company and Nevada
                Bond Investment Corp. II (5)
4.1(m)          Agreement for Consents and Waivers dated as of January 21, 1998 by 21st Century
                Communication
                Partners, L.P., 21st Century Communications T-E Partners, L.P. and
                21st Century Communications Foreign
                Partners, L.P. and Pulitzer Publishing (1)
4.1(n)          Amended and Restated Registration Rights Agreement among the Company and
                certain of its security holders dated as of January 28, 2000 (5)
</TABLE>



                                       34


<PAGE>   36

<TABLE>

<S>             <C>
4.1(o)          Common Stock Registration Rights and Stockholders Agreement dated as of February
                18, 1998 by and between the Company and NatWest Capital Markets Limited (5)
4.1(p)          Amendment No. 1 dated January 28, 2000 to the Common  Stock Registration Rights
                and Stockholders Agreement dated February 18, 1998 (5)
4.1(q)          Amended and Restated Stockholders' Agreement among the Company and certain of
                its securities holders dated as of January 28, 2000 (5)
4.1(r)          Joinder Agreement dated December 26, 1995 by and between Stephen Adams, Gerard
                P. Joyce and Thomas M. Pugliese (1)
10.1(a)         Memorandum of Understanding between the Company and Alex Zubillaga (3)
10.1(b)         Assignment of Security Interest in United States Copyrights dated as of February 18,
                1998 by and between the Company and United States Trust Company of New York as
                Collateral Agent (5)
10.1(c)         Assignment of Security Interest in United States  Patents dated as of February 18,
                1998 by and between the Company and United States Trust Company of New York as
                Collateral Agent (5)
10.1(d)         Assignment of Security Interest in United States Trademarks dated as of February 18,
                1998 by and between the Company and United States Trust Company of New York as
                Collateral Agent (5)
10.2(B)(a)      Media Network Services Agreement dated April 18, 1995 by and between The 7-11
                Corporation and the Company  (1)
10.2(B)(b)      Amendment No. 1 to Media Network Services Agreement (4)
10.2(B)(c)      Amendment No. 2 to Media Network Services Agreement (5)
10.2(B)(d)      E*Display Agreement dated as of January 17, 2000 with Otis Elevator Company (5)
10.3(A)(a)      Employment Agreement dated as of January 1, 2000 between the Company and
                Gerard P. Joyce (5)
10.3(A)(b)      Employment Agreement dated as of January 1, 2000 between the Company and
                Thomas M. Pugliese (5)
10.3(A)(c)      2000 Stock Incentive Plan (5)
10.3(A)(d)      1998 Stock Option Plan (5)

10.3(A)(e)      1994 Stock Option Plan (5)
10.3(A)(f)      1993 Stock Option Plan (5)
27.1            Financial Data Schedule
</TABLE>




(1) Such Exhibit was filed with the Company's Registration Statement on
    Form S-4 (File No.333-49279) as amended, originally filed with the
    Securities and Exchange Commission on April 2, 1998, and is incorporated
    herein by reference.
(2) Such Exhibit was filed with the Company's Quarterly Report on Form 10-QSB
    for the period ended September 30, 1998 and is incorporated herein by
    reference.
(3) Such Exhibit was filed with the Company's Quarterly Report on Form 10-QSB
    for the period ended June 30, 1999 and is incorporated herein by reference.
(4) Such Exhibit was filed with the Company's Annual Report on Form 10-KSB for
    the period ended December 31, 1999 and is incorporated herein by reference.
(5) To be filed by amendment.



                                       35
<PAGE>   37



                  b) Reports on Form 8-K
                  None
























                                       36
<PAGE>   38






                          INDEX TO FINANCIAL STATEMENTS
                          NEXT GENERATION NETWORK, INC.


                                    CONTENTS
<TABLE>

<S>                                                                              <C>
Independent Auditor's Report.......................................................38
Balance Sheets as of December 31, 1999 and 1998....................................39
Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997......40
Statements of Changes in Stockholders' Deficit for the Years Ended
     December 31, 1999, 1998 and 1997..............................................41
Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997......42
Notes to Financial Statements......................................................43
</TABLE>











                                       37

<PAGE>   39


                          INDEPENDENT AUDITOR'S REPORT

To the Board of Directors
Next Generation Network, Inc.
Eden Prairie, Minnesota

         We have audited the accompanying balance sheets of Next Generation
Network, Inc. as of December 31, 1999 and 1998, and the related statements of
operations, changes in stockholders' deficit, and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Next Generation
Network, Inc. as of December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.


                                           McGLADREY & PULLEN, LLP


Minneapolis, Minnesota
February 25, 2000









                                       38
<PAGE>   40

                          NEXT GENERATION NETWORK, INC.
                                 BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                                    December 31,
                                                                          --------------------------------
                                                                              1999                 1998
                                                                          ------------        ------------
<S>                                                                     <C>                 <C>
ASSETS (Note 2)
       Current Assets:
           Cash and cash equivalents                                      $    403,435        $ 24,710,213
           Trade accounts receivable, less allowance of $120,000
                in 1999 and $119,000 in 1998                                 1,511,939             468,725
           Other current assets                                                 85,284              91,159
                                                                          ------------        ------------

                  Total current assets                                       2,000,658          25,270,097
                                                                          ------------        ------------

       Equipment and Furnishings, at cost (Note 7)
           Equipment                                                        17,303,681          12,068,615
           Office furniture, equipment, and software                         1,421,334             888,951
           Leasehold improvements                                              262,582             319,764
                                                                          ------------        ------------
                                                                            18,987,597          13,277,330
           Less accumulated depreciation and amortization                    5,514,497           2,759,624
                                                                          ------------        ------------
                                                                            13,473,100          10,517,706
                                                                          ------------        ------------

       Other Assets
           Deferred financing costs (net of accumulated
             amortization of $911,188 in 1999 and $390,072 in 1998)          2,050,481           2,519,597
           Deposits, noncurrent trade receivables, and other assets            191,730             145,971
                                                                          ------------        ------------
                                                                             2,242,211           2,665,568
                                                                          ------------        ------------
                                                                          $ 17,715,969        $ 38,453,371
                                                                          ============        ============

LIABILITIES AND STOCKHOLDERS' DEFICIT
       Current Liabilities:
           Current maturities of long-term debt                           $     24,949        $     21,439
           Accounts payable                                                  2,721,429           1,211,742
           Accrued expenses (Notes 3 and  9)                                 4,848,637           4,516,000
                                                                          ------------        ------------

                  Total current liabilities                                  7,595,015           5,749,181
                                                                          ------------        ------------

       Non-current accrued site lease expense (Note 3)                         223,239             207,712
                                                                          ------------        ------------

       Long-term Debt, less current maturities (Note 2)                     49,555,649          42,115,147
                                                                          ------------        ------------

       Commitments (Notes 3, 4 and 5)

       Mandatory Redeemable Preferred Stock (Notes 5 and 10)
             14.8% Series B, nonvoting; authorized 91,100 shares;
                    issued and outstanding 91,059 shares; stated at
                    liquidation value plus accrued dividends                11,273,351           9,748,507
             14.8% Series C, nonvoting; authorized 90,000 shares;
                    issued and outstanding 75,540 shares stated at
                    liquidation value plus accrued dividends                 8,123,598           7,024,323
                                                                          ------------        ------------
                                                                            19,396,949          16,772,830
                                                                          ------------        ------------
       Stockholders' Deficit (Notes 5, 6, and 10)
              8.25% Series A cumulative preferred stock,
                     nonvoting; authorized 20,000 shares; issued and
                     outstanding 6,000 shares, stated at liquidation
                     value, excluding cumulative unpaid dividends
                     (aggregate liquidation value of $4,980,000 in 1999
                     and $4,732,500 in 1998)                                 3,000,000           3,000,000
              Common stock, $0.01 par value; authorized 20,000,000
                     shares; issued and outstanding 2,662,680 shares            26,627              26,627
              Additional paid-in capital                                     6,574,267           9,242,405
              Accumulated deficit                                          (68,655,777)        (38,660,531)
                                                                          ------------        ------------
                                                                           (59,054,883)        (26,391,499)
                                                                          ------------        ------------
                                                                          $ 17,715,969        $ 38,453,371
                                                                          ============        ============
</TABLE>

See notes to financial statements.

                                       39
<PAGE>   41


                          NEXT GENERATION NETWORK, INC.
                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                                            Years ended December 31,
                                                                  -------------------------------------------
                                                                      1999            1998           1997
                                                                  ------------    ------------   ------------
<S>                                                             <C>             <C>            <C>
Revenues:
       Advertising revenues                                       $  5,682,125    $  2,609,512   $  1,243,868
       Less agency commissions                                        (186,503)        (47,851)       (39,325)
                                                                  ------------    ------------   ------------

       Net advertising revenues                                      5,495,622       2,561,661      1,204,543
       Network equipment                                                 4,807          26,309        137,279
       Network operating revenues                                          840           1,720        485,299
                                                                  ------------    ------------   ------------
             Total revenues                                          5,501,269       2,589,690      1,827,121
                                                                  ------------    ------------   ------------

Costs and expenses:
       Network operating expenses (Note 3)                           6,936,130       4,140,918      2,256,387
       Selling expenses                                              8,980,846       6,062,770      1,757,523
       General and administrative expenses                           5,448,175       3,643,005      1,850,775
       Corporate overhead                                            3,618,305       2,093,299      1,408,366
       Depreciation and amortization                                 2,764,005       1,371,959        713,892
       Cost of network equipment sales                                   1,526           9,996         60,893
                                                                  ------------    ------------   ------------
            Total costs and expenses                                27,748,987      17,321,947      8,047,836
                                                                  ------------    ------------   ------------

            Operating loss                                         (22,247,718)    (14,732,257)    (6,220,715)

Non operating income (expense):
       Interest expense  (Note 2)                                   (8,296,716)     (6,494,147)      (280,806)
       Interest income                                                 616,362       1,563,427        113,037
       Other expense                                                   (67,175)             --             --
                                                                  ------------    ------------   ------------

            Net loss before preferred stock dividends              (29,995,247)    (19,662,977)    (6,388,484)
Preferred stock dividends (Note 5)                                   2,871,619       2,515,590      1,630,836
                                                                  ------------    ------------   ------------

            Net loss applicable to common stockholders            $(32,866,866)   $(22,178,567)  $ (8,019,320)
                                                                  ============    ============   ============

            Basic and diluted net loss per common share           $     (12.34)   $      (8.33)  $      (3.01)
                                                                  ============    ============   ============
Weighted average number of common shares outstanding                 2,662,680       2,662,680      2,662,680
                                                                  ============    ============   ============
</TABLE>



See notes to financial statements.



                                       40

<PAGE>   42


                          NEXT GENERATION NETWORK, INC.
                 STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT

<TABLE>
<CAPTION>

                                         Series A
                                        Cumulative
                                     Preferred Stock          Common Stock        Additional
                                     ---------------          ------------         Paid-In     Accumulated
                                   Shares        Amount     Shares      Amount     Capital        Deficit          Total
                                   ------        ------     ------      ------     -------     -----------         -----
<S>                               <C>       <C>         <C>         <C>         <C>          <C>             <C>
Balance, December 31, 1996          6,000     $3,000,000  2,662,680   $ 26,627    $5,440,956   (12,609,071)    (4,141,488)
Accrued dividends on
  mandatory redeemable
  preferred stock                      --             --         --         --    (1,383,336)           --     (1,383,336)
Series C mandatory
  redeemable preferred stock
  issuance costs                       --             --         --         --      (155,566)           --       (155,566)
Compensation element of stock
  options forfeited (Note 6)           --             --         --         --       (21,129)           --        (21,129)
Net loss                               --             --         --         --            --    (6,388,484)    (6,388,484)
                                    -----     ----------  ---------   ----------   ----------  ------------  ------------
Balance, December 31, 1997          6,000      3,000,000  2,662,680     26,627     3,880,925   (18,997,555)   (12,090,003)
Accrued dividends on
  mandatory redeemable
  preferred stock                      --             --         --         --    (2,268,090)           --     (1,664,741)
Issuance of Warrants in
  connection with PIK Notes            --             --         --         --     7,700,000            --      7,700,000
  (Note 2)
Compensation element of
  stock options forfeited
  (Note 6)                             --             --         --         --       (70,430)           --        (70,430)
Net Loss                               --             --         --         --            --   (19,662,977)   (19,662,977)
                                    -----     ----------  ---------   ----------  ----------  ------------   ------------
Balance, December 31, 1998          6,000      3,000,000   2,662,680    26,627     9,242,405   (38,660,531)   (26,391,499)
Accrued dividends on
  mandatory redeemable
  preferred stock                      --             --         --         --    (2,624,119)           --     (2,624,119)
Compensation element of
  stock options forfeited
  (Note 6)                             --             --         --         --       (44,019)           --        (44,019)
Net Loss                               --             --         --         --            --   (29,995,247)   (29,995,247)
                                    -----     ----------  ---------   ----------  ----------  ------------   ------------
Balance, December 31, 1999          6,000     $3,000,000  2,662,680   $ 26,627    $6,574,267  $(68,655,777)  $(59,054,883)
                                    =====     ==========  =========   ==========  ==========  ============   ============
</TABLE>




See notes to financial statements.





                                       41
<PAGE>   43


                          NEXT GENERATION NETWORK, INC.
                            STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>

                                                                                  Years Ended December 31,
                                                                        --------------------------------------------

                                                                            1999            1998            1997
                                                                        --------------------------------------------
<S>                                                                   <C>             <C>             <C>
Operating Activities:
      Net Loss                                                          $(29,995,247)   $(19,662,977)   $ (6,388,484)
      Adjustments to reconcile net loss to net cash used in
         operating activities:
           Accretion of long term debt discounts                           1,612,452       1,255,840          88,027
           Noncash interest on PIK Notes                                   6,145,895       4,813,050              --
           Amortization of deferred financing costs                          521,116         390,072              --
           Depreciation and amortization                                   2,764,005       1,371,959         713,892
           Compensation element of stock options forfeited                   (44,019)        (70,430)        (21,129)
           Loss from equity method investee                                   67,175              --              --
           Other                                                               8,454          17,710           1,896
           Changes in assets and liabilities:
              Receivables                                                 (1,015,544)       (124,617)       (270,530)
              Other current assets                                             5,875          29,728        (120,886)
              Accounts payable                                             1,509,687         892,337        (198,148)
              Accrued expenses                                                 3,269         595,956       1,543,107
                                                                        ------------    ------------    ------------

           Net Cash Used In Operating Activities                         (18,416,882)    (10,491,372)     (4,652,255)
                                                                        ------------    ------------    ------------

Investing Activities:
      Purchases of equipment and furnishings                              (5,733,059)     (7,899,479)     (1,278,775)
      Investments, purchases of other assets and deposits                   (140,604)         66,752        (109,516)
      Proceeds from sale of equipment                                          5,207              --              --
                                                                        ------------    ------------    ------------

           Net Cash Used in Investing Activities                          (5,868,456)     (7,832,727)     (1,388,291)
                                                                        ------------    ------------    ------------

Financing Activities:

      Borrowings under PIK Notes                                                  --      37,300,000              --
      Principal payments on long-term debt                                   (21,440)     (1,923,764)        (56,149)
      Net proceeds from issuance of preferred stock                               --              --       5,143,245
      Proceeds from issuance of warrants                                          --       7,700,000              --
      Deferred financing costs                                                    --      (2,831,066)        (78,603)
                                                                        ------------    ------------    ------------

           Net Cash Provided by (Used in) Financing Activities               (21,440)     40,245,170       5,008,493
                                                                        ------------    ------------    ------------

           Increase (decrease) in cash and cash equivalents              (24,306,778)     21,921,071      (1,032,053)
Cash and cash equivalents
      Beginning                                                           24,710,213       2,789,142       3,821,195

                                                                        ------------    ------------    ------------
      Ending                                                            $    403,435    $ 24,710,213    $  2,789,142
                                                                        ============    ============    ============

Supplemental Cash Flow Information
      Cash payments for interest                                        $     17,262    $     35,243    $    192,779
      Non cash activities:
         Increase in mandatory redeemable preferred stock and
            decrease in paid-in capital from accrued dividends             2,624,119       2,268,090       1,383,336
         Accrued interest converted to long term debt (Note 2)             5,853,000       2,441,000              --
         Increase in long term debt resulting from interest accretion      1,612,452       1,255,840              --
         Reduction in paid-in capital from issuance costs on
            mandatory redeemable preferred stock                                  --              --         155,566
         Equipment repurchased through issuance of notes payable                  --              --         996,514
         Stockholder note converted to Series C mandatory
           redeemable preferred stock (Note 5)                                    --              --         500,038
                                                                        ============    ============    ============
</TABLE>

See notes to financial statements.



                                       42

<PAGE>   44


                          NEXT GENERATION NETWORK, INC.

                          NOTES TO FINANCIAL STATEMENTS

NOTE 1.    NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

         NATURE OF BUSINESS: Next Generation Network, Inc. (the Company) sells
advertising space and programming in a network of digital video advertising
displays, known as E*billboards. The Company was founded in 1990 and thereafter
developed its proprietary technology platform to deliver digital advertising and
other media across its network of E*billboards in the U.S. At the same time, the
Company concentrated its efforts on securing site agreements for the placement
of E*billboards as well as recruiting local sales personnel and opening local
sales offices in designated market areas.

         As of December 31, 1999, the Company has installed E*billboards at
5,031 sites and has secured long-term site rights covering approximately 5,000
additional sites. E*billboards have been installed in seventeen market areas,
principally in major cities. The Company currently generates revenue principally
through the sale of advertising on E*billboards and previously by selling
equipment and exclusive territorial rights for the NGN system within certain
markets (owner-operator networks). During 1997, the Company repurchased all
E*billboard equipment from the owner-operators who, in turn, forfeited their
territorial rights (see Note 7).

         A summary of the Company's significant accounting policies follows:

         REVENUE RECOGNITION: Advertising revenues are recognized at the time
the advertisement appears on the network. The Company bills advertisers and
recognizes revenue monthly for contracts that exceed one month in length, and on
the first day of a month during which the advertisement appears on the network
for contracts for shorter periods. Costs incurred for the production of media
advertising are recognized in the initial month of the advertising service or
contract period or as incurred during the advertising service period.
Advertising revenues are reduced by agency commissions (generally fifteen
percent) on the statements of operations. Revenue from network equipment sales
is recognized upon installation of the equipment. Network operating revenues,
which consist of network operating fees and royalties from advertising on
owner-operator networks, are recognized in the period the service is provided.
Network equipment sales and network operating revenues principally relate to
former owner operators (See Note 7). In addition, the Company provides
allowances for uncollectible revenues receivable based on Management's periodic
assessment of the need for such allowances. Such allowances charged to expense
amounted to $223,396 in 1999, $100,640 in 1998 and $45,363 in 1997.

         The Company recognized advertising revenues of $240,133 from a company
affiliated with one of its Directors of which $99,860 was in trade accounts
receivable at December 31, 1999.

         BARTER TRANSACTIONS: Barter transactions, which represent the exchange
of E*billboard advertising for goods or services, are recorded at the estimated
fair value of the products or services received, not to exceed the estimated
fair value of the E*billboard advertising provided. The Company has valued all
bartered revenues recognized and the resulting barter credit assets received at
a substantial discount from the Company's standard advertising rates. Barter
revenues are




                                       43
<PAGE>   45


recognized as barter credit on the balance sheet when E*billboard advertising
appears on the network, and barter expense is recognized when the related
products or services are received or used. Barter revenues were $62,116 during
1999, $257,142 during 1998 and $158,076 during 1997, of which $42,125 and
$47,738 of barter credit are included in other current assets on the balance
sheets at December 31, 1999 and 1998, respectively.

         CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, the
Company considers any Treasury bills, commercial paper, certificates of deposit,
and money market funds with an original maturity of three months or less to be
cash equivalents. The Company maintains its cash in bank deposit accounts which,
at times, may exceed federally insured limits. The Company has not experienced
any losses in such accounts.

         ADVERTISING EXPENSE: The Company expenses advertising costs as
incurred. Advertising expense was approximately $233,000, $309,000, and $15,000
in 1999, 1998, and 1997, respectively.

         RESEARCH AND DEVELOPMENT COSTS: Expenditures for research and
development activities performed by the Company, which principally relate to
software feasibility, testing new equipment and exploring different
applications, are charged to operations as incurred. Research and development
expense was approximately $233,000, $430,000 and $363,000 for the years ended
December 31, 1999, 1998 and 1997 respectively.

         SOFTWARE DEVELOPMENT COSTS: The majority of the Company's software
development costs are associated with the internal development and enhancement
of the NGN technology and software. During 1999 the Company adopted the
provisions of Statement of Position 98-1 Accounting for Costs of Computer
Software Developed or Obtained for Internal Use. Under the provisions of this
Statement the Company capitalizes internal and external costs incurred to
develop or upgrade and enhance its internal use NGN technology software during
the application development stage if it is probable that such development or
modifications will result in additional functionality. The Company capitalized
$138,792 of such costs during 1999 and is amortizing them over their expected
useful life of two years on a straight line basis. Prior to 1999 the Company's
policy was to expense such costs as incurred and to include them with research
and development costs.

         DEPRECIATION: It is the policy of the Company to provide depreciation
based on estimated useful lives of its equipment and furnishings using the
straight-line method. The Company is using five year lives on its E*billboard
display equipment and three to seven year lives on its other equipment and
furnishings. Leasehold improvements are being amortized over the terms of the
respective leases.

         ACCOUNTING FOR LONG-LIVED ASSETS: The Company generates operating
revenues with its long-lived assets and is in the process of building up an
acceptable revenue base and related cash flows. Management has and will
continue, on a periodic basis, to closely evaluate its equipment to determine
potential impairment by comparing its carrying value with the estimated future
net undiscounted cash flows expected to result from the use of the assets,
including cash flows from disposition. Should the sum of the expected future net
cash flows be less than the carrying value, the Company would recognize an
impairment loss at that date. An impairment loss would be measured by comparing
the amount by which the carrying value exceeds the fair value (estimated
discounted future cash flows or appraisal of assets) of the long-lived assets.
To date, management has determined that no impairment of long-lived assets
exists.



                                       44
<PAGE>   46

         DEFERRED FINANCING COSTS: In connection with the issuance of Senior
Secured PIK Notes in 1998 the Company incurred approximately $2,910,000 of
financing costs which have been deferred and are being amortized over the five
year term of the Notes using the interest method. In addition, as of December
31, 1999 the Company had incurred $52,000 of financing costs in connection with
a private sale of its common stock subsequent to year end (see Note 10). These
costs have been deferred and will be recorded as a reduction of the common stock
sales proceeds in 2000.

         INVESTMENT: The Company has an investment in Next Generation Network
International, LLC ("NGN International") which was formed for the purpose of
researching the development of markets for E*billboards in several countries
outside of the U.S. The Company owns 50% of NGN International and one of the
Company's directors controls the remaining 50%. The Company's interest in this
entity is reflected in other assets on the balance sheet and activity to date is
reflected as other expense on the statement of operations.

         BASIC AND DILUTED NET LOSS PER SHARE: Basic per share amounts are
computed, generally, by dividing net income or loss by the weighted-average
number of common shares outstanding. Diluted per share amounts assume the
conversion, exercise, or issuance of all potential common stock instruments
unless their effect is antidilutive, thereby reducing the loss or increasing the
income per common share.

         Loss per share has been adjusted for undeclared, cumulative dividends
on the Company's Series A cumulative preferred stock which totaled $247,500 for
each of the years ended December 31, 1999, 1998, and 1997, and the dividends
accrued on the Series B and C mandatory redeemable preferred stock of
$2,624,119, $2,268,090, and $1,383,336 for the years ended December 31, 1999,
1998, and 1997, respectively. As described in Note 6, the Company has options
and warrants outstanding to purchase shares of common stock, and the Series A,
B, and C preferred stock is convertible into common stock. However, because the
Company has incurred losses in all periods presented, the inclusion of those
potential common shares in the calculation of diluted loss per share would have
an antidilutive effect. Therefore, basic and diluted loss per share amounts are
the same in each period presented.

         INCOME TAXES: The Company accounts for deferred taxes on an asset and
liability method whereby deferred tax assets are recognized for deductible
temporary differences and operating loss and tax credit carryforwards and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax basis. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.

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

         FAIR VALUE OF FINANCIAL INSTRUMENTS: The financial statements include
the following financial instruments and the methods and assumptions used in
estimating their fair value: for cash and cash equivalents, the carrying amount
is fair value; for trade accounts receivable and accounts



                                       45
<PAGE>   47

payable, the carrying amounts approximate their fair values due to the short
term nature of these instruments; and for the fixed rate notes payable the
estimated fair value approximates the carrying value based on discounted cash
flows using interest rates being offered for similar borrowing. No separate
comparison of fair values versus carrying values is presented for the
aforementioned financial instruments since their fair values are not
significantly different than their balance sheet carrying amounts. In addition,
the aggregate fair values of the financial instrument would not represent the
underlying value of the Company.

         SEGMENTS: The Company believes that it has one operating segment,
although certain separate financial information by the Company's market areas is
available. That is, the services being provided, the development of the
services, the method in which the services are being delivered and the customers
the services are being provided to, are similar.

         REPORTING COMPREHENSIVE INCOME: For the Company, reporting
comprehensive income is equivalent to reporting operating results in the
statement of operations.


NOTE 2. LONG-TERM DEBT:


         On February 18, 1998, the Company issued 45,000 units representing $45
million principal amount of 12% Series A Senior Secured PIK Notes (the "Notes")
and warrants to purchase 125,240 shares of common stock (the "Warrants"). The
Notes mature on February 1, 2003. Interest on the Notes is payable semiannually
in arrears on February 1 and August 1 of each year commencing August 1, 1998.
Interest on the Notes is payable either in cash or in additional Notes, at the
option of the Company, until August 1, 2000, and thereafter is payable in cash.
At the time of issuance, each Warrant entitled the holder to purchase one share
of common stock at an exercise price of $0.01 per share, representing in the
aggregate approximately 20% of the common stock on a fully diluted basis at the
time of issuance. The number of shares purchasable by holders of the Warrants is
subject to antidilution adjustments. The Warrants are detachable and are
exercisable anytime prior to February 1, 2008. For financial reporting purposes
the aforementioned Notes have been recorded net of the value ascribed to the
Warrants which is in effect an original issuance discount on the Notes. This
discount is being amortized as additional interest expense over the five year
term of the Notes using the interest method. The value ascribed to the Warrants
was $7.7 million, and was recorded as additional paid in capital. The Warrant
value was determined based on the total estimated potential market
capitalization of the Company's common stock, on a fully diluted basis before
the Warrant issuance, using an estimated per share value of $7.70 per share
(post stock split) and the percentage of such value that the Warrants represent,
if exercised. In 1999 and 1998, the Company issued additional Notes in payment
of $5,853,000 and $2,441,000, respectively, of accrued interest on the
aforementioned Notes.

         On August 19, 1998, all Series A Senior Secured PIK Notes were
exchanged for Series B 12% Senior Secured PIK Notes due 2003. Generally, the
form and terms of the Series B Notes are the same as the Series A Notes except
that they do not bear legends restricting their transfer.

         The Notes are secured by a first priority lien on substantially all
assets of the Company except for certain equipment collateralizing
noninterest-bearing notes included in long-term debt. The Notes contain certain
restrictive covenants that among other things prohibit the payment of dividends
on, and the redemption of, the Company's capital stock.




                                       46
<PAGE>   48


         A summary of long-term debt at December 31, 1999 and 1998 is as
follows:

<TABLE>
<CAPTION>
                                                                                         1999             1998
                                                                                      -----------      -----------
         <S>                                                                        <C>              <C>
         12% Series B Senior Secured PIK Notes due February 2003 (net of
            $5,181,775 and $6,606,331, respectively, of unamortized
            discount attributed to warrants issued in connection with PIK
            Notes) (See above)                                                        $48,112,225      $40,834,669
         Noninterest-bearing note payable, discounted at 15%, total of
            $700,000 payable based on certain cash flows, if any, with
            balance due December 2001, secured by equipment repurchased
            (Note 7)                                                                      529,300          460,260
         Noninterest-bearing note payable, discounted at 15%, total of
            $1,500,000 payable August 2003, plus 10% of certain net
            revenues, if any, secured by equipment repurchased (Note 7)                   905,308          786,452
         Other debt - capital lease obligations                                            33,765           55,205
                                                                                      -----------      -----------
                                                                                       49,580,598       42,136,586

         Less current maturities                                                           24,949           21,439
                                                                                      -----------      -----------
                                                                                      $49,555,649      $42,115,147
                                                                                      ===========      ===========
</TABLE>

         The long term debt excluding capital lease obligations and assuming
full accretion of related discounts is payable as follows: $700,000 in 2001 and
$54,794,000 in 2003.

         Interest expense on an 8% note payable to a shareholder was
approximately $20,000 and $176,000 for the years ended December 31, 1998 and
1997, respectively. This note of approximately $1,875,000 was repaid in full on
February 18, 1998.

NOTE 3. LEASE COMMITMENTS

         SITE AGREEMENTS: In connection with the E*billboard network, the
Company enters into site agreements that provide for revenue-sharing
arrangements (based on percentage of net advertising revenues) with the
operators of the sites in which its E*billboards are located. The Company
accrues as monthly site agreement expense the greater of the computed amount
based on a percent of revenue or, where applicable, the appropriate portion of
an annual minimum.

         At December 31, 1999, in connection with the aforementioned
arrangements, the Company was committed to certain minimum site agreement fees
of approximately $3,262,000 annually through the year 2003, based on
E*billboards installed as of December 31,1999. The Company is highly dependent
upon one multistore site agreement and 65 percent of the Company's E*billboards
are located in sites covered by this agreement which expires on January 1, 2004,
if not renewed. This agreement also requires the Company to have E*billboards in
a specified number of locations by November 30, 2000 or be subject to $150,000
of liquidated damages.

         Site agreement fees included in network operating expenses in the
statements of operations were $3,465,350, $2,087,945 and $1,120,431, for the
years ended December 31, 1999, 1998 and 1997 respectively.

         OPERATING LEASES: The Company leases its offices and warehouse
facilities under noncancelable operating leases, which require various monthly
payments including operating costs.



                                       47
<PAGE>   49

The approximate future minimum lease payments under operating leases at December
31, 1999 are as follows:

<TABLE>
<CAPTION>

     Years ending December 31:
            <S>                      <C>
              2000                     $1,490,000
              2001                      1,255,000
              2002                      1,215,000
              2003                        994,000
              2004                        683,000
              Thereafter                1,367,000
                                       ----------
                                       $7,004,000
                                       ==========
</TABLE>

         Rent expense amounted to approximately $1,567,000, $623,000, and
$303,000 for the years ended December 31, 1999, 1998, and 1997 respectively.
Letters of credit in the amount of approximately $193,000 are outstanding at
December 31, 1999 as security for certain of these leases.


NOTE 4. EMPLOYMENT AGREEMENTS

         Effective January 1, 2000 the Company entered into new employment
agreements with two officers, who are also significant shareholders of the
Company. These agreements, which extend to January 31, 2004, provide for an
annual base salary for each officer of $300,000. Bonuses are payable to these
officers solely at the discretion of the Board of Directors. If the officers are
terminated without cause or if the officers elect to terminate their employment
under certain circumstances the Company is required to pay them the greater of
the remaining amounts payable under the agreements or two times their annual
base salary. Under a prior employment agreement one of these officers received
230 shares (valued at $17,710) of Series C Preferred Stock in 1998.  The
issuance of these shares was accounted for as compensation expense in 1998.
These shares were valued at $77 per share, the share value at which such shares
were sold to private investors.

         The Company issued 88,310 shares of restricted common stock to one of
these officers and 49,830 shares of restricted common stock to the other officer
in 1996, effectively in exchange (at $7.70 per share) for $1,063,656 of deferred
compensation obligations payable to them under prior employment agreements. Such
shares are subject to forfeiture in certain circumstances under the January 1,
2000 employment agreements and become unrestricted (vest) December 31, 2006 or
upon the occurrence of death, disability, qualifying public offering, certain
business combinations, termination without cause and in certain other
circumstances.



NOTE 5. COMMON AND PREFERRED STOCK


         COMMON STOCK AUTHORIZED AND STOCK SPLIT: The Company amended its
Certificate of Incorporation to increase the number of authorized shares of
common stock of the Company to 20,000,000 shares in January, 2000. In addition,
the outstanding common stock of the Company was split on a ten for one basis,
effective April 26, 1999. The effect of the stock split has been retroactively
reflected in the financial statements for all periods presented.

         PREEMPTIVE RIGHTS: As of December 31, 1999, holders of 1,765,930 shares
of Common Stock (including shares issuable upon exercise of outstanding warrants
or upon conversion of Preferred Stock), or their transferees, are entitled to
certain rights permitting them to maintain their percentage common equity
interest in the Company (on a fully diluted basis).



                                       48
<PAGE>   50

         PREFERRED STOCK: The Company's Board of Directors has authorized
500,000 shares of preferred stock for designation and issuance, of which 298,900
shares were not designated as of December 31, 1999.

         DIVIDEND RESTRICTIONS: The Company is restricted from paying dividends
under its indenture covering the Series B Notes, as well as under its Series A,
Series B, and Series C Preferred Stock.

         SERIES A CUMULATIVE PREFERRED STOCK: See Note 10 for partial conversion
to common stock subsequent to December 31, 1999.

         The Company's 8.25% Series A cumulative preferred stock is convertible
at the option of the holder into Common Stock, at any time prior to the close of
business on the tenth day prior to the date fixed for a redemption or exchange
by the Company, at a conversion price of $13.527 per common share (equivalent to
a conversion rate of 36.96 shares of common stock for each share of preferred
stock).

         The Series A preferred stock is redeemable at the option of the
Company, if not previously converted into common stock, in whole or in part, at
$500 per share, plus accrued and unpaid dividends to the redemption date.

         Dividends of $247,500 for each of the years ended December 31, 1999,
1998, and 1997 were not declared nor paid. Dividends in arrears totaled
$1,980,000 and $1,732,500 at December 31, 1999 and 1998, respectively. The
dividends in arrears are also convertible into common stock at a conversion
price of $13.527 per common share.

         SERIES B MANDATORY REDEEMABLE PREFERRED STOCK: See Note 10 for
conversion to common stock subsequent to December 31, 1999.

         The Series B Senior Cumulative Compounding Redeemable Preferred Stock
was equal in all respective rights with the Series C Preferred Stock and senior
to all other classes of capital stock with respect to dividend and liquidation
rights. Dividends, which accrue at 14.8% on an initial liquidation value of $77
per share, were to be paid quarterly on March 1, June 1, September 1, and
December 1. On each dividend payment date, accrued dividends, to the extent
unpaid, were compounded upon the stock's liquidation value. For the years ended
December 31, 1999, 1998, and 1997, dividends of $1,524,844, $1,318,592, and
$1,125,070 respectively, were accrued relative to those years but were not paid.

         The Series B Preferred Stock and all accrued unpaid dividends were
convertible, in whole or in part, at the option of the holder into common stock
at a conversion price of $7.70 per share (representing 1,464,072, 1,266,040, and
1,094,790 shares of common stock at December 31, 1999, 1998, and 1997,
respectively). The stock was convertible at the option of the Company in the
event of a qualifying public offering. The stock was also redeemable in whole,
but not in part, at the option of the Company at a redemption price of $308 per
share at any time prior to the mandatory redemption date, which was September
2003. At that time, the Company would have been required to redeem all
outstanding shares of the Series B preferred stock at a redemption price of $77
per share, adjusted for cumulative compounded unpaid dividends.

         SERIES C MANDATORY REDEEMABLE PREFERRED STOCK: See Note 10 for
conversion to common stock subsequent to December 31, 1999.




                                       49
<PAGE>   51

          During 1997, the Company's Board of Directors created and designated
for issuance 90,000 shares of $1 par Series C Senior Cumulative Compounding
Convertible Redeemable Preferred Stock. This preferred stock contained terms and
provisions that were virtually identical to the Series B Preferred Stock except
for the mandatory redemption date, which was March 2003 for Series C.

         During 1997, the Company issued 75,310 shares of Series C Preferred
Stock to private investors at $77 per share. Proceeds upon issuance of this
stock, net of issuance costs of approximately $156,000 totaled approximately
$5,643,000, which consisted of approximately $5,143,000 in cash and conversion
of a stockholder note of $500,038. For the years ended December 31, 1999, 1998
and 1997, dividends of $1,099,275, $949,498, and $258,266, respectively, were
accrued relative to those years on this preferred stock and were not paid.

         The Series C Preferred Stock and all accrued unpaid dividends were
convertible into common stock at a conversion price of $7.70 (representing
1,055,013, 912,250 and 786,640 shares of common stock at December 31, 1999, 1998
and 1997, respectively). The terms were similar to the Series B Preferred Stock.



NOTE 6. STOCK OPTIONS AND WARRANTS

         The Company has a 1993 Stock Option Plan effective January 1, 1994, a
1994 Stock Option Plan effective December 15, 1994 and a 1998 Nonqualified Stock
Option Plan effective November 20, 1998 (the Plans). The Plans permit the
granting of incentive stock options and nonqualified options. A total of 40,000,
80,000, and 820,000 shares of the Company's common stock have been reserved for
issuance pursuant to options granted under the 1993, 1994, and 1998 Plans,
respectively.

         Grants under the Plans are accounted for following APB Opinion No. 25
and related interpretations. During 1999, 1998 and 1997, certain compensatory
options were forfeited, resulting in the reversal of $44,019, $70,430 and
$21,129, respectively, of compensation expense. Had compensation cost for the
options been determined using the fair value method required by FASB Statement
No. 123, the Company's basic and diluted net loss applicable to common
stockholders and net loss per common share on a pro forma basis would have been
as follows:

<TABLE>
<CAPTION>

                                                                        Years Ended December 31
                                                           -----------------------------------------------
                                                                1999             1998              1997
                                                           ------------     ------------       -----------
       <S>                                               <C>              <C>                <C>
         Net loss applicable to common stockholders:
              As reported..................................$(32,866,866)    $(22,178,567)      $(8,019,320)
              Pro forma.................................... (33,234,000)     (22,269,000)       (8,088,000)
         Basic and diluted net loss per common Share:
              As reported..................................      (12.34)           (8.33)            (3.01)
              Pro forma....................................      (12.48)           (8.36)            (3.04)

</TABLE>

         The fair value of each option grant is estimated on the date of the
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants: risk-free interest rates of 6.50%
and 6.16% in 1999 and 1997, respectively; expected lives of 5 years; expected
volatility of 10%; and no dividends.



                                       50
<PAGE>   52

         A summary of stock option activity is as follows:

<TABLE>
<CAPTION>

                                                                        Weighted
                                                                        Average
                                                                      Grant Date                       Weighted-
                                                                         Fair                           Average
                                                                         Value         Shares        Exercise Price
                                                                         -----         ------        --------------
           <S>                                                        <C>             <C>             <C>
         Outstanding at December 31, 1996                                              59,060            $2.14
            Granted                                                     $7.70          10,000             7.70
            Canceled                                                      ---          (3,000)             .10
                                                                                      -------
         Outstanding at December 31, 1997                                              66,060             3.08
            Cancelled                                                     ---         (15,000)            3.08
                                                                                      -------
         Outstanding at December 31, 1998                                              51,060             3.08
            Granted                                                      7.70         815,000             7.70
            Cancelled                                                     ---        (104,250)            7.24
                                                                                     --------
         Outstanding at December 31, 1999                                             761,810             7.45
                                                                                     ========
</TABLE>



         The Company believes the exercise price of options granted was greater
than or equal to the per share fair value of the Company's common stock as of
the date of grant. In 1997 this was based on significant recent cash sales of
securities convertible into common stock at $7.70 per share. In 1999 the Company
obtained an opinion from an independent investment services organization that
the fair value of the Company's stock was less than $7.70 per share.

         The weighted average fair value per option for options granted during
1999 and 1997 was $2.19 and $2.10, respectively, based on the Black-Scholes
option pricing model. No options were granted in 1998.

         There were 28,810, 3,506, and 3,308 options exercisable at December 31,
1999, 1998 and 1997 at weighted-average exercise prices of $1.16, $0.97 and
$0.37, respectively.

         The following table summarizes additional information about stock
options outstanding as of December 31, 1999:

<TABLE>
<CAPTION>

                                                         Weighted Average
                                                           Remaining                 Number of Options
   Range of exercise           Number of Options        Contractual Lives (In          Exercisable at
        prices                   Outstanding                  Years)                 December 31, 1999
        ------                   -----------                  -----                  -----------------
<S>                             <C>                        <C>                          <C>
        $ .10                       24,810                     4.0                         24,810
        $7.70                      737,000                     8.8                          4,000
                                   -------                                                 ------
                                   761,810                                                 28,810
                                   =======                                                 ======
</TABLE>

         WARRANTS: The Company issued warrants to purchase 31,000 shares of
common stock at a price of $7.143 per share, exercisable any time prior to May
1, 2000, in connection with a 1995 financing arrangement. Since the exercise
price approximated the estimated fair value of the common stock at date of
issuance and since the scheduled interest over the term of the financing was not
significantly different than interest computed using the Company's incremental
borrowing rate, no separate value was ascribed to the warrants as it was
determined to be immaterial.



                                       51

<PAGE>   53


         In connection with the Company's issuance of Senior Secured PIK Notes
the Company issued warrants to purchase 1,252,400 shares of its common stock at
a price of $.01 per share, exercisable at any time prior to February 1, 2008. A
value of $7.7 million was ascribed to these warrants (See Note 2). Due to
antidilution provisions, these warrants allowed the holders to acquire 1,401,792
shares of common stock as of December 31, 1999.

NOTE 7. TERRITORIAL AGREEMENTS AND REPURCHASE OF NETWORK EQUIPMENT

         In January 1997, the Company entered into an agreement with one of its
two NGN owner-operators whereby the Company repurchased equipment (which had
been previously paid for in full) originally sold by the Company in exchange for
a $700,000 note payable. In addition, the owner-operator forfeited its
territorial rights. This equipment repurchase was not a condition of or done in
connection with the terms of the original territorial agreement and equipment
sales contract. The note is noninterest-bearing and is payable annually at an
amount equal to 40% of operating cash flows generated by the former
owner-operator's territory with the unpaid balance of the note due December 31,
2001. The note is secured by the equipment repurchased. The Company recorded the
note and the repurchased equipment at $348,023, the present value of the note
using a discount rate of 15% and no assumed payments until maturity. No periodic
payments were assumed since the former owner-operator's territory was not
generating positive operating cash flow at the time of the equipment repurchase
and there is no assurance that such positive cash flow will be achieved and in
what amount.

         In April 1997, the other NGN owner-operator gave notice of forfeiture
of its territorial rights and its option to purchase the exclusive rights to
certain additional designated NGN territories, effective as of August 18, 1997.
The Company subsequently entered into an agreement with the owner-operator
whereby, in August 1997, the Company repurchased equipment (which had been
previously paid for in full) originally sold by the Company in exchange for
$25,000 cash and a $1,500,000 note payable. This equipment repurchase was not a
condition of or done in connection with the terms of the original territorial
agreement and equipment sales contract. The note is noninterest-bearing and is
payable in full on August 18, 2003. The note is secured by the equipment
repurchased. The Company has also agreed to pay the former owner-operator 10
percent of the net revenues generated by the forfeited Florida territory for the
term of the note. The Company recorded the repurchased equipment at $25,000 plus
$648,491, the present value of the note using a discount rate of 15%.

         In the aforementioned equipment repurchase transactions the entire
recorded present value repurchase price approximated less than fifty percent of
the original aggregate installed cost of the E*billboards (monitor equipment).
The Company believes this equipment has a five year useful life and at time of
repurchase had been used on average approximately six months to one year. The
Company allocated all of the repurchase price to the E*billboards in place since
it believed its fair value was significantly greater than the present value of
the total repurchase price. No value was allocated to the territorial rights
since they were forfeited, not repurchased, and since the estimated fair value
of the tangible assets repurchased more than exceeded their repurchase cost as
noted above. The repurchased E*billboards are being depreciated over their
approximate remaining useful lives.




                                       52

<PAGE>   54


NOTE 8: INCOME TAXES

         Deferred income tax assets (liabilities) consisted of the following:

<TABLE>
<CAPTION>

                                                                      December 31
                                                            ------------------------------------
                                                               1999                     1998
                                                            ------------------------------------
<S>                                                       <C>                     <C>
Deferred tax assets:
   Net operating loss carryforwards                         $26,920,000             $ 14,523,000
   Tax credit carryforwards                                     166,000                  166,000
   Nondeductable compensation                                   530,000                  541,000
   Allowance for uncollectible accounts and other                93,000                   64,000
                                                            -----------             ------------
                                                             27,709,000               15,294,000
Deferred tax liabilities:
   Depreciation and amortization                               (449,000)                (118,000)
                                                            -----------             ------------
Net deferred tax                                             27,260,000               15,176,000
Less valuation allowance                                    (27,260,000)             (15,176,000)
                                                            -----------             ------------
                                                            $        --             $         --
                                                            ===========             ============
</TABLE>

         The Company had valuation allowances of $27,260,000 and $15,176,000
against its deferred tax assets to reduce those assets to amounts that
management believes are appropriate at December 31, 1999 and 1998, respectively.

         The Company's income tax expense (benefit) differed from that which
would result from applying the statutory federal rate to the Company's net loss
as follows:

<TABLE>
<CAPTION>

                                                                                  Years ended December 31,
                                                                    --------------------------------------------------
                                                                         1999               1998              1997
                                                                    ------------         -----------       -----------
<S>                                                               <C>                  <C>               <C>
Statutory rate applied to loss before income taxes                  $(10,198,000)        $(6,685,500)      $(2,172,000)
State income tax benefit net of federal tax effect
    and other                                                         (1,886,000)         (1,136,000)         (288,000)
                                                                    ------------         -----------       -----------
Change in deferred tax valuation allowance

    resulting from unused NOLs                                        12,084,000           7,821,000         2,460,000
                                                                    ------------         -----------       -----------
                                                                    $         --         $        --       $        --
                                                                    ============         ===========       ===========
</TABLE>

         The Company has tax net operating loss and tax credit carryforwards
which are available to reduce income taxes payable in future years. Future
utilization of these loss and credit carryforwards is subject to certain
limitations under provisions of the Internal Revenue Code including limitations
subject to Section 382, which relate to a 50 percent change in control over a
three-year period, and are further dependent upon the Company attaining
profitable operations. The Company believes that the issuance of warrants during
1998 (see Note 2) resulted in an "ownership change" under Section 382.
Accordingly, the Company's ability to use net operating loss carryforwards
generated prior to February 1998 (generally those expiring in 2012 and in prior
years) may be limited to approximately $1.3 million per year. Future equity
transactions could further limit the utilization of those carryforwards. The
carryforwards and credits will expire as follows:




                                       53

<PAGE>   55


<TABLE>
<CAPTION>

                                                  Operating Loss              Tax Credit
                             Year                  Carryforwards           Carryforwards
                             ----                 --------------------------------------
<S>                                                <C>                        <C>
                             2005                    $   627,000                $     --
                             2006                      1,532,000                      --
                             2007                      1,536,000                      --
                             2008                      1,400,000                      --
                             2009                      1,442,000                 100,000
                             2010                      2,165,000                  15,000
                             2011                      1,959,000                  24,000
                             2012                      6,364,000                  27,000
                             2018                     20,172,000                      --
                             2019                     30,105,000                      --
                                                     -----------                --------
                                                     $67,302,000                $166,000
                                                     ===========                ========
</TABLE>


NOTE 9. ACCRUED EXPENSES

       The components of accrued expenses are as follows:

<TABLE>
<CAPTION>

                                                                             December 31,
                                                                      --------------------------
                                                                          1999           1998
                                                                      --------------------------
<S>                                                                 <C>             <C>
                          Site agreement fees                         $1,382,091      $1,807,422
                          Interest                                     2,664,945       2,372,050
                          Compensation                                   561,032         207,952
                          Legal fees                                     167,000              --
                          Other                                           73,569         128,576
                                                                      ==========      ==========
                                                                      $4,848,637      $4,516,000
                                                                      ==========      ==========
</TABLE>


NOTE 10.  EVENTS SUBSEQUENT TO DECEMBER 31, 1999

         LICENSE AGREEMENT: On January 17, 2000 the Company entered into a ten
year agreement with an unrelated company (licensee) for the worldwide rights to
license and distribute the E*billboard System in and around elevator and shuttle
installations and immediately adjacent to escalators and moving walkways. The
licensee shall be solely responsible for the installation, maintenance and
configuration of the E*billboard equipment and software, as well as acquiring
and contracting with customers (locations), in the aforementioned venues. Under
this arrangement, the Company will be responsible for, among other things,
operation of the NGN System and selling, producing and delivering advertisements
on the E*billboards in the licensee's venues. The Company and the licensee have
a sharing arrangement for advertising or other revenues generated under this
arrangement.

         SALE OF COMMON STOCK: Through a Stock Purchase Agreement dated January
28, 2000 the Company sold 3,025,017 shares of its common stock at $10 per share
to an entity affiliated with the aforementioned licensee. This sale represented
approximately thirty percent of the Company's common stock, as calculated on a
fully diluted basis, immediately after giving effect to the issuance of the
shares.

         Concurrent with and as a condition precedent to the January 28, 2000
stock sale all of the outstanding shares of the Company's Series B and C Senior
Cumulative Compounding Convertible Redeemable Preferred Stock together with all
accrued and unpaid dividends were converted into



                                       54

<PAGE>   56


2,546,353 shares of Company common stock. In addition, 2,760 shares of the
Company's Series A Convertible Exchangeable Preferred stock together with
accumulated unpaid dividends thereon were converted into 169,346 shares of
Company common stock.

         In connection with the Stock Purchase Agreement: amended and restated
Certificates of Incorporation and Amended and Restated Bylaws were adopted;
Restated Stockholders and Restated Registration Rights agreements were executed;
and certain preemptive and antidilution rights relative to shares and warrants
were terminated, or waived for this transaction.

         SENIOR SECURED NOTE REPURCHASE: On February 25, 2000, the Company
repurchased $18,092,000 face amount of its senior secured notes from the
noteholder, who is also a stockholder of the Company, for $2,927,579. As of the
date of this transaction the repurchased senior secured notes and related
accrued interest, net of unamortized discount, had a net book value of
$16,665,000.

         STOCK OPTIONS: In February 2000, the Company adopted the 2000 Stock
Incentive Plan and reserved 1,300,000 shares of common stock for use in
connection with the plan. In addition, the Company's Board of Directors granted
666,000 stock options to management. These grants will be effective with the
completion of an initial public offering and each option will have an exercise
price equal to the initial public offering price per share. At the same time the
Board of Directors also granted options to acquire 278,000 shares at an exercise
price of $10.00 per share to Company employees under its other stock option
plans.




                                       55

<PAGE>   57


                                   SIGNATURES


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

                                      NEXT GENERATION NETWORK, INC.


Date:  March 27, 2000                 By: /s/ Thomas M. Pugliese
                                         ---------------------------------------
                                         Thomas M. Pugliese
                                         Chief Executive Officer

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

<TABLE>
<CAPTION>

           Name                       Capacity(ies)                          Date
           ----                       -------------                          ----
<S>                         <C>                                            <C>
/s/ Gerard P. Joyce
----------------------        President, Chairman and Director               March 27, 2000
Gerard P. Joyce

/s/ Thomas M. Pugliese
----------------------        Chief Executive Officer, Secretary             March 27, 2000
Thomas M. Pugliese            and Director (Principal Executive Officer)

/s/ Michael J. Kolthoff
----------------------        Treasurer and Assistant Secretary              March 27, 2000
Michael J. Kolthoff           (Principal Financial and Accounting
                              Officer)

/s/ Thomas J. Davis
----------------------        Director                                       March 27, 2000
Thomas J. Davis


----------------------        Director                                       March 27, 2000
Ari Bousbib

/s/ Michael J. Marocco
----------------------        Director                                       March 27, 2000
Michael J. Marocco

/s/ Susan Molinari
----------------------        Director                                       March 27, 2000
Susan Molinari
</TABLE>



                                       56

<PAGE>   58


<TABLE>

<S>                         <C>                                            <C>
/s/ Malcolm Lassman
---------------------         Director                                       March 27, 2000
Malcolm Lassman

/s/ Anthony Bonacci
---------------------         Director                                       March 27, 2000
Anthony Bonacci

/s/ Alejandro Zubillaga
---------------------         Director                                       March 27, 2000
Alejandro Zubillaga

/s/ David Pecker
---------------------         Director                                       March 27, 2000
David Pecker

/s/ J. William Grimes
---------------------         Director                                       March 27, 2000
J. William Grimes
</TABLE>





                                       57