U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB


[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____

                         Commission file number 0-25114

                                 ImaginOn, Inc.
                 ----------------------------------------------
                 (Name of small business issuer in its charter)

Delaware                                                              84-1217733
---------------------------------                            -------------------
(State or other jurisdiction                                    (I.R.S. Employer
of incorporation or organization)                            Identification No.)

1313 Laurel Street, Suite 1
San Carlos, California                                                     94070
---------------------------------------                               ----------
(Address of principal executive office)                               (zip code)

                    Issuer's telephone number (650) 596-9300

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

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

                          Common Stock, $.01 par value
                          ----------------------------
                                (Title of Class)

                        Warrants to Purchase Common Stock
                        ---------------------------------
                                (Title of Class)

    Check  whether  the issuer  (1) filed all  reports  required  to be filed by
Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 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. (1) Yes |X|  No | |    (2) Yes |X|   No | |

    Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained herein, and no disclosure will be contained,  to the
best of the issuer'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.| |

    State the issuer's revenues for its most recent fiscal year.

    As of March 26, 1999, 37,602,752 shares of Common Stock were outstanding and
aggregate  market  value of the shares  (based  upon the  average of the bid and
asked price of the shares on the over-the-counter market) of ImaginOn, Inc. held
by nonaffiliates was approximately $143,622,424.

                   Documents Incorporated by Reference - None

Transitional Small Business disclosure format (check one):Yes | |  No |X|
<PAGE>

                                 IMAGINON, INC.
                                AND SUBSIDIARIES

                                   FORM 10-KSB

THIS REPORT MAY CONTAIN  CERTAIN  "FORWARD-LOOKING"  STATEMENTS  AS SUCH TERM IS
DEFINED  IN THE  PRIVATE  SECURITIES  LITIGATION  REFORM  ACT OF  1995 OR BY THE
SECURITIES AND EXCHANGE COMMISSION IN ITS RULES, REGULATIONS AND RELEASES, WHICH
REPRESENT THE  REGISTRANT'S  EXPECTATIONS OR BELIEFS,  INCLUDING BUT NOT LIMITED
TO, STATEMENTS  CONCERNING THE REGISTRANT'S  OPERATIONS,  ECONOMIC  PERFORMANCE,
FINANCIAL CONDITION, GROWTH AND ACQUISITION STRATEGIES,  INVESTMENTS, AND FUTURE
OPERATIONAL  PLANS. FOR THIS PURPOSE,  ANY STATEMENTS  CONTAINED HEREIN THAT ARE
NOT  STATEMENTS  OF  HISTORICAL  FACT  MAY  BE  DEEMED  TO  BE   FORWARD-LOOKING
STATEMENTS.  WITHOUT  LIMITING THE  GENERALITY OF THE  FOREGOING,  WORDS SUCH AS
"MAY," "WILL," "EXPECT," "BELIEVE," "ANTICIPATE," "INTENT," "COULD," "ESTIMATE,"
"MIGHT," OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR COMPARABLE
TERMINOLOGY  ARE  INTENDED  TO  IDENTIFY   FORWARD-LOOKING   STATEMENTS.   THESE
STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES,  CERTAIN
OF WHICH ARE BEYOND THE  REGISTRANT'S  CONTROL,  AND ACTUAL  RESULTS  MAY DIFFER
MATERIALLY  DEPENDING ON A VARIETY OF IMPORTANT FACTORS,  INCLUDING  UNCERTAINTY
RELATED TO  ACQUISITIONS,  GOVERNMENTAL  REGULATION,  MANAGING  AND  MAINTAINING
GROWTH,  VOLATILITY OF STOCK PRICE AND ANY OTHER  FACTORS  DISCUSSED IN THIS AND
OTHER REGISTRANT FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.


                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS
         -----------------------

         NOTE:  READERS OF THIS  REPORT  SHOULD  NOTE THAT THE  BUSINESS  OF THE
REGISTRANT  MATERIALLY  CHANGED  AFTER  DECEMBER 31,  1998.  EXCEPT AS OTHERWISE
DESCRIBED  IN THIS  REPORT,  THE  INFORMATION  IN THIS  REPORT IS GIVEN  THROUGH
DECEMBER 31, 1998.  BECAUSE THE COMPANY HAS CEASED ITS PRIOR OPERATIONS,  MERGED
WITH  ANOTHER  COMPANY ON JANUARY 20, 1999 AND NOW IS ENGAGED IN ANOTHER LINE OF
BUSINESS,  THE  INFORMATION  IN THIS  REPORT  IS  MAINLY  HISTORICAL  AND IS NOT
REFLECTIVE  OF THE  COMPANY'S  CURRENT  OPERATIONS  OR FINANCIAL  POSITION.  THE
COMPANY  FILED A PROXY  STATEMENT  IN  NOVEMBER  1998  THAT  INCLUDES  FINANCIAL
STATEMENTS OF IMON,  UNAUDITED PRO FORMA  FINANCIAL  INFORMATION  REFLECTING THE
MERGER,  AND OTHER INFORMATION ABOUT IMON AND THE MERGER.  THE COMPANY ALSO WILL
BE FILING A CURRENT REPORT ON FORM 8- K/A WHICH WILL CONTAIN UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. SEE THE LAST PARAGRAPH OF ITEM 1(A)
FOR A DESCRIPTION OF THE COMPANY'S CURRENT BUSINESS.

(a)      BUSINESS DEVELOPMENT.

         California  Pro  Sports,  Inc.,  (now  known  as  ImaginOn,   Inc.  and
hereinafter  referred  to as  the  "Company"  or  "Registrant"),  is a  Delaware
corporation,  which,  in 1993,  acquired the  California  Pro(TM)  in-line skate
business from  California Pro USA Corp.  Playmaker Co., LTD  ("Playmaker"),  the
Taiwanese in-line skate  manufacturer and majority owner of the seller,  granted
the  Company  an  exclusive,  perpetual,  non-royalty  bearing  license  to  the
California   Pro(TM)  names  and   trademarks   and  entered  into  a  five-year
manufacturing  agreement to supply  substantially  all of the Company's  in-line
skate products. This acquisition was a taxable transaction and was accounted for

<PAGE>

as a purchase.  Due to the significant  continuing  ownership  participation  of
Playmaker in the Company,  the assets acquired were recorded at historical cost.
Cash paid and notes  given by the  Company  for the  agreements  not to compete,
management  buy-out and consulting fees, and the guaranty fees, were recorded as
intangible assets.

         In  another  acquisition  completed  on August  1,  1994,  the  Company
purchased certain assets,  including an exclusive,  perpetual world-wide license
to the Kemper(R) name and trademark,  subject to a royalty. The Company acquired
its  license  directly  from  the  registered  owner of the  Kemper(R)  name and
trademark, Front 500 Corporation ("Front 500").

         In  1995,  the  Company  formed  USA  Skate  Corporation,   a  Delaware
corporation,  ("Skate Corp.").  Skate Corp. was a majority owned  (approximately
62%)  subsidiary of the Company and its financial  statements  are  consolidated
with those of the Company in this report.  Effective as of April 30, 1996, Skate
Corp.  acquired  100%  of  USA  Skate  Co.,  Inc.  ("USA  Skate"),  a  New  York
corporation,  in a stock  purchase  transaction.  USA Skate  owned,  directly or
indirectly,  all of the capital stock of Les Equipements  Sportifs Davtec,  Inc.
("Davtec"),  a Canadian  corporation.  The  acquisition  was  accounted for as a
purchase.  Consideration for the purchase was $10.5 million, consisting of $3.65
million of cash  (including  approximately  $98,000 of cash  acquired),  a $1.05
million 8% installment note payable due through November 1998, 250,000 shares of
Skate Corp.  common stock valued at $300,000,  and  assumption of  approximately
$5.5 million of debt.

         The cash  portion of  purchase  price for USA Skate was paid with funds
raised by Skate Corp.,  including  the private  placement  of 884,667  shares of
common stock of Skate Corp. for  approximately  $1.06  million;  the issuance of
approximately   $1.08  million  of  9%  promissory   notes  payable  to  certain
officers/stockholders  due June 30, 1997; and the issuance of approximately $2.5
million  of 9%  promissory  notes due  January  1997  (the  "Skate  Notes").  As
permitted under their terms, the due date of the Skate Notes was extended to May
5, 1998 and the annual  interest  rate  increased  to 12%  during the  extension
period. The Skate notes are convertible under certain circumstances.

         The debt assumption portion of this acquisition was financed in part by
a bank loan to USA Skate by LaSalle  National  Bank,  the proceeds of which were
used to repay the  outstanding  indebtedness  under the credit facility in place
for USA Skate prior to completion of the acquisition. The LaSalle loan agreement
allowed for advances  based on percentages  of qualifying  accounts  receivable,
qualifying  inventories and outstanding  letters of credit, with a maximum limit
of $5 million. The loan agreement required payment of various financing fees and
contained  certain  financial  covenants and restrictions  regarding  payment of
dividends,  officers'  compensation and consulting fees, as well as restrictions
on  USA  Skate's  loans  and  investments.   The  loan  was   collateralized  by
substantially  all of USA Skate's  assets and was  guaranteed by Skate Corp. and
certain of its affiliates and  stockholders.  At December 31, 1996,  Skate Corp.
was in technical  default  under this lending  arrangement  primarily due to the
Company's wholly-owned  subsidiary being in default under its loan with LaSalle.
At year-end 1996, California Pro, Inc. was under-collateralized by approximately
$800,000  and was not in  compliance  with certain of its  financial  covenants.
Although,  LaSalle could have accelerated both loans and required immediate full
repayment,  LaSalle  did not  accelerate  either  loan nor did it  require  full
repayment.

                                       -2-
<PAGE>

         At the time of the acquisition, Skate Corp. made a capital contribution
of $500,000 to Davtec, and the former controlling  shareholder of USA Skate paid
Davtec  $165,000 in return for a $125,000,  8% promissory  note due December 31,
1996 and payment of a $40,000 outstanding  receivable.  The proceeds of $665,000
were used to reduce  Davtec's  indebtedness  to its  Canadian  bank  lender.  In
connection with the payments, and subject to certain other terms and conditions,
the  Canadian  bank  agreed to extend the  existing  line of credit  with Davtec
through July 31, 1997. In March 1997,  the Company repaid $50,000 under the note
to  the  former  controlling  shareholder  of  USA  Skate  and  entered  into  a
modification  agreement  extending  the due  date of the  remaining  $75,000  to
October 1, 1997. In February  1997, the Company  received  notice that it was in
violation  of a loan  covenant  and in March  1997,  the bank  filed a notice of
intention to enforce security and to demand payment of the loan.

         At the time of the USA Skate acquisition,  the Company, Skate Corp. and
USA Skate also entered into certain other agreements with the former controlling
shareholder of USA Skate. USA Skate entered into a one-year employment agreement
with the former controlling  shareholder of USA Skate, which provides for annual
compensation of $90,000. The former controlling shareholder of USA Skate entered
into a five-year  consulting  agreement  with the Company,  Skate Corp.  and USA
Skate and a  ten-year  noncompete  agreement  in  consideration  for  receipt of
400,000 shares of the Company's common stock valued at $900,000.  USA Skate also
entered  into a  worldwide,  exclusive  license  agreement  for  use of  certain
trademarks owned by the former controlling  shareholder of USA Skate in exchange
for  minimum  royalty  payments of $3 million  due on or before  December  2001.
Finder's  fees,  bank  origination,  legal,  accounting  and other  costs of the
acquisition were approximately  $1.53 million,  including  guarantee fees to two
officers/stockholders   of  $600,000  related  to  the   officers'/stockholders'
providing  personal  guarantees of certain of the debt assumed and issued in the
transaction.

         In 1996  and  1997,  due to  continuing  operating  losses,  management
decided to restructure and reduce its debt  Accordingly,  in September 1997, the
Company  completed the sale of substantially  all of the assets of Skate Corp.'s
direct and indirect  operating  subsidiaries,  USA Skate and Davtec, to Rawlings
Sporting Goods Company,  Inc. and Rawlings Canada,  Inc.  Consideration to Skate
Corp. consisted of $14.5 million cash, including $1.0 million retained in escrow
for  purchase  price  adjustments  and  proven  claims  by the  purchasers,  and
assumption  of trade  payables  and  accrued  liabilities  related to the assets
purchased.

         An additional component of the restructuring plan included management's
decision to cease  operating its California Pro and Kemper  licenses,  eliminate
most of the operating and overhead  expenses  associated with its sporting goods
business  and  begin to  concentrate  on  sub-licensing  its  trademark  rights.
Accordingly,  in the  second  quarter of 1997,  the  Company  began  liquidating
remaining  inventories  and  commenced a search for  sub-licensees  and a merger
candidate.

         As a result of its search,  on October 2, 1997,  the  Company  signed a
letter  of intent to merge  with  ImaginOn,  Inc.  ("ImaginOn")  of San  Carlos,
California,  a  privately  held  company.  Thereafter,  the  Company  signed  an
agreement  and plan of merger as of January  30, 1998 under which there would be
an exchange of 100% of the outstanding  shares of ImaginOn for approximately 60%
of the outstanding post merger common stock of the Company.

                                       -3-
<PAGE>

         On January 4, 1999, in  anticipation  of the pending  completion of the
transaction,  California Pro Sports, Inc. changed its name to ImaginOn, Inc. and
the company previously known as ImaginOn,  Inc. changed its name to ImaginOn.com
("IMON").

         The  transaction  was  completed  on January  20,  1999 by the  Company
issuing  21,248,665  shares of its common  stock in exchange  for the  7,456,131
outstanding shares of IMON.

         IMON  is  engaged  in  the   business   of   designing,   selling   and
manufacturing:   (i)  consumer   software   products  for  the  rapidly  growing
"infotainment"  and  "edutainment"  compact  disc  and  digital  video  disc-Rom
markets;  and  (ii)  Internet  software.  IMON's  core  proprietary  technology,
transformational  database  processing  and  playback,  is  used  in a set of 12
software tools developed and used by IMON. New products  created with IMON tools
are characterized by seamless real-time access to video, audio, graphics,  text,
html and three dimensional objects from multiple remote or local databases. IMON
is packaging its tool set as a content  management  system.  IMON is producing a
series of interactive  travelogues for  distribution  on CD and DVD.  ImaginOn's
first  general-purpose  software  application,  "WebZinger(TM)," is an automated
productivity tool that searches the Web, then formats its results into a graphic
PowerPoint(TM)-like slideshow.

(b)      BUSINESS OF ISSUER.

         The Company  licenses  California  Pro(R) in-line  skates,  and related
protective gear and accessories from Playmaker. Kemper(R) snowboards and related
snowboard accessories are licensed from Front 500. VIC(R), VICTORIAVILLE(TM) and
McMartin(TM) ice and street/roller hockey skates,  sticks and related protective
gear and  accessories  were  licensed  until  September  1997  from  the  former
controlling  shareholder of USA Skate. Davtec, USA Skate's wholly-owned Canadian
subsidiary,  manufactured hockey sticks,  pants and gloves for USA Skate and was
the Canadian  distributor  for all of the hockey related  VICTORIAVILLE(TM)  and
VIC(R) product lines.

         The Company  in-line  skate  products  were sold in the United  States,
Canada,  the Caribbean and U.S.  military  bases world wide.  Its snowboards and
related  accessories  were sold  primarily  in the United  States  and  European
countries. Through September 1997, the Company sold its hockey- related products
through independent sales  representatives  and independent  distributors in the
United States, Canada and various other countries.

         As part of  management's  restructuring  plan [see Item  1(a)--Business
Development],  in 1998  the  Company  entered  into two  sub-license  agreements
regarding the use of the Kemper name.

         The Company will rely on the expertise of its sub-licensees to develop,
import or manufacture,  and market and distribute  within their licensed product
categories and territories.

         One of the Kemper  sub-licensees,  a major west  coast  sporting  goods
retailer,  designs,  imports and sells directly to consumers a line of snowboard
apparel.  The other Kemper sub-licensee is one of the leading  manufacturers and
marketers of snowboards and related  products such as bindings,  boots and other
accessories.

                                       -4-
<PAGE>

         Each of the  Kemper  sub-licensees  offer a full  line of  products  at
various price points within their respective product categories.

PRODUCTS

         Through  September  1997,  the  Company had five major  hockey  product
categories  consisting of hockey stick,  hockey  protective gear, figure and ice
hockey skates,  hockey bags and related  accessories,  and street/roller  hockey
skates  and   protective   gear.   These   products  were  marketed   under  the
VICTORIAVILLE(TM),   VIC(R)  and  McMartin(R)   brands.   Davtec,  the  Canadian
subsidiary of the Company's hockey division,  manufactured hockey sticks,  pants
and gloves  for the  Company  and was the  Canadian  distributor  for all of the
hockey related VIC(R) and VICTORIAVILLE(TM) product lines.  Approximately 70% of
Skate Corp.'s products were manufactured by the Canadian subsidiary.

PRODUCT DESIGN AND DEVELOPMENT

         Design and  development of the Company's  hockey  products sold through
September 1997 was undertaken by internal research and development  personnel in
conjunction with outside design firms and vendors, where appropriate.

SALES AND MARKETING

         The  Company  marketed  its ice  hockey  products  primarily  in retail
sporting  goods  chains  and  specialty  shops.  Distribution  was  accomplished
primarily  through  networks  of  independent  sales  representative  groups and
distributors  who sold  directly  to buyers and  retail  accounts.  These  sales
representative groups and distributors were paid on a standard,  commission-only
basis.

         The   Company's   marketing   strategy   emphasized   the   price/value
relationship of its branded products.

         USA Skate  advertised and promoted its hockey products through multiple
methods  customary  within the industry,  including  participation  in all major
trade  exhibits,   special   promotions,   advertising  in  trade  and  consumer
publications,  point of purchase  materials and  endorsements by National Hockey
League players.

SUPPLIERS AND MANUFACTURING

         IN-LINE  SKATE  PRODUCTS.  The Company had an  exclusive  manufacturing
agreement with Playmaker which expired in 1998,  under which Playmaker  supplied
most of the Company's in-line skates and in-line skate accessory products. Prior
to the decision to suspend marketing of in-line skates and related  accessories,
Playmaker manufactured, assembled and packaged its in-line skate products at its
facilities  in Taiwan  and China for set  prices,  in U.S.  dollars,  negotiated
annually.  In 1996, the Company began sourcing certain in-line skate models from
an alternative Pacific Rim supplier.

                                       -5-
<PAGE>

         HOCKEY PRODUCTS. Prior to selling certain assets in September 1997, the
Company  had three  Canadian  manufacturing  facilities.  Products  representing
approximately  70% of USA Skate's sales were  manufactured by Davtec.  The other
products marketed were sourced from a variety of suppliers throughout the world.

LICENSES, PATENTS AND TRADEMARKS

         The Company derives its proprietary  protection primarily from licenses
with others who own patents and trademarks.  The Company owns no patents and has
applied for or owns a limited number of trademarks.

         IN-LINE SKATE PRODUCTS.  The Company  entered into a perpetual  license
agreement with Playmaker under which the Company has the exclusive, royalty-free
right to use the California Pro(R) and Rolling  Thunder(TM) names and trademarks
on in-line  skates,  accessories  and any other  products in the United  States,
Canada,  certain areas of the Caribbean and U.S. military  exchanges  worldwide.
The  Company has also  entered  into an  agreement  with  Playmaker  under which
Playmaker  will pay the  Company  a five  percent  royalty  on all  sales of any
product made by  Playmaker  to any new  customer of  Playmaker  generated by the
Company. No royalties have been agreed to or paid to date under this agreement.

         The Company  and  Playmaker  each have  non-exclusive  royalty  bearing
patent  license  agreements  with  Rollerblade,  Inc.  related to one feature on
several the Company,  Inc.'s  in-line skate  models.  These  agreements  require
payment to  Rollerblade,  Inc. of a percentage  of the net sales price to retail
merchants. Playmaker reimburses the Company for 90% of the royalties paid by the
Company to Rollerblade under these agreements.

         The Company,  after  continuing to analyze the competitive  position of
the  California  Pro brand in the  marketplace,  has  decided to seek  potential
sub-licensing candidates. Management feels there is value in the brand, not only
for in-line skates but in other sporting  goods  categories  such as skateboards
and waterskis.

         SNOWBOARD PRODUCTS.  In August 1994, the Company,  Inc. entered into an
agreement with Front 500  Corporation,  for an exclusive,  perpetual,  worldwide
license to use the name "Kemper  Snowboards  Inc." and the Kemper(R)  design and
all derivations thereof in the manufacture,  import, export, design,  marketing,
promotion  and  distribution  of  Kemper(R)  snowboards  and related  equipment,
clothing and accessories. In return for these license rights, the Company paid a
royalty of net sales for products sold under this license.

         In February  1998,  the Company  reached a two-year  agreement  with an
international  manufacturer and marketer of snowboards and related products. The
agreement,  in effect, assigns all the license rights the Company had from Front
500 to the sub-licensee. The Company has no further obligations to Front 500 and
is  entitled  to the  greater  of a  royalty-based  payment  on net sales by the
sub-licensee, or an annual minimum guaranteed payment.

                                       -6-
<PAGE>

         In  1997,  the  Company   entered  into  a  three  year   non-exclusive
sub-license agreement with a major west coast sporting goods chain retailer. The
agreement  allows  for  the   sub-licensee  to  manufacture,   or  cause  to  be
manufactured,  snowboard apparel (jackets,  pants, fleece garments, socks, etc.)
bearing  the name  and/or  logo of Kemper,  and to sell such  products in retail
stores. The agreement requires the retailer to pay to the Company the greater of
a  percentage  of their cost to  manufacture  the  apparel or an annual  minimum
guaranteed payment.

         HOCKEY  PRODUCTS.  The  Company,  through  September  1997,  owned  the
exclusive  worldwide  trademark  rights  to  the  VICTORIAVILLE(TM)  and  VIC(R)
trademarks  under a royalty bearing  license.  Included with the sale of certain
assets of the Company's hockey business were these trademarks.  Accordingly, the
Company paid  $2,678,000 of the proceeds  from  Rawlings the former  controlling
shareholder of USA Skate for, primarily, the purchase price of these trademarks.

COMPETITION

         IN-LINE  SKATE  BUSINESS.  The  in-line  skate  business  is  a  highly
competitive  industry.  The Company  believes that there has been lower consumer
demand for in-line skates as well as retailers not quickly selling through their
existing  inventory  which,  in turn,  will  diminish the value of the Company's
trademarks.  The primary competitors are Rollerblade,  Inc., Ultra Wheels (First
Team  Sports,  Inc.),  Bauer  and  Variflex.   Management  believes  that  these
competitors collectively have a market share of over 50%.

         The primary  competitive  factors in the  in-line  skate  business  are
product  features,  quality,  price,  service  and  name  recognition.  Although
Rollerblade  is still the most  recognized  name in the in-line skate  industry,
consumers are now comparing features and price more closely.

         SNOWBOARD  BUSINESS.  The Company's  sub-licensees  compete with Burton
Snowboards,  with a world market share  estimated at  approximately  50%.  Other
competitors  include Sims Snowboards and Ride Snowboard  Company.  Additionally,
many of the ski manufacturers have also entered the market.  Management believes
that these  companies have greater  financial and other resources than ImaginOn,
Inc.'s sub-licensees.

         HOCKEY  BUSINESS.  While  the  Company  was  engaged  in  the  ice  and
street/roller  hockey  businesses  competition  was  intense  with  the  markets
dominated by a  relatively  small  number of large  companies,  most of whom had
greater financial and other resources than the Company.  The primary competitors
were Bauer,  CCM,  Sherwood and Karhu Corp.,  which, the Company  believes,  had
collectively a market share of over 50%.

CUSTOMERS

         For the year ended December 31, 1998, no customers accounted for 10% or
more of the Company's sales.

                                       -7-
<PAGE>

EMPLOYEES

         As of December 31, 1998,  the Company had two  full-time  employees and
one  consultant.  The Company  believes its  relations  with its  employees  and
consultant  are good.  The  Company's  employees  are not subject to  collective
bargaining agreements.

ITEM 2.  DESCRIPTION OF PROPERTY
         -----------------------

(a)      FACILITIES
                                                    Lease (L)        Annual
Location     Use                      Sq. Ft.        Own (O)          Rent 
--------     ---                      -------       ---------        ------
Greer, SC    Corporate Offices        3,900             L            $36,000  *

--------------
*        Leased on a month-to-month basis.

(b) AND (c)

         Not applicable

ITEM 3.  LEGAL PROCEEDINGS
         -----------------

         The Company was named as a defendant in a lawsuit  styled Timothy Wayne
Wooten and Tammy Marie Wooten v. Amy Marie Abott and California Pro Sports, Inc.
The action was filed on  October  21,  1998 in the  District  Court of  Midland,
Texas,  238th  Judicial  District  alleging a product  defect that resulted in a
wrongful death.  Plaintiffs seek damages in an amount not less than $10,000,000.
The Company referred the petition to its insurer,  which  thereafter  provided a
defense.  The Company intends to vigorously  defend itself and strongly believes
the matter will be resolved in its favor.

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

         On  December  10,  1998,  the  Registrant  held a  Special  Meeting  of
Stockholders.  The  stockholders  elected the  following  three persons to serve
until the next meeting of stockholders and the votes were cast as follows:

                                     For              Against
                                     ---              -------
         David M. Schwartz         9,309,224           97,094

         Leonard W. Kain           9,289,017          117,301

                                       -8-
<PAGE>

         Mary E. Finn              9,239,017          167,301

         Additionally,  the following proposals were presented and voted upon at
the meeting and the votes were cast as follows:

         To amend  Paragraph  Fourth  of the  Certificate  of  Incorporation  to
increase  the number of  authorized  shares of the  Company's  common stock from
20,000,000 shares to 50,000,000 shares. The votes were cast as follows:

                   For                Against           Abstain
                   ---                -------           -------
                   9,014,652          339,066            52,600


         At the discretion of the board of directors,  to amend Paragraph Fourth
of the Certificate of Incorporation to cause a one-for-three reverse stock split
of the Company's common stock. The votes were cast as follows:

                   For                Against           Abstain
                   ---                -------           -------
                   8,762,190          582,378            61,750

         To ratify the merger of a  wholly-owned  subsidiary of the Company with
and into ImaginOn, Inc., a privately-held California corporation. The votes were
cast as follows:

                   For                Against           Abstain
                   ---                -------           -------
                   6,340,105           80,444             1,500

         To amend Paragraph First of the Certificate of Incorporation to cause a
change in the name of the Company from California Pro Sports,  Inc. to ImaginOn,
Inc. The votes were cast as follows:

                   For                Against           Abstain
                   ---                -------           -------
                   9,318,499            83,169            4,650

                                       -9-
<PAGE>

                                     PART II


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

(a)      MARKET INFORMATION.

         The   Company's   common   stock  and   warrants   have   been   traded
over-the-counter  since January 18, 1995 and were quoted on the Nasdaq  SmallCap
Market under the symbols CALP and CALPW,  respectively  through January 3, 1999.
On December 18, 1998,  California Pro Sports, Inc. changed its name to ImaginOn,
Inc. and on January 4, 1999, began to trade under the symbols IMON and IMONW for
the common stock and warrants.  The following table sets forth the range of high
and low bid  prices  as  quoted  by  Nasdaq.  These  market  quotations  reflect
inter-dealer prices without retail mark-up, mark-down or commissions and may not
represent actual transactions.

                                          COMMON STOCK           WARRANTS
                                           BID PRICES            BID PRICES     
        1998                            HIGH         LOW       HIGH       LOW
        ----                            ----         ---       ----       ---

First Quarter (1/1/98-3/31/98)         $1.625      $1.125      $.8125    $.4375
Second Quarter (4/1/98-6/30/98)        $1.9375     $1.1875     $.875     $.50
Third Quarter (7/1/98-9/30/98)         $1.50        $.75       $.6875    $.4375
Fourth Quarter (10/1/98-12/31/98)      $2.625       $.50      $1.375     $.25

        1997
        ----

First Quarter (1/1/97-3/31/97)         $1.53125     $.8125     $.40625   $.25
Second Quarter (4/1/97-6/30/97)        $2.00        $.9375     $.6875    $.21875
Third Quarter (7/1/97-9/30/97)         $2.375      $1.375      $.75      $.4375
Fourth Quarter (10/1/97-12/31/97)      $3.0625     $1.0625    $1.15623   $.6875


(b)      HOLDERS.

         The number of record holders of the Company's  common stock as of March
26, 1999 was approximately 307.

(c)      DIVIDENDS.

         The Company has not declared or paid dividends on its Common Stock, nor
does it anticipate  paying any cash  dividends in the  foreseeable  future.  The
Company  currently  intends to retain any future earnings to fund operations and
for the continued development of its business.

                                      -10-
<PAGE>

Further,  the Company's  prior loan  agreements  provided that without the prior
written consent of the lender, the Company could not declare or pay any dividend
on any  class of stock  until  satisfaction  of all  liabilities  under the loan
agreements.

(d)      RECENT SALES OF UNREGISTERED SECURITIES.

         On October 1, 1998,  the  Company  issued  20,000  shares of its Common
Stock to two directors of the Company for services rendered.

         On October 5, 1998,  the  Company  issued  43,191  shares of its Common
Stock in exchange for the extensions of the maturity date to November 5, 1998 on
notes of Skate Corp.  The amount owed was  calculated  at 5% of the  outstanding
principal  balance  and  payment  was made based on $.70 per share.  The Company
relied on the  exemption  from  registration  provided  by  Section  4(6) of the
Securities Act related to the issuance of these shares.

         On November 5, 1998,  the Company  issued  56,477  shares of its Common
Stock in exchange for the extensions of the maturity date to December 5, 1998 on
notes of Skate Corp.  The amount owed was  calculated  as 5% of the  outstanding
principal  balance  and  payment  was made based on $.71 per share.  The Company
relied on the  exemption  from  registration  provided  by  Section  4(6) of the
Securities Act related to the issuance of these shares.

         On November 23, 1998,  the Company  issued 525,073 shares of its Common
Stock in  exchange  for the  conversion  of 245  shares of Series B  Convertible
Preferred Stock.

         On November 27, 1998,  the Company  issued 122,675 shares of its Common
Stock in  exchange  for the  conversion  of 95 shares  of  Series B  Convertible
Preferred Stock.

         On December 2, 1998,  the Company  issued  100,000 shares of its Common
Stock to a consultant upon the exercise of a previously granted option.

         On December 5, 1998,  the Company  issued  21,922  shares of its Common
Stock in exchange for the  extensions of the maturity date to January 5, 1999 on
notes of Skate Corp.  The amount owed was  calculated  at 5% of the  outstanding
principal  balance and  payment  was made based on $1.73 per share.  The Company
relied on the  exemption  from  registration  provided  by  Section  4(6) of the
Securities Act related to the issuance of these shares.

         From December 24 through  December 31, 1998, the Company issued 131,686
shares of its  common  stock in  exchange  for the  conversion  of 110 shares of
Series C Convertible Preferred Stock.

         On December 31, 1998,  the Company  issued 232,256 shares of its Common
Stock in exchange for assumption of certain  liabilities of the Company totaling
$239,326,  the Company relied on the exemptions  from  registration  provided by
Section 4(2) and/or 4(6) of the Securities Act.

                                      -11-
<PAGE>

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

THIS REPORT MAY CONTAIN  CERTAIN  "FORWARD-LOOKING"  STATEMENTS  AS SUCH TERM IS
DEFINED  IN THE  PRIVATE  SECURITIES  LITIGATION  REFORM  ACT OF  1995 OR BY THE
SECURITIES AND EXCHANGE COMMISSION IN ITS RULES, REGULATIONS AND RELEASES, WHICH
REPRESENT THE  REGISTRANT'S  EXPECTATIONS OR BELIEFS,  INCLUDING BUT NOT LIMITED
TO, STATEMENTS  CONCERNING THE REGISTRANT'S  OPERATIONS,  ECONOMIC  PERFORMANCE,
FINANCIAL CONDITION, GROWTH AND ACQUISITION STRATEGIES,  INVESTMENTS, AND FUTURE
OPERATIONAL  PLANS. FOR THIS PURPOSE,  ANY STATEMENTS  CONTAINED HEREIN THAT ARE
NOT  STATEMENTS  OF  HISTORICAL  FACT  MAY  BE  DEEMED  TO  BE   FORWARD-LOOKING
STATEMENTS.  WITHOUT  LIMITING THE  GENERALITY OF THE  FOREGOING,  WORDS SUCH AS
"MAY," "WILL," "EXPECT," "BELIEVE," "ANTICIPATE," "INTENT," "COULD," "ESTIMATE,"
"MIGHT," OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR COMPARABLE
TERMINOLOGY  ARE  INTENDED  TO  IDENTIFY   FORWARD-LOOKING   STATEMENTS.   THESE
STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES,  CERTAIN
OF WHICH ARE BEYOND THE  REGISTRANT'S  CONTROL,  AND ACTUAL  RESULTS  MAY DIFFER
MATERIALLY  DEPENDING ON A VARIETY OF IMPORTANT FACTORS,  INCLUDING  UNCERTAINTY
RELATED TO  ACQUISITIONS,  GOVERNMENTAL  REGULATION,  MANAGING  AND  MAINTAINING
GROWTH,  VOLATILITY OF STOCK PRICE AND ANY OTHER  FACTORS  DISCUSSED IN THIS AND
OTHER REGISTRANT FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.

OVERVIEW

         During 1997, the Company had limited  revenues in its in-line skate and
snowboard  businesses,  and in September  1997,  sold  substantially  all of the
assets of its ice and  street/roller  hockey business  ("Hockey").  In 1998, the
Company had no operating  revenues,  but did realize  income from  sub-licensing
agreements.  The following  discussion  pertains to the business  operations for
in-line skates and snowboards and ice and street/roller  hockey products through
September 1, 1997 (the asset disposition date of USA Skate.)

         The Company  imported  and  distributed  products in three  participant
sports categories.  In- line skates and related accessory products were marketed
under the brand names California Pro(R) and Rolling Thunder(TM); since August 1,
1994,  snowboards  and snowboard  accessory  products  were  marketed  under the
Kemper(R) brand;  and from May 1996 to September 1, 1997, ice and  street/roller
hockey skates,  sticks,  related gear and accessories,  as well as figure skates
were marketed under the VICTORIAVILLE(TM),  VIC(R), Hespeler(TM) and McMartin(R)
brands.  The Company purchased most of its in-line skate and snowboard  products
from manufacturers in Taiwan,  mainland China,  Austria and Canada.  Some of the
Company's   accessory   products  were   purchased   from  domestic   suppliers.
Approximately  70% of all hockey  products sold were  manufactured by Davtec and
skates and related gear were purchased from foreign suppliers.

         The Company sold its in-line skate products principally to major retail
sporting goods chains in North America and to U.S. military exchanges worldwide,
through independent sales representative groups, under an exclusive royalty free
perpetual  license.  Snowboard  products  were sold to regional  sporting  goods
chains and specialty  shops through  independent  sales agencies in the U.S. and
Canada and directly by the Company to its foreign distributors.  Hockey products
were sold in North America through a network of independent sales representative

                                      -12-
<PAGE>

groups to major retail  sporting  goods  chains as well as smaller,  specialized
independent sporting goods shops. Internationally,  hockey products were sold to
and  distributed  by  independent  distributors  located  primarily  in Germany,
Switzerland, Italy, Austria, Czech Republic, Sweden, France, Finland and Brazil.

MANAGEMENT'S PLAN OF RESTRUCTURE

         As a result of  continuing  operating  losses,  the Board of Directors,
early in 1997,  decided to restructure and deleverage the Company.  Accordingly,
in  September  1997,  the Company and Skate Corp.  sold assets of the ice hockey
related business  (including the trademark  rights to VIC(R),  VICTORIAVILLE(TM)
and McMartin(TM)) to Rawlings for $14.5 million and certain debt assumption. The
proceeds of the sale were substantially  utilized to pay secured revolving lines
of credit, purchase the remainder of the trademarks from the previous owner, and
partially reduce notes payable of Skate Corp. to unaffiliated noteholders.

         As a result  of the  sale to  Rawlings,  and  other  restructuring  and
deleveraging  activities,  including the  assumption  and  assignment of certain
notes  and trade  payables  to third  parties  in  exchange  for  common  and/or
preferred  stock of the Company,  the Company has reduced its  liabilities  from
approximately  $18,988,000 as of January 1, 1997 to approximately  $1,500,000 as
of December 31, 1998.

         The Company has completed private placements  generating  aggregate net
proceeds  of  $2,267,000.  In  addition,  $579,410  has been  received  from the
exercise of stock  options for the purchase of 534,200  shares of the  Company's
common stock. In conjunction  with  dramatically  reducing  overhead,  a plan to
restore operating profitability to the remaining sporting goods businesses is in
place  through  licensing  programs.  Additionally,  the  Company  is seeking to
diversify  its business  through a merger with  ImaginOn,  Inc. Each part of the
Company's plan is discussed in detail below.

         On March 13, 1998,  the Company began a private  placement for the sale
of the 1,842,000  shares of Skate Corp.  common stock it owns, which includes an
option to acquire 2,763,000 shares of the Company's common stock in exchange for
the Skate Corp.  shares.  The Company intended to sell 14 units at $100,000 each
for total aggregate proceeds of $1,400,000. Each unit consists of 131,571 shares
of Skate Corp. with an option to acquire 197,357 shares of the Company's  common
stock in exchange for the Skate Corp. shares. The Company received $255,000 cash
from  purchasers  acquiring  335,507 shares of Skate Corp. Each of the investors
exercised  their  options to exchange  those  shares for  167,754  shares of the
Company's  Series A preferred  stock which  automatically  converted  to 503,261
shares of the Company's common stock on July 13, 1998 upon stockholder  approval
of an increase  in the  authorized  shares of common  stock from  10,000,000  to
20,000,000.  Subsequent to the receipt of the $255,000, this offering was closed
to further investors,  and two  officers/stockholders of the Company have agreed
to  purchase  the shares of Skate  Corp.  from the  Company  for  $90,000.  This
transaction was completed and the Company received the $90,000 in January 1999.

         The Company's  business and financial  consultant has introduced to the
Company accredited investors who have purchased a combination of 2,080 shares of

                                      -13-
<PAGE>

the Company's Series B and C Preferred Stock and restricted common stock for net
proceeds of approximately $1,600,000. The Series B and C Preferred Stock will be
convertible  at the  option  of the  holder  at any time  after 90 days from the
closing date into a number of shares of common stock equal to $1,000  divided by
the lower of 65% of the average  market  price of the common stock for five days
immediately  prior to the conversion  date, or the market price at the first day
of closing.  These private placements were completed in August 1998. In December
1998, holders of Series B and C Convertible Preferred Stock converted 450 shares
into 742,644 shares of common stock of the Company.

         As part of the  restructuring  plan, the Company has eliminated most of
the overhead expenses  associated with its sporting goods business and has begun
to  concentrate  on  sub-licensing  its  trademark  rights  to  the  Kemper  and
California Pro trade names.

         In August  1997,  the  Company  began  negotiating  with  ImaginOn.com,
formerly ImaginOn, ("IMON") of San Carlos, California, a privately held company,
to acquire,  in an exchange of stock,  all of the  outstanding  capital stock of
IMON. IMON, formed in March 1996, designs,  manufactures and sells: (i) consumer
software  products for the CD/DVD-ROM  market and (ii) a  navigational  tool for
sophisticated  Internet  users.   ImaginOn's  proprietary   technology,   called
"Transformational  Database  Processing  and  Playback"  ("TDPP"),  enables  the
creation of new business and consumer  products that provide  user-friendly  and
entertaining access to multimedia databases.

         The Company  signed an  Agreement  and Plan of Merger as of January 30,
1998  whereby  there would be an exchange of 100% of the  outstanding  shares of
IMON for an amount equal to 60% of the outstanding  post-merger  common stock of
the Company, subject to certain adjustments. 

         On November 12, 1998,  the Company  announced a special  meeting of its
stockholders, to be held December 10, 1998, at which time the stockholders voted
upon, and approved, among other things, a proposal to ratify the plan of merger.

         On January 20, 1999, the Company through ImaginOn  Acquisition Corp., a
newly formed wholly-owned subsidiary, completed the merger with IMON.

         IMON  is  engaged  in  the   business   of   designing,   selling   and
manufacturing:   (i)  consumer   software   products  for  the  rapidly  growing
"infotainment"  and  "edutainment"  compact  disc  and  digital  video  disc-Rom
markets;  and  (ii)  Internet  software.  IMON's  core  proprietary  technology,
transformational  database  processing  and  playback,  is  used  in a set of 12
software tools developed and used by IMON. New products  created with IMON tools
are characterized by seamless real-time access to video, audio, graphics,  text,
html and three dimensional objects from multiple remote or local databases. IMON
is packaging its tool set as a content  management  system.  IMON is producing a
series of interactive  travelogues for  distribution  on CD and DVD.  ImaginOn's
first  general-purpose  software  application,  "WebZinger(TM)," is an automated
productivity tool that searches the Web, then formats its results into a graphic
PowerPoint(TM)-like slideshow.

                                      -14-
<PAGE>

         Management  believes it has begun the  successful  implementation  of a
plan that will provide the Company with the liquidity necessary to continue as a
going concern.

         The Company has entered into two sub-license  agreements  regarding the
use of the Kemper  name.  Effective  May 1, 1997,  the Company  entered  into an
agreement through April 30, 2000 with United  Merchandising  Corp., a California
corporation ("UMC"). The Company granted UMC a non-exclusive,  non-transferrable
license to manufacture  and/or  purchase and sell various  snowboarding  apparel
bearing  the name and/or logo of  "Kemper",  in its retail  stores in the United
States.  The  royalty  rate is 7.5% of the cost to UMC with a minimum of $30,000
per annum.  UMC has an option to renew for one or two additional  years.  During
the first  contract  year  (May 1, 1997  through  April  30,  1998) the  Company
received royalties of approximately $34,300.

         Effective  in  February  1998  the  Company  entered  into  a two  year
exclusive  Licensing Agreement with Jaysport  International,  Inc., a California
corporation  ("Jaysport").  Subject to the prior sub-license granted to UMC, the
Company sub-licensed to Jaysport the exclusive worldwide right to use the Kemper
name and trademark on snowboards,  related  equipment,  clothing and accessories
(the "Products").  Jaysport has the option to renew the agreement for additional
two year periods  thereafter.  The agreement includes a royalty payment of 3% of
net sales on all products with a minimum royalty of $25,000 per annum.

         After considerable consolidation in the snowboard industry in 1997, the
Company believes the snowboard market is rebounding. Kemper, one of the original
snowboard brands,  should prosper in this new environment.  The combined minimum
annual royalty of these licenses is $55,000, and based upon discussions with the
sub-licensors  and review of their sales  plans,  management  projects  that the
actual combined royalty income from these two licenses will exceed the minimum.

         On  January  1, 1998,  the  Company  adopted  SFAS No.  130,  REPORTING
COMPREHENSIVE  INCOME. This standard establishes  requirements for disclosure of
comprehensive income which includes certain items previously not included in the
statements of operations,  including minimum pension  liability  adjustments and
foreign currency translation  adjustments,  among others.  During the year ended
December  31,  1998,  the  Company  had no items of  comprehensive  income.  The
financial statements for the year ended December 31, 1997 have been reclassified
to disclose items of comprehensive  income. There are no significant tax effects
related to these items.

         In 1997, the Financial  Accounting Standards Board ("FASB") issued SFAS
No. 131,  Disclosures  about Segments of an Enterprise and Related  Information,
and in February 1998, the FASB issued SFAS No. 132, Employer's  Disclosure about
Pensions and Other Post Retirement  Benefits.  Both of these statements  require
disclosure   only  and  therefore  will  not  impact  the  Company's   financial
statements.

         In June 1998,  the FASB issued SFAS No. 133,  Accounting for Derivative
Instruments and Hedging Activities. This statement is effective for fiscal years
beginning  after  June  15,  1999.  Currently,  the  Company  does  not have any
derivative financial instruments and does not participate in hedging activities.
Therefore,  management believes that SFAS No. 133 will not have an impact on its
financial statements.


                                      -15-
<PAGE>

RESULTS OF OPERATIONS

         The  following  table sets forth the  Company's  sales by major product
category for the periods indicated:

                                                YEAR ENDED DECEMBER 31,
                                              1998                    1997
                                       -----------------      ------------------
                                                 (dollars in thousands)

                                         $            %          $           %
                                        ---          ---        ---         ---
In-line skates, snowboards              (2)
  and related accessories                                      $1,311        14%
Ice and street/roller hockey (1)                                7,777        86%
                                                               ------       ----
                                                               $9,088       100%

(1)  Sale of hockey products began May 1, 1996 and ceased on September 12, 1997.
(2)  The Company generated no sales in 1998.

         The  following   table  sets  forth  for  the  periods   indicated  the
percentages  which selected items in the  Consolidated  Statements of Operations
bear to net sales:

                                                              Year ended
                                                              December 31,

                                                            1998         1997

Net Sales                                                    (1)        100.0
Cost of Goods Sold                                                       81.9
Gross Profit                                                             18.1
General & Administrative Expenses                                        51.1
Depreciation and Amortization                                             6.9
Consulting & Management Fees, related parties                             2.3
Charges                                                                   2.6
Income (Loss) from Operations                                           (44.8)
Interest and Other Expenses                                              22.1
Income Tax Expense (Benefit)                                             (1.8)
Minority Interest                                                        (8.0)
Extraordinary item                                                       (4.2)
                                                                         -----
Net Income (Loss)                                                       (52.9)
                                                            =====       ======
(1)  The Company generated no sales in 1998.


YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

         NET  SALES.  Net  sales  for the year  ended  December  31,  1997  were
$9,087,676;  comprised  of  $7,777,000  for the 1997  period of  hockey  related

                                      -16-
<PAGE>

products (January 1 through August 31) and sales for the Company's in-line skate
and snowboard  products  $1,311,000 in the 1997 period. In 1997 the Company sold
substantially  all of the assets of Skate Corp.'s direct and indirect  operating
subsidiaries  and also ceased  operating its California Pro and Kemper licenses,
and  began  to seek  sub-  licenses  for  these  brands.

         GROSS PROFIT.  Gross profit was  $2,042,423 for the year ended December
31, 1997. As a percent of sales,  gross profit was 22.5% in 1997. 

         GENERAL ADMINISTRATIVE AND SELLING EXPENSES. General and administrative
expenses decreased to $2,060,000 for the year ended December 31, 1998,  compared
to $5,270,153 for the year ended December 31, 1997.  This  represents a decrease
of  $3,210,152.  The  primary  reason for the  decrease is  attributable  to the
Company selling substantially all of the assets of the operating subsidiaries of
Skate Corp. in September 1997.  Included in the 1997 expenses was  approximately
$989,000  of selling  expenses  and  $1,561,000  of general  and  administrative
expenses.  Additionally,  sales and marketing expenses related to in-line skates
and snowboards decreased by approximately  $279,000 in 1998 compared to 1997 due
to the Company no longer directly marketing those product lines, relying instead
on its sub-licensees to market the brands.

         CONSULTING  FEES,   RELATED  PARTY.   Consulting  fees,  related  party
decreased to $180,000 for the year ended December 31, 1998 from $210,000 for the
year ended  December 31, 1997. The Company pays an  officer/stockholder  $10,000
per month for  services  primarily  related  to  long-term  strategic  planning,
financing and acquisitions and paid an additional  $30,000 from USA Skate during
1998.  Another  officer/stockholder  also received $30,000 from USA Skate during
1998.   In  1997  $5,000  was  paid  per  month  from  USA  Skate  each  to  two
officers/directors prior to the time of the Company selling substantially all of
the operating assets of USA Skate's operating subsidiaries.

         IMPAIRMENT  CHARGES.  For the year ended December 31, 1998, the Company
had  impairment  charges of  $489,825.  These  charges  related to  management's
re-evaluation of certain  trademarks and licenses  ($327,273,  other intangibles
($81,825) and goodwill ($80,723).  In 1997 the Company had impairment charges of
$239,452  related to its write-off of goodwill,  resulting  from the sale of the
Company's hockey assets.

         LOSS FROM  OPERATIONS.  In the year ended December 31, 1998 the Company
had a loss from  operations  of $2,729,826  compared to $4,075,182  for the year
ended  December 31, 1997. The decrease in the loss of $1,345,356 was a result of
lower  operating  expenses of  $2,987,779  in 1998  compared to 1997,  partially
offset by the gross profit of $1,642,423 that was recognized in 1997.

         OTHER  INCOME/EXPENSES.  In 1998,  the Company  recognized  $103,643 of
royalty and other income compared to $62,312 in the 1997 period.  Other expenses
for the year ended  December 31, 1998 were $709,509  compared to $2,011,339  for
the year ended  December 31,  1997.  The decrease of  $1,301,830  was  primarily
attributable to the 1997 loss on the sale of USA Skate assets (see Note 4 to the
consolidated  financial  statements) of $751,522 and interest expense related to
the operations of USA Skate.  Additionally,  interest expense on USA Skate notes
was approximately $265,000 in 1997, compared to $105,000 in 1998.

                                      -17-
<PAGE>

         INCOME TAX BENEFIT.  For the year ended  December 31, 1997, the Company
had an income tax benefit of $166,404.

         LIQUIDITY AND CAPITAL RESOURCES. Through September 1, 1997, the Company
funded  its  operations  principally  through a $5.5  million  revolving  credit
facility with a bank, and, to a lesser degree,  loans from private investors and
trade credit.  Concurrent  with the sale of the USA Skate assets,  the revolving
line of credit facility was repaid in full and other indebtedness of the Company
was significantly reduced.

         On September 12, 1997, the Company sold substantially all of the assets
of its hockey  business  for  $14,500,000  inclusive of  $1,000,000  retained in
escrow for purchase price  adjustments and proven claims by the purchasers,  and
assumption of trade payables and accrued liabilities of approximately $1,600,000
related to the asset purchased. The proceeds were utilized as follows:

           Secured revolving lines of credit     $ 7,984,000
           Convertible noteholders                   549,000
           Secured debt                              519,000
           Other notes                               100,000
           Stockholder notes                         505,000
           Payment to previous USA Skate
             owners                                2,678,000
           Interest payments                          85,000
           Cash to escrow account                  1,000,000
           Cash in bank                              680,000
                                                 -----------
                                                 $14,500,000

         In February  1998,  Rawlings and the Company agreed to a purchase price
reduction of $395,108 due to a final  valuation by Rawlings of the fair value of
the net assets purchased.

         During 1998,  the Company  issued  167,754 shares of Series A preferred
stock in a private placement in which the Company received $166,653. On July 15,
1998 the Company  issued  525,262 shares of its common stock in exchange for the
167,754 Series A preferred  stock shares.  Also in 1998 the Company issued 2,080
shares of Series B and C convertible  preferred stock (further described in note
7 to the  consolidated  financial  statements)  for  $1,660,026  net of offering
costs.

         Finally,  during 1998 the  Company  received  $440,000  for the sale of
580,000 shares of restricted common stock.

         At December 31, 1998, the Company had working capital of
approximately  $807,733  compared to a deficit of $384,312 at December 31, 1997.
The increase in working  capital is primarily  related to the Company  realizing
net proceeds of  approximately  $2,267,000  from various  private  placements as
described above, and the Company  converting  approximately  $684,000 of debt to
equity.

                                      -18-
<PAGE>

         On October 2, 1997, the Company signed a letter of intent to merge with
IMON.  Subsequently,  the Company  signed an agreement  and plan of merger as of
January 30, 1998  whereby  there will be an exchange of 100% of the  outstanding
shares of IMON for an amount equal to 60% of the outstanding  post merger common
stock of the  Company.  IMON is a  developmental  stage  company  engaged in the
business of designing,  manufacturing and selling consumer software products for
the  rapidly  growing  "edutainment"  CD/DVD ROM  market as well as an  internet
utility and an authoring tool. ImaginOn's proprietary technology,  TDPP, enables
the creation of new business and consumer  products  that provide  user-friendly
and  entertaining  access to multimedia and mixed-format  databases  distributed
across local disk storage and networks.

         In January  1999,  the Company  completed  the sale of 3,000  shares of
Series D and E preferred  stock  whereby the Company  received  net  proceeds of
$2,550,000.

         In addition,  the Company  announced  that the  exercise  period of its
publicly  traded common stock purchase  warrants  exercisable at $1.50 per share
has been extended from December 31, 1998 through June 30, 1999.

         For  payments to foreign  suppliers,  the Company  has  utilized  trade
acceptances,  which generally are payable upon receipt of  documentation  by the
Company's  bank,  but no later than time of delivery,  utilizing  available cash
under the Company's  revolving line of credit.  For 1997 the Company  negotiated
with its suppliers to be paid 50% upon shipment and 50% on 90 day terms.

         SEASONALITY.  The Company's in-line skate and hockey related sales were
strongest  in the second and third  quarters of each  calendar  year.  Snowboard
product  sales  were  strongest  during the third and  fourth  quarters  of each
calendar  year.  However,  industry  trade shows and other sales,  marketing and
administrative costs typically precede the strong selling season and, therefore,
the  Company  anticipates  that it may  incur a  significant  loss in the  first
quarter of each year, including 1997.

         FOREIGN EXCHANGE.  Through September 1997, the Company's  products were
principally  purchased from suppliers located in Taiwan,  mainland China, Korea,
Austria and Canada.  The Company  purchased its in-line  skate  products for set
prices negotiated annually in U.S. dollars at exchange rates reset annually. The
Company  purchased  its  snowboards  in Deutsche  Marks.  The  Company  sold its
snowboard  and hockey  products  both  domestically  and  internationally.  As a
result,  extreme exchange rate fluctuations  could have had a significant effect
on its sales, costs of goods sold and the Company's gross margins.  Further,  if
exchange rates had fluctuated dramatically,  it may have become uneconomical for
the relationship between the Company and its suppliers to continue.  The Company
does not engage in hedging transactions.

         EFFECT OF INFLATION.  Management  believes that inflation has not had a
significant impact on its business.

                                      -19-
<PAGE>

ITEM 7.  FINANCIAL STATEMENTS
         --------------------

         The Company's audited financial  statements,  described as follows, are
included in this report following the signature page of this report.

ImaginOn, Inc. and Subsidiaries Consolidated Financial Statements 

      Independent auditors' report...........................................F-1

      Consolidated financial statements:

         Balance sheet at December 31, 1998..................................F-2

         Statements of operations and comprehensive loss - for the years
         ended December 31, 1998 and 1997....................................F-3

         Statement of shareholders' equity
         for the years ended
         December 31, 1998 and 1997 .........................................F-4

         Statements of cash flows - for the years
         ended December 31, 1998 and 1997...................................F-12

         Notes to consolidated financial statements.........................F-14


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

         None

                                      -20-
<PAGE>

                                    PART III

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

(a)      IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS.

         The  officers  and  directors  of the  Company  are listed  below.  The
directors  of the  Company  are  elected to hold  office  until the next  annual
meeting of stockholders and until their respective  successors have been elected
and qualified. Officers of the Company are elected by the Board of Directors and
hold office until their successors are elected and qualified.

         The chart below  identifies  persons who, at any time during the fiscal
year, served as officers and/or directors of the Company.

Name                Age     Positions
----                ---     ---------

David M. Schwartz   50      Chairman, Chief Executive Officer, President
                            and Director, effective January 20, 1999

Leonard W. Kain     37      Executive Vice President, Chief Financial
                            Officer/Treasurer, Secretary and Director, 
                            effective January 20, 1999

Mary E. Finn        40      Director, effective January 20, 1999

Dennis Allison      58      Director, effective March 4, 1999

Jim Polizotto       62      Director, effective March 4, 1999

Henry Fong          62      Chairman of the Board of Directors and Chief 
                            Executive Officer, resigned January 20, 1999

Barry S. Hollander  41      Acting President, Treasurer and Chief Financial
                            Officer, resigned January 27, 1999

Brian C. Simpson    64      Director, resigned January 20, 1999

Hung-Chang Yang     52      Director, resigned January 20, 1999


         DAVID M. SCHWARTZ has been Chairman, Chief Executive Officer, President
and  Director of the Company  since  January 20,  1999.  Mr.  Schwartz  has been
principally   employed  as  an  officer  and  director  of  ImaginOn,   Inc.,  a
privately-held  California  corporation,  and  wholly-owned  subsidiary  of  the
Company since its formation in 1996.  From 1992 until 1996, Mr.  Schwartz served
as Vice  President of New Media  Systems and  Technology  at Atari  Corporation,

                                      -21-
<PAGE>

where he invented GameFilm technology for video game applications, and served as
a principal  designer of the Atari Jaguar(TM) CD peripheral.  From 1990 to 1992,
Mr.  Schwartz was a senior  member of the technical  staff at Tandy  Electronics
Research  Labs in San  Jose,  California,  where he  headed  the  software  team
developing  the first  erasable  CD ROM.  In 1983 Mr.  Schwartz  started and led
CompuSonics Corporation which went public in 1984. CompuSonics ceased operations
in 1989. In 1985,  CompuSonics  introduced the  CompuSonics  DSP1000,  the first
consumer audio recorder for floppy or optical disks.  The  CompuSonics  Video PC
Movie-Maker,  introduced in 1986,  inaugurated real-time digital video recording
and  editing  on  desktop  PCS.  Mr.  Schwartz  earned  a  Bachelor  of  Arts in
Architecture    from    Carnegie-Mellon    University,    after   completing   a
multidisciplinary  program in Architecture,  Engineering and Computer Science in
1972.

         LEONARD W. KAIN has been  Executive  Vice  President,  Chief  Financial
Officer/Treasurer,  Secretary  and a Director of the Company  since  January 20,
1999. Mr. Kain was principally  employed as an officer and director of ImaginOn,
Inc., a privately-held  California  corporation,  and wholly-owned subsidiary of
the Company  since its  formation in 1996.  From 1991 until July 1996,  Mr. Kain
served as the real-time  systems  manager at Compression  Labs,  Inc.,  where he
supervised  all  aspects  of  multimedia  and  video  communications,  including
networking,  communications framing,  audio-video compression,  real-time system
design and user  interface  design.  From 1988 until 1991, Mr. Kain was software
manager at Telebit  Corporation  where he managed  development  of domestic  and
international high speed modems and network products.  From 1986 until 1988, Mr.
Kain served with Mr. Schwartz as director of software development at CompuSonics
Corporation.  Mr. Kain earned a Bachelor's  Degree in  Engineering  from Stevens
Institute  of  Technology  in New  Jersey  in  1983,  and a  Masters  Degree  in
Electrical  Engineering  from Stanford  University  in 1985.  In 1998,  Mr. Kain
earned a Masters of Business Administration from the University of Phoenix.

         MARY E. FINN has been a Director of the Company since January 20, 1999.
She has more than 15 years'  experience in various  media fields,  utilizing her
skills in writing, editing, broadcasting,  teaching and management. From 1994 to
1997, Ms. Finn served as publicity  director for the local chapter of FEMALE,  a
national  mother's  support group.  From 1988 to 1991, Ms. Finn served as a talk
show producer and engineer at KNBR in San  Francisco,  California.  From 1982 to
1986,  Ms.  Finn  taught  radio  production  at  Phillips  Academy  in  Andover,
Massachusetts.  Ms. Finn earned a Bachelor of Arts degree in Communication  from
the  University of Michigan in 1981, and a Master's  degree in Media  Management
from Emerson College in Boston in 1987.

         DENNIS  ALLISON,  a Director of the Company,  is a Stanford  University
Computer  Systems  Laboratory  Lecturer.  Mr.  Allison  is also  an  independent
consultant  and  an  editorial   advisor  on  computer  science  and  electrical
engineering   to   Addison-Wesley-Longham.   A  former  Series  Advisor  on  the
Prentice-Hall  Series on Innovative  Technology,  Mr. Allison also served on the
editorial  board of  Microprocessor  Report.  He was also the  co-founder of HaL
Computer Systems and of the People's Computer Company, a non-profit organization
that played a pivotal role in the  development of the personal  computer.  He is
also a past IEEE CS Governing  Board  Member and a past member of the  editorial
boards of IEEE Computer and IEEE Software.

         JIM POLIZOTTO,  a Director of the Company,  Mr. Polizotto has served an
Engineering  Director of VTEL Corporation,  Sunnyvale,  California,  since 1994,
where he is responsible for the company's Sunnyvale Validation organization. He

                                      -22-
<PAGE>

also has corporate responsibility to ensure interoperability with other vendors'
systems.  VTEL  Corporation is a world leader in Digital Visual  Communications.
Prior to 1994,  Polizotto helped to create a multimedia  development  laboratory
for IBM in Silicon Valley and was  responsible  for the  development of many IBM
multimedia  breakthroughs,  including  the 1993  launch of IBM's  Internet-based
multimedia video streaming server. Mr. Polizotto also serves on the board of the
International  Multimedia  Teleconferencing   Consortium,   Inc.,  a  non-profit
corporation comprised of more than 150 companies from around the world.

         HENRY  FONG was the  Chief  Executive  Officer  and a  director  of the
Company from its inception in January 1993 through January 20, 1999.  During his
tenure, Mr. Fong served as a member of the executive  committee of the Company's
Board of Directors.  From 1987 to June 1997,  Mr. Fong was chairman of the board
and  chief  executive  officer  of RDM  Sports  Group,  Inc.  (f/k/a  Roadmaster
Industries, Inc. ("RDM")), a New York Stock Exchange listed company, and was its
president and treasurer from 1987 to 1996. In August 1997, RDM filed for Chapter
11  bankruptcy.  Since  1983,  Mr. Fong also has served as the  President  and a
director and is a  significant  stockholder  of Equitex,  Inc., a  publicly-held
business  development  company.  In March 1994,  Mr. Fong was one of twelve CEOs
selected  as Silver  Award  winners  in  Financial  World  magazine's  Corporate
American "Dream Team."

         BARRY S. HOLLANDER was the Treasurer and Chief Financial Officer of the
Company  since  March  1993 and  Acting  President  since  September  1997.  Mr.
Hollander  resigned as an officer of the Company on January 27,  1999.  From May
1991 through July 1996, Mr. Hollander served as Vice President of Operations and
Chief  Financial  Officer of MacGregor  Sports and Fitness,  Inc.  (subsequently
renamed IntraNet Solutions,  Inc.), a publicly-held company. From August 1986 to
1989, Mr. Hollander held various positions with MacGregor  Sporting Goods, Inc.,
including  Accounting  Manager  and  Chief  Financial  Officer  of the  Athletic
Products Division.

         BRIAN C.  SIMPSON  was a director  of the Company  from  November  1994
through January 20, 1999. During his tenure with the Company, Mr. Simpson serves
as a member of the executive, compensation and audit committees of the Company's
Board of Directors.  Since 1992,  his principal  occupation  has been that of an
international management consultant,  providing management support and strategic
planning services for various  companies,  Dunlop-Slazenger  and BTR Industries.
From 1989 to 1992,  Mr.  Simpson  served as  Strategic  Planning  Director  on a
worldwide basis for Dunlop- Slazenger  International Limited. Prior to 1989, Mr.
Simpson served as president of Dunlop- Slazenger Corporation USA and as regional
director, North America for Dunlop-Slazenger  Corporation International Limited,
UK. Mr. Simpson has extensive experience in sales,  licensing,  distribution and
manufacturing,  both  nationally  and  internationally,  in the  sporting  goods
business.

         HUNG-CHANG  (HERO)  YANG was  elected as a director  of the  Company in
November  1994.  Mr.  Yang  resigned as a director of the Company on January 20,
1999.  In addition,  Mr. Yang serves as a member of the  compensation  and audit
committees of the Company's Board of Directors. Since 1984, Mr. Yang's principal
occupation  has been that of  president of Precision  Golf  Associates,  Ltd., a
Taiwanese  company which engages in the  manufacture and sale of golf equipment.
From time-to-time, Mr. Yang has served as an unpaid consultant to the Company in
areas such as quality control of products and components.

                                      -23-
<PAGE>

(b)      SIGNIFICANT EMPLOYEES.

         None.

(c)      FAMILY RELATIONSHIPS.

         Mr. Schwartz and Ms. Finn are husband and wife.

(d)      INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS.

         None.

(e)      COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

         Section 16(a) of the  Securities  Exchange Act of 1934, as amended (the
"Exchange Act"),  requires the officers and directors of the Company and persons
who own more than ten percent of a registered class of the Company's  securities
(collectively, "reporting persons"), to file reports of ownership and changes in
ownership  on  Forms 3, 4, and 5 with the  Securities  and  Exchange  Commission
("SEC"). Reporting Persons are required by SEC regulation to furnish the Company
with copies of all Forms 3, 4, and 5 filed.

         Based  solely upon a review of the copies of such forms it has received
and  representations  from the  Reporting  Persons,  the  Company  believes  all
reporting persons have complied with the applicable filing requirements.

ITEM 10. EXECUTIVE COMPENSATION
         ----------------------

SUMMARY COMPENSATION TABLE.

         The following table sets forth information regarding  compensation paid
to (i) the  Company's  Chief  Executive  Officer  and  (ii)  each  of its  other
executive  officers whose total annual  compensation  exceeded  $100,000 for the
years ended  December 31, 1996,  1997 and 1998.  No executive  officer  received
awards or payments of any  long-term  compensation  from the Company  during the
period covered.

                                      -24-
<PAGE>
<TABLE>
<CAPTION>

                                                Annual                          Long Term        All Other
                                             Compensation                      Compensation     Compensation
                                 ------------------------------------          ------------     ------------
                                                 ($$)                                               ($$)
                                                                                Securities
                                                                                Underlying
Name and Position                 Year      Salary       Bonus        Other      Options 
-----------------                 ----      ------       -----        -----     -----------    
<S>                               <C>      <C>         <C>             <C>         <C>           <C>
Henry Fong,                       1998     150,000(1)     -0-          -0-         -0-
Chief Executive Officer           1997     165,000(1)     -0-          -0-         -0-             -0-
and Chairman of the Board         1996     160,000(1)     -0-          -0-         -0-           $300,000(2)
Resigned January 20, 1999


Michael S. Casazza,               1998     -0-            -0-          -0-         -0-             -0-
President, Chief                  1997     157,500     413,000(3)      -0-         -0-
Operating Officer & Director      1996     190,000        -0-          -0-         -0-           $300,000(2)
Resigned September 1997



Barry S. Hollander,               1998     155,000      76,313(4)      -0-         -0-             -0-
Acting President, Treasurer and   1997     117,738        -0-          -0-         -0-             -0-
Chief Financial Officer           1996     125,000        -0-          -0-         -0-             -0-
Resigned January 27, 1999
</TABLE>

----------

(1)        Mr. Fong was not an employee  of the  Company  and  received  fees of
           $10,000 per month for consulting services rendered to the Company and
           received an  additional  $30,000 USA Skate fee  primarily  related to
           long-term strategic planning, financing and acquisitions.
(2)        Represents  guaranty  fees accrued in  connection  with the USA Skate
           acquisition.  These fees were paid at December  31, 1996 in shares of
           common  stock based on a price of $1.375 per share,  the December 31,
           1996 market price.
(3)        Represents  a bonus of 236,000  shares of common stock of the Company
           for, among other things,  the forgiveness of the remaining  amount of
           $149,000 of the $400,000  promissory note,  making other loans to the
           Company  and/or  its  subsidiaries  in order for the  Company to meet
           immediately  due  obligations,  and his  efforts in  negotiating  and
           moving the USA Skate asset sale forward to completion.
(4)        In  January  1998,  the  Company  issued  18,500  shares  of Series A
           preferred stock to Mr.  Hollander.  The shares were valued based upon
           the trading price of the Company's common stock, adjusted for the one
           for three conversion feature of the preferred stock, and accordingly,
           the Company recognized an expense of $76,313.

                                      -25-
<PAGE>

OPTION/SAR GRANTS IN LAST FISCAL YEAR.

         During 1997, 85,000 incentive stock options were granted at an exercise
price of $1.00 to Mr.  Hollander under the Company's 1994 Stock Option Plan. Mr.
Hollander  exercised  these options in January 1998 in order to provide  working
capital to the  Company.  In  January  1998 Mr.  Hollander  was  granted  49,500
incentive stock options at an exercise price of $1.00. In May 1998 Mr. Hollander
exercised 49,500 options in order to provide working capital to the Company

AGGREGATED OPTION/SAR EXERCISES AND YEAR-END 1998 OPTION/SAR VALUES.

         The  following  table sets forth  information  concerning  the value of
unexercised options held by each of the named executive officers at December 31,
1998. No stock  appreciation  rights are  outstanding  and 211,700  options were
exercised by Messrs. Hollander (134,500) and Fong (77,200).

                             Number of                       Value of
                       Securities Underlying                Unexercised
                        Unexercised Options            In-the-Money options
                     at December 31, 1998 (#)        at December 31, 1998 (#)
Name                 Exercisable/Unexercisable       Exercisable/Unexercisable
----                 -------------------------       -------------------------
Henry Fong                 221,400/725,200                  $83,025/0
Barry S. Hollander               0/254,800                       $0/0


         COMPENSATION OF DIRECTORS.  During 1997, Messrs. Lin, Simpson and Yang,
the outside  directors  of the Company,  received an annual  retainer of $10,000
paid  quarterly,  and $1,000 for each Board of  Directors  meeting  attended  in
person.  In  addition,  they were  reimbursed  for  expenses  incurred to attend
meetings  of the Board of  Directors  or  otherwise  in  connection  with  their
services as directors of the Company.  Directors  also were  eligible to receive
grants of stock options under the Company's 1994 Stock Option Plan. During 1997,
10,000  incentive  stock  options  were  granted  to  each of the  then  outside
directors of the Company at an exercise price of $1.00. In 1998, Messrs. Simpson
and Yang each received  10,000  shares of common stock in connection  with their
services as  directors.  Additionally,  Mr.  Yang  exercised  15,000  previously
granted options. In 1998,10,000  incentive stock options were granted to Messrs.
Yang and Simpson each at an exercise price of $1.42.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
         --------------------------------------------------------------

         Set forth  below is  certain  information  as of March 26,  1999,  with
respect to ownership of the Company's  common and preferred stock held of record
or  beneficially  by (i) the Company's  executive  officers named in the summary
compensation  table,  (ii) each  director of the Company,  (iii) each person who
owns beneficially more than five percent of the Company's outstanding Common and
Preferred Stock; and (iv) all directors and executive officers as a group:

                                      -26-
<PAGE>

                                                                    Percentage
                                             Number of               Owned of
Name and Address                              Common                  Common
of Beneficial Owner                        Shares Owned               Shares 
-------------------                        ------------             ----------

Henry Fong                                   926,800(1)                 2.4%
2401 PGA Blvd., Suite 280F
Palm Beach Gardens, FL 33410

Gulfstream 1998 Irrevocable Trust          2,238,813                    6.0%
3155 Miro Drive North
Palm Beach Gardens, FL 33410

David Schwartz                             5,431,742                   14.4%
(Officer and Director)
1313 Laurel St., Suite 1
San Carlos, CA 94070

Leonard Kain                               2,710,000                    7.2%
(Director)
1313 Laurel St., Suite 1
San Carlos, CA 94070

Mary E. Finn                                     -0-(2)                 -0-
(Director)
1313 Laurel St., Suite 1
San Carlos, CA 94070

Dennis Allison                                   -0-                    -0-
(Director)
1313 Laurel St., Suite 1
San Carlos, CA 94070

Jim Polizotto                                    -0-                    -0-
(Director)
1313 Laurel St., Suite 1
San Carlos, CA 94070

Wayne W. Mills                             2,987,241(3)                 7.9%
R.J. Steichen & Co.
5500 Wayzata Blvd
Suite 290
Golden Valley, MN 55402

Michael Casazza                              120,613                     .3%
906 Thornblade Blvd.
Greer, SC   24650

                                      -27-
<PAGE>

                                                                    Percentage
                                             Number of               Owned of
Name and Address                              Common                  Common
of Beneficial Owner                        Shares Owned               Shares 
-------------------                        ------------             ----------

Barry S. Hollander                           254,800(4)                  .7%
1221-B S. Batesville Road
Greer, SC   29650

All Directors and executive                8,141,742                   21.7%
officers as a group (5 persons)

----------

(1)        Includes warrants currently not exercisable to acquire 725,200 shares
           of  common  stock.
(2)        Does not  include  5,431,742  shares  owned by her  spouse,  David M.
           Schwartz,  as  to  which  she  disclaims  beneficial  ownership.  (3)
(3)        Includes Warrants currently  exercisable to acquire 271,000 shares of
           Common Stock
(4)        Includes Warrants currently not exercisable to acquire 254,800 shares
           of Common Stock.

           CHANGES IN CONTROL.  None.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
         ----------------------------------------------

         In April 1994, the Company issued  warrants to Henry Fong, a founder of
the Company to purchase up to 148,600 shares of Common Stock and issued warrants
to Michael S. Casazza, a founder of the Company, to purchase up to 51,400 shares
of Common  Stock,  exercisable  at $4.50 per share  through  April 14, 1997 (the
"April Warrants").  In August 1995, the Company issued warrants to Messrs.  Fong
and Casazza each to purchase up to 150,000  shares of Common Stock,  exercisable
at $3.56 per share through August 1, 1998 (the "August Warrants").  The exercise
price of these warrants  represented 100% of the closing bid price of the Common
Stock as reported by Nasdaq on the date of grant. The warrants issued to Messrs.
Fong and  Casazza  in April  1994 and  August  1995 were  issued  as  additional
compensation for their valuable services rendered to the Company. In April 1996,
as compensation for their extra efforts in causing the USA Skate  acquisition to
close,  the Company  lowered the exercise  price of all of the warrants  held by
Messrs. Fong and Casazza to $2.38 per share, the closing bid price of the Common
Stock on the date the warrants were  repriced.  Additionally,  the exercise date
for the April  Warrants was extended to April 14, 2002 and the exercise date for
the August  Warrants  was  extended to August 1, 2003.  On January 8, 1998,  the
Company  lowered  the  exercise  of all the  warrants  held by Messrs.  Fong and
Casazza to $1.00 per share.  In  January  1999,  Mr.  Casazza  sold his  201,400
warrants.

         At December 31, 1995,  the Company owed Mr. Fong $90,000 of accrued but
unpaid fees. During the second quarter of 1996, the Company  transferred  75,000
shares of USA Skate common stock to Mr. Fong in satisfaction of this debt, based
on a price of $1.20 per share of USA Skate common stock.

                                      -28-
<PAGE>

         Messrs.  Fong and Casazza  personally  guaranteed the Company's in-line
skate/snowboard  related  bank line of credit up to $5.5  million and its hockey
related  bank line of credit up to $5 million.  In  addition,  Messrs.  Fong and
Casazza  each  guaranteed,  jointly  and  severally  with other  guarantors,  an
additional  $5.25 million of indebtedness of the Company  incurred in connection
with the USA Skate  acquisition,  and Messrs.  Fong and Casazza have guaranteed,
jointly and severally with another guarantor, approximately CDN $650,000 owed by
the  Canadian  subsidiary  to a Canadian  bank.  The Company has accrued fees of
$300,000 each for Messrs.  Fong and Casazza as compensation  for their extensive
personal guaranties.  As of December 31, 1996 Messrs. Fong and Casazza agreed to
accept  payment  of  these  fees in  common  stock of the  Company  based on the
December 31, 1996 market price of $1.375 per share.

         In March 1996, the Chief Operating Officer loaned the Company $170,000.
During the second quarter of 1996, the Company transferred 141,667 shares of USA
Skate common stock to Mr. Casazza in satisfaction of this debt, based on a price
of $1.20 per share of USA Skate common stock. In May 1997, the 141,667 shares of
USA Skate  common  stock were  returned to the  Company in exchange  for 170,000
shares of common stock of the Company.

         In May 1996, Mr. Fong loaned $680,000,  and Mr. Casazza loaned $400,000
to the  Company's  majority  owned  subsidiary,  which  funds were used to pay a
portion of the purchase price for the USA Skate acquisition. In return for these
loans, the subsidiary  issued  promissory notes for the principal amount of each
loan with  interest at nine  percent  payable  quarterly,  due July 1, 1997.  In
addition, the subsidiary granted warrants to Mr. Fong to purchase 566,667 shares
of USA Skate common stock and to Mr.  Casazza to purchase  333,333 shares of USA
Skate common stock, all exercisable through April 30, 1998 at $1.20 per share of
USA Skate common stock.

         In December 1996, Mr. Fong agreed to convert $60,000 owed to him by the
Company for consulting  services for the period July 1 through December 31, 1996
into shares of the Company,  at the December 31, 1996 market price of $1.375 per
share.

         In March 1997,  Mr. Fong agreed to convert  $30,000  owed to him by the
Company for consulting services for the period January 1, 1997 through March 31,
1997,  and $10,000 for a note payable  into shares of the Company,  at the March
31, 1997 market price of $1.00 per share.

         In September  1997, Mr. Fong agreed to convert  $181,000 owed to him by
the  Company,  for a note payable of the  Company,  assumed by Mr. Fong,  at the
September 30, 1997 market price of $2.00 per share.  In December  1997, Mr. Fong
agreed to convert  the  common  shares  issued  September  30,  1997 to Series A
Preferred Shares of the Company. Upon stockholder approval of a recapitalization
measure in July 1998,  Mr. Fong received  90,500 shares of the Company's  Common
Stock in exchange for the Series A Preferred Stock.

         In September  1997, the Company  awarded Mr. Casazza a bonus of 236,000
shares of common stock (at a value of $1.75 per share) of the Company for, among
other  things,  the  forgiveness  of the  remaining  amount of  $149,000  of the
$400,000  promissory  note,  making  other  loans  to  the  Company  and/or  its
subsidiaries in order for the Company to meet immediately due  obligations,  and
his  efforts  in  negotiating  and moving  the USA Skate  asset sale  forward to
completion, as well as for his past services to the Company.  Additionally,  Mr.
Casazza resigned from all positions effective with the completion of the sale of
USA Skate,  however he agreed to assist, as requested and act as a consultant to
the Company.

                                      -29-
<PAGE>

         In January  1998, so as to infuse the Company with  short-term  working
capital,  Mr.  Hollander agreed to exercise 85,000 options to purchase shares of
Common Stock granted pursuant to an Incentive Stock Option Agreement dated April
23,  1997.  In exchange for this  exercise,  the Company  awarded Mr.  Hollander
29,500  non-statutory  stock  options  and 18,500  shares of Series A  Preferred
Stock. On July 15, 1998, the Series A Preferred  Shares were converted to 55,500
shares of Common Stock.

         In January 1998,  the Company  authorized the issuance of 50,000 shares
of Common  Stock to Mr.  Casazza in exchange  for  consulting  services  for the
period  September  12, 1997  through  January 12,  1998,  at the January 5, 1998
market price of $1.375.

         In May 1998, at the request of the Company,  Barry Hollander  exercised
49,500 options so as to infuse the Company with short-term working capital.

         In June of 1998, at the request of the Company,  Henry Fong exercised a
total of 77,200  options so as to infuse the  Company  with  short-term  working
capital.

         Transactions between the Company and its officers, directors, employees
and  affiliates  were on terms no less  favorable to the Company than would have
been available from unaffiliated  parties. Any such transactions were subject to
the  approval  of a  majority  of the  disinterested  members  of the  Board  of
Directors.


                                      -30-
<PAGE>

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
         --------------------------------

(a)      EXHIBITS.

         Exhibits being filed herewith are listed below.

Number         Description
------         -----------

 3(i).1        Certificate of Incorporation of the Registrant.  (INCORPORATED BY
               REFERENCE  TO  EXHIBIT  3.1  TO  THE  REGISTRANT'S   REGISTRATION
               STATEMENT ON FORM SB-2,  REGISTRATION  NO. 33-85108 AS FILED WITH
               THE SECURITIES AND EXCHANGE  COMMISSION "SEC" ON OCTOBER 13, 1994
               (THE "1994 REGISTRATION STATEMENT").)

 3(i).2        Certificate of Designations for Series B 4% Convertible Preferred
               Stock.  (INCORPORATED  BY  REFERENCE  TO  EXHIBIT  3.(I).1 OF THE
               REGISTRANT'S JUNE 30, 1998 10-QSB.)

 3(i).3        Certificate of Designations for Series C 4% Convertible Preferred
               Stock.   (INCORPORATED   BY  REFERENCE  TO  EXHIBIT  3.4  OF  THE
               REGISTRANT'S  REGISTRATION STATEMENT ON FORM S-3/A,  REGISTRATION
               NO.   333-62713  AS  FILED  WITH  THE   SECURITIES  AND  EXCHANGE
               COMMISSION ON DECEMBER 21, 1998.)

 3(i).4        Certificate of Designations For Series D 4% Convertible Preferred
               Stock.  (INCORPORATED  BY  REFERENCE  TO  EXHIBIT  3(I).4  OF THE
               REGISTRANT'S  REGISTRATION STATEMENT ON FORM S-3/A,  REGISTRATION
               NO.   333-71989  AS  FILED  WITH  THE   SECURITIES  AND  EXCHANGE
               COMMISSION ON MARCH 17, 1999 (THE "1999 FORM S- 3/A").)

 3(i).5        Certificate  of  Designations  for the  Series  E 4%  Convertible
               Preferred Stock. FILED HEREWITH.

 3(i).6        Amendment to Certificate of Incorporation of the Registrant dated
               July 22, 1998.  (INCORPORATED  BY REFERENCE TO EXHIBIT  3(I).5 OF
               THE 1999 FORM S-3/A.)

 3(i).7        Amendment to Certificate of Incorporation of the Registrant dated
               December 17, 1998.  (INCORPORATED  BY REFERENCE TO EXHIBIT 3(I).6
               OF THE 1999 FORM S-3/A.)

 3(ii)         Bylaws as  currently  in effect.  (INCORPORATED  BY  REFERENCE TO
               EXHIBIT 3.2 TO THE 1994 REGISTRATION STATEMENT.)

 4.1           Specimen of Common Stock certificate.  (INCORPORATED BY REFERENCE
               TO  EXHIBIT  4.1 TO  AMENDMENT  NO.  4 TO THE  1994  REGISTRATION
               STATEMENT,  FILED  WITH  THE  SEC ON  DECEMBER  22,  1994 (" 1994
               AMENDMENT #4).)

                                      -31-
<PAGE>

 10.1          Manufacturing  Agreement,   dated  April  1,  1993,  between  the
               Registrant and Playmaker.  (INCORPORATED  BY REFERENCE TO EXHIBIT
               10.2 TO THE 1994 REGISTRATION STATEMENT.)

 10.2          Exclusive  License  Agreement,  dated April 1, 1993,  between the
               Registrant and Playmaker.  (INCORPORATED  BY REFERENCE TO EXHIBIT
               10.4 TO THE 1994 REGISTRATION STATEMENT.)

 10.3          Patent  License  Agreement,  dated  April 1, 1993 and  Assignment
               thereof.  (INCORPORATED  BY REFERENCE  TO EXHIBIT  10.8(B) TO THE
               1994 REGISTRATION STATEMENT.)


 10.4          1994 Stock  Option  Plan.  (INCORPORATED  BY REFERENCE TO EXHIBIT
               10.14 TO THE 1994 REGISTRATION STATEMENT.)

 10.5          License  Agreement,  dated  July  28,  1994,  between  Front  500
               Corporation and CP.  (INCORPORATED  BY REFERENCE TO EXHIBIT 10.16
               TO THE 1994 REGISTRATION STATEMENT.)

 10.6          Exclusive  Distributorship  Agreement,  dated  March  1994,  with
               Maneuverline Co. Ltd. (INCORPORATED BY REFERENCE TO EXHIBIT 10.20
               TO THE 1994 REGISTRATION STATEMENT.)

 10.7          Exclusive  Distributorship  Agreement,  dated March 1, 1991, with
               Airtool Ltd.  (INCORPORATED  BY REFERENCE TO EXHIBIT 10.21 TO THE
               1994 REGISTRATION STATEMENT.)

 10.8          Exclusive  Distributorship  Agreement,  dated June 15, 1994, with
               Wolf  Strobel  Sportswear  GMBH.  (INCORPORATED  BY  REFERENCE TO
               EXHIBIT 10.22 TO THE 1994 REGISTRATION STATEMENT.)

 10.9          License Agreement, dated May 10, 1995, granted by California Pro,
               Inc. to Big5 Co.,  Ltd.  (INCORPORATED  BY  REFERENCE  TO EXHIBIT
               10.23 IN REGISTRATION STATEMENT 33-98898.)

 10.10         Form of Warrant related to the Registrant's  issuance of warrants
               to purchase up to 200,000  shares of Common Stock.  (INCORPORATED
               BY  REFERENCE  TO  EXHIBIT  10.29(A)  TO  THE  1994  REGISTRATION
               STATEMENT.)

 10.11         Form of Warrant  related to the  issuance of warrants to purchase
               up to 21,000 shares of Common Stock.  (INCORPORATED  BY REFERENCE
               TO EXHIBIT 10.29(C) TO 1994 AMENDMENT #1.)

 10.12         Form of Indemnity  Agreements for the Registrant's  directors and
               officers. (INCORPORATED BY REFERENCE TO EXHIBIT 10.31 TO THE 1994
               REGISTRATION STATEMENT.)

                                      -32-
<PAGE>

 10.13         Lease  Agreement,  dated February 16, 1993, for office space,  as
               amended   by  letter   agreement   dated   February   16,   1994.
               (INCORPORATED   BY  REFERENCE  TO  EXHIBIT   10.32  TO  THE  1994
               REGISTRATION STATEMENT.)

 10.14         Patent License Agreement,  with Out of Line Sports, Inc. dated as
               of  September  30,  1994.  (INCORPORATED  BY REFERENCE TO EXHIBIT
               10.33 TO THE 1994 REGISTRATION STATEMENT.)

 10.15         Trademark  License  Agreement,  dated as of  September  30, 1994.
               (INCORPORATED   BY  REFERENCE  TO  EXHIBIT   10.34  TO  THE  1994
               REGISTRATION STATEMENT.)

 10.16         Agreement, dated October 31, 1994, between California Pro Sports,
               Inc. and Playmaker related to royalty payments.  (INCORPORATED BY
               REFERENCE TO EXHIBIT 10.35 TO AMENDMENT NO. 2 TO THE REGISTRATION
               STATEMENT,  FILED  WITH  THE  SEC ON  NOVEMBER  16,  1994  ("1994
               AMENDMENT #2").)

 10.17         Form of Warrant related to the Registrant's  issuance of warrants
               to purchase up to 300,000  shares of Common Stock.  (INCORPORATED
               BY  REFERENCE  TO  EXHIBIT   10.37  IN   REGISTRATION   STATEMENT
               33-98898.)

 10.18         Form of Warrant related to the Registrant's  issuance of warrants
               to   purchase  up  to  150,000   shares  of  Common   Stock  with
               Registration  Rights  Agreement.  (INCORPORATED  BY  REFERENCE TO
               EXHIBIT 10.39 IN REGISTRATION STATEMENT 33- 98898.)

 10.19         Consulting and  Non-Competition  Agreement among Warren Amendola,
               Sr., USA and the Registrant, with related Guaranty. (INCORPORATED
               BY REFERENCE TO EXHIBIT 10.1(C) TO THE 1996 FORM 8-K.)

 10.20(a)      Asset Purchase  Agreement,  dated September 10, 1997 by and among
               Les  Equipements  Sportifs  Davtec Inc., USA Skate Co., Inc., USA
               Skate  Corporation,  the  Registrant,  Rawlings  Canada Inc.  and
               Rawlings Sporting Goods Company, Inc.  (INCORPORATED BY REFERENCE
               TO EXHIBIT 10.1(A) TO REGISTRANT'S  FORM 8-K, FILED SEPTEMBER 29,
               1997,  REPORTING AN EVENT ON SEPTEMBER 12, 1997,  COMMISSION FILE
               NO. 0-25114 (THE "1997 FORM 8-K").)

 10.20(b)      Exhibit A - Escrow  Agreement,  dated  September  12, 1997 by and
               among Les Equipements  Sportifs Davtec Inc., USA Skate Co., Inc.,
               Rawlings Canada Inc.,  Rawlings Sporting Goods Company,  Inc. and
               the Bank of New  York.  (INCORPORATED  BY  REFERENCE  TO  EXHIBIT
               10.1(B) TO REGISTRANT'S 1997 FORM 8-K.)

 10.20(c)      Exhibit C -  Guaranty,  dated  September  12,  1997 for  Rawlings
               Canada  Inc.   and  Rawlings   Sporting   Goods   Company,   Inc.
               (INCORPORATED  BY  REFERENCE TO EXHIBIT  10.1(C) TO  REGISTRANT'S
               1997 FORM 8-K.)

                                      -33-
<PAGE>

 10.21         Agreement and Plan of Merger, dated January 30, 1998 by and among
               the Registrant,  ImaginOn,  Inc. and ImaginOn  Acquisition  Corp.
               (INCORPORATED  BY  REFERENCE TO EXHIBIT 3 OF  REGISTRANT'S  PROXY
               STATEMENT ON SCHEDULE 14A, FILED WITH THE SECURITIES AND EXCHANGE
               COMMISSION ON NOVEMBER 13, 1998.)

 10.22(a)      Merger  Agreement and Plan of  Reorganization,  dated February 9,
               1999  by and  among  Network  Specialists,  Inc.,  INOW  and  the
               Registrant.   (INCORPORATED   BY  REFERENCE  TO  EXHIBIT  2.1  TO
               REGISTRANT'S  FORM 8-K, FILED MARCH 23, 1999,  REPORTING AN EVENT
               ON MARCH 9, 1999,  COMMISSION  FILE NO.  0-25114 (THE "MARCH 1999
               FORM 8-K").)

 10.22(b)      First  Amendment to Merger  Agreement and Plan of  Reorganization
               dated as of March 8, 1999.  (INCORPORATED BY REFERENCE TO EXHIBIT
               2.2 TO THE MARCH 1999 FORM 8-K.)

 10.22(c)      Side  Agreement to Merger  Agreement  and Plan of  Reorganization
               dated March 8, 1999. (INCORPORATED BY REFERENCE TO EXHIBIT 2.3 TO
               THE MARCH 1999 FORM 8- K.)

 11.1          Statement Re: Computation of Per Share Earnings. FILED HEREWITH.

 21.1          List of Subsidiaries. FILED HEREWITH.

 27.1          Financial Data Schedule. FILED HEREWITH.


(b)      REPORTS ON FORM 8-K.

     During the last  quarter  for the fiscal year ended  December  31, 1998 and
through March 31, 1999, the Company filed the following  Current Reports on Form
8-K:

Date                                         Item Numbers
----                                         ------------
February 3, 1999                                  2,7

March 23, 1999                                    2,7

                                      -34-
<PAGE>

                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange  Act of 1934,  the  Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.

                                IMAGINON, INC.


Date: March 31, 1999            /s/ David M. Schwartz
      --------------            -----------------------------------------
                                David M. Schwartz, President


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


Date: March 31, 1999            /s/ David M. Schwartz
      --------------            -----------------------------------------
                                David M. Schwartz, Chief Executive Officer,
                                Chief Accounting Officer, President and Director


Date: March 31, 1999            /s/ Leonard W. Kain
      --------------            -----------------------------------------
                                Leonard W. Kain, Secretary and Director


Date: March 31, 1999            /s/ Mary E. Finn
      --------------            -----------------------------------------
                                Mary E. Finn, Director


Date: March 31, 1999            /s/ Dennis Allison
      --------------            -----------------------------------------
                                Dennis Allison, Director

Date: March 31, 1999            /s/ Jim Polizotto
      --------------            -----------------------------------------
                                Jim Polizotto, Director


                                                           -35-

<PAGE>




                         IMAGINON, INC. AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1998 AND 1997




<PAGE>

                         IMAGINON, INC. AND SUBSIDIARIES

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

                          INDEX TO FINANCIAL STATEMENTS



                                                                            Page
                                                                            ----
Independent auditors' report                                                 F-1

Consolidated financial statements:

     Balance sheet                                                           F-2

     Statements of operations and comprehensive loss                         F-3

     Statements of shareholders' equity                             F-4  -  F-11

     Statements of cash flows                                      F-12  -  F-13

     Notes to financial statements                                 F-14  -  F-34






<PAGE>
                          INDEPENDENT AUDITORS' REPORT

Board of Directors
ImaginOn, Inc.

We have audited the accompanying  consolidated  balance sheet of ImaginOn,  Inc.
and  subsidiaries  as  of  December  31,  1998,  and  the  related  consolidated
statements of operations and comprehensive loss,  shareholders'  equity and cash
flows for each of the years in the  two-year  period  ended  December  31, 1998.
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 consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of ImaginOn,  Inc. and
subsidiaries  as of December 31, 1998,  and the results of their  operations and
their cash flows for each of the years in the two-year period ended December 31,
1998, in conformity with generally accepted accounting principles.




GELFOND HOCHSTADT PANGBURN & CO.


Denver, Colorado
March 22, 1999

                                       F-1
<PAGE>

                         IMAGINON, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                DECEMBER 31, 1998

<TABLE>
<CAPTION>
                                     Assets
                                     ------
                                                                               Unaudited
                                                                               Pro forma       Historical
                                                                              ------------    ------------
                                                                                (Note 7)

<S>                                                                           <C>             <C>
Current assets:
      Cash ................................................................   $  2,714,103    $     74,103
      Notes receivable:
        Related party (Note 10) ...........................................      1,477,217       1,477,217
        Other .............................................................        104,226         104,226
      Prepaid expenses and other ..........................................         25,000          25,000
      Assets of subsidiary held for sale (Note 4) .........................                        624,284
                                                                              ------------    ------------
          Total current assets ............................................      4,320,546       2,304,830
                                                                              ------------    ------------

Furniture and equipment, net of
  accumulated depreciation of $469,379 ....................................          2,674           2,674
                                                                              ------------    ------------
Other assets:
      Deferred merger costs ...............................................        167,777         167,777
      Trademark license costs, net of
        accumulated amortization  of $16,666 ..............................         83,334          83,334
                                                                              ------------    ------------
                                                                                   251,111         251,111
                                                                              ------------    ------------
                                                                              $  4,574,331    $  2,558,615
                                                                              ============    ============

                      Liabilities and Shareholders' Equity
                      ------------------------------------
Current liabilities:
      Accounts payable and accrued expenses ...............................   $    278,333    $    233,532
      Liabilities of subsidiary held for sale (Note 4) ....................                      1,263,565
                                                                              ------------    ------------
          Total liabilities (all current) .................................        278,333       1,497,097
                                                                              ------------    ------------
Minority interest .........................................................                         56,320
                                                                              ------------    ------------
Commitments and contingencies  (Notes 4, 5, and 10)
Shareholders'  equity (Note 7):
      Preferred stock, $0.01 par value; authorized
       5,000,000 shares:
        Series B/C, issued and outstanding 1,630 shares ...................      1,300,902       1,300,902
        Series D/E, issued and outstanding 3,000 shares ...................        935,000
      Common stock, $0.01 par value; authorized
       50,000,000   shares; issued 13,434,731 shares ......................        134,347         134,347
      Warrants ............................................................        394,200         394,200
      Capital in excess of par ............................................     15,583,849      13,968,849
      Accumulated deficit .................................................    (14,052,300)    (14,052,300)
      Treasury stock held by subsidiary, at cost,
         1,204,950 shares of common stock .................................                       (740,800)
                                                                              ------------    ------------
          Total shareholders' equity ......................................      4,295,998       1,005,198
                                                                              ------------    ------------
                                                                              $  4,574,331    $  2,558,615
                                                                              ============    ============
</TABLE>
                 See notes to consolidated financial statements.

                                       F-2
<PAGE>

                         IMAGINON, INC. AND SUBSIDIARIES

          CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                                  1998            1997      
                                                                              ------------    ------------
<S>                                                                           <C>             <C>
Net sales .................................................................   $               $  9,087,767
Cost of sales .............................................................                      7,445,344
                                                                              ------------    ------------
        Gross profit ......................................................                      1,642,423
                                                                              ------------    ------------
Operating expenses:
      General, administrative and selling expenses ........................      2,060,001       5,270,153
      Consulting fees, related party (Note 5) .............................        180,000         210,000
      Impairment charges ..................................................        489,825         237,452
                                                                              ------------    ------------
Total operating expenses ..................................................      2,729,826       5,717,605
                                                                              ------------    ------------

Loss from operations ......................................................     (2,729,826)     (4,075,182)
                                                                              ------------    ------------

Other expenses (income):
      Interest income, related party (Note 10) ............................        (43,948)
      Interest expense:
        Related parties ...................................................                        297,338
        Other .............................................................        141,040         669,140
      Foreign currency gains ..............................................                        (59,791)
      Royalty and other income ............................................       (103,643)        (62,312)
      Loss on marketable securities (Note 3) ..............................                         62,392
      Gain on sale of investment in subsidiary (Note 4) ...................                        (87,593)
      Finance fees (Notes 4 and 7) ........................................        591,060         440,643
      Loss on sale of USA Skate assets (Note 4) ...........................        125,000         751,522
                                                                              ------------    ------------
                                                                                   709,509       2,011,339
                                                                              ------------    ------------

Loss before income taxes and minority interest ............................     (3,439,335)     (6,086,521)

Income tax benefit (Note 6) ...............................................                       (166,404)
                                                                              ------------    ------------
Loss before minority interest .............................................     (3,439,335)     (5,920,117)

Minority interest .........................................................         58,252        (727,197)
                                                                              ------------    ------------

Loss before extraordinary item ............................................     (3,497,587)     (5,192,920)

Extraordinary item (Note 8) ...............................................                        383,705
                                                                              ------------    ------------

Net loss ..................................................................     (3,497,587)     (4,809,215)

Other comprehensive income:
      Foreign currency translation adjustments ............................                          7,774

Comprehensive loss ........................................................   $ (3,497,587)   $ (4,801,441)
                                                                              ============    ============

Net loss ..................................................................   $ (3,497,587)   $ (4,809,215)

Amortization of discount on preferred stock ...............................     (1,120,000)
                                                                              ------------    ------------

Net loss applicable to common shareholders ................................   $ (4,617,587)   $ (4,809,215)
                                                                              ============    ============

Basic and diluted loss pershare:
      Before extraordinary item ...........................................   $      (0.48)   $      (0.94)
      Extraordinary item ..................................................                           0.07
                                                                              ------------    ------------

Basic and diluted loss per common share ...................................   $      (0.48)   $      (0.87)
                                                                              ============    ============

Weighted average number of shares outstanding .............................      9,549,353       5,544,833
                                                                              ============    ============
</TABLE>

                 See notes to consolidated financial statements.

                                       F-3
<PAGE>

                         IMAGINON, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                          Series A                     Series B and C            
                                         Common Stock                  Preferred Stock                 Preferred Stock            
                                  ---------------------------     ---------------------------     ---------------------------
                                    Shares           Amount         Shares          Amount          Shares          Amount    
                                  -----------     -----------     -----------     -----------     -----------     -----------
<S>                               <C>             <C>             <C>             <C>             <C>             <C>
Balances,
  January 1, 1997                   4,699,511     $    46,995

Issuance of 371,493
shares of common stock
in exchange for 480,417
shares of the Company's
subsidiary stock (Note 4)             371,493           3,715

Issuance of 75,000
shares of common stock
in satisfaction of 300,000
options to purchase
common stock (Note 5)                  75,000             750

Issuance of 75,000
shares of common stock
for consulting and finan-
cial services (Note 5)                 75,000             750

Issuance of 865,225
shares of common stock
in satisfaction of
$1,171,656 of liabilities
(Note 7)                              865,225           8,652

Issuance of 235,701
shares of common stock
for extending maturity date
on certain notes (Note 4)             235,701           2,357

Issuance of 52,500
shares of common stock
upon the exercise of
options (Note 7)                       52,500             525

Issuance of 349,214
Class A Series Preferred
Stock (Note 7)                                                        349,214     $     3,492

Issuance of stock
to subsidiary in satisfac-
tion of $893,640 liabilities
(Note 7)                              360,000           3,600         750,471           7,505

Net loss for 1997

Foreign currency
translation adjustment
                                  -----------      ----------     -----------     -----------     -----------     -----------
Balances,
 December 31, 1997                  6,734,430     $    67,344       1,099,685     $    10,997
</TABLE>

                                       F-4                           (Continued)
<PAGE>


                         IMAGINON, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
                                              Capital                       Foreign currency
                                             in excess                         translation       Treasury
                             Warrants          of par          Deficit         adjustment         stock            Total    
                            -----------     ------------     -------------     -----------     ------------     ------------
<S>                         <C>             <C>              <C>               <C>             <C>              <C>
Balances,
  January 1, 1997           $   394,200     $  6,386,332     $  (5,745,498)    $    (7,774)                     $  1,074,255

Issuance of 371,493
shares of common stock
in exchange for 480,417
shares of the Company's
subsidiary stock (Note 4)                        407,677                                                             411,392

Issuance of 75,000
shares of common stock
in satisfaction of 300,000
options to purchase
common stock (Note 5)                             69,563                                                              70,313

Issuance of 75,000
shares of common stock
for consulting and finan-
cial services (Note 5)                            74,250                                                              75,000

Issuance of 865,225
shares of common stock
in satisfaction of
$1,171,656 of liabilities
(Note 7)                                       1,163,004                                                           1,171,656

Issuance of 235,701
shares of common stock
for extending maturity date
on certain notes (Note 4)                        438,284                                                             440,641

Issuance of 52,500
shares of common stock
upon the exercise of
options (Note 7)                                  94,475                                                              95,000

Issuance of 349,214
Class A Series Preferred
Stock (Note 7)                                 1,564,638                                                           1,568,130

Issuance of stock
to subsidiary in satisfac-
tion of $893,640 liabilities
(Note 7)                                         882,535                                       $   (893,640)

Net loss for 1997                                               (4,809,215)                                       (4,809,215)

Foreign currency
translation adjustment                                                               7,774                             7,774
                            -----------     ------------     -------------     -----------     ------------     ------------
Balances,
 December 31, 1997          $   394,200     $ 11,080,758     $ (10,554,713)                    $   (893,640)    $    104,946
</TABLE>

                                       F-5                           (Continued)
<PAGE>


                         IMAGINON, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                          Series A                     Series B and C            
                                         Common Stock                  Preferred Stock                 Preferred Stock            
                                  ---------------------------     ---------------------------     ---------------------------
                                    Shares           Amount         Shares          Amount          Shares          Amount    
                                  -----------     -----------     -----------     -----------     -----------     -----------
<S>                               <C>             <C>             <C>             <C>             <C>             <C>
Issuance of 437,593
shares of common stock
in consideration for
extending the date on
certain notes (Note 4)                437,593           4,376

Issuance of 50,000
shares of common stock
for consulting services
(Note 5)                               50,000             500

Issuance of 534,200
shares of common stock
upon exercise of options
and warrants (Note 7)                 534,200           5,342

Issuance of 18,500
shares of Series A
preferred stock (Note 7)                                               18,500             185

Issuance of 167,754
shares of Series A
preferred stock in
private placement
(Note 7)                                                              167,754           1,678

Issuance of 41,667
shares of Series A
preferred stock in
satisfaction of $150,000
of liabilities (Note 7)                                                41,667             417

Issuance of 3,982,818
shares of common stock in
exchange for 1,327,606
shares of Series A
preferred stock (Note 7)            3,982,818          39,828      (1,327,606)        (13,277)

Issuance of 245,520
shares of common stock
owned by Skate Corp. in
satisfaction of $245,520
of liabilities (Note 7)

Issuance of 316,256
shares of common stock
in satisfaction of
$288,826 of liabilities
(Note 7)                              316,256           3,163
</TABLE>

                                       F-6                           (Continued)
<PAGE>


                         IMAGINON, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
                                              Capital                       Foreign currency
                                             in excess                         translation       Treasury
                             Warrants          of par          Deficit         adjustment         stock            Total    
                            -----------     ------------     -------------     -----------     ------------     ------------
<S>                         <C>             <C>              <C>               <C>             <C>              <C>
Issuance of 437,593
shares of common stock
in consideration for
extending the date on
certain notes (Note 4)                           538,426                                                             542,802

Issuance of 50,000
shares of common stock
for consulting services
(Note 5)                                          68,250                                                              68,750

Issuance of 534,200
shares of common stock
upon exercise of options
and warrants (Note 7)                            574,068                                                             579,410

Issuance of 18,500
shares of Series A
preferred stock (Note 7)                          76,128                                                              76,313

Issuance of 167,754
shares of Series A
preferred stock in
private placement
(Note 7)                                         164,975                                                             166,653

Issuance of 41,667
shares of Series A
preferred stock in
satisfaction of $150,000
of liabilities (Note 7)                          149,583                                                             150,000

Issuance of 3,982,818
shares of common stock in
exchange for 1,327,606
shares of Series A
preferred stock (Note 7)                         (26,551)

Issuance of 245,520
shares of common stock
owned by Skate Corp. in
satisfaction of $245,520
of liabilities (Note 7)                          161,503                                             84,017          245,520

Issuance of 316,256
shares of common stock
in satisfaction of
$288,826 of liabilities
(Note 7)                                         285,663                                                             288,826
</TABLE>

                                       F-7                           (Continued)
<PAGE>

                         IMAGINON, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                          Series A                     Series B and C            
                                         Common Stock                  Preferred Stock                 Preferred Stock            
                                  ---------------------------     ---------------------------     ---------------------------
                                    Shares           Amount         Shares          Amount          Shares          Amount    
                                  -----------     -----------     -----------     -----------     -----------     -----------
<S>                               <C>             <C>             <C>             <C>             <C>             <C>
Issuance of 2,080
shares of Series B and
C preferred  stock in
connection  with
private placement,
net of costs
(Note 7)                                                                                                2,080     $   540,026

Issuance of 1,327,000
shares of common stock
owned by Skate Corp. in
exchange for 884,667
shares of Skate Corp.
(Note 7)

Issuance of 80,000
shares of common stock
in a private placement
(Note 7)                               80,000             800

Issuance of 500,000
shares of common stock
for $400,000 (Note 7)                 500,000           5,000

Issuance of 36,790
shares of common stock
for penalty on Series B
and C preferred stock
(Note 7)                               36,790             368

Issuance of 742,644
shares of common stock
in exchange for 450
shares of Series B
and C preferred stock
(Note 7)                              742,644           7,426                                            (450)       (359,124)

Issuance of 20,000
shares to outside
members of the Board of
Directors                              20,000             200

Sale of 84,212 shares of
treasury owned by
subsidiary (Note 7)

Amortization of Class B
and C Series preferred
stock                                                                                                               1,120,000
</TABLE>

                                       F-8                           (Continued)
<PAGE>

                         IMAGINON, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
                                              Capital                       Foreign currency
                                             in excess                         translation       Treasury
                             Warrants          of par          Deficit         adjustment         stock            Total    
                            -----------     ------------     -------------     -----------     ------------     ------------
<S>                         <C>             <C>              <C>               <C>             <C>              <C>
Issuance of 2,080
shares of Series B and
C preferred  stock in
connection  with private 
placement, net of costs
(Note 7)                                       1,120,000                                                           1,660,026

Issuance of 1,327,000
shares of common stock
owned by Skate Corp. in
exchange for 884,667
shares of Skate Corp.
(Note 7)                                        (107,797)                                           454,099          346,302

Issuance of 80,000
shares of common stock
in a private placement
(Note 7)                                          39,200                                                              40,000

Issuance of 500,000
shares of common stock
for $400,000 (Note 7)                            395,000                                                             400,000

Issuance of 36,790
shares of common stock
for penalty on Series B
and C preferred stock
(Note 7)                                          47,890                                                              48,258

Issuance of 742,644
shares of common stock
in exchange for 450
shares of Series B and
C preferred stock
(Note 7)                                         351,698

Issuance of 20,000
shares to outside
members of the Board of
Directors                                         19,800                                                              20,000

Sale of 84,212 shares of
treasury owned by
subsidiary (note 7)                              150,255                                             28,724          178,979

Amortization of Class B
and C Series preferred
stock                                         (1,120,000)
</TABLE>

                                       F-9                           (Continued)

<PAGE>

                         IMAGINON, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                          Series A                     Series B and C            
                                         Common Stock                  Preferred Stock                 Preferred Stock            
                                  ---------------------------     ---------------------------     ---------------------------
                                    Shares           Amount         Shares          Amount          Shares          Amount    
                                  -----------     -----------     -----------     -----------     -----------     -----------
<S>                               <C>             <C>             <C>             <C>             <C>             <C>
Receipt of  subsidiary 
of 250,000  shares of
common  stock from
third party in settlement
of an amount due to
subsidiary from third
party (Note 4)

Net loss for the year
ended December
31, 1998                                                                                                                    
                                  -----------     -----------     -----------     -----------     -----------     -----------
                                   13,434,731     $   134,347                                           1,630     $ 1,300,902
                                  ===========     ===========     ===========     ===========     ===========     ===========
</TABLE>

                                      F-10                           (Continued)

<PAGE>


                         IMAGINON, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
                                              Capital                       Foreign currency
                                             in excess                         translation       Treasury
                             Warrants          of par          Deficit         adjustment         stock            Total    
                            -----------     ------------     -------------     -----------     ------------     ------------
<S>                         <C>             <C>              <C>               <C>             <C>              <C>
Receipt of subsidiary
of 250,000 shares of
common  stock from
third  party in settlement
of an amount due to
subsidiary from third
party (Note 4)                                                                                     (414,000)        (414,000)

Net loss for the year
ended December
31, 1998                                                        (3,497,587)                                       (3,497,587)
                            -----------     ------------     -------------     -----------     ------------     ------------
                            $   394,200     $ 13,968,849     $ (14,052,300)                    $   (740,800)    $  1,005,198
                            ===========     ============     =============     ===========     ============     ============
</TABLE>

                                      F-11
<PAGE>


                         IMAGINON, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                             1998            1997      
                                                                         ------------    ------------
<S>                                                                      <C>             <C>
Cash flows from operating activities:
      Net loss .......................................................   $ (3,497,587)   $ (4,809,215)
                                                                         ------------    ------------
      Adjustments to reconcile net loss to
       net cash used in operating activities:
        Extraordinary gain ...........................................                       (383,705)
        Net unrealized holding loss ..................................                         62,392
        Gain on sale of investment in subsidiary .....................                        (87,593)
        Loss on sale of USA Skate assets .............................        125,000         751,522
        Expense incurred upon issuance of common stock
          and options ................................................        756,122         724,223
        Depreciation and amortization ................................        230,821         628,601
        Amortization of license fee payable and other ................                         88,867
        Provision for losses on accounts receivable ..................        272,086         250,836
        Foreign currency gains .......................................                        (59,791)
        Minority interest ............................................         58,252        (727,197)
        Restructuring and impairment charges .........................        489,825         237,452
      Decrease (increase) in assets:
        Accounts receivable ..........................................                       (135,947)
        Income taxes receivable ......................................                        221,624
        Due from related parties .....................................     (1,345,947)       (310,369)
        Inventories ..................................................                      1,806,578
        Prepaid expenses and other ...................................        (82,898)        436,111
        Assets of subsidiary held for sale ...........................       (2-5.843)
      Increase (decrease) in liabilities:
        Accounts payable and accrued expenses ........................        853,585        (394,606)
        Payables to officers/shareholders and other
          related parties ............................................                        (36,804)
        Liabilities of subsidiary held for sale ......................       (450,574)     (1,340,648)
                                                                         ------------    ------------
           Total adjustments .........................................        700,429       1,731,546
                                                                         ------------    ------------
Net cash used in operating activities ................................     (2,797,158)     (3,077,669)
                                                                         ------------    ------------

Cash flows from investing activities:
      Payment from sale of USA Skate Co., Inc. .......................                     14,500,000
      Capital expenditures ...........................................                        (95,141)
      Proceeds from sale of marketable securities ....................                        166,260
      Deferred merger costs ..........................................       (167,777)
                                                                         ------------    ------------
Net cash (used in) provided by investing activities ..................       (167,777)     14,571,119
                                                                         ------------    ------------
</TABLE>

                                      F-12                           (Continued)
<PAGE>

                         IMAGINON, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                             1998            1997      
                                                                         ------------    ------------
<S>                                                                      <C>             <C>
Cash flows from financing activities:
      Proceeds from notes payable and long-term debt .................                        174,545
      Repayments of notes payable, license fees
        and long-term debt ...........................................                    (11,713,124)
      Proceeds from sale of treasury stock ...........................        178,980
      Net proceeds from issuance of
       common stock and warrants .....................................      2,846,089
                                                                         ------------    ------------
Net cash provided by (used in) financing activities ..................      3,025,069     (11,538,579)
                                                                         ------------    ------------

Net increase (decrease) in cash ......................................         60,134         (45,129)

Cash, beginning ......................................................         13,969          59,098
                                                                         ------------    ------------
Cash, ending .........................................................   $     74,103    $     13,969
                                                                         ============    ============

Supplemental disclosure of cash flow information:
      Cash paid for interest .........................................   $    152,000    $    826,000
                                                                         ============    ============


Supplemental disclosure of noncash investing and financing activities:
      Disposition of USA Skate Co., Inc.
        Cost of assets disposed of....................................                   $(16,937,947)
        Liabilities disposed of ......................................                      1,899,533
        Loss on disposition ..........................................                        538,414
                                                                                         ------------
      Total cash received, net of cash acquired ......................                   $(14,500,000)
                                                                                         ============

      Issuance of 371,493 shares of common stock in
        exchange for 480,417 shares of Company's
        subsidiary stock .............................................                   $    411,392
                                                                                         ============

      Issuance of 316,256 and 865,225 shares of common stock
        in 1998 and 1997, respectively, in satisfaction of amounts
        due ..........................................................   $    288,826    $  1,171,656
                                                                         ============    ============

      Issuance of 1,327,000 shares of common stock owned
        by subsidiary in exchange for 884,667 shares of Skate
        Corp .........................................................   $    346,302
                                                                         ============

      Issuance of 41,667 preferred shares in satisfaction of
        amounts due ..................................................   $    150,000
                                                                         ============

      Receipt by subsidiary of 250,000 shares of common
        stock from third party in settlement of an amount due
        to subsidiary from third party ...............................   $    414,000
                                                                         ============
</TABLE>

                 See notes to consolidated financial statements.

                                      F-13
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

1.   Basis of presentation, business and plan of restructuring:

     Basis of presentation:

     The accompanying  consolidated financial statements include the accounts of
       Imaginon,  Inc.  (formerly  known as  California  Pro Sports,  Inc.) (the
       "Company") and its subsidiaries,  California Pro, Inc. ("CP"),  USA Skate
       Corporation  ("Skate Corp.") and Imaginon  Acquisition  Corp. Skate Corp.
       was formed in 1995 to acquire USA Skate Co.,  Inc.  ("USA Skate") and its
       subsidiary,  Les Equipments Sportifs Davtec, Inc., a Canadian corporation
       ("Davtec").  On  December  31,  1998,  the  Company  owned  100%  of  the
       outstanding CP and Imaginon  Acquisition Corp. capital stock and 89.8% of
       the outstanding Skate Corp. capital stock.  Minority interest  represents
       Skate Corp.'s minority  shareholders'  10.2% ownership  interest in Skate
       Corp. Intercompany transactions have been eliminated in consolidation.

     Business and plan of restructuring:

     In 1997, due  to  continuing   operating  losses,   management  decided  to
       restructure  and deleverage the Company.  In connection with these plans,
       the Company:

       a.  Ceased operating the California Pro and Kemper  licenses,  eliminated
           most of the  operating  and  overhead  expenses  associated  with its
           sporting goods business and began to concentrate on sub-licensing the
           Company's trademark rights.

       b.  Sold  substantially  all of its Skate Corp.  sporting  goods  related
           assets in September 1997 (Note 4).

       c.  Completed various private equity placements  throughout 1998 and into
           1999 (Note 7).

       d.  Completed  the merger of the Company  and IMON in January  1999 (Note
           10).

       e. Completed the sale of Skate Corp. in January 1999 (Note 4).

     Prior to the second  quarter of 1997,  the Company sold in-line  skates and
       accessories,   under  the  brand  names  California  Pro(R)  and  Rolling
       Thunder(TM),  to  retail  sporting  goods  stores  principally  in  North
       America,  and sold snowboards and  accessories  under the Kemper(R) brand
       name to retail sporting goods stores in North America and

                                      F-14
<PAGE>

                         IMAGINON, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

1.   Basis of presentation, business and plan of restructuring (continued):

     Business and plan of restructuring (continued):

       distributors in Europe and Japan.  In connection  with its  restructuring
       and  deleverage  plans,  in the second quarter of 1997, the Company began
       liquidating   remaining   in-line   skate,   snowboard  and   accessories
       inventories.  Prior to September  1997,  the Company  also  manufactured,
       imported and marketed VICTORIAVILLE(TM), VIC(R), and McMartin(TM) ice and
       street/roller  hockey  skates,  sticks and  related  protective  gear and
       accessories for sale to retail sporting goods stores in the United States
       and Canada and independent  distributors  primarily located in Europe. In
       September  1997,  Skate Corp.   sold  substantially  all of the operating
       assets  of USA  Skate and  Davtec.  During  1998,  the  Company  operated
       exclusively  as a licensor  of trade  names and  trademarks.  The Company
       currently receives income from sub-licenses it has entered into regarding
       the use of the Kemper brand name. The Company has no other sporting goods
       related business.

2.   Significant accounting policies:

     Use of accounting estimates in financial statement preparation:

     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  periods.  Actual  results  could differ from those
       estimates.

                                      F-15
<PAGE>

                         IMAGINON, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

2.   Significant accounting policies (continued):

     Furniture, equipment, and depreciation:

     Furniture and equipment are stated at cost. Depreciation is provided by use
       of accelerated and straight-line  methods over the estimated useful lives
       (5 to 10 years) of the related assets.

     Intangible assets:

     Intangible  assets at December 31, 1998 consist of trademark  licence costs
       related to Kemper perpetual license  agreements.  Trademark license costs
       are amortized on the straight-line method over 12 years.

     Management  assesses the carrying value of intangible and other  long-lived
       assets for impairment when circumstances warrant such a review, primarily
       by comparing  current and projected  sales,  operating  income and annual
       cash flows on an undiscounted basis, with the related annual amortization
       expenses.   The  Company  has  not  been  successful  in  concluding  any
       arrangements with regard to sub-licensing of the California Pro brand and
       currently is not in any  discussions  with third parties.  Therefore,  in
       1998, the Company  wrote-off the remaining balance of $409,102 related to
       the  California  Pro  trademark.  In 1998, the Company also wrote-off the
       remaining  balance of $80,723  related to goodwill that arose on the 1996
       acquisition  of USA Skate.  In 1997 goodwill  related to USA Skate with a
       carrying  value of $428,573  was written  down to $191,121  (Note 4). The
       resulting  expenses  of  $489,825  for 1998 and  $237,452  for 1997  were
       included in restructuring and impairment charges.

     Deferred merger costs:

     Costs  incurred  through  December  31,  1998  related to the merger of the
       Company and IMON (Note 10) have been  deferred.  The merger was completed
       in January 1999 and at that time the Company  charged the costs,  as well
       as additional amounts incurred in January 1999, directly to equity.

                                      F-16
<PAGE>

                        IMAGINON, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

2.   Significant accounting policies (continued):

     Revenue recognition:

     The Company's revenue  recognition  policy is to record sales as product is
       shipped and recognize royalty and other income when  sub-licenses  report
       royalties and the Company receives payment.

     Foreign currency transactions:

     In 1997, CP primarily  purchased and sold its in-line skate  products in US
       dollars. CP primarily purchased its snowboard products in German Deutsche
       Marks ("DM") and sold to its  customers  in either DM or US dollars.  USA
       Skate primarily purchased and sold its products in US dollars, and Davtec
       primarily  purchased its goods in Canadian  dollars and sold to customers
       in both US and  Canadian  dollars.  Gains and losses on foreign  currency
       transactions are included in determining consolidated net loss.

     Convertible preferred stock:

     During 1998, the Company issued Series B and C convertible  preferred stock
       for which the conversion  feature was "in the money" at the date of issue
       (a "beneficial  conversion feature").  The Company allocated a portion of
       the proceeds equal to the intrinsic  value of the  beneficial  conversion
       feature to capital in excess of par.  This amount has been  amortized  to
       preferred stock from the date of issuance through the date the securities
       are first convertible.

     Net loss per share:

     Basic loss per share is  computed  by dividing  loss  applicable  to common
       shareholders by the weighted-average  number of common shares outstanding
       for the year.  In arriving  at loss  applicable  to common  shareholders,
       amortization of the beneficial conversion feature related to the Series B
       and C preferred  stock has been deducted from net loss.  Diluted loss per
       share  reflects  the  potential  dilution  that could  occur if  dilutive
       securities  and other  contracts to issue common stock were  exercised or
       converted  into common  stock or resulted in the issuance of common stock
       that then shared in the earnings of the Company,  unless the effect is to
       reduce  a loss  or  increase  earnings  per  share.  The  Company  had no
       potential common stock instruments which would result in diluted loss per
       share in 1998 and 1997.

                                      F-17
<PAGE>

                         IMAGINON, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

2.   Significant accounting policies (continued):

     Fair value of financial instruments:

     The carrying value of the Skate Corp. convertible promissory notes payable,
       included in liabilities of subsidiary  held for sale on the  consolidated
       balance sheet (Note 4), is not practicable to estimate because management
       believes  that due to the  financial  condition of the  Company,  similar
       instruments with similar terms could not be obtained elsewhere.  The fair
       values  of  the  Company's   receivables from related   parties  are  not
       practicable  to  estimate,  due  to  the  related  party  nature  of  the
       underlying  transactions  and  indefinite  payment  terms.  The  carrying
       amounts of the Company's other financial  instruments  approximates their
       fair values because of the short maturities of these instruments.

     Subsidiary equity transactions:

     The Company recognizes in its consolidated financial statements,  gains and
       losses  resulting  from the  sales of  previously  unissued  stock by its
       subsidiaries,  which have the effect of reducing the parent's  percentage
       equity holding. There were no gains or losses in 1998 or 1997.

     Stock-based compensation:

     Statement of Financial Accounting Standard ("SFAS") No. 123, ACCOUNTING FOR
       STOCK-  BASED   COMPENSATION,   defines  a  fair-value-based   method  of
       accounting for stock-based  employee  compensation plans and transactions
       in which an entity  issues its  equity  instruments  to acquire  goods or
       services  from  non-employees,   and  encourages  but  does  not  require
       companies  to  record   compensation   cost  for   stock-based   employee
       compensation  plans at fair value.  The Company has chosen to continue to
       account for  stock-based  compensation  using the intrinsic  value method
       prescribed in Accounting  Principles Board Opinion No. 25, ACCOUNTING FOR
       STOCK  ISSUED TO  EMPLOYEES  ("APB NO. 25") and related  interpretations.
       Accordingly,  compensation  cost for stock  options  is  measured  as the
       excess,  if any of the quoted market price of the Company's  stock at the
       date of the grant over the  amount an  employee  must pay to acquire  the
       stock.

                                      F-18
<PAGE>

                         IMAGINON, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

2.   Significant accounting policies (continued):

     Recently issued accounting standards:

     On January  1,  1998,  the  Company   adopted   SFAS  No.  130,   REPORTING
       COMPREHENSIVE   INCOME.  This  standard   establishes   requirements  for
       disclosure  of   comprehensive   income  which  includes   certain  items
       previously  not  included  in the  statements  of  operations,  including
       minimum pension  liability  adjustments and foreign currency  translation
       adjustments,  among others.  During the year ended December 31, 1998, the
       Company had no items of comprehensive  income.  The financial  statements
       for the year ended December 31, 1997 have been  reclassified  to disclose
       items of  comprehensive  income.  There are no  significant  tax  effects
       related to these items.

     In 1997, the Financial  Accounting Standards Board ("FASB") issued SFAS No.
       131, Disclosures about Segments of an Enterprise and Related Information,
       and in February 1998, the FASB issued SFAS No. 132, Employer's Disclosure
       about  Pensions  and  Other  Post  Retirement  Benefits.  Both  of  these
       statements  require  disclosure  only and  therefore  will not impact the
       Company's financial statements.

     In June 1998,  the FASB  issued SFAS No.  133,  Accounting  for  Derivative
       Instruments  and Hedging  Activities.  This  statement is  effective  for
       fiscal years beginning after June 15, 1999.  Currently,  the Company does
       not have any derivative financial instruments and does not participate in
       hedging activities. Therefore, management believes that SFAS No. 133 will
       not have an impact on its financial statements.

     Reclassifications:

     Certain  amounts  reported  in the  1997  financial  statements  have  been
       reclassified to conform to the 1998 presentation.

3. Marketable securities:

     In 1996, the Company  received marketable  securities  from an affiliate in
       payment of an amount  owed to the Company by a related  party,  which the
       Company classified as trading  securities under SFAS No. 115,  Accounting
       for  Certain  Investments  in Debt and Equity  Securities.  In 1997,  the
       Company sold these  securities  and  recognized  a loss of $62,392.  This
       amount is included in loss on marketable  securities in the  consolidated
       statements of operations and comprehensive loss.

                                      F-19
<PAGE>

                         IMAGINON, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

4.   Skate Corp. transactions:

     Gain on sale of investment in subsidiary:

     In March 1997, the Company satisfied  payables in the amount of $106,500 by
       exchanging  88,750 shares of Skate Corp. common stock held by the Company
       in satisfaction  of the liability.  The carrying value of the Skate Corp.
       shares was  $61,237  and the  estimated  fair  value of those  shares was
       $106,500. The Company also sold 83,000 shares of Skate Corp. common stock
       held by the Company to a third  party.  The  carrying  value of the Skate
       Corp.  shares  was  $57,270  and  the  sales  price  was  $99,600.  These
       transactions resulted in total gains of $87,593.

     Purchase of subsidiary common stock:

     In May and September 1997,  the Company  acquired  230,417  shares of Skate
       Corp. common stock from two shareholders (one of which was an officer) in
       exchange for 238,160 shares of common stock of the Company.  In 1997, the
       Company also issued  133,333  shares of common  stock to acquire  250,000
       shares of Skate Corp. common stock, that otherwise the Company would have
       been obligated to redeem.  The Company  accounted for these  transactions
       under the purchase  method of  accounting  based upon the market value of
       the common stock issued by the Company.

     Sale of USA Skate assets:

     On September 12, 1997, the Company sold substantially  all of the operating
       assets of USA Skate for $14,500,000, with $1,000,000 to be held in escrow
       for potential  purchase price adjustments and other claims.  The proceeds
       of the sale were used to repay the Company's  outstanding lines of credit
       and other liabilities.  Subsequent to September 1997,  purchase price and
       other adjustments have reduced the principle amount of the escrow account
       by  approximately  $423,000  and  approximately  $180,000  of the  escrow
       account was disbursed and used to partially repay a trade liability.  The
       Company  recognized a loss in 1997 of approximately  $752,000 on the sale
       of the USA  Skate  assets,  and due to the post  closing  adjustments  an
       additional loss of $125,000 in 1998.

                                      F-20
<PAGE>

                         IMAGINON, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

4.   Skate Corp. transactions:

     Sale of USA Skate assets:

     The  remaining  account  balances of Skate Corp.  have been  classified  as
       assets and  liabilities  held for sale in the  accompanying  consolidated
       balance sheet and consist of the following:

         Assets held for sale:
           Cash                                        $          39,782
           Cash held in escrow                                   397,002
           Accounts receivable, related parties                  187,500
                                                       -----------------

                                                       $         624,284
                                                       =================
         Liabilities held for sale:
           Accounts payable and accrued expenses       $         545,451
           Convertible promissory notes payable                  718,114
                                                       -----------------

                                                       $       1,263,565
                                                       =================

     The accounts  receivable,  related parties are non-interest bearing and are
       due January 1999 through  2000.  The  convertible  promissory  notes were
       originally  due in January 1997 with interest at 9%. In January 1997, the
       due date of the notes was extended to July 1997 and the interest rate was
       adjusted  to 12%.  Beginning  July  1997,  substantially  all of the note
       holders  agreed to extend the notes for 30 day  intervals in exchange for
       the Company  issuing the note holders common stock of the Company at each
       extension  date.  During,  1997, the Company had issued 235,701 shares of
       common stock and  recognized  financing fees of  approximately  $440,641.
       During 1998,  the Company  issued  437,593  shares of common  stock,  and
       recognized financing fees of $542,802 for the note extensions.  The notes
       were paid in full in January 1999.

     In December 1998 Skate Corp.  negotiated  and  received  250,000  shares of
       common  stock of the  Company in  settlement  of accounts  receivable  of
       $580,000.  The  market  price on the day of  settlement  was  $1.656  and
       accordingly Skate Corp.  realized a loss of $166,000 which is included in
       the  consolidated  operating  expenses in the financial  statements.  The
       250,000 shares of common stock are included in treasury stock.

                                      F-21
<PAGE>

                         IMAGINON, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

4.   Skate Corp. transactions (continued):

     Subsequent sale of the Company's investment in Skate Corp.:

     In April 1998, the Company received  commitments from a group of accredited
       investors to purchase for  $1,400,000 the shares of common stock of Skate
       Corp.  owned by the Company along with an option to acquire shares of the
       Company in exchange for the purchased  shares of Skate Corp.  The options
       allowed the  investors to exchange  each common share of Skate Corp.  for
       1.5 shares of the  Company's  common  stock.  In April and May 1998,  the
       Company  received  gross  proceeds of $255,000 (net proceeds of $166,653)
       from  investors  acquiring  335,507  shares  of Skate  Corp.  Each of the
       investors  exercised  their options to exchange  those shares for 167,754
       shares of the Company's  Series A preferred  stock,  which  automatically
       converted  to 503,261  shares of the  Company's  common stock on July 15,
       1998 upon the shareholders approving an increase in the authorized common
       shares of the Company from  10,000,000 to  20,000,000.  Subsequent to the
       receipt of the $255,000,  this offering was closed to further  investors.
       The offering  was closed to further  investors as the Company was able to
       obtain similar  financing on terms more beneficial to the Company through
       the sale of  preferred  stock as discussed in Note 7. Upon the closing of
       the offering, two officers/shareholders of the Company agreed to purchase
       the shares of Skate Corp. from the Company for $90,000 with no conversion
       rights.  The  purchase  price  was  based  on the net  book  value of the
       Company's  investment  in Skate Corp. at the time of the  agreement.  The
       sale of Skate Corp. was completed,  and the Company received the $90,000,
       in January 1999.

5. Commitments and contingencies:

     Office lease:

     The Company  is  currently  leasing  office  space in South  Carolina  on a
       month-to-month  basis for $3,000 per month plus  certain  real estate and
       property  taxes.  Total rent expense for 1998 and 1997 was  approximately
       $41,000 and $227,000,  respectively,  and includes rent expense and lease
       termination fees in 1997 on the Company's prior operating  warehouses and
       office space.

                                      F-22
<PAGE>

                         IMAGINON, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

5.   Commitments and contingencies (continued):

     In-line skate license agreements:

     The Company  has  various  license  agreements  with  Playmaker,  Co.  Ltd.
       ("Playmaker")  under which the Company  has the  exclusive,  royalty-free
       right to use the California Pro and Rolling  Thunder names and trademarks
       on in-line  skates,  accessories and other products in the United States,
       Canada,  certain  areas  of the  Caribbean  and U.S.  military  exchanges
       worldwide.  The Company has also entered into an agreement with Playmaker
       whereby  Playmaker  will pay the Company a 5% royalty on all sales of any
       product made by  Playmaker to any new customer of Playmaker  generated by
       the Company.  No royalties have been agreed to or paid to date under this
       agreement. The agreements are subject to cancellation if the Company does
       not meet certain sales and/or purchase requirements.

     The Company  has a patent  license  agreement  related  to one  feature  on
       several  of  the  Company's  in-line  skate  models.  Under  the  license
       agreements,  the  Company  pays  royalty  fees  based on its sales of the
       related  items.  Playmaker  reimburses  the  Company for a portion of the
       royalties paid. The royalties were not significant in 1998 or 1997.

     Kemper license agreements:

     The Company has a license agreement for the exclusive, perpetual use of the
       Kemper name on  snowboards  and  accessories.  The Company pays a royalty
       based on net sales of products sold under this license.

     In 1997, the  Company  entered  into  a  three-year  exclusive  sub-license
       agreement  with a third party which allows the third party to manufacture
       and sell certain Kemper products.  The agreement provides for the Company
       to  receive  license  fees  based on  manufacturing  costs,  or an annual
       minimum guaranteed payment.

     In February 1998,  the Company  entered  into a two-year  agreement  with a
       third party  snowboard  manufacturer  and  marketer.  The  agreement,  in
       effect,  assigns all of the Company's  license  rights to the Kemper name
       (except  for the  sub-license  described  above)  to the  third  party in
       exchange  for the greater of a royalty  fee based on sales,  or an annual
       minimum guaranteed payment.

                                      F-23
<PAGE>

                         IMAGINON, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

5.   Commitments and contingencies (continued):

     Employment and consulting agreements:

     On a month to month  basis, the  Company  accrues  expense  to an  officer/
       shareholder  consulting  fees of $10,000  per  month.  Skate  Corp.  paid
       consulting fees to two Company officers/shareholders that totaled $60,000
       and $90,000 in 1998 and 1997, respectively.

     Prior to 1997, the Company had issued  warrants to purchase  300,000 shares
       of common stock to an unrelated financial advisory  consultant.  In 1997,
       in lieu of the warrants to purchase  300,000 shares of common stock,  the
       Company issued the party 75,000 shares of common stock.

     In 1997, the Company  entered  into a  financial  advisory  and  consulting
       agreement  with an  unrelated  third  party.  Under this  agreement,  the
       Company  issued 75,000 shares of common stock and 33,333 shares of Series
       A preferred stock to the consultant (included in total Series A preferred
       stock issuances on the consolidated  statement of shareholders'  equity).
       In 1998, the Company began working with another financial  consultant who
       was a former  director and officer of the Company.  Under the  agreement,
       the Company issued 50,000 shares of common stock to the  consultant.  The
       Company  recorded  consulting  expense for the shares issued based on the
       market value of the common stock.

     Litigation:

     The Company is involved in various claims and legal actions  arising in the
       ordinary course of business.  In the opinion of management,  the ultimate
       disposition  of these  matters  will not have a  material  effect  on the
       financial statements of the Company.

6. Income taxes:

     The Company recognizes deferred tax liabilities and assets for the expected
       future  tax  consequences  of events  that have  been  recognized  in the
       financial  statements  or tax returns.  Under this  method,  deferred tax
       liabilities and assets are determined based on the difference between the
       financial  statement  carrying  amounts  and  tax  bases  of  assets  and
       liabilities  using  enacted tax rates in effect in the years in which the
       differences are expected to reverse.

                                      F-24
<PAGE>

                         IMAGINON, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

6.   Income taxes (continued):

     The provision  benefit for income  taxes for the years ended  December  31,
       1998 and 1997 consists of the following:

                                               1998                 1997       
                                        -----------------     -----------------
       Current:
         Federal                        $                     $
         State and local
         Foreign                                                       (166,404)
                                        -----------------     -----------------
                                                                       (166,404)
                                        =================     =================
     Deferred:
         Federal                               (1,089,000)           (1,345,000)
         State and local                         (108,000)             (219,000)
         Foreign                                                       (120,000)
                                        -----------------     -----------------
                                               (1,197,000)           (1,684,000)
                                        -----------------     -----------------
     Change in valuation allowance
       for deferred tax assets                  1,197,000             1,684,000
                                        -----------------     -----------------
       Income tax benefit               $                     $        (166,404)
                                        =================     =================

     A reconciliation  of the statutory federal income tax rate to the Company's
       effective  income tax rate for the years ended December 31, 1998 and 1997
       is as follows:

                                                       1998            1997
                                                   ------------    ------------
       Statutory income tax benefit                       (34%)           (34%)
       Deferred income tax valuation allowance             35%             28%
       Other                                               (1%)             3%
                                                   ------------    ------------
                                                                           (3%)
                                                   ============    ============

                                      F-25
<PAGE>

                         IMAGINON, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

6.   Income taxes (continued):

     The  following  is a summary  of the  Company's  deferred  tax  assets  and
       liabilities at December 31, 1998:

       Deferred tax assets:
         Net operating loss carryforward                     $       4,012,000
         Intangible assets                                             492,000
         Accounts receivable                                            94,000
                                                             -----------------
         Inventories                                                 4,598,000

       Valuation allowance for deferred tax assets                  (4,598,000)
                                                             -----------------
                                                             $               0
                                                             =================

     Net operating loss carryforwards of approximately $10,700,000 are available
       to offset future taxable income,  if any, through 2018. The net operating
       loss carryforwards may be subject to certain restrictions due to the sale
       of Skate  Corp.  assets,  the  IMON  merger  and  other  transactions.  A
       valuation  allowance has been provided to reduce the deferred tax assets,
       as realization of the assets is not assured.

7. Shareholders' equity:

     Series A preferred stock:

     In 1997, the Company  issued  349,214  shares of Series A  preferred  stock
       (including   30,167  to  an   officer/shareholder)   in  satisfaction  of
       $1,568,130   of    liabilities    (including    $181,000   due   to   the
       officer/shareholder).  In 1997, the Company also issued 750,471 shares of
       Series A  preferred  stock and  360,000  shares  of  common  stock to its
       subsidiary in satisfaction of intercompany liabilities, which resulted in
       an increase in treasury  stock of $893,640.  The shares were valued based
       upon the trading  price of the Company's  common stock,  adjusted for the
       one for three conversion feature of the preferred stock.

                                      F-26
<PAGE>

                         IMAGINON, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

7.   Shareholders' equity (continued):

     Series A preferred stock (continued):

     During 1998, the Company  issued 18,500 shares of Series A preferred  stock
       to an  officer of the  Company.  The shares  were  valued  based upon the
       trading  price of the Company's  common  stock,  adjusted for the one for
       three conversion  feature of the preferred  stock,  and accordingly,  the
       Company recognized an expense of approximately $76,313.  During 1998, the
       Company  also  issued  167,754  shares of Series A  preferred  stock in a
       private  placement,  in which  the  Company  received  $166,653,  and the
       Company issued 41,667 shares of Series A preferred  stock in satisfaction
       of $150,000 of liabilities.

     Each  share  of   outstanding   Series  A   Convertible   Preferred   Stock
       automatically converted to three shares of common stock in July 1998 upon
       shareholder  approval of a  recapitalization  measure that  increased the
       authorized  number of common  shares of the Company,  from  10,000,000 to
       20,000,000.  Upon  conversion of the Series A Preferred Stock into common
       stock,   there  were  no  Series  A  Preferred  shares   outstanding  and
       accordingly all rights for Series A stockholders have been terminated.

     Series B/C preferred stock:

     During 1998,  the Company issued 2,080 shares of Series B and C convertible
       preferred  stock ("Series B/C") for $1,660,026 (net of offering costs) at
       a price of $1,000 per share.  The Series B/C stock is  convertible at the
       option of the  holder at any time  after 90 days from the  closing  date,
       into a number of shares of common  stock  equal to $1,000  divided by the
       lower of 65% of the average market price of the common stock for the five
       trading days  immediately  prior to the  conversion  date,  or the market
       price on the day of first closing. During the fourth quarter of 1998, the
       Company   issued  36,790  shares  of  common  stock  to  the  Series  B/C
       shareholders  as a penalty for not  completing a  registration  statement
       within an agreed upon time period.  The Company  recorded  financing  fee
       expense of $48,258 based on the market value of the common shares issued.
       The  registration  statement was filed in the fourth  quarter of 1998 and
       the holders of Series B and C convertible  preferred  stock converted 450
       shares into 742,644  shares of common  stock of the Company.  At December
       31, 1998, 1,630 shares of Series B/C remain outstanding.

                                      F-27
<PAGE>

                         IMAGINON, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

7.   Shareholders' equity (continued):

     Series D/E preferred stock:

     In January  1999,  the  Company  with  the   assistance  of  its  financial
       consultant  completed private placements whereby the Company received net
       proceeds  of  $2,550,000  from  accredited  investors  introduced  to the
       Company by the  consultant,  for the  purchase  of 1,500  shares  each of
       Series D and E Convertible Preferred Stock, par value $.01 ("Series D/E")
       at a price of $1,000 per share.  The Series D/E stock is  convertible  at
       the option of the holder at any time after 90 days from the closing  date
       into a number  of shares  of  common  stock  equal to the lower of $1,000
       divided by 75% of the average  closing bid price of the common  stock for
       the five trading days  immediately  prior to the conversion date, or 120%
       of the  market  price  on the day of  closing.  In  connection  with  the
       placement  of the Series  D/E,  the Company  issued  warrants to purchase
       300,000  shares of common stock to financial  advisors that assisted with
       placements.  One-half of the  warrants  are  exercisable  at $7.28063 per
       share (the market price of the common stock at the date of issuance). All
       warrants expire in January 2004.

     Unaudited pro forma balance sheet:

     The accompanying consolidated balance sheet includes an unaudited pro forma
       consolidated  balance sheet as of December 31, 1998, that gives effect to
       the following  transactions as if these transactions had been consummated
       on December 31, 1998:

       a.  The receipt of $2,550,000  cash from  investors  who purchased  3,000
           shares of Series D/E  preferred  stock from the Company as  described
           above.  The portion of the proceeds  equal to the intrinsic  value of
           the beneficial  conversion feature ($1,615,000) has been allocated to
           capital in excess of par.

       b.  The  receipt of $90,000  cash from two  officers/shareholders  of the
           Company to purchase all of the Company's shares of Skate Corp. common
           stock  as  described  in Note 4,  "Subsequent  sale of the  Company's
           investment in Skate Corp." Thus the unaudited pro forma balance sheet
           reflects  the receipt of $90,000 of cash in  exchange  for the assets
           and  liabilities  held for sale,  the  elimination  of the historical
           Skate Corp.  minority  interest,  the decrease in treasury stock that
           had  been  recorded    in  the  historical  consolidation,   and  the

                                      F-28
<PAGE>

                         IMAGINON, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

7.   Shareholders' equity (continued):

     Unaudited pro forma balance sheet (continued):

           recognition of $44,801 of intercompany  accounts payable due to Skate
           Corp. that had been eliminated in the historical  consolidation.  The
           pro  forma  adjustment  does  not  result  in any gain or loss to the
           Company.

     The  unaudited  pro  forma  consolidated  balance  sheet  should be read in
       conjunction with the historical  financial statements of the Company. The
       unaudited  pro forma  consolidated  balance  sheet does not purport to be
       indicative of the financial  position of the Company had the transactions
       occurred on December 31, 1998.

     Issuances of common stock:

     During the year ended  December 31, 1998, the Company issued 437,593 shares
       of its common  stock at prices  from $.70 to $1.72 per share in  exchange
       for the  extensions  of the  maturity  date on notes of Skate  Corp.  The
       Company  recognized  finance  fee  expense of  $542,902  related to these
       services.  Additionally,  the Company  issued 50,000 shares of its common
       stock at $1.375 per share (the market value of the stock on the effective
       date of issuance) to a consultant  who was a former  director and officer
       of the Company.  The Company  recognized  $68,750 of consulting  expenses
       related  to this  issuance.  During  the year ended  December  31,  1998,
       534,200  options  and/or  warrants  were  exercised at $1.00 to $1.15 per
       share, by officers (211,700), consultant (300,000), director (15,000) and
       an employee (7,500).

     In July 1998, the Company sold 80,000 shares of restricted  common stock in
       a private placement to a third party for $40,000.

     During the year ended December 31, 1998, the Company  received  proceeds of
       $400,000 cash from  investors who acquired  500,000  shares of restricted
       common stock from the Company.

     In 1998, the Company  issued 316,256 shares of common stock in satisfaction
       of $288,826 of liabilities. In 1997, the Company issued 865,225 shares of
       common stock (including 299,633 to officers/shareholders) in satisfaction
       of   $1,171,656   of   liabilities   (including   $493,995   due  to  the
       officers/shareholders).  The shares were  valued at the trading  price of
       the Company's common stock.

                                      F-29
<PAGE>

                         IMAGINON, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

7.   Shareholders' equity (continued):

     Issuance of stock to Skate Corp.:

     During the year  ended  December  31,  1998,  the  Company  issued  245,520
       treasury  shares owned by Skate Corp. with a carrying value of $84,017 in
       satisfaction of $245,520 of Skate Corp.  liabilities  held for sale. As a
       result of this  transaction,  the treasury stock balance has been reduced
       by $84,017.

     During  December 1998, Skate  Corp.  sold  84,212  treasury  shares  with a
       carrying value of $28,724 for cash of $178,979.  As a result of this sale
       the  carrying  value of  treasury  stock has been  reduced by $28,724 and
       capital in excess of par was increased by $150,255.

     The Company also issued 1,327,000 treasury shares owned by Skate Corp. with
       a carrying  value of  $454,099 in  exchange  for 884,667  shares of Skate
       Corp.  As a result of this  transaction,  the treasury  stock balance has
       been reduced by $454,099.

     Stock options:

     The Company has a stock  option plan (the "1994 Stock  Option  Plan") which
       provides  for  the  issuance  to  employees,   officers,  directors,  and
       consultants  of the Company  options to purchase up to 200,000  shares of
       common  stock.  Options may be granted as incentive  stock  options or as
       non-statutory  options.  Only employees are eligible to receive incentive
       options. For options that are granted, the exercise period may not exceed
       ten years. The exercise price for incentive  options may not be less than
       100% of the fair market value of the  Company's  common stock on the date
       of grant,  except for options issued to persons controlling more than 10%
       of the Company's common stock, for which the option price may not be less
       than 110% of the fair market value of the  Company's  common stock on the
       date of grant.  The exercise price for  non-statutory  options may not be
       less than 80% of the fair market value of the  Company's  common stock on
       the date of grant.

                                      F-30
<PAGE>

                         IMAGINON, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

7.   Shareholders' equity (continued):

     Stock options (continued):

     In 1997, the Company granted  options to purchase  150,000 shares of common
       stock to non-employees for services provided to the Company.  General and
       administrative expense was charged $42,500.

     A summary of the status of the Company's stock options and weighted average
       exercise prices is as follows:

                         1994 Plan              Other                Total
                     ----------------------------------------------------------
                      Shares    Price     Shares     Price     Shares     Price
                     ----------------------------------------------------------
Outstanding,
 January 1, 1997      20,000    $2.50                           20,000    $2.50

Granted              130,000    $1.00     150,000    $0.83     280,000    $0.95

Exercised            (22,500)   $1.00     (30,000)   $1.00     (52,500)   $1.00
                     -------    -----   ---------    -----   ---------    -----

Outstanding,
 December 31, 1997   127,500    $1.24     120,000    $0.89     247,500    $1.07

Canceled             (20,000)   $2.50    (100,000)   $0.88    (120,000)   $1.15

Granted               49,500    $1.00   1,100,000    $2.22   1,149,500    $2.17

Exercised           (157,000)   $1.00                         (157,000)   $1.00
                     -------    -----   ---------    -----   ---------    -----

Outstanding,
 December 31, 1998         0            1,120,000    $2.20   1,120,000    $2.20
                     =======    =====   =========    =====   =========    =====

     The 1994 Plan options  expire from 1999  through  2003.  The other  options
       expire from 2000 through 2002.

                                      F-31
<PAGE>

                         IMAGINON, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

7.   Shareholders' equity (continued):

     Stock options (continued):

     Had  compensation  cost for the 1994 options  granted in 1997 and 1998 been
       determined based on the fair value at the grant dates consistent with the
       provisions  of SFAS No. 123,  the  Company's  net loss and loss per share
       would not have been materially different from that reported.

     Warrants:

     The Company has outstanding warrants to purchase 1,990,000 shares of common
       stock at $1.00 per share that expire in June 1999 (the  "Warrants").  The
       Company also has  outstanding  warrants to purchase  120,000  Warrants at
       $0.30 per Warrant that expire in June 1999.

     In 1997, the exercise  price of warrants to purchase  500,000 shares of the
       Company's common stock that had been granted to two officers/shareholders
       of the  Company  were  reduced  from  $2.38  per share to $1.00 per share
       (which approximated fair value).  These warrants expire from 2002 through
       2003.

     The Company  also has  outstanding  warrants to purchase  58,331  shares of
       common stock at $4.81 per share that expire in 2000.

8.   Extraordinary item:

     The Company  recognized an extraordinary gain of $383,705 in 1997 (of which
       $149,000   related   to  debt  due  to   officer/shareholder)   from  the
       extinguishment  of debt for amounts less than the  carrying  value of the
       liabilities.

                                      F-32
<PAGE>

                         IMAGINON, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

9.   Foreign operations and export sales:

     Information about the Company's  operations in the United States and Canada
       for the year ended December 31, 1997 are as follows:

                                 United                              Combined
                                 States       Canada   Eliminations   total
                               -----------  ---------- ------------ -----------
         Sales to unaffiliated
           customers           $ 5,494,000  $3,594,000              $ 9,088,000
         Intercompany sales                    740,000  $(740,000)
                               -----------  ----------  ---------   -----------
         Net sales             $ 5,494,000  $4,334,000  $(740,000)  $ 9,088,000
                               ===========  ==========  =========   ===========

         Loss from operations  $(3,650,000) $ (418,000) $  (7,000)  $(4,075,000)
                               ===========  ==========  =========   ===========

     During the year ended December 31, 1997 sales by geographic regions were as
       follows:

         Europe and other                              $       1,395,330
         Canada                                                3,185,923
         Japan                                                   101,595
                                                       -----------------
                Total exports                                  4,682,848

         USA sales                                             4,404,919
                                                       -----------------
                Total sales                            $       9,087,767
                                                       =================

10.  Merger agreement:

     On January 20, 1999,  the Company,  through ImaginOn  Acquisition  Corp., a
       newly formed, wholly owned subsidiary of the Company,  completed a merger
       with ImaginOn.com,  Inc. of San Carlos,  California ("IMON"), a privately
       held company. IMON, formed in March 1996, designs, manufactures and sells
       consumer  software  products  for  Internet  users.  At  closing,  IMON's
       shareholders  received  approximately  60% of the post merger  issued and
       outstanding common stock of the Company  (21,248,665  shares) in exchange
       for their IMON common stock.

                                      F-33
<PAGE>

                         IMAGINON, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

10.  Merger agreement (continued)

     The Company filed a proxy statement relating to the transaction in November
       1998 that  includes  financial  statements  of IMON,  unaudited pro forma
       financial information  reflecting the merger, and other information about
       IMON and the merger. The merger transaction was approved in December 1998
       by the boards of directors of both companies and was also approved by the
       Company's shareholders. The merger transaction was consummated on January
       20, 1999.  During 1998, the Company  advanced  ImaginOn  $1,433,269 at 9%
       interest. This amount, plus interest receivable of $43,948, is classified
       as notes receivable, related party on the consolidated balance sheet.


     On March 8, 1999,  the  Company  acquired  Network  Specialists,  Inc.,  an
       internet  service  provider for $230,000 cash and  approximately  260,000
       shares of the Company's common stock.

                                      F-34