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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   Form 10-KSB

/XX/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

     For Fiscal Year Ended DECEMBER 31, 1998                   [Fee Required]
                           -----------------

/  / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES ACT OF 1934                                        [No Fee Required]

         For the transition period               to               .
                                  ---------------  ---------------

                           Commission File No. 1-11976
                                               -------

                           UNAPIX ENTERTAINMENT, INC.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

         DELAWARE                                      95-4404537
--------------------------------------------------------------------------------
(State or other jurisdiction of              (IRS Employer Identification No.)
incorporation of organization)

200 Madison Avenue, New York, NY                         10016
--------------------------------------------------------------------------------
(Address of principal executive offices)               (Zip Code)

Registrant's telephone number, including area code:  (212) 252-7600
                                                   ----------------

Securities registered pursuant to Section 12(b) of the Act:

                                                        Name of each exchange
Title of Each Class                                     On Which Registered
-------------------                                    -----------------------
Common Stock                                           American Stock Exchange

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

Check whether the issuer (i) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (ii) has been subject to such filing requirements for the past 90
days.
Yes   X            No
    -----            -----

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB ( ).


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Issuer's revenues for its most recent fiscal year were $36,481,000.

The aggregate market value of the common stock held by non-affiliates of the
registrant is approximately $11,859,000 (based upon the closing sales price of
these shares on the American Stock Exchange on March 16, 1999).

On March 30, 1999, there was a total of 7,600,982 shares of the registrant's
common stock outstanding.

Documents Incorporated by Reference:

1.       Proxy statement for 1999 Annual Meeting incorporated in Part III.

2.       Certain exhibits to Registration Statement, as amended, File No.
         33-61798.

3.       Certain exhibits to Quarterly Report on Form 10-QSB for the quarterly
         period ended June 30, 1993.

4.       Certain exhibits to Quarterly Report on Form 10-QSB for the quarterly
         period ended September 30, 1993.

5.       Certain exhibits to Quarterly Report on Form 10-QSB for the quarterly
         period ended June 30, 1996.

6.       Certain exhibits to Quarterly Report on Form 10-QSB for the quarterly
         period ended March 31, 1997.

7.       Certain exhibits to Quarterly Report on Form 10-QSB for the quarterly
         period ended September 30, 1997.

8.       Certain exhibits to Annual Report on Form 10-KSB for the year ended
         December 31, 1993.

9.       Certain exhibits to Annual Report on Form 10-KSB for the year ended
         December 31, 1994.

10.      Certain exhibits to Annual Report on Form 10-KSB for the year ended
         December 31, 1995.

11.      Certain exhibits to Annual report on Form 10-KSB for the year ended
         December 31, 1996.

12.      Certain exhibits to Annual Report on Form 10-KSB for the year ended
         December 31, 1997.

13.      Certain exhibits to Current Report on Form 8-K for Event of June 21,
         1995.

14.      Certain exhibits to Current Report on Form 8-K for Event of July 16,
         1998


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                                     PART I

ITEM 1.  BUSINESS

         Unapix Entertainment, Inc. (the "Company") is primarily a world-wide
distributor, licensor and producer of feature films and programming; it exploits
multiple distribution channels, including all forms of television (including
free and pay television, syndication, broadcast, cable and satellite), the home
video market, including videocassette, laser discs and digital video disks
("DVD"), and the consumer market, including direct response and electronic
commerce ("E-Commerce"). The Company's current "library" of films and programs
includes feature films, non-fiction series, children's programming, educational
and special interest programming, musical concerts, comedy shows, adventure
series and classic films and serials (together with music videos and audio
recordings, "Properties").

         Since 1993 the Company has sought to exploit the increasing worldwide
demand for television programming and feature films resulting from the
fractionalization of the television viewing audience. A shift has occurred from
mass audiences dominated by a few, free broadcast networks to niche audiences
served by diverse cable, satellite and free television services, home
videocassette and other products. This fragmentation has been augmented by
technological developments including, most recently, the growth of the internet.
The Company primarily focuses on the licensing and distribution of Properties
that are designed to appeal to a specific segmented audience. However, during
1998 the Company expanded its development, production and distribution of
Properties that it believes have broader appeal, such as reality-based
television programming and fictional feature films designed for a relatively
wide audience, such as family films. In addition, during 1998 the Company
continued its exploitation of new technologies by marketing most of its
Properties over its own E-Commerce web sites as well as approximately 30
E-Commerce web sites operated by others.

         The Company's operations currently consist principally of the
following: the distribution of feature films via videocassettes to domestic home
video rental stores; the distribution of Properties from the Company's library
to foreign broadcasters and home video publishers; the licensing of Properties
to the North American television market; and the marketing of products that are
intended to be purchased by consumers, including via sales to mass merchants and
through catalogues and the internet.

         The Company was incorporated in Delaware on January 7, 1993 and is the
successor to Majestic Entertainment, Inc., which was incorporated in California
on January 6, 1986 and which was merged into the Company on March 23, 1993.


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ACQUISITION OF FEATURE FILMS AND TELEVISION PROGRAMMING

         The Company continuously monitors the industry for available films and
television programming and attempts to acquire rights to such Properties which
it believes are saleable to various markets. Before acquiring the rights to a
specific film or program, the Company analyzes its viability for licensing or
distribution in light of its projected costs and revenues and attempts to target
the Property's audience appeal. The Company includes in its calculation the
degree to which it will be able to exploit the Property through its various
distribution channels. In determining the desirability of acquiring rights to
films or television programs, the Company examines their content, genre,
quality, theme, participating talent (e.g., actors and directors), plot, format
and other criteria to determine the Properties' suitability for the commercial
broadcast, cable, satellite, pay television and home video markets. In acquiring
finished films or programming, management typically views a program or film in
its entirety to evaluate its commercial viability.

         In order to obtain licensing or distribution rights with respect to
films or television programs, the Company generally enters into a licensing or
distribution arrangement with the copyright holder or an assignee of rights from
the copyright holder. The Company's rights generally cover all media, but in
certain instances may be limited to specific media (e.g., broadcast television,
cable or home video). The rights also may be limited to particular geographic
areas. Most of the Company's domestic distribution rights to feature films that
it has acquired during the last year, have terms ranging from 15 years to
perpetuity. The Company's distribution rights with respect to television
programming are often of shorter duration. In acquiring rights, the Company
usually pays a non-refundable advance and/or commits to expend a certain amount
of funds on marketing. In some cases, the producer or distributor licensing the
Property to the Company is entitled to receive the revenues from the Company's
distribution activities, after the Company has been paid a specified
distribution fee (which is a percentage of revenues) as well as recouped its
advance and specific recoupable marketing and other distribution expenses. In
other cases, the Company will agree to pay the licensor a royalty equal to a
specific percentage of revenues; after the Company has recouped its advance, it
will then pay the licensor its royalty and the Company will be entitled to
retain all remaining revenues. The Company usually charges interest on its
advances, which, similar to the principal of the advances, is payable only out
of royalties or participations otherwise payable to the licensor.

         While the majority of the films and television programs that the
Company acquired for distribution during 1998 were produced by others and had
been completed at the time the Company acquired rights therein, the Company has
increasingly been acquiring distribution rights in films and television programs
by funding a portion of their production, or in certain instances, by funding
all of their production. In exchange for such funding, the Company


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may acquire, in addition to its distribution rights, an ownership interest in
the Property entitling it to a percentage of profits from any distribution
thereof (whether or not effectuated by the Company). Funding productions often
enables the Company to acquire distribution rights of longer duration than it
might otherwise have been able to obtain. In consideration for its involvement
in a production, the Company may also receive an Executive Producer's fee.
Because production arrangements necessarily entail unfinished programs, the
Company is not able to view the program prior to acquiring its rights, and
therefore, there is the risk that the finished product may be different from
that which was initially envisioned. The Company assigns executives to monitor
the production, in an effort to reduce such risk.

         Production costs include the costs of acquiring or developing a
screenplay, film studio rental, cinematography, post-production and the
compensation of creative and other production personnel. Major studios (such as
Universal Pictures, Warner Brothers, Twentieth Century Fox, Sony Pictures
Entertainment, Paramount Pictures, and The Walt Disney Company) generally fund
production costs from cash flow from their motion picture and related activities
or, in some cases, from unrelated businesses. Independent production companies
generally avoid incurring substantial overhead costs by hiring creative and
other production personnel and retaining the other elements required for
pre-production, principal photography and post-production activities on a
project-by-project basis. Independent production companies often arrange for
financing on a project by project basis.

         After acquiring rights in a feature film or television program prior to
production, the Company typically, at a minimum, has approval rights over key
product elements and maintains a production supervisory staff to carefully
monitor production and maintain quality control. In connection with acquiring
rights in television programming prior to production, the Company has often
acted as an independent production company, retaining the personnel and other
elements required for production, and frequently developing concepts for
programs as well.

         Since 1996 the Company has developed and produced documentary and
educational non-fiction programming. A recent program developed by the Company,
which is being co-produced by the Company together with Story Street Productions
and Films 2 People, is a two part, two-hour documentary, "Nelson Mandela", that
is scheduled to be broadcast on the Public Broadcasting System's "Frontline"
series in May 1999.

         During the second quarter of 1998, the Company expanded its television
programming production operation to include the development (for domestic and
international markets) of reality based and creative television programming that
is principally designed to have a mass audience appeal. During February 1999 the
first such production by the Company, "Shocking Behavior: Caught on Tape," was
broadcast domestically on the Fox network. The program was the second most
watched television show in its time slot,


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earning a 10 rating and a 15 share of television viewers nationwide.

         To date, the Company has sought to limit its risk with respect to the
production of both television series and film. In connection with the production
of television series or programs, the Company generally limits its initial
funding to the creation of print materials or the production of a short demo
film. Additional financing of production by the Company is then conditioned upon
attaining a significant level of pre-sales of the series or program based upon
the demo film or print materials. Pre-sales consist of license fees paid or
committed to be paid to the producer by third parties in return for the right to
exhibit the program or to distribute it in home video, television or ancillary
markets in certain negotiated territories. While pre-selling a series reduces
the Company's risk, it does not entirely eliminate the risks to the Company,
which include the following: failure to complete the production and deliver the
programs in which case the Company will either not be entitled to be paid by the
licensee to whom it pre-sold the programs or may have to reimburse amounts
already paid; a delay in completing production as to some or all of the episodes
comprising a series, which would result in the Company's not being paid
according to schedule by the licensee to whom it pre-sold the series and could
result in cancellation of the sale; and actual production costs significantly
exceeding the original production budget, thereby materially increasing the
Company's cash flow requirements and decreasing the ultimate profitability of
the series. When a television program has a well-defined television or home
video audience and entails relatively limited production costs, the Company has
funded its entire production without pre-selling the series. During 1998 the
Company completed production of approximately 50 hours of television
programming.

         In connection with the financing of the production of a feature film,
the Company generally commits to provide an amount of funding that, when added
to other financial commitments the producer already has received, equals the
production budget. In most cases, the Company makes only limited commitments to
advance funds prior to completion of principal photography, when the bulk of
production costs has already been incurred. In addition, in most instances when
the Company provides production financing of a feature film the producer obtains
a completion bond that guarantees delivery of a finished film. In the future,
the Company anticipates that it will, in some instances, act as the lead
producer on feature films by developing projects and hiring creative and other
production personnel. One such project that the Company is developing with a
planed release for the year 2000 is "The Texas Chainsaw Massacre - 25th
Anniversary." In such cases, the Company anticipates that it will not proceed to
principal photography unless it has obtained a significant level of pre-sales.
In 1998 the Company co-financed the production of 10 films, and it plans to
co-finance the production of 12 films during 1999.


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         There is no assurance that in the future the Company will not change
its conditions for providing production financing for feature films or
television programs.

         The Company believes that through production financing it can acquire
distribution rights to higher quality films and programs with better production
values and more recognizable stars, as well as on more favorable terms, than can
be obtained after a Property is completed.

         To enhance the Company's position in a dynamic marketplace, given the
financial terms and available rights, the Company seeks to acquire distribution
rights in as many media and territories with respect to films and television
programs as is practicable. This permits a single Property to be marketed by
more than one of the Company's divisions and subsidiaries and has permitted the
Company to exploit new technological developments such as DVD.


VIDEOCASSETTE DISTRIBUTION OF FEATURE FILMS TO HOME VIDEO RENTAL
STORES IN THE UNITED STATES

         The Company, through A-Pix Entertainment("A-Pix"), is engaged in the
promotion and distribution of feature films for the home video rental market in
the United States, primarily consisting of video rental chains, individual video
rental stores, and supermarkets.

         The Company commenced distributing videocassettes to the home video
rental market in 1994, releasing a total of 22 films during that year. During
1995, 1996 and 1997 the Company released a total of 23, 24 and 25 films,
respectively. The Company released 27 films in 1998 and expects to release 29
films in 1999. Most of the films distributed by the Company in this market to
date have been films that were released directly to the video rental market
without any prior exhibition in theaters or without a premiere on cable or
broadcast television.

         The market for home videos has become increasingly competitive and
video rental outlets are becoming more selective in their choice of product. In
addition, overall growth in the domestic home video market has slowed as growth
in the number of new outlets and new VCR homes has moderated. The growth in
outlets designed to serve the rental market has remained essentially flat or has
actually declined for the past several years. Furthermore technological
developments could make competing delivery systems economically viable and could
affect the home video marketplace. This has resulted in a significant decrease
in the number of A-Pix's competitors.

         The Company has been reacting to this evolving market by seeking to
acquire (i) increasingly higher quality films with more recognizable stars and
better production values and (ii) all domestic distribution rights, which
enables the Company's other divisions to exploit new evolving technologies as
well as presently


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existing distribution channels such as the following: pay-per-view, which
allows cable television and satellite service subscribers to purchase individual
programs; pay television, which allows cable television subscribers to view
premium channels such as HBO/Cinemax and Showtime/The Movie Channel; and
broadcast and basic cable television delivery systems, which allow viewers to
receive, without charge, programming broadcast over the air by affiliates of the
major networks (ABC, CBS, NBC and Fox), newly formed networks (UPN and WB
Network), independent television stations and cable and satellite networks and
stations.

         Approximately 50% of the Company's films distributed to the domestic
home video rental market during 1998 were also licensed by the Company for
exhibition on pay-per-view and pay and basic cable television. In most
instances, such licenses were for exhibition after the release of the film to
the home video rental market. However, during 1998 two of the Company's films
that were released to the rental market also premiered on pay television. The
Films "Devil in the Flesh" (starring Rose McGowan) and "Bram Stoker's The Mummy"
(starring Louis Gossett, Jr.), both of which were co- produced by the Company,
premiered on HBO. During 1998 the Company also released one film to the
theatrical market; the film was promoted and exhibited in a select group of
cities. As the Company acquires or produces higher quality films, it anticipates
that the proportion of the films that it releases to the home video rental
market which have previously been released to the theatrical market or premiered
on cable or broadcast television will increase; albeit, there can be no
assurance that this will, in fact, be the case.

         Almost all feature films released by A-Pix are subsequently distributed
by the Company to the consumer market. Certain films that were previously
released by A-Pix have been, and all of its current films are, reformatted on
DVD for distribution for purchase by consumers.

         Notable films that have recently been released by A-Pix or are
scheduled to be released by it within the next 12 months include the following:

         The family films: "Invisible Dad"; and "Boys will be Boys"
(starring Randy Travis, Julie Hagerty and Jon Voight);

         The horror films: "Uncle Sam" (starring Robert Forster and
Isaac Hayes); "Bleeders" (starring Rutger Hauer); and "Jack Frost";

         "Jane Doe" (starring Calista Flockhart), which won grand prize for best
feature film at the New York Independent Film and Video Festival in February
1999. This film is slated for release in 1999.

         "A Merry War" (starring Helena Bonham Carter and Richard E.
Grant); and

         "Lies and Whispers" (starring Gina Gershon).


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INTERNATIONAL OPERATIONS

          The Company, through its division Unapix International, exploits
rights to Properties in the international marketplace; marketing Properties to
broadcasters and others in more than 100 countries.

         The Company's international library contains documentaries and
television series. Its library also contains films in the drama, adventure,
comedy, horror, musical, war and western genres as well as music videos from
Miramar. Many of the Company's acquisitions for international distribution have
been exhibited domestically on PBS, the Disney, Discovery and A&E Channels as
well as on The Learning Channel.

         During 1994, the Company formed a unit to concentrate on international
television distribution of educational programming. Currently, the unit has over
350 hours of telecourse programming in diverse areas, such as science,
humanities, business, sociology, child development and art.

         Notable Properties that the Company distributes in the international
marketplace include the following: "Nova's Century of Discovery" (a series
consisting of five two-hour programs that explores 100 years of monumental
achievements in a variety of scientific fields); "Banana Zoo" (a series
consisting of 26 half- hour programs that is designed to foster a child's love
for nature and animals); "Medical Detectives" (a series consisting of 52 half-
hour programs which is a non-fiction crime solving series that airs domestically
on The Learning Channel); "Too Extreme" (a series consisting of four one-hour
programs featuring human behavior taken to the limit); and "Out of Control" (a
series consisting of three one-hour programs focusing on people, vehicles and
mother nature running amok).

NORTH AMERICAN TELEVISION LICENSING

         The Company licenses the Company's feature films and television
programs to domestic and Canadian television networks, independent television
stations, satellite networks and cable system operators. The Company also acts
as a sales agent for other distributors or producers with respect to the
licensing of their programs in these markets, for which the Company receives a
sales commission. The Company's licensing activities to the domestic television
market are conducted by the Company's division, Unapix Program Enterprises
("UPE"), and its majority-owned subsidiary Unapix Syndication, Inc. ("Unapix
Syndication").

         UPE licenses Properties primarily for exhibition on pay-per view, pay
television and basic cable channels. Customers have included the following: HBO;
Showtime; The Sundance Channel; Encore; Disney Channel; Lifetime; USA Network;
TNT; Comedy Central; The Discovery Channel; The History Channel; American Movie
Classics; F/X; The Family Channel; The Learning Channel ("TLC"); Animal Planet;
and CNBC. In addition to the feature films


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distributed to the domestic home video rental market, notable Properties that
UPE has licensed in the North American television market include the following:
"Ushuaia: Adventures of Nicolas Hulot" (a series consisting of 26 one-hour
episodes of a television series that had been broadcast in France for many
years. The series began broadcast on CNBC in January 1998); and
"Superstructures" (a series consisting of ten one-hour programs featuring
episodes on such subjects as the following: Nuclear Submarines, Tunnels,
Skyscrapers, the Panama Canal and an oil rig off the coast of Nova Scotia. The
series has been broadcast on TLC).

         The Company commenced its syndication operations in the fourth quarter
of 1998 in order to distribute, to individual domestic television broadcasters,
the Company's Properties as well as first-run series and specials produced
directly for syndication and off-network syndication strips (in which shows
originally produced for weekly broadcast on a network are aired five days a
week). Unapix Syndication licenses Properties for domestic national or regional
broadcast on a television station by station basis (including television station
groups).

         In addition to the operations of UPE and Unapix Syndication, in the
second quarter of 1998, the Company began to focus on developing and producing
specials for broadcast on domestic television networks. The Company develops the
ideas for the specials then attempts to obtain production financing from the
networks. During February 1999 the Company's first such production, "Shocking
Behavior: Caught on Tape," a one-hour special, was broadcast domestically on the
Fox network.

CONSUMER PRODUCTS

         The Company, through its wholly-owned subsidiaries, Miramar Images,
Inc. ("Miramar"), currently doing business under the name Unapix Home
Entertainment, and Unapix Direct Media, Inc. ("Unapix Direct Media"), conducts
"sell-through" operations, marketing products that are intended to be purchased
by consumers. Products marketed by the Company for consumer purchase primarily
consist of feature films, television series and special interest programs on
videocassettes and DVDs. Typical suggested retail prices for videocassettes to
be marketed as sell-through range from $9.95 to $19.95 per program; suggested
retail prices on DVDs range from $14.98 to $29.98 per program. At such prices it
is believed that the product becomes attractive for consumer purchase.

         A portion of the Company's sell-through operations is conducted under
the name "Inner Dimension." Inner Dimension currently distributes home videos
and audio books, which explore the dynamics of the human mind or body or
metaphysics, to retailers, mail-order companies, mass merchants and
distributors. Many of the products marketed under the Inner-Dimension label are
sold at General Nutrition Centers and other health stores. Programs distributed
by Inner Dimension include PBS specials such as the following: Andrew Weil's
"Eight Weeks to Optimum Health" and "Spontaneous Healing;" Caroline Myss' "Three
Levels of Power and


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How to Use them" and "Why People Don't Heal and How They Can;" Deepak Chopra's
"The Seven Spiritual Laws of Success" and "The Way of the Wizard;" and Joseph
Campbell's "Mythos," hosted by Susan Sarandon, which explores the world's most
enduring archetypes.

         In addition to the Inner Dimension operations, the Company also
distributes for consumer purchase films and programs licensed and distributed by
the Company in other markets as well as Properties acquired by the Company
solely for sell-through distribution. An example of a Property acquired solely
for the sell-through market is Lifetime's "Intimate Portrait" series (each
episode of which presents biographies of women from the diverse worlds of art,
entertainment, politics, business and sports) which the Company began
distributing in 1998. The Company currently markets to consumers approximately
two titles per month that were previously released to the home video rental
market by A-Pix; marketing for sell-through typically commences approximately
nine months after the initial rental market release. The Company currently
operates three direct mail catalogues, consisting of:

         "Inner Dimension," which offers programs distributed by the Company as
         well as programs and products purchased wholesale from other vendors,
         all of which are focused on healthy living;

         "The Jazz Store," which features collections of jazz recordings,
         videos, T-Shirts, books and collectibles and which is operated through
         the Company's 90% owned subsidiary The Jazz Store, Inc. ("The Jazz
         Store"). Most of the products distributed through The Jazz Store
         catalogue are acquired whole-sale from third party vendors, but certain
         of the products are The Jazz Store's own proprietary items; and

         "The Entertainer," which offers video cassettes and DVD's, of the
         Company's Properties and programs and products purchased wholesale from
         third party vendors.

         During 1998 the Company launched a number of E-Commerce web- sites.
These sites are in addition to The Jazz Store web-site
(WWW.THEJAZZSTORE.COM),(which offers substantially the same merchandise as the
Jazz Store catalogue), that has been operated by The Jazz Store since 1995. The
new E-Commerce sites consist of the following:

         The Horror Shop (WWW.THEHORRORSHOP.COM), which offers genre videos and
         related merchandise to horror fans;

         Direct Response Television (WWW.REPLYTV.COM), which allows television
         viewers to quickly and easily purchase Company programs;

         Inner Dimension (WWW.INNERDIMENSIONS.COM), which features the
         same products as the catalogue by the same name; and


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         The Digital Entertainment Catalog (WWW.DVDENT.COM), which offers
         Company titles on DVD.

         The Company operates a number of other web-sites that serve, via links
on such sites, as conduits for its E-Commerce web-sites. An example of such a
web-site is Horrormovies.com, which the Company acquired in 1998; this web-site
has chat rooms and articles related to the horror genre and serves as an
important link to the Company's E-Commerce site the horror shop.com. In
addition, the Company markets its products through approximately 30 E-Commerce
sites operated by others, such as Amazon.com.

MARKETING OF FEATURE FILMS AND TELEVISION PROGRAMS

         In acquiring the rights to various film and television Properties, the
Company analyzes the viability of the Properties for distribution to the various
marketplaces in an effort to target the Properties' audience appeal. After such
analysis, the Company markets the Properties to the various media in a selective
manner. The Company and its key personnel have established contact with many
broadcasters, cable system operators and home video companies worldwide. The
Company also presents certain of its films and television programs to foreign
and domestic broadcasters, cable system operators and home video companies who
are in attendance at the various international and domestic television
programming conventions such as NATPE, MIP, MIP Asia, MIPCOM, DISCOP East
Europe, the London Screenings, and the Los Angeles Screenings. In addition, with
respect to certain of its non-fiction programming, i.e. to date its "Great
Minds" series, the Company has entered into arrangements with print publishers
to both promote the series and give the series greater prominence, such as
Forbes for "Great Minds of Business," and American Heritage magazine for "Great
Minds of American History."

         In connection with its distribution of films and television programming
to the international marketplace and its licensing of such Properties to the
North American television market, the Company licenses Properties for exhibition
primarily via pay, basic cable, pay-per-view and broadcast television, and, in
the case of international distribution, also via home video publishers. The
Company enters into license agreements with ultimate exhibitors, i.e.,
television networks, television stations and cable and satellite systems
operators, as well as sub-distributors. The Company does not, with some minor
exceptions, directly distribute videocassettes internationally, rather, its
licenses videocassette distribution rights to sub-distributors. The Company also
licenses feature films and television programs or series for distribution on
DVD.

         The Company's license agreement with a customer typically grants the
customer an exclusive license to either exhibit or distribute a specific film or
television program for a specified term, territory and medium, and in the case
of a license to a pay television channel or a broadcast or cable television
operator, the right to exhibit the Property for a specified number of times.


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Upon the execution of the license agreement, the Company typically delivers a
copy of the master of the film or television program in a format appropriate to
the customer's needs. In consideration for the granting of the license to a
specific film or television program, the Company receives a licensing fee,
which, in the case of a license granted to a distributor or a pay-per-view
television exhibitor, is a percentage of revenues from the licensee's
distribution or exhibition of the Property and may include an advance of the fee
which is then recoupable from what otherwise would have been payable to the
Company. In the case of a license granted directly by the Company to a broadcast
network or station or pay or basic cable television operator, the Company
usually receives a set license fee that is not dependent upon the amount of
revenue achieved by the channel, network or operator from the exhibition of the
licensed Property. In certain cases Unapix Syndication will enter into barter
arrangements where the license fee it receives from a television station
consists of advertising time; the Company then sells that time to advertisers.

         The Company distributes videocassettes of feature films to the domestic
home video rental market primarily by selling them to nine wholesale
distributors, who then sell the videocassettes to rental outlets, such as video
rental chains, individual video rental stores, and supermarkets. The Company
also sells videocassettes directly to Blockbuster Entertainment and Hollywood
Entertainment. During 1998, an aggregate of approximately 27% of the Company's
total revenues on a consolidated basis arose from sales to Discovery Channel
Inc. and its affiliates, Blockbuster Entertainment and Ingram Entertainment. The
Company currently sub- licenses laser disc and DVD rights to other domestic and
Canadian distributors, who directly or indirectly, sell the laser discs and DVDs
to retail outlets.

         The Company selects an average of approximately two feature films for
release each month to the United States home video rental market. Approximately
sixteen weeks prior to a video's retail release, the Company embarks on a
marketing campaign that includes advertising in distributor mailers and trade
publications and direct mailing of marketing literature and screening copies of
the video. The Company sells videocassettes to the United States home video
rental market primarily on a "pre-order" basis. Distributors who meet certain
sales and performance objectives may earn rebates, return credits and
cooperative advertising allowances.

         The Company believes that the packaging and art work for the video
boxes, posters, advertisements and other selling materials relating to the films
it distributes to the United States home video rental market are key factors in
determining the amount of sales. The Company believes that it was one of the
first distributors to utilize several new techniques of video box designs
including the use of 3-D graphics and "moving" images, along with multiple box
designs for the same films. The Company designs the promotional campaign for
each such Property it releases. While some of the art works for packaging,
advertisements, trade show displays and posters are created entirely in-house,
the Company


                                       13

<PAGE>



usually commissions outside parties to assist in the art work for these
materials. The Company then arranges for the printing, production and
distribution of all promotional materials.

         Most of the feature films the Company distributes to the domestic home
video rental marketplace are released directly to that market. From 1995 to
1998, the Company had not engaged in theatrical distribution, albeit, during
such period, it had distributed films that were released by others theatrically.
As the Company has been acquiring rights in feature films earlier in their
production stages, the Company has been seeking to acquire all rights in the
United States, including theatrical distribution rights. Because the production
quality of these films as well as the caliber of their stars has been improving,
the Company intends to increasingly exploit the theatrical rights it acquires by
either sub-licensing such rights to domestic theatrical distributors or engaging
in theatrical distribution itself. Theatrical distribution of a film involves
the manufacture of release prints, the promotion of the picture through
advertising and publicity campaigns and the licensing of the motion picture to
theatrical exhibitors. The size of the promotional advertising campaign can
materially affect the revenues realized from the theatrical release of a motion
picture. During 1998 the Company theatrically released one film on a platform
basis. In a platform release, a film is exhibited in theatres in one or two
cities where the film is promoted; if the release is successful in those cities,
then it is released in other cities.

         Films that are first released theatrically are generally released to
the home video rental market four to six months after the theatrical release.
Films that are first exhibited on cable television are generally released to the
home video rental market two to three months after the television premiere.

         It is expected that in the future a greater percentage of the films the
Company releases for the home video rental market will first be released
theatrically or premiere on cable television. During 1998 two of the films that
A-Pix released to the home video rental market first premiered on pay
television. The Company believes that a theatrical release or pay cable premiere
of a film should complement its home video release by generating greater
interest and awareness of the film before it is marketed for home videos.

         The Company markets films and television programs that are intended to
be purchased by consumers by the following means: (i) selling to distributors
and "rack-jobbers" who then sell the products to large retail outlets (such as
"Best Buy," "Music Land" and "Tower Records"), convenience stores (such as
"Seven Eleven") or mass merchants (such as "Sam's Club"), or otherwise market
the products via shelf space they occupy at these locations, for resale to the
ultimate consumer, (ii) direct response advertisements appearing on the
Company's videocassettes and at the end of


                                       14

<PAGE>


broadcasts of some of the Company's programs, and (iii) sales to specialty
retail outlets (such as governmental agencies, gift stores, libraries, museums,
Radio Shack, The Nature Company, The Sharper Image and General Nutrition
Centers). In addition, the Company markets Properties directly to consumers
through their inclusion in catalogues operated by the Company and others, and
through web-sites operated by the Company and others. All of the Company's
E-Commerce web-sites are cross-promoted via direct advertising, web addresses on
telecasts of Company programs, in Company mail-order catalogues, customer
response cards included with Company product, the use of trailers on the
Company's videos and via links to other Web sites operated by the Company. The
Company's E-Commerce sites themselves cross-promote the Company's other
products; as an example, thehorrorshop.com may contain promotion for an upcoming
horror video release by A-Pix.

MUSIC VIDEOS AND AUDIO TAPES AND COMPACT DISCS - MIRAMAR IMAGES,
INC.

         The Company, through Miramar Images, Inc. ("Miramar"), which was
acquired by the Company in 1997, produces and distributes music videos and audio
recordings primarily for the New Adult Contemporary market, i.e., products that
are designed to appeal to individuals over the age of 25. Miramar's videos are
primarily long form music videos that match visual images with music rather than
attempting to tell a story. Miramar commenced operations in 1985 and was known
primarily as a "New Age" label. Early Miramar productions included "Natural
States," "Desert Vision," and "Canyon Dreams." During the 1990's Miramar
progressed from merely being a "New Age" label and began producing videos that
utilize a computer animated medium rather than traditional cinematography, such
as "The Mind's Eye," "Beyond the Mind's Eye" and "The Gate to the Mind's Eye."
In 1999, Miramar's music video "Televoid" was nominated for a Grammy Award for
Best Long Form Video. Miramar markets the soundtracks to a number of its videos
separately as audio products. In addition, Miramar's record division produces
and markets audio albums independent of videos. Artists who have recorded on the
Miramar label include the following: Tangerine Dream; Pete Bardens; Jan Hammer;
Thomas Dolby; Abraxas Pool; and Roger Smith. Audio only albums that have been
released by Miramar include: "Drive;" "220 Volt Live;" "Both Sides;" and
"Tyranny of Beauty." While most of Miramar's products are marketed to adults,
Miramar has a children's line of videos, examples of which are "Gift of the
Whales," "Imaginaria," and "Elroy's Toy."

         Recordings are primarily obtained from artists and their agents who
approach Miramar seeking a distribution label. In almost all cases, the music
has been recorded on a relatively high quality master when it is presented to
Miramar. Miramar may re-sequence and remix the master, however, rarely will it
arrange for a record to be produced by an artist in a recording studio.


                                       15

<PAGE>


         Most recordings are acquired by Miramar's purchasing the master. Such
master purchase arrangements usually enable Miramar to have distribution rights
in all media and territories in perpetuity to the recordings thereon. The artist
is usually prohibited from rerecording the music on the master for a period of
three to seven years. To a lesser extent, Miramar may acquire recordings by
obtaining the exclusive right to distribute the recordings on audio tapes and
compact discs, and where applicable, use the recordings in conjunction with
videos. The license will usually be limited to a certain time period and
territory. In acquiring distribution rights to recordings under either master
purchase arrangements or license agreements, Miramar usually pays a small
royalty advance as well as royalties based upon net sales. In some instances
Miramar may sign an exclusive recording agreement with a particular musician or
musical group, whereby Miramar agrees to acquire the recording that has already
been presented to Miramar by the musician or musical group and has the option to
acquire the next subsequent recordings at an agreed upon fee structure.

         Miramar distributes its products to both the "traditional retail
marketplace," such as retail record and video stores and chain bookstores, as
well as specialty retail outlets (alternative markets), such as governmental
agencies, gift stores, libraries, museums, Radio Shack and The Sharper Image. In
January, 1998 Miramar entered into a distribution agreement with Distribution
North America ("DNA"), a division of Valley Media, Inc., for distributing its
music videocassettes and audio compact discs and tapes in the "traditional
retail marketplace" in United States, which is the principal territory in which
Miramar's products are sold. The distribution agreement with DNA expires in
January 2001. Miramar maintains an in-house sales department that promotes and
markets its products particularly targeting the alternative market; it also
utilizes radio air play, television exposure, retail promotion, and publicity
and advertising to create demand within both the traditional and alternative
markets. Miramar from time to time has licensed its videos for exhibition on PBS
and the Disney Channel. It also markets its products through direct response
television advertisements and direct mail, including through catalogues operated
by the Company and others, and the Company's Web sites.

FOREIGN SALES

         Revenues derived by the Company from foreign markets were $6,313,000
and $6,358,000, in the years ended December 31, 1998 and 1997, respectively. The
Company is subject to various risks inherent in foreign trade which could have a
significant impact on the Company's ability to market its Properties
competitively. These risks include economic or political instability and
artificial ceilings placed on the demand for the Company's Properties in foreign
markets by foreign government's implementation of local content and quota
requirements prohibiting or limiting the quantity of foreign-made feature films
and


                                       16

<PAGE>


television programs which may be exhibited or broadcast in one or
more foreign countries.


GOVERNMENT AND OTHER REGULATION

         United States television stations and networks as well as foreign
governments impose restrictions on the content of motion pictures which may
restrict in whole or in part exhibition on television or in a particular
territory. There can be no assurance, therefore, that current or future
restrictions on the content of the Company's films, may not limit or affect the
Company's ability to exhibit certain of such motion pictures in such media or
markets.

EMPLOYEES

         Currently the Company and its subsidiaries, have 91 employees, three of
which are part-time.

COMPETITION

         Success in the distribution of films, television programming and audio
compact discs and tapes is largely dependent upon a company's ability to acquire
distribution rights to products at attractive prices and upon the subsequent
performance of these products in the marketplace. The Company faces significant
competition both in obtaining distribution rights and in selling products.

         Competition for distribution rights to films, television programs and
recordings is based primarily on the amount of royalty advances that companies
are willing to offer to producers and recording artists and the producers' and
artists' perception of the Company's marketing capabilities and its commitment
to marketing the property. The Company's principal competitors for acquisitions
of films and television programs are companies such as New Line Cinema, Artisan
Home Entertainment, Trimark Entertainment, Columbia Tristar Home Video, BMG
Entertainment, Pearson Television, Winstar Home Entertainment and Tapestry 
International. The Company's principal competitors for recordings are Windham 
Hill, Private Music, and Narada Media; however, to the Company's knowledge, 
Private Music and Narada Media do not produce or distribute long form music 
videos to any significant extent. Many of the Company's competitors have 
significantly greater financial resources and longer operating histories than 
the Company. In general, the Company acquires films, television programming, 
videos and recordings that are designed to appeal to a specific niche 
audience, and which can be promoted with a limited advertising budget. Many 
of the films and television programs the Company acquires may appeal to such 
a targeted audience that competitors who are financially stronger than the 
Company may not actively pursue them, and the competitors that do seek to 
acquire distribution rights in them may be financially

                                       17

<PAGE>


weaker than the Company, do not have as good a marketing reputation, or are
unable to exploit the films or programs in as many markets as the Company (i.e.
domestic television, domestic home video rental, consumer or international
markets). The Company also believes that it is able to compete against larger
companies because it can react to trends in the entertainment industry and
public tastes more quickly than such competitors since it lacks the more
elaborate bureaucracies that often characterize larger organizations. Most of
the recordings that Miramar seeks to acquire are not pursued by major record
labels because of their limited appeal. The Company believes that Miramar can
compete against other smaller record labels for acquisitions of recordings
because of Miramar's reputation in the industry.

         In marketing films, television programs, recordings and music videos,
the Company competes against the same competitors with whom it competes for the
acquisition of such products, as well as major studios and record companies,
such as Time/Warner, The Walt Disney Company, MCA, Paramount, Fox,
Sony/Columbia, and Geffen Records. Since the Company expends significantly less
on product acquisitions than many of these competitors it believes it can
produce profits from even modest sales volume.

SERVICEMARKS AND TRADEMARKS

         The Company has registered the following trademarks or service marks
with the United States Patent and Trademark Office: "UNAPIX;" "MIRAMAR
PRODUCTIONS;" A-PIX;" "INNER DIMENSION;" "UNAPIX FILMS;" and "The HORROR SHOP."
The Company has applied for federal registration of the following trademarks or
service marks: "UNAPIX CONSUMER PRODUCTS;" "THE JAZZ STORE;" "GREAT MINDS OF ,;"
"DOCERE;" and related logo treatments and designs.

FACTORS WHICH MAY AFFECT RESULTS

         THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH
STATEMENTS MAY CONSIST OF ANY STATEMENT OTHER THAN A RECITATION OF HISTORICAL
FACT AND CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS
"EXPECT," "ESTIMATE," "ANTICIPATE," "MAY," "BELIEVE," OR "CONTINUE" OR THE
NEGATIVE THEREOF AND SIMILAR EXPRESSIONS AND VARIATIONS THEREOF. THE READER IS
CAUTIONED THAT ALL FORWARD-LOOKING STATEMENTS ARE NECESSARILY SPECULATIVE AND
THAT THERE ARE CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL EVENTS OR
RESULTS TO DIFFER MATERIALLY FROM THOSE REFERRED TO IN SUCH FORWARD-LOOKING
STATEMENTS. CERTAIN OF THOSE RISKS AND UNCERTAINTIES ARE SET FORTH BELOW.
HOWEVER, THE RISKS HIGHLIGHTED BELOW AND ELSEWHERE IN THIS ANNUAL REPORT SHOULD
NOT BE ASSUMED TO BE THE ONLY THINGS THAT COULD AFFECT THE COMPANY'S FUTURE
PERFORMANCE. THE COMPANY DOES NOT HAVE A POLICY OF UPDATING OR REVISING
FORWARD-LOOKING STATEMENTS AND THUS IT SHOULD NOT BE ASSUMED THAT SILENCE BY THE


                                       18

<PAGE>



COMPANY'S MANAGEMENT OVER TIME MEANS THAT ACTUAL EVENTS ARE BEARING OUT AS
ESTIMATED IN SUCH FORWARD-LOOKING STATEMENTS.

NATURE OF THE ENTERTAINMENT INDUSTRY - The film, television programming and
audio compact disc and tape distribution business involves a substantial degree
of risk. The success of a product depends upon unpredictable and changing
factors such as competition and audience acceptance, which may bear little or no
correlation to the Company's production and other costs. Audience acceptance of
the Company's products represents a response not only to the artistic components
of the products, but also to the level of advertising and promotion by the
distributor and availability of alternative forms of entertainment and leisure
time activities, general economic conditions and public taste, and other
intangible factors, all of which change rapidly and cannot be predicted with
certainty. In addition, as a result of the Company increasing its resources to
film and television product earlier in its production and acquisition stages,
the possibility always exists that the finished product may be different from
that which was initially envisioned. Therefore, there is a substantial risk that
some or all of the Company's products may not be commercially successful,
resulting in costs not being recouped or anticipated profits not being realized.

CAPITAL INTENSIVE INDUSTRY; ADDITIONAL FINANCING REQUIREMENTS - The film,
television programming and audio compact disc and tape distribution and
licensing industry is capital intensive and requires significant expenditures of
funds to establish a library of Properties from which revenues may be generated.
The Company could be dependent upon future financing in order to compete more
effectively in the marketplace. The Company's cash requirements have been and
will continue to be significant. If additional funding is unavailable to the
Company when needed, the Company could be required to curtail significantly one
or more aspects of its operations and the Company's business and financial
condition could be materially adversely affected.

DEPENDENCE UPON KEY PERSONNEL - The Company is highly dependent on the services
of Herbert M. Pearlman, its Chairman of the Board and Chief Executive Officer,
Scott Hanock, Co-President of the Company and Managing Director of International
Sales and Marketing, and Robert Baruc, Co-President of the Company and President
of A-Pix. The loss of the services of one or more of Messrs. Pearlman, Hanock or
Baruc could have a material adverse effect upon the Company's business.
Presently, the Company has key man life insurance on the life of Mr. Baruc in
the amount of $750,000.

INCOME FORECAST; BASIS OF PRINCIPAL ASSETS; POSSIBLE FLUCTUATION IN OPERATING
RESULTS - Included in the Company's assets at December 31, 1999 are unamortized
film costs of $36,525,000 which include costs incurred for the production,
acquisition and distribution of its Properties and other rights acquired from
third parties. Amortization of these costs is based on the "individual film


                                       19

<PAGE>


forecast method" of accounting. This method, which is prescribed by generally
accepted accounting principles and is standard practice in the entertainment
industry, requires management to project future revenues to be generated by the
Company's Properties and to amortize the costs of the Properties based on the
percentage that revenue recognized bears to total projected revenues. There can
be no assurance that management's projection of future revenues will be
realized. Moreover, if the Company subsequently determines that future revenues
will be less than originally projected, an adjustment would have to be made in
the carrying value of deferred costs which could materially affect operating
results reported in the period such adjustment is made. Accordingly, there may
be significant fluctuation in quarterly financial results reported by the
Company as a result of such adjustments.

COMPETITION - The Company currently competes with other distribution companies
including many of which have longer-standing relationships in the industry,
significantly greater financial resources and more extensive libraries than the
Company. There can be no assurance that the Company will be able to compete
successfully against these other companies.

SHIFT IN STRATEGY - Although members of management of the Company have prior
experience in film and television program productions, the Company itself has a
limited track record in such activities. The Company's shift in strategy toward
an increased emphasis on motion picture production may increase the rewards
available to the Company, but may increase the risks as well.

ITEM 2.  PROPERTIES

         The Company's principal executive offices, consisting of approximately
11,254 square feet, are located at 200 Madison Avenue, 24th Floor, New York, New
York 10016. The Company occupies these offices pursuant to an eleven-year lease
that commenced in May 1996 and provides for annual rent of $281,350 during the
first three years, annual rent of $298,231 during the next three and one-half
years, and annual rent of $320,739 during the remainder of the lease term.

         The Company also leases approximately 3,400 square feet of office space
located at 4515 Van Nuys Boulevard, Sherman Oaks, California 91403. The current
lease is for a term of three years, commencing April 1996, at a base annual rent
of $44,400 for the first year, $45,600 for the second year and $46,200 for the
third year. This space is used for the offices of Unapix International. Pursuant
to a sublease with a term commencing on April 1, 1999 and expiring on December
31, 2003, Unapix International and certain administrative personnel of the
Company will lease approximately 14,000 square feet of space located at 15910
Ventura Boulevard, Encino, California. The lease provides for a base annual rent
of


                                       20

<PAGE>


$250,000. The Company plans to sub-let a portion of these premises
to other parties.

         The Company also shares occupancy, with three other affiliated
corporations, of 4,500 square feet of office space located at 537 Steamboat
Road, Greenwich, CT. All four corporations are tenants under a lease which is
for a term of four years commencing June 1998 with an annual base rent of
$112,500 for the first year, $117,000 for the second year, $121,500 for the
third year and $126,000 for the fourth year. The Company currently pays
approximately 25% of the rent.

         Miramar's offices, consisting of approximately 7,000 square feet of
office space, are located at 200 Second Avenue West, Seattle, Washington 98119.
Miramar occupies these offices pursuant to a lease expiring in January 1999,
which provides for a current base annual rent of $99,000. The Company is
currently negotiating an extension of this lease.

         Unapix Productions West's offices occupy 2,000 square feet of space at
10950 West Washington Boulevard, Culver City, California 90232. The offices are
occupied pursuant to a five year lease that commenced in June 1998. The lease
provides for a base annual rent of approximately $50,000 per year.

         Unapix Direct Media's and The Jazz Store's offices, consisting of a
total of 3,163 square feet of space, are located at 427 Bloomfield Avenue,
Montclair, New Jersey, 07042. Unapix Direct Media's offices are occupied
pursuant to a five year lease, that commenced in October 1998. The Jazz Store's
offices are occupied pursuant to a three year lease that commenced in June 1998.
The leases provide for base annual rent aggregating approximately $77,000 per
year.

         The Company believes that its office space is adequate for its current
needs.

ITEM 3.  LEGAL PROCEEDINGS

         The Company is involved in legal proceedings which it considers to be
routine and incidental to its business. The Company believes that any liability
which may arise as a result of any such proceeding will not have a material
adverse effect on its financial condition.

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

         On October 19, 1998, the Company held its 1998 Annual Meeting of
Stockholders at which stockholders elected David M. Fox, Robert Baruc and Scott
Hanock as directors of the Company to serve until the Company's Annual Meeting
of Stockholders in the year 2001, or until their successors are duly elected.
5,636,625 shares were voted in favor of the election of such individuals and
votes were


                                       21

<PAGE>

withheld with respect to 63,280 shares. In addition to the individuals 
elected as directors at the 1998 Annual Meeting, Messrs. Herbert M. Pearlman, 
David S. Lawi, Lawrence Bishop and Walter M. Craig, Jr., who were directors 
of the Company at the time of the 1998 Annual Meeting of Stockholders, 
continue to serve as directors of the Company. Stuart J. Beck became a 
director of the Company in October 1998 subsequent to the Annual Meeting and 
resigned as a director in March 1999. David M. Fox resigned as a director 
effective as of January 31, 1999.


                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

(a)      MARKET INFORMATION

         The Company's Common Stock is primarily traded on the American Stock
Exchange (the "AMEX") under the symbol UPX. Until June 22, 1998, the Company's
Class B Warrants also traded on the AMEX under the symbol UPX.W.S.B. Trading of
the Class B Warrants was discontinued as a result of the expiration of such
warrants in accordance with their terms.

         The following table sets forth the range of high and low sales prices
of the Company's securities as reported by the AMEX.

<TABLE>
<CAPTION>

                                                       American
                                                    Stock Exchange
                                                    --------------
                                                 Low               High
                                                -----             -----
<S>                  <C>                        <C>               <C>
1997
----
First Quarter        Common Stock               3 13/16           4  3/4
                     Class B Warrants              9/16              7/8

Second Quarter       Common Stock               3  9/16           4 11/16
                     Class B Warrants              9/16           1

Third Quarter        Common Stock               4  1/8            4 15/16
                     Class B Warrants              5/8            1

Fourth Quarter       Common Stock               3 13/16           5   3/8
                     Class B Warrants              9/16           1  5/16


1998
----
First Quarter        Common Stock               4   1/8           5  1/16
                     Class B Warrants              7/16             15/16

</TABLE>


                                       22

<PAGE>


<TABLE>
<S>                  <C>                        <C>               <C>
Second Quarter       Common Stock               4  1/16           6  1/16
                     Class B Warrants*              3/8               7/8

Third Quarter        Common Stock               2                 5   1/4

Fourth Quarter       Common Stock               1   3/4           2   3/4

</TABLE>

----------
*   Trading of the Class B Warrants was discontinued by the AMEX as of the
    close of business on June 22, 1998.

(b)      HOLDERS

         As of March 8, 1999, there were, to the best of the Company's
knowledge, approximately 205 holders of record (not beneficial holders) of the
Company's Common Stock.

(c)      DIVIDENDS

         The Company has not paid any cash dividends on its common stock. The
Company does not anticipate paying any cash dividends in the foreseeable future,
and is prohibited from paying any cash dividends on its common stock under its
working capital credit facility.

(d)      RECENT SALES OF UNREGISTERED SECURITIES

         Set forth below is a description of all sales of unregistered
securities during the fourth quarter of 1998 (sales of unregistered securities
during the first three quarters of 1998 were previously reported on the
Company's Quarterly Reports on Form 10-QSB).

         In October 1998 the Company granted a total of 245,000 common stock
purchase options to employees, of which: 220,000 have an exercise price of
$2.375 per share; and 25,000 have an exercise price of $2.50 per share. All such
options expire in October 2008. 50,000 of such options are immediately
exercisable. 150,000 of the options will not become exercisable for
approximately 9.5 years, subject to earlier exercisability, if certain earnings
goals are achieved. The remaining options become exercisable based solely upon
the grantee's continuing to provide services to the Company. The options were
issued pursuant to the exemption contained in Section 4(2) of the Securities Act
of 1933, as amended (the "Act").

         In December 1998 the Company sold a total of 500 shares of its Series C
8% Cumulative Convertible Preferred Stock, $.01 par value per share ("Preferred
Stock C"). Each share of Preferred Stock C has a stated value of $1,000 and is
convertible into shares of Common Stock at a conversion price of $2.50 per share
(i.e. each share of Preferred Stock C is convertible into 400 shares of the
Company's Common Stock). The sale was made pursuant to the exemption contained
in Section 4(2) of the Act. All of the


                                       23

<PAGE>


investors were "accredited" (as such term is defined in Rule 501 of Regulation D
promulgated under the Act).

         Also, in December 1998 the Company granted an aggregate of 95,000
common stock purchase options to one officer and three of its directors (who are
not also employees). All such options have an exercise price of $2.86 per share
and expire in June 2008. 12,917 of such options are immediately exercisable. The
remaining options become exercisable based solely upon the grantee's continuing
to provide services to the Company. The options were issued pursuant to the
exemption contained in Section 4(2) of the Act.

         In January 1999 the Company issued 52,942 shares of its Common Stock to
Steve and Marcia Brecker, who are officers, directors and shareholders of the
Company's subsidiary, The Jazz Store, Inc. (the "Jazz Store"). Such shares were
a portion of an aggregate of 75,000 shares of Common Stock that the Company is
obligated to issue to Steve and Marcia Brecker in exchange for a total of 598
shares of the Jazz Store, constituting 28.2% of the Jazz Store's outstanding
shares, that they sold to the Company.


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

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

         Revenues increased to $36,481,000 in 1998, an increase of $4,329,000
(14%), compared to $32,152,100 in 1997. The increase is primarily the result of
the increase in home video revenues of $5,321,000 (27%) to $24,802,000 in 1998
compared to $19,481,000 in 1997. The Company expects to recognize continued
growth in the home video market into 1999. This growth should be generated by
continued phasing into aggressive market penetration, as well as the Company's
emphasis on distributing higher quality films to the rental marketplace and
non-fiction titles to the sell-through marketplace.

         Licensing and distribution costs decreased by $1,404,000 (16%) to
$7,543,000 in 1998 from $8,947,000 in 1997. The decrease was due to lower sales
in 1998 and a major sale in 1997 to which a higher than normal amortization rate
applied. Home video costs increased $1,825,000 (15%) to $14,396,000 in 1998
compared with $12,571,000 in 1997 which reflects increased royalty, amortization
and other film expenses associated with higher level of revenues.

         General and administrative expenses were $12,685,000 in 1998 compared
to $7,364,000 in 1997, an increase of $5,321,000 (72%). The increase is
primarily attributable to costs related to the infrastructure required to
support the Company's expansion and diversification. These costs consisted
mainly of increased staffing and office costs to support increased marketing
activity and


                                       24

<PAGE>


establishment of new business units. Other non-recurring costs of $333,000 in
1998 represent costs incurred primarily for termination and relocation expenses.

         Income from operations was $1,524,000 in 1998 and $3,270,000 in 1997.
The decrease reflects higher general and administrative expenses referred to
above.

         Interest and debt expense, net increased to $1,248,000 in 1998 from
$977,000 in 1997. The increase reflects interest on the 10% convertible notes
issued in the second half of 1997 and in 1998, as well as increased bank
borrowings.


LIQUIDITY AND CAPITAL RESOURCES

         For the year ended December 31, 1998, operating activities provided
cash of $11,178,000. The Company used $24,772,000 in investing activities which
consisted primarily of $24,344,000 incurred in acquiring, producing and
promoting new properties for the home video rental and the licensing and
distribution markets. The additional cash requirements were primarily met by
proceeds of $14,876,000 from financing activities which included private
offerings of 10% convertible subordinated notes, preferred stock and proceeds
from the exercise of warrants and options. The net result was an increase in
cash and cash equivalents of $1,282,000.

         In the normal course of business the Company makes certain guarantees
to producers and other third parties as to the minimum amount such parties will
receive from the Company's distribution of their products. The Company has
committed to pay film acquisition advances and guarantees of approximately
$7,000,000 as of December 31, 1998, which amounts are payable upon delivery of
the films. The Company also expects to incur significant additional cash flow
needs relating to its continued expansion. In order to meet its future funding
needs the Company will utilize cash on-hand, operating cash flows, its line of
credit and other potential financing.

         The Company has a $10,000,000 revolving credit facility with Imperial
Bank dated April 17, 1997. The parties expect to amend the agreement to provide
for total borrowings of up to $20,000,000 which includes a revolving credit of
up to $15,000,000 based on the Company's qualifying accounts receivable and
other contractual rights to payment and up to $5,000,000 for qualifying film
productions. The amendment will extend the facility to March 2001 and is
contingent upon the bank obtaining a participant for the credit facility, which
management expects to occur in the very near future. Pending obtaining a
participant, the present facility was amended April 12, 1999 to provide for
borrowings of up to $13,000,000 based on qualifying accounts receivable and
other


                                       25

<PAGE>


contractual rights to payment and the agreement was extended to March 2, 2000.
Beginning May 3, 1999 and each month thereafter, the maximum amount available
decreases by $500,000 but not below $10,000,000. Outstanding amounts under the
facility are collateralized by a security interest in substantially all of the
Company's assets. (See note 4 to the consolidated financial statements).

         In February 1998, the Company issued, in a private placement,
$5,250,000 principal amount of 10% convertible subordinated notes due June 30,
2003 convertible initially into common stock at $4.75 per share. The conversion
price is subject to adjustment in certain circumstances, including resets at
September 1, 1998 and March 1, 1999. The conversion price was reset on September
1, 1998 to $4.00 per share and on March 1, 1999 to $3.50 per share. Notes in the
principal amount of $900,000 were issued to certain investors in a film
acquisition fund in exchange for their interests therein. Upon completion of the
offering, proceeds of $250,000 were used to repay the loans from the Chairman
and the Secretary, and proceeds of $650,000 were used to repay Mezzanine
Financial Corp. The remaining $100,000 of the Mezzanine loan was exchanged for
an equivalent amount of 10% convertible notes (See note 4 to the consolidated
financial statements).

         In July 1998 the Company consummated a private placement of 300 shares
of its non-voting Series B preferred stock and a three year warrant to purchase
200,000 shares of common stock at $5.16 per share for a gross purchase price of
$3,000,000. Each share of Series B preferred stock has a stated value of $10,000
and provides for dividends cumulatively at 6% per annum payable quarterly in
cash, or, at the Company's option, under certain circumstances, in common stock.
The series B preferred stock is convertible into common stock. (See note 5 to
the consolidated financial statements).

         In December 1998 the Company initiated a private placement to
accredited investors of up to 2,500 shares of Series C 8% cumulative convertible
preferred stock each of which has a stated value of $1,000 per share and is
convertible into common stock at a conversion price of $2.50 per share. The
offering price is $1,000 per share. The Series C preferred stock provides for
cumulative cash dividends at an annual rate of 8% of the stated value per share.
At the Company's option, dividends that accrue through December 31, 2000 may be
paid in common stock. The Company may redeem the Series C preferred stock
beginning in 2002 at a premium of $60 per share which declines to zero in 2008
and thereafter. So long as shares of Series B preferred stock are outstanding,
the Company cannot redeem Series C preferred stock without the prior


                                       26

<PAGE>


written consent of the holder of Series B. Proceeds of $500,000 were received
through December 31, 1998 of which $300,000 was received from two officers and
directors of the Company.

         The feature film and television licensing and distribution industries
require significant expenditures of funds to establish and expand a library of
films and programs from which revenues may be generated. The Company could be
dependent upon future financings to continue its long term plans of expansion
and growth. The Company anticipates that as its asset base grows it will secure
an increased working capital line of credit as well as explore other film
acquisition financing arrangements. The Company may also have additional debt or
equity financings.

Year 2000

         The Company has undertaken a study of its technological systems to
determine their year 2000 compliance and to the extent of noncompliance, the
required remediation. The Company has generally completed this process of
review. All software in use is vendor supplied and will be upgraded to a current
version and is expected to be fully certified as year 2000 compliant prior to
the end of the third quarter of 1999. The Company believes it has identified all
non-compliant hardware and has scheduled replacements also by the end of the
third quarter of 1999. The Company does not believe that the cost to complete
such remediation will be material.

         An assessment of the readiness of year 2000 compliance of third party
entities such as suppliers, banking institutions, customers and others is
ongoing. As with other companies in its industry, the Company is dependent on a
number of third parties for the supply of products and services that are
themselves dependent on computers. The Company's initial assessment of
compliance by third party entities is not yet completed, and therefore, the
Company has not yet developed any related contingency plans. Currently, the
Company is unable to predict the cause of the worst case year 2000 scenario nor
the likelihood of any third party not being year 2000 compliant or the direct or
indirect costs to the Company of non-compliance by third parties.

         Except for the historical information contained herein, the matters
discussed are forward-looking statements which are necessarily speculative and
are subject to risks and uncertainties which could cause actual events or
results to differ materially from those referred to in such forward-looking
statements. Certain of such risks include the following: (i) The film,
television programming and audio compact disc and tape distribution business


                                       27

<PAGE>


involves a substantial degree of risk. The success of a product depends upon
unpredictable and changing factors such as competition and audience acceptance,
which may bear little or no correlation to the Company's production and other
costs. Audience acceptance of the Company's products represents a response not
only to the artistic components of the products, but also to the level of
advertising and promotion by the distributor and availability of alternative
forms of entertainment and leisure time activities, general economic conditions
and public taste, and other intangible factors, all of which change rapidly and
cannot be predicted with certainty. In addition, as a result of the Company
increasing its resources to film and television product earlier in its
production and acquisition stages, the possibility always exists that the
finished product may be different from that which was initially envisioned.
Therefore, there is a substantial risk that some or all of the Company's
products may not be commercially successful, resulting in costs not being
recouped or anticipated profits not being realized; and (ii) The film,
television programming and audio compact disc and tape distribution and
licensing industry is capital intensive and requires significant expenditures of
funds to establish a library of entertainment properties from which revenues may
be generated. The Company could be dependent upon future financing in order to
compete more effectively in the marketplace. The Company's cash requirements
have been and will continue to be significant. If additional funding is
unavailable to the Company when needed, the Company could be required to curtail
significantly one or more aspects of its operations and the Company's business
and financial condition could be materially adversely affected. Additional
factors that could affect results are described in "FACTORS WHICH MAY AFFECT
RESULTS". The highlighted risks should not be assumed to be the only things that
could affect the Company's future performance. The Company does not have a
policy of updating or revising forward-looking statements and thus it should not
be assumed that silence by the Company's management over time means that actual
events are bearing out as estimated in such forward-looking statements.

ITEM 7.  FINANCIAL STATEMENTS.

See financial statements set forth in Item 13 of this annual report.

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

         None.


                                       28

<PAGE>


                                    PART III

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

         The information required by Item 9 is incorporated herein by reference
to the information set forth under the sections entitled "ELECTION OF DIRECTORS
and "EXECUTIVE OFFICERS" in the Company's definitive Proxy Statement for the
Annual Meeting of Stockholders for 1999 to be filed with the Securities and
Exchange Commission not later than 120 days after December 31, 1998 (the "Proxy
Statement").


ITEM 10. EXECUTIVE COMPENSATION.

         The information required by Item 10 is incorporated herein by reference
to the material under this heading in the Proxy Statement.

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

         The information required by Item 11 is incorporated herein by reference
to the information under this heading in the Proxy Statement.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The information required by Item 12 is incorporated herein by reference
to the information under this heading in the Proxy Statement.

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

    (a)  (1)  Financial Statements

<TABLE>
<CAPTION>

                                                 Page
                                                 ----
<S>                                              <C>
    Independent Auditor's Report...............  F-1
    Consolidated Balance Sheet as of
       December 31, 1998.......................  F-2
    Consolidated Statements of Operations
       for the years ended December 31, 1998
       and 1997................................  F-3
    Consolidated Statements of Changes in
       Stockholders' Equity for the years
       ended December 31, 1998 and 1997........  F-4
    Consolidated Statements of Cash Flows
       for the years ended December 31, 1998
       and 1997................................  F-5
    Notes to Consolidated Financial Statements.  F-7

</TABLE>


                                       29

<PAGE>


    (b)  Reports on Form 8-K

         The Company did not file any current Reports on Form 8-K during the
fourth quarter of 1998.

    (c) Exhibits


<TABLE>
<CAPTION>

Exhibit
Number        Description
-------       ------------
<S>           <C>
 3.1          Company's Certificate of Incorporation, dated January 7,
              1993 [incorporated herein by reference to Exhibit 3.1 to
              the Company's Form SB-2 Registration Statement, File No.
              33-61798 (the "Registration Statement")]

 3.1.1        Amendment No. 1 to Company's Certificate of
              Incorporation, dated March 15, 1993 [incorporated herein]
              by reference to Exhibit 3.1.1 to the Registration
              Statement]

 3.1.2        Certificate of Ownership and Merger, dated March 23, 1993
              [incorporated herein by reference to Exhibit 3.1.2 to the
              Registration Statement]

 3.1.3        Amendment No. 2 to Company's Certificate of
              Incorporation, dated April 21, 1993 [incorporated herein
              by reference to Exhibit 3.1.3 to the Registration
              Statement]

 3.1.4        Amendment No. 3 to Company's Certificate of
              Incorporation,  dated June 10, 1993 [incorporated herein
              by reference to Exhibit 3.1.4 to the Registration
              Statement]

 3.1.5        Certificate of Designations, Preferences and Rights of Series
              A 8% Cumulative Convertible Preferred Stock [incorporated
              herein by reference to Exhibit 3.1.5 to the Company's Annual
              Report on Form 10-KSB for 1993 (the "1993 Form 10-KSB")]

 3.1.6        Certificate of Increase to the Certificate of
              Designations, Preferences and Rights of Series A 8%
              Cumulative Convertible Preferred Stock [incorporated
              herein by reference to Exhibit 3.1.6 to the Company's
              Annual Report on Form 10-KSB for 1994 (the "1994 Form 10-
              KSB")]

 3.1.7        Certificate of Ownership and Merger, dated August 8, 1996,
              merging A-Pix Entertainment, Inc. into the Company
              [incorporated herein by reference to Exhibit 3.1.7 to the
              Company's Annual Report on Form 10-KSB for 1996 (the "1996
              Form 10-KSB")]

</TABLE>


                                       30

<PAGE>



<TABLE>
<CAPTION>

Exhibit
Number        Description
-------       ------------
<S>           <C>
 3.1.8        Certificate of Amendment of the Company's Certificate of
              Incorporation, dated October 7, 1997, increasing the number of
              authorized shares of common stock [incorporated herein by
              reference to Exhibit 3 to the Company's Quarterly Report on
              Form 10-QSB for the Quarterly Period ended September 30, 1997]

 3.1.9        Certificate of Designation, Powers, Preferences and Rights of
              the 6% Series B Convertible Preferred Stock [incorporated
              herein by reference to Exhibit 3.1 to the Company's Current
              Report on Form 8-K for Event of July 16, 1998 (the "July 1998
              Form 8-K")]

 3.1.10       Certificate of Designations, Preferences and Rights of
              Series C 8% Cumulative Convertible Preferred Stock (1)

 3.2          By-Laws of the Company (1)

 4.1          Form of Common Stock Certificate [incorporated herein by
              reference to Exhibit 4.1 to the Registration Statement]

 4.2          Form of Variable Rate Senior Subordinated Note due
              December 31, 2001 [incorporated herein by reference to
              Exhibit 4.8 of the 1994 Form 10-KSB]

 4.3          Form of Common Stock Purchase Warrant Certificate for
              Warrants issued together with Variable Rate Senior
              Subordinated Notes due December 31, 2001 [incorporated
              herein by reference to Exhibit 4.9 of the 1994 Form 10-
              KSB]

 4.4          Common Stock Purchase Warrant Certificate issued to
              Atlantic Bank of New York entitling it to purchase 20,000
              shares of Common Stock [incorporated herein by reference
              to Exhibit 10.3 of the Company's Current Report on Form
              8-K for event of June 21, 1995]

 4.5          Common Stock Purchase Warrant Certificate entitling the
              holder to purchase 15,000 shares of common stock at an
              exercise price of $4.25 per share and expiring on June
              30, 2000 [incorporated herein by reference to Exhibit
              4.11 of the Company's Annual Report on Form 10-KSB for
              1995 (the "1995 Form 10-KSB")]

 4.6          Common Stock Purchase Warrant Certificate entitling the
              holder to purchase 10,000 shares of common stock at an
              exercise price of $4.50 per share and expiring on
              December 31, 2000 [incorporated herein by reference to
              Exhibit 4.12 of the 1995 Form 10-KSB]

</TABLE>


                                       31

<PAGE>



<TABLE>
<CAPTION>

Exhibit
Number        Description
-------       ------------
<S>           <C>
 4.7          Form of 10% Convertible Subordinated Note due June 30,
              2003 having an original conversion price of $4.50 per
              share [incorporated herein by reference to Exhibit 4.1 to
              the Company's Quarterly Report on Form 10-QSB for the
              Quarterly Period ended June 30, 1996 (the "June 1996 Form
              10-QSB")]

 4.8          Form of Common Stock Purchase Warrant Certificate, entitling the
              holder to purchase shares of Common Stock at an original exercise
              price of $6.00 per share and expiring on June 30, 2003
              [incorporated herein by reference to Exhibit 4.2 to the June 1996
              Form 10-QSB]

 4.9          Form of Common Stock Purchase Warrant Certificate, entitling the
              holder to purchase shares of Common Stock at $4.50 per share and
              expiring on December 31, 2001 [incorporated herein by reference to
              Exhibit 4.15 of the 1996 Form 10-KSB]

 4.10         Form of 10% Convertible Subordinated Note due June 30, 2003 having
              an original conversion price of $4.75 per share [incorporated
              herein by reference to Exhibit 4.13 of the Company's Annual Report
              on Form 10-KSB for 1997 (the "1997 Form 10-KSB")]

 4.11         Form of 10% Convertible Subordinated Note due June 30, 2004 having
              an original conversion price of $5.00 per share [incorporated
              herein by reference to Exhibit 4.14 to the 1997 Form 10-KSB]

 4.12         Form of Common Stock Purchase Warrant Certificate, entitling the
              holder to purchase shares of Common Stock at an original exercise
              price of $6.00 per share and expiring on June 30, 2004
              [incorporated herein by reference to Exhibit 4.15 to the 1997 Form
              10-KSB]

 4.13         Form of Common Stock Purchase Warrant Certificate, entitling the
              holder to purchase shares of Common Stock at $5.00 per share and
              expiring December 31, 2002 [incorporated herein by reference to
              Exhibit 4.16 to the 1997 Form 10-KSB]

 4.14         Form of Common Stock Purchase Warrant dated July 16, 1998 in favor
              of KA Investments with respect to 200,000 shares of underlying
              common stock [incorporated herein by reference to Exhibit 10.3 to
              the July 1998 Form 8-K]

</TABLE>


                                       32

<PAGE>



<TABLE>
<CAPTION>

Exhibit
Number        Description
-------       ------------
<S>           <C>
 *10.1        Employment Agreement between the Company and David Fox
              [incorporated herein by reference to Exhibit 10.1 to the
              Registration Statement]

 *10.1.1      Form of Amendment No. 1 to Employment Agreement between the
              Company and David Fox [incorporated herein by reference to Exhibit
              10.1.1 to the Registration Statement]

 *10.2        Employment Agreement between the Company and Scott Hanock
              [incorporated herein by reference to Exhibit 10.2 to the
              Registration Statement]

 *10.2.1      Form of Amendment No. 1 to Employment Agreement between the
              Company and Scott Hanock [incorporated herein by reference to
              Exhibit 10.2.1 to the Registration Statement]

 *10.2.2      Form of Amendment No. 2 to Employment Agreement between the
              Company and Scott Hanock [incorporated herein by reference to
              Exhibit 10.2.2 to the Registration Statement]

 *10.3        Form of Employment Agreement between the Company and Herbert M.
              Pearlman [incorporated herein by reference to Exhibit 10.4 to the
              Registration Statement]

 *10.4        Form of Employment Agreement between the Company and David S. Lawi
              [incorporated herein by reference to Exhibit 10.5 to the
              Registration Statement]

 *10.5        1993 Stock Option Plan, as amended (1)

  10.6        Form of Lease Agreement for 537 Steamboat Road, Greenwich,
              Connecticut offices [incorporated herein by reference to Exhibit
              10.9 to the 1994 Form 10-KSB]

  10.7        Lease Agreement for 200 Madison Avenue Location [incorporated
              herein by reference to Exhibit 10.9 to the 1995 Form 10-KSB]

 *10.8        Stock Option Agreement between the Company and David Fox (embodied
              in Exhibit 10.1) [incorporated herein by reference to Exhibit 10.1
              to the Registration Statement]

 *10.9        Form of Earnings Performance Stock Option Agreement between the
              Company and Herbert M. Pearlman, dated April 23, 1993
              [incorporated herein by reference to Exhibit 10.18 to the
              Registration Statement]

</TABLE>


                                       33

<PAGE>



<TABLE>
<CAPTION>

Exhibit
Number        Description
-------       ------------
<S>           <C>
  10.10       Schedule of omitted documents in the form of Exhibit 10.9,
              including material detail in which such documents differ from
              Exhibit 10.9 [incorporated herein by reference to Exhibit 10.18.1
              to the Registration Statement]

 *10.11       Employment Agreement between the Company and Robert Baruc
              [incorporated herein by reference to Exhibit 10.1 of the Company's
              Quarterly Report on Form 10-QSB for the Quarterly Period ended
              June 30, 1993]

 *10.12       Amendment No. 1 to Employment Agreement of Robert Baruc
              [incorporated herein by reference to Exhibit 10.16 to the
              Company's 1996 Form 10-KSB]

 *10.13       Employment Agreement between the Company and Robert Miller
              [incorporated herein by reference to Exhibit 10.17 to the
              Company's 1996 Form 10-KSB]

 *10.14       Employment Agreement between the Company and Timothy Smith
              [incorporated herein by reference to Exhibit 10.18 to the
              Company's 1996 Form 10-KSB]

  10.15       Lease Agreement, as amended to date, for Miramar's offices at 200
              Second Avenue West, Seattle, Washington [incorporated herein by
              reference to Exhibit 10.29 to the 1996 Form 10-KSB]

  10.16       Revolving Credit Loan and Security Agreement, dated April 16,
              1997, among Imperial Bank, Unapix Entertainment, Inc., A-Pix
              Entertainment, Inc. and Miramar Images, Inc. [incorporated herein
              by reference to Exhibit 10.1 to the Company's Quarterly Report on
              Form 10-QSB for the Quarterly Period ended March 31, 1997]

  10.17       Amendment No.1 to Revolving Credit Loan and Security Agreement
              entered into March 25, 1998, by and between (i) Unapix
              Entertainment, Inc. and Miramar Images, Inc. and (ii) Imperial
              Bank [incorporated herein by reference to Exhibit 10.25 to the
              1997 Form 10-KSB]

  10.18       Amendment No. 2 to Revolving Credit Loan and Security Agreement
              entered into March 19, 1999, by and between (i) Unapix
              Entertainment, Inc. and Miramar Images, Inc. and (ii) Imperial
              Bank(1)

  10.19       Convertible Preferred Stock Purchase Agreement, dated as of July
              15, 1998, between KA Investments LDC and the Company [incorporated
              herein by reference to Exhibit 10.1 to the July 1997 Form 8-K]

  10.20       Registration Rights Agreement, dated as of July 15, 1998,

</TABLE>


                                       34

<PAGE>



<TABLE>
<CAPTION>

Exhibit
Number        Description
-------       ------------
<S>           <C>
              between KA Investments LDC and the Company [incorporated
              herein by reference to Exhibit 10.2 to the July 1998 Form 8-K]

 10.21        Lease Agreement for Unapix Production West's office space located
              at 10950 West Washington Boulevard, Culver City, California 90232
              (1)

 10.22        Lease Agreements for Unapix Direct Media's and The Jazz Store's
              offices located at 427 Bloomfield Avenue, Montclair, New Jersey
              07042 (1)

 10.23        Sublease Agreement for Unapix International's Office space located
              at 15910 Ventura Boulevard, Encino, California (1)

 10.24        Amendment No. 3 to Revolving Credit Loan and Security Agreement,
              entered into April 14, 1999, by and between (i) Unapix
              Entertainment, Inc. and Miramar Images, Inc. and (ii) Imperial
              Bank (1)

 21.1         Subsidiaries (1)

 23.1         Consent of Richard A. Eisner & Company, LLP. (1)

 27.1         Financial Data Schedules (1)

</TABLE>

----------
(1) Filed herewith.

*   Management contract or compensatory plan or arrangement.


                                       35

<PAGE>


                                   SIGNATURES


In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on the 14th day of April, 1999.


                                  UNAPIX ENTERTAINMENT, INC.



                                  By: /s/Herbert M. Pearlman
                                     ------------------------------
                                      Herbert M. Pearlman
                                      Chief Executive Officer
                                      (principal executive officer)



                                  By: /s/Cheryl Freeman
                                     ------------------------------
                                     Cheryl Freeman
                                     Chief Financial Officer
                                     (principal financial and
                                     accounting officer)


                                       36

<PAGE>


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


/s/Herbert M. Pearlman       Chairman of the
-----------------------      Board of Directors               April 14, 1999
Herbert M. Pearlman          and Chief Executive
                             Officer


/s/David S. Lawi             Chairman of the Executive
-----------------------      Committee and Director           April 14,1999
David S. Lawi


/s/Robert Baruc              Office of the President
-----------------------      and Director                     April 14, 1999
Robert Baruc


/s/Scott Hanock              Office of the President
-----------------------      and Director                     April 14, 1999
Scott Hanock


/s/Walter M. Craig, Jr.      Director                         April 14, 1999
-----------------------
Walter M. Craig, Jr.


/s/Lawrence Bishop           Director                         April 14, 1999
-----------------------
Lawrence Bishop


                                       37

<PAGE>


INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
    Unapix Entertainment, Inc.

We have audited the accompanying consolidated balance sheet of Unapix
Entertainment, Inc. and subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the years in the two-year period then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the financial statements enumerated above present fairly, in all
material respects, the consolidated financial position of Unapix Entertainment,
Inc. and subsidiaries as of December 31, 1998, and the consolidated results of
their operations and their consolidated cash flows for each of the years in the
two-year period then ended in conformity with generally accepted accounting
principles.



/s/ Richard A. Eisner & Company, LLP

New York, New York
April 1, 1999, except for Note 4 as
to which the date is April 12, 1999


                                      F-1

<PAGE>


                   UNAPIX ENTERTAINMENT, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                      (In thousands, except share amounts)


<TABLE>
<CAPTION>

                                                                  December 31,
                                                                     1998
                                                                   --------
<S>                                                              <C>      
                                ASSETS

Cash and cash equivalents                                               $ 1,707
Accounts receivable, net of allowances of $1,909                         18,968
Film costs, net                                                          36,525
Product inventory                                                         2,978
Property and equipment, net                                               1,037
Other assets                                                              1,389
Excess of cost over fair value of net assets acquired, net                3,279
                                                                       --------
  Total Assets                                                          $65,883
                                                                       --------
                                                                       --------
                 LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities :
Accounts payable and accrued expenses                                   $ 8,845
Deferred income taxes                                                     1,104
Royalty payable                                                           5,234
Bank line of credit                                                       9,978
Variable rate senior subordinated notes                                   2,608
10% convertible subordinated notes                                       13,343
                                                                       --------
  Total Liabilities                                                     $41,112
                                                                       --------

Commitments and Contingencies

Stockholders' Equity:

Preferred stock; $.01 par value; 3,000,000 authorized
Cumulative convertible Series A 8% preferred stock;
 501,000 issued and outstanding (aggregate liquidation
 preference of $1,503)                                                        5
Non-voting convertible Series B 6% preferred stock;
 300 shares issued and outstanding, (aggregate liquidation
 preference of $3,000)                                                       --
Cumulative Convertible Series C 8% preferred stock;
 675 shares issued and outstanding (aggregate liquidation
 preference of $675)                                                         --
Common stock $.01 par value per share; 40,000,000 authorized;                --
 7,515,000 shares issued and outstanding                                     76
Additional paid-in capital                                               26,695
Notes receivable from equity sales                                       (2,715)
Retained Earnings                                                           710
                                                                       --------
 Total Stockholders' Equity                                             $24,771
                                                                       --------
 Total Liabilities and Stockholders' Equity                             $65,883
                                                                       --------
                                                                       --------

</TABLE>

           See accompanying notes to consolidated financial statements


                                       F-2
<PAGE>

                   UNAPIX ENTERTAINMENT, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                     For the Years Ended December 31,
                                                           1998          1997
                                                           ----          ----
<S>                                                      <C>           <C>     
Revenues:
      Licensing and distribution                         $ 11,679      $ 12,671
      Home video                                           24,802        19,481
                                                         --------      --------
                                                           36,481        32,152
                                                         --------      --------
Operating costs:
      Licensing and distribution                            7,543         8,947
      Home video                                           14,396        12,571
      General and administrative expenses                  12,685         7,364
      Other - non recurring                                   333          --
                                                         --------      --------
                                                           34,957        28,882
                                                         --------      --------

Income from operations                                      1,524         3,270


Interest and other debt expense, net                       (1,248)         (977)
                                                         --------      --------
Income before provision for income taxes                      276         2,293

Provision for income taxes                                    166           946
                                                         --------      --------
Net income                                               $    110      $  1,347

Loss preferred stock dividends                                203           121
                                                         --------      --------
Net income (loss) available to common shareholders       $    (93)     $  1,226
                                                         --------      --------
                                                         --------      --------
Net income (loss) per common share
   Basic                                                 $   (.01)     $    .21
                                                         --------      --------
                                                         --------      --------
   Diluted                                               $   (.01)     $    .19
                                                         --------      --------
                                                         --------      --------

Weighted average number of common shares outstanding
   Basic                                                    6,783         5,796
                                                         --------      --------
                                                         --------      --------

   Diluted                                                  6,783         6,465
                                                         --------      --------
                                                         --------      --------
</TABLE>


           See accompanying notes to consolidated financial statements

                                       F-3
<PAGE>


                   UNAPIX ENTERTAINMENT, INC. AND SUBSIDIARIES
           Consolidated Statements of Changes in Stockholders' Equity
                                 (In thousands)

<TABLE>
<CAPTION>

                                     Convertible      Convertible    Convertible
                                      Preferred        Preferred      Preferred
                     Common Stock   Stock Series A   Stock Series B  Stock Series C
                     -------------- --------------   --------------  ---------------                Notes      Retained
                              Par            Par              Par              Par   Additional  Receivable    Earnings
                              Value         Value            Value            Value    Paid-in    on Stock   (Accumulated)
                     Shares  ($.01) Shares ($.01)     Shares ($.01)   Shares  ($.01)   Capital     Sales       (Deficit)    Total
                     ------  ------ ------ ------     ------ ------   ------  ------   -------     -----       ---------    -----
<S>                  <C>      <C>    <C>     <C>      <C>    <C>      <C>     <C>      <C>        <C>           <C>        <C>
Balance at
 January 1, 1997      5,325   $53    534     $5                                        $15,273    $(2,033)      $ (484)    $12,814

Notes receivable on
 common stock sales
 and exercise of
 warrants                                                                                              16                      16

Acquisition of
 subsidiary             314     3                                                        1,397                              1,400

Exercise of options
 and warrants           109     2                                                          271                                273

Warrant, option and
 private placement
 expenditures                                                                              (14)                               (14)

Issuance of common
 stock                  202     2                                                            7                                  9

Preferred stock
 dividends                                                                                 (61)                    (60)       (121)

Common stock issued
 in lieu of cash
 dividend                19                                                                 82                                 82

Issuance of warrants                                                                       224                                224

Preferred stock
 conversion              33          (33)

Net income for 1997                                                                                              1,347       1,347
                     ------  ------ ------ ------     ------ ------   ------  ------  --------    -------       ------     -------
Balance at
 December 31, 1997    6,002   $60    501     $5                                       $17,179     $(2,017)      $  803     $16,030
                     
</TABLE>


                                       F-4

<PAGE>


                   UNAPIX ENTERTAINMENT, INC. AND SUBSIDIARIES
           Consolidated Statements of Changes in Stockholders' Equity
                                 (In thousands)

<TABLE>
<CAPTION>

                                     Convertible      Convertible    Convertible
                                     -----------      -----------    -----------
                                      Preferred        Preferred      Preferred
                                      ---------        ---------      ---------
                     Common Stock   Stock Series A   Stock Series B  Stock Series C
                     -------------- --------------   --------------  ---------------                Notes      Retained
                              Par            Par              Par              Par   Additional  Receivable    Earnings
                              Value         Value            Value            Value    Paid-in    on Stock   (Accumulated)
                     Shares  ($.01) Shares ($.01)     Shares ($.01)   Shares  ($.01)   Capital     Sales       (Deficit)    Total
                     ------  ------ ------ ------     ------ ------   ------  ------   -------     -----       ---------    -----
<S>                  <C>      <C>    <C>     <C>      <C>    <C>      <C>     <C>      <C>        <C>           <C>        <C>
Balance at
 January 1, 1998     6,002    $60    501     $5                                        $17,179    $(2,017)      $803       $16,030

Repayment on Notes                                                                                     80                       80

Acquisition of
 subsidiary             75      1                                                          169                                 170

Exercise of
 warrants,
 net of expenses
 $313,000            1,399     14                                                        5,620       (778)                   4,856

Sale of preferred
 stock, net                                           300             500                3,315                               3,315

Preferred Stock
 issued in payment
 of principal
 variable rate note                                                   175                  175                                 175

Preferred stock
 dividends                                                                                                      (203)         (203)

Common stock issued
 in lieu of cash
 dividend               39      1                                                          118                                 119

Issuance of warrants                                                                       119                                 119

Net income for 1998                                                                                              110           110
                     ------  ------ ------ ------     ------ ------   ------  ------  --------    -------       ------     -------
Balance at
 December 31, 1998   7,515    $76    501     $5       300     --      675      --      $26,695    $(2,715)      $710       $24,771

</TABLE>


                                       F-5

<PAGE>


                   UNAPIX ENTERTAINMENT, INC. AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
                                 (In thousands)


<TABLE>
<CAPTION>

                                                     For the Years Ended December 31,
                                                           1998          1997
                                                           ----          ----
<S>                                                      <C>           <C>     
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                            $    110      $  1,347
   Adjustments to reconcile net income to net
     cash provided by operating activities:
   Amortization and depreciation                           13,113        15,200
   Deferred income taxes                                      107           867
   Accretion of notes discount                                114            90
   Film rights received                                        --          (900)
   Increase in accounts receivable, net                    (4,613)       (3,802)
   Increase in product inventory                           (1,325)         (605)
   (Increase) decrease in other assets                        927          (800)
   Increase (decrease) in accounts payable and
     accrued expenses                                       1,256        (1,582)
   Increase in royalties payable                            1,489           976
                                                         --------      --------
Total cash flows provided by operating activities          11,178        10,791
                                                         --------      --------

CASH FLOWS FROM INVESTING ACTIVITIES -
   Film cost expenditures                                 (24,344)      (19,600)
   Acquisition of subsidiary                                   --          (736)
   Purchase of property and equipment                        (428)         (234)
                                                         --------      --------
Total cash flows used by investing activities             (24,772)      (20,570)
                                                         --------      --------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from 10% convertible
     notes private placement                                4,052         2,511
   Proceeds from preferred stock offerings, net             3,315            --
   Repayments on variable rate notes                         (128)           --
   Net borrowings under bank line of credit                 3,185         6,484
   Proceeds from employee notes receivable                     80            55
   Proceeds from warrant and option exercises               4,856           234
   Advances from affiliates                                   700           300
   Repayments of advances and other
   obligations to affiliates                               (1,100)           --
   Preferred stock dividends                                  (84)          (39)
                                                         --------      --------
Total cash flows from financing activities               $ 14,876      $  9,545
                                                         --------      --------

</TABLE>


                                       F-6

<PAGE>


                   UNAPIX ENTERTAINMENT, INC. AND SUBSIDIARIES
                Consolidated Statements of Cash Flows (continued)
                                 (In thousands)


<TABLE>
<CAPTION>

                                                       For the Years Ended December 31,
                                                              1998        1997
                                                             ------      ------
<S>                                                         <C>         <C>     
NET INCREASE(DECREASE)IN CASH AND
   CASH EQUIVALENTS                                         $ 1,282     $  (234)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                  425         659
                                                            -------     -------
CASH AND CASH EQUIVALENTS AT END OF YEAR                      1,707     $   425
                                                            -------     -------
                                                            -------     -------


SUPPLEMENTAL SCHEDULE OF NONCASH
   INVESTING AND FINANCING ACTIVITIES:
    Film cost additions                                         999       1,812
   Equipment acquired under capital lease                       217         109
   Acquisition of subsidiary                                    170       2,365
   Warrants issued                                              119         224
   Conversion of accrued liability
      to acquisition fund payable                                --          71
   Preferred stock dividends paid in common stock               119          82
   Notes received for employee common stock purchase             --          39
   Notes received for exercise of warrants                      778          --
   Exchange of debt payable to affiliates
      for 10% convertible subordinated notes                  1,000          --
   Series C preferred stock issued for principal
      payment on variable rate senior subordinated note         175          --
                                                            -------     -------
                                                            -------     -------


SUPPLEMENTAL DISCLOSURE OF CASH FLOW
   INFORMATION:
     Cash paid for interest                                 $ 2,533     $ 1,390
                                                            -------     -------
                                                            -------     -------
     Cash paid for taxes                                    $   133     $    65
                                                            -------     -------
                                                            -------     -------

</TABLE>


           See accompanying notes to consolidated financial statements


                                       F-7

<PAGE>


                   UNAPIX ENTERTAINMENT, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


1.  OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

OPERATIONS:

Unapix Entertainment, Inc. and its subsidiaries (the "Company"), is a world-wide
licensor, distributor and producer of programming and feature films for the
television market (including free and pay television, cable and satellite), the
home video market (including video cassette, laser disc and digital video disks)
and the consumer market (including direct response and electronic commerce). Due
to the similarity in products, management considers such operations to be one
reportable segment.

SIGNIFICANT ACCOUNTING POLICIES:

The following is a summary of significant accounting policies consistently
followed by the Company in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles which
require management to make estimates and assumptions that effect the amounts
reported in the financial statements and related notes. Actual amounts could
differ from those estimates.

PRINCIPLES OF CONSOLIDATION:

The consolidated financial statements include the accounts of Unapix
Entertainment, Inc., its wholly-owned subsidiaries and an immaterial majority
owned subsidiary. All significant intercompany balances and transactions have
been eliminated.

REVENUE AND COST RECOGNITION:

Revenues earned under non-cancelable film and television programming licenses
are recognized when the films or programming are made available to the licensee
and all other conditions of the sale are met. Home video and direct marketing
revenues are recorded upon shipment. The Company provides for estimated future
returns and allowances at the time the units are sold. Revenues relative to
other services are recognized when such services are performed.

Film costs include the direct costs of acquiring and producing films and
television programming, as well as exploitation costs which benefit future
periods. The Company amortizes film costs using the
individual-film-forecast-computation method. This method amortizes costs in the
same ratio that current gross revenues bear to anticipated total gross revenues
for each particular film. The anticipated total gross revenues are reviewed
quarterly by management, which may result in revised amortization rates and,
when applicable, write downs to net realizable value. Direct costs, such as
duplication and shipping, are expensed as the related product is shipped.

Film costs are stated at the lower of unamortized historical cost or estimated
net realizable value. Participation, royalty, and commission expense, to the
extent that such amounts can be reasonably estimated, are accrued when revenue
is recognized on the related license agreement.


                                       F-8

<PAGE>


                   UNAPIX ENTERTAINMENT, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)


PROPERTY AND EQUIPMENT:

Property and equipment, which are stated at cost, are depreciated using the
straight-line method over estimated useful lives of 3 to 10 years.


PRODUCT INVENTORY

Product inventory consisting principally of video cassettes are stated at the
lower of cost on a first-in-first-out basis or market.


EARNINGS (LOSS) PER COMMON SHARE

The net income (loss) per basic common share is computed by dividing the net
income (loss) available to common shareholders by the weighted average number of
common shares outstanding.

Net income per diluted share is computed by dividing the net income available to
common shareholders, adjusted on an as if converted basis, by the weighted
average number of common shares outstanding plus potential dilutive securities.

<TABLE>
<CAPTION>

                                                              Shares (In Thousands)
                                                              ---------------------
                                                               1998         1997
                                                               ----         ----
<S>                                                            <C>         <C>  
Weighted average basic shares outstanding                      6,783       5,796
Effect of dilutive securities:
     Options                                                      --         550
     Warrants                                                     --         119
                                                               -----       -----

     Weighted average dilutive shares outstanding              6,783       6,465
                                                               -----       -----
                                                               -----       -----

</TABLE>

<TABLE>
<CAPTION>

                                                           Dollars (In Thousands)
                                                           ----------------------
                                                              1998         1997
                                                              ----         ----
<S>                                                          <C>          <C>   
Net income                                                   $  110       $1,347
Less preferred stock dividends                                  203          121
                                                             ------       ------
Net income (loss) available to common shareholders
  per basic and dilutive share                               $  (93)      $1,226
                                                             ------       ------
                                                             ------       ------

</TABLE>


                                       F-9

<PAGE>


                   UNAPIX ENTERTAINMENT, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

EARNINGS (LOSS) PER COMMON SHARE (CONTINUED)

Securities not included in the calculation of diluted earnings per share for the
years ended December 31, because of their anti-dilutive effects are as follows
(in thousands):

<TABLE>
<CAPTION>

                                                       1998            1997
                                                       ----            ----
<S>                                                   <C>               <C>
Options                                               3,079             340
Warrants                                              2,953           2,047
Shares issuable on conversion of preferred stock      1,671             505
Shares issuable on conversion of convertible notes    3,177           1,860
                                                     ------           -----
                                                     10,880           4,752
                                                     ------           -----
                                                     ------           -----

</TABLE>


CASH EQUIVALENTS

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

STOCK OPTIONS AND WARRANTS:

The Company accounts for stock options and warrants issued to employees in
accordance with Accounting Principles Board Opinion 25 "Accounting for Stock
Issued to Employees." For financial statement disclosure purposes and issuance
of options and warrants to non-employees for services rendered, the Company
follows SFAS 123, "Accounting for Stock-Based Compensation."

EXCESS OF COST OVER FAIR VALUES OF NET ASSETS ACQUIRED

Excess of cost over the fair value of net assets acquired is being amortized on
a straight line basis over 20 years and is evaluated periodically, and adjusted
if necessary, if events and circumstances indicate that the carrying amount is
impaired. As of December 31, 1998 accumulated amortization amounted to $288,000.

2. FILM COSTS

The Company's film costs include (in thousands):

<TABLE>
<CAPTION>

                                                December 31,
                                                   1998
                                                ------------
<S>                                             <C>     
              Films released                    $ 78,418
              Accumulated amortization           (54,260)
                                                ------------
                                                  24,158
              Films in process                    12,367
                                                ------------
                                                $ 36,525
                                                ------------
                                                ------------

</TABLE>


The Company expects that it will amortize approximately 80% of its remaining
film costs during the three-year period ending December 31, 2001.


                                      F-10

<PAGE>


3. PROPERTY AND EQUIPMENT, NET

Property and equipment, net, consists of the following (in thousands):

<TABLE>
<CAPTION>

                                               December 31,
                                                  1998
                                               ------------
<S>                                               <C>   
              Furniture and equipment             $1,666
              Leasehold improvements                 242 
                                               ------------
                                                   1,908

              Less accumulated depreciation          871 
                                               ------------
                                                  $1,037 
                                               ------------
                                               ------------

</TABLE>


Equipment acquired under capital leases and related depreciation amount to
$326,000 and 65,000, respectively.

4. FINANCING

BANK LINE OF CREDIT:

The Company has a $10,000,000 revolving credit facility (increased from
$7,000,000 on March 25, 1998) with Imperial Bank dated April 17, 1997. The
parties expect to amend the agreement to provide for total borrowings of up to
$20,000,000 which includes a revolving credit of up to $15,000,000 based on the
Company's qualifying accounts receivable and other contractual rights to payment
and up to $5,000,000 for qualifying film productions. The amendment will extend
the facility to March 2001 and is contingent upon the bank obtaining a
participant for the credit facility, which management expects to occur in the
very near future. Pending obtaining a participant, the present facility was
amended April 12, 1999 to provide for borrowings of up to $13,000,000 based on
qualifying accounts receivable and other contractual rights to payment and the
agreement was extended to March 2, 2000. Beginning May 3, 1999 and each month
thereafter, the maximum amount available decreases by $500,000 but not below
$10,000,000. Interest on the outstanding loan balance accrues at a rate of 1.25%
per annum in excess of the Bank's publicly announced benchmark rate (7.75% at
December 31, 1998). The Company is also required to pay an unused credit line
fee at a rate equal to .5% per annum of the amount by which the collateral base
exceeds the average daily loan balance during any calendar quarter. Outstanding
amounts under the facility are collateralized by a security interest in
substantially all of the Company's assets.

The facility contains restrictive covenants that require minimum tangible net
worth. The covenants also, among other things, prohibit the payment of cash
dividends on the Company's common stock, require minimum amounts of tangible net
worth and limit (a) the Company's ratio of debt to net worth on a consolidated
basis, (b) the amount of cost that the Company can incur in producing, financing
or acquiring entertainment properties, (c) the amount of cost and expenses that
the Company may incur with respect to theatrical releases of films, and (d)
limits the Company to incurring losses for two consecutive quarters.

VARIABLE RATE SENIOR SUBORDINATED NOTES:

The variable rate senior subordinated notes ("variable rate notes") of
$2,608,000, net of unamortized discount of $114,000 at December 31, 1998, were


                                      F-11

<PAGE>


4. FINANCING (CONTINUED)

issued with common stock purchase warrants in a private placement. The units
were sold only to accredited investors by officers of the Company (without
remuneration). Certain customers of an investment advisory firm, of which a
director of the Company is an Executive Vice President, acquired the units in
the placement. The variable rate notes bear interest at a rate of 10% per annum
through 1998 and at 3% over the prime rate thereafter, provided however, that
the rate does not fall below 8% or exceed 12% per annum. Mandatory repayment of
10% of the original principal amount commenced in 1998, to be followed by 15% of
the original principal amount in 1999 and 2000 with the balance due in 2001. The
1998 principal payment of $303,000 was paid in cash for $128,000 and through the
issuance of 175 shares of Series C Preferred Stock valued at $175,000.

The variable rate notes are subordinated to indebtedness of the Company to a
bank or other financial institution. The Company may redeem all or a portion of
the notes at any time after December 31, 1998 at a premium over the principal
amount of the notes of 4%, which declines annually at the rate of 2% until
January 1, 2001, after which the redemption price will be the principal amount
of the notes. A total of 425,804 warrants were issued in this offering, each
such warrant entitles the holder to purchase common stock at an exercise price
of $3.70 per share and expires on December 31, 2001. The holders of the warrants
are entitled to certain registration rights with respect to the shares issuable
upon exercise thereof.

10% CONVERTIBLE NOTES:

In 1996 and through the first half of 1997, the Company completed a 
$7,222,500 principal amount private offering of units (proceeds of $5,947,500 
in 1996 and $1,275,000 in 1997), each consisting of a 10% $250,000 principal 
amount of convertible subordinated note due June 30, 2003 convertible into 
common stock at $4.44 per share and warrants to purchase common stock, at an 
exercise price of $5.62 per share expiring June 30, 2003. Such warrants 
(771,085), were valued at $471,000 (unamortized balance of $366,000 at 
December 31, 1998) and recorded as debt discount. The warrants and notes are 
redeemable by the Company under certain circumstances. The Company incurred 
placement and finders' fees of $394,000 and granted warrants to purchase 
295,000 shares of common stock at $4.50 expiring in five years. Such warrants 
were valued at $167,000 and recorded as deferred financing costs which are 
being amortized over the term of the notes.

In the fourth quarter of 1997, the Company sold in a private placement
$1,300,000 principal amount of 10% convertible notes due June 30, 2004. The
notes are convertible into common stock at $4.87 per share. For every $1,000
principal amount of notes purchased, the holders also received warrants to
purchase common stock at $5.64 per share expiring June 30, 2004. Such warrants
(138,298) were valued at $86,000 (unamortized balance of 64,000 at December 31,
1998) and recorded as debt discount. The notes are redeemable by the Company
beginning July 1, 1999 at a premium. The warrants are redeemable on or after
July 1, 2000. The Company also issued warrants expiring December 31, 2002 to
purchase 26,000 shares of common stock at $5.00 per share as a placement fee.
Such warrants were valued at $21,000 and recorded as deferred finance costs,
which are being amortized over the term of the notes.


                                      F-12

<PAGE>


4. FINANCING (CONTINUED)

In February 1998, the Company issued, in a private placement, $5,250,000
principal amount of 10% convertible subordinated notes due June 30, 2003
("Notes") convertible initially into common stock at $4.75 per share. The
conversion price on $4,250,000 principal amount of notes is subject to
adjustment in certain circumstances, including resets at September 1, 1998 and
March 1, 1999 to 110% of the then current market price of the common stock but
not less than $4.00 and $3.50 respectively. The conversion price was reset to
$4.00 at September 1, 1998 and to $3.50 at March 1, 1999.

On conversion, the holders of $4,250,000 principal amount will receive warrants
to purchase common stock (an aggregate of 538,249) at $5.92 per share expiring
June 30, 2003. If a holder converts the Note prior to September 1, 1999, the
holder will receive an amount equal to 75% of the interest which would have
accrued from the date of conversion through September 1, 1999. The holders of
$1,000,000 principal amount will receive on conversion, warrants to purchase
145,068 shares of common stock at $5.17 per share expiring June 30, 2003. The
Company also issued warrants expiring June 30, 2003 to purchase 43,074 shares of
common stock at $5.92 per share as a placement fee which were valued at $63,000
and recorded as deferred financing costs. Notes in the principal amount of
$900,000 were issued to certain investors in a film acquisition fund in exchange
for their interests therein as described below.

ACQUISITION FUND:

In December 1993, an acquisition fund was created for the purpose of funding the
acquisition of the distribution rights to independently produced films. The
initial investors in the fund were the Chairman, Secretary and an investor who
is a customer of an investment advisory firm, of which a director of the Company
is an Executive Vice President, and a partnership of which the same Director is
a general partner. As of December 31, 1997, the Company owed the acquisition
fund $1,035,000, representing advances and related film profits earned. In
February 1998, the fund was terminated and the Company issued $900,000 principal
amount of 10% convertible subordinated notes due June 30, 2003 and a $200,000
promissory demand note with interest at 10% (which was subsequently repaid) in
exchange for the obligations to the acquisition fund.

OTHER:

Short term loans of $1,000,000 were obtained, of which $300,000 was received in
December 1997 and $700,000 in January 1998. Loans were extended by Mezzanine
Financial Corp. ($750,000), the Chairman ($150,000) and the Secretary ($100,000)
in order to enable the Company to fund program acquisitions in accordance with
its expansion plans pending the completion of the private offering of 10%
convertible notes. The Chairman and Secretary are also officers and directors of
Mezzanine Financial Corp. Upon completion of the offering of Notes, proceeds of
$250,000 were used to repay the loans from the Chairman and the Secretary, and
proceeds of $650,000 were used to repay Mezzanine Financial Corp. The remaining
$100,000 of the Mezzanine loan was exchanged for an equivalent amount of Notes.


                                      F-13

<PAGE>


4. FINANCING (CONTINUED)

Maturities of debt subsequent to December 31, 1998, in thousands, are as
follows:

<TABLE>
<CAPTION>

                                       Bank Line      Variable    Convertible
                            Total      of Credit     Rate Notes      Notes
                          --------     ---------     ----------   -----------
<S>                       <C>          <C>           <C>          <C>
       1999               $   454      $             $  454
       2000                10,432       9,978           454
       2001                 1,814                     1,814
       2002                    -
       2003                12,473                                  12,473
       2004                 1,300                                   1,300
                           ------      -------       -------      -------
                           26,473       9,978         2,722       $13,773
Less debt discount           (544)         --          (114)         (430)
                           ------      -------       -------      -------

                          $25,929      $9,978        $2,608       $13,343
                          -------      -------       -------      -------
                          -------      -------       -------      -------

</TABLE>


5.  STOCKHOLDERS' EQUITY

NOTES RECEIVABLE FROM EQUITY SALES:

In September 1995, the Company completed the placements of 420,000 shares of
common stock under a stock purchase plan ("the Plan") which permitted certain of
the Company's employees, directors and consultants to purchase units ("Units"),
each of which consists of one share of common stock, one common stock purchase
warrant with an exercise price of $19.05 per share and one common stock purchase
warrant with an exercise price $28.57 per share. The warrants expire on December
31, 2000. They are redeemable by the Company (at a price of $0.025 per warrant)
at any time after the closing sales price of the common stock has been at least
125% of the then effective exercise price of the warrants for a period of 20
consecutive business days after the underlying shares of common stock have been
registered under the Securities Act of 1933. The purchase price of each unit was
$4 (which was the closing market price of the common stock on effective date of
the Plan). The Company ascribed a diminimus value to the common stock purchase
warrants.

The Plan permitted participants to acquire Units by paying 5% of the total price
upon purchase and delivering a promissory note for the remaining 95% of the
price. Each note provides for the annual payment of 5% of the original principal
amount thereof, commencing in 1996, with a balloon payment of the remaining
unpaid principal amount of the note payable on a specified date in 2005 (the
"Maturity Date"). Interest accrues on each Note at a rate of 6% per annum,
payable on the last day of each year throughout the term of the Note, with all
remaining accrued and unpaid interest due on the Maturity Date.

Each participant pledged 95% of the Units that they acquired under the plan to
the Company as security for such participant's Note. Such Units may be released
to the participant as the Note is paid under certain circumstances. Participants
are permitted to make payments under their Notes by delivering shares of common
stock that they own, including pledged shares, which are credited against
amounts owed under their Notes at fair market value thereof. Purchasers of Units
are entitled to certain registration rights with respect to the securities
comprising the Units.


                                      F-14

<PAGE>


5.  STOCKHOLDERS' EQUITY (CONTINUED)


CUMULATIVE CONVERTIBLE SERIES A PREFERRED STOCK:

As of December 31, 1998 there are 501,114 shares of Cumulative Convertible
Series A 8% Preferred Stock outstanding. Each share has a liquidation preference
of $3.00 plus accumulated and unpaid dividends; is convertible into 1.05 shares
of common stock at any time prior to redemption; and is entitled to one vote.
Semi-annual dividends of $0.12 per share are payable on June 30 and December 31.
The Company may redeem the shares if the market price of the common stock has
exceeded twice the then applicable conversion price at a time when the
underlying shares of common stock are registered under the Securities Act of
1933. The Company may redeem the shares at a premium of 3% declining annually at
the rate of 1% until January 1, 2002, after which the redemption price will be
$3.00. The Company accepted 9% promissory notes aggregating $95,000, of which
$20,000 was paid at December 31, 1998, from three officers in connection with
their participation in the preferred stock offering. The corresponding shares
are held by the Company as collateral for the notes. The Company declared
dividends of $121,000 for each of the years ended December 31, 1998 and 1997.
Shareholders were given the option of receiving shares of common stock (at a
price equal to 90% of the average closing sales price of the common stock over
the last 10 trading days preceding the dividend payment date) in lieu of the
cash dividend declared, which resulted in $73,000 and $82,000 of the dividends
being paid in shares of common stock for the years ended December 31, 1998 and
1997, respectively, and the remainder in cash.

NON-VOTING CONVERTIBLE SERIES B PREFERRED STOCK:

On July 15, 1998, the Company completed a private placement of 300 shares of its
non-voting Series B preferred stock and a three-year warrant to purchase 200,000
shares of common stock at $5.16 per share for a gross purchase price of
$3,000,000. Each share of Series B preferred stock has a stated value of $10,000
and provides for dividends cumulatively at 6% per annum payable quarterly in
cash, or, at the Company's option, under certain circumstances, in common
stock. For 1998 the Company declared dividends of $82,000 of which $36,000 was
paid in cash and $46,000 was paid in common stock. The Series B preferred is
convertible, on or after January 16, 1999 into common stock at the lesser of
$5.16 or the average closing sales price for any two trading days during the ten
trading day period prior to conversion but not less than 80% of the average
closing sales price over the five trading days preceding July 16, 1998 subject
to antidilution adjustments. Prior to January 16,1999, conversions are only
permitted at a conversion price greater than 101% of the average closing price.
Any remaining Series B preferred stock is automatically converted into common
stock on June 15, 2000. The investor has, except for certain defined
circumstances, the right of first refusal for any private placement of the
Company's common stock or any of its derivative securities prior to July 15,
1999.

The holders have registration rights and are entitled to certain specified
remedies and, under certain circumstances controllable solely by the Company,
are entitled to require the Company to redeem their shares of Series B preferred
stock at a premium, if the Company does not timely comply with its obligations
with respect to the preferred stock. The Company incurred as a placement fee,
$150,000 in cash and a three-year common stock purchase warrant to purchase
50,000 shares of common stock at an exercise price of $5.16 per share.


                                      F-15

<PAGE>


5.  STOCKHOLDERS' EQUITY (CONTINUED)

CUMULATIVE CONVERTIBLE SERIES C PREFERRED STOCK:

In December 1998 the Company initiated a private placement of up to 2,500 shares
of Series C 8% cumulative convertible preferred stock each of which has a stated
value of $1,000 per share and is convertible into common stock at a conversion
price of $2.50 per share. The offering price is $1,000 per share. The Series C
preferred stock provides for cumulative cash dividends at an annual rate of 8%
of the stated value per share. At the Company's option, dividends that accrue
through December 31, 2000 may be paid in common stock. The Company may redeem
the Series C preferred stock beginning in 2002 at a premium of $60 per share
which declines to zero in 2008 and thereafter. Holders of Series C are entitled
to the number of votes that equals the number of common shares issuable on
conversion. So long as shares of Series B preferred stock are outstanding, the
Company cannot redeem Series C preferred stock without the prior written consent
of the holders of Series B. Proceeds of $500,000 were received through December
31, 1998 of which $300,000 was received from two officers and directors of the
Company.

WARRANTS:

A summary of the status of the Company's warrants as of December 31, 1998 and
1997, and changes during the years ended on those dates is presented below:

<TABLE>
<CAPTION>


                                           1998                    1997        
                                   --------------------    --------------------
                                            Weighted                   Weighted
                                   Shares    Average       Shares      Average
                                   (000)  Exercise Price   (000)    Exercise Price
                                   ------ --------------   ------   --------------
<S>                                <C>       <C>            <C>        <C>  
Outstanding at beginning of year   3,947     $  8.76        3,593      $9.07

Granted                              380     $  5.20          354      $5.61

Exercised                         (1,399)    ($ 4.26)          --      $  --

Forfeited                           (658)    ($22.69)          --      $  --

Outstanding at end of year
                                  ------                    -----      
                                   2,270      $  6.92       3,947      $8.76
                                  ------      -------       -----      -----
                                  ------      -------       -----      -----

Warrants exercisable at year-end   2,270      $  6.92       3,947      $8.76
                                  ------      -------       -----      -----
                                  ------      -------       -----      -----

Weighted-average fair value
of warrants granted during
the year
                                              $  1.83                  $ .65
                                              -------                  -----
                                              -------                  -----
</TABLE>


                                      F-16
<PAGE>

5.  STOCKHOLDERS' EQUITY (CONTINUED)

The following table summarizes information relating to warrants outstanding at
December 31, 1998:

<TABLE>
<CAPTION>
                               Warrants Outstanding                     Warrants Exercisable
                    ---------------------------------------------    --------------------------
                       Number    Weighted-average     Weighted-         Number      Weighted-
     Range          Outstanding     Remaining          Average       Exercisable     Average
Exercise Prices     At 12/31/98  Contractual Life   Exercise Price   At 12/31/98  Exercise Price
---------------     -----------  ----------------   --------------   -----------  --------------
<S>                 <C>                <C>             <C>             <C>           <C>
$ 3.14 - $ 4.50         762             1              $ 4.04            762         $ 4.04

$ 4.91 - $ 6.00       1,277             4              $ 5.58          1,277         $ 5.58

$19.05 - $28.57         231             2              $23.81            231         $23.81
                      ------                                           -----

$ 3.14 - $28.57       2,270             3              $ 6.92          2,270         $ 6.92
                      ------                                           -----
                      ------                                           -----
</TABLE>

In 1998 class B warrants were exercised for the purchase of 1,359,000 shares of
common stock. The Company received net cash proceeds of $4,725,000 and
promissory notes of $778,000 (including $632,000 of notes from directors and
other related parties. Principal payments of 10% are due each year for four 
years with the balance due at the end of the fifth year with interest at 5.8% 
per annum).

EMPLOYEE STOCK OPTION PLAN:

The 1993 Option Plan, as amended, (the "Plan") authorizes the grant of options
to purchase up to an aggregate of 1,225,000 shares. Both non-qualified options
and options intended to qualify as "Incentive" stock options under Section 422
of the Internal Revenue Code of 1986, as amended, may be granted under the Plan.
A Stock Option Committee of the Board of Directors administers the Plan. The
exercise price of any option granted under the Plan shall not be less than the
fair market value of the common stock on the date of the grant.

A summary of the status of the Company's employee stock options as of December
31, 1998 and 1997, and changes during the years ending on those dates is
presented below:

<TABLE>
<CAPTION>
                                                    1998                         1997        
                                           -----------------------      --------------------
                                                       Weighted                    Weighted
                                           Shares      Average          Shares     Average
                                           (000)    Exercise Price       (000)  Exercise Price
                                           ------   --------------      ------  --------------
<S>                                         <C>        <C>                <C>      <C>   
Outstanding at beginning of year            398        $ 3.77             419      $ 3.52

Granted                                     584        $ 2.69              71      $ 4.59

Exercised                                    --            --             (68)     ($2.86)

Forfeited                                   (55)       ($2.86)            (24)     ($4.40)
                                            ----                          ---
Outstanding at end of year                  927        $ 2.75             398      $ 3.77
                                            ----       ------             ----     ------
                                            ----       ------             ----     ------

Options exercisable at year-end             472        $ 2.84             381      $ 3.76

Weighted-average fair value
of options granted during the year                     $ 1.41                      $ 1.91
                                                        -----                      ------
                                                        -----                      ------
</TABLE>

On December 9, 1998, the exercise price for 559,750 employee stock options 
held by non-director employees was restated to $2.86. The original exercise 
prices for these options, a substantial portion of which was granted in 
1998, range from $3.93 to $6.38.

                                      F-17
<PAGE>

5.  STOCKHOLDERS' EQUITY (CONTINUED)

Other Options:

In April 1993, the Company granted options to purchase an aggregate of 945,000
shares of Common Stock at an exercise price of $2.86 per share to employees and
other persons considered to be instrumental to the progress of the Company. The
options are exercisable at various times through June 2003.

A summary of the status of the Company's other stock options as of December 31,
1998 and 1997, and changes during the years ending on those dates is presented
below:

<TABLE>
<CAPTION>
                                                      1998                       1997          
                                              ----------------------     ----------------------
                                                          Weighted                   Weighted
                                              Shares      Average        Shares      Average
                                               (000)   Exercise Price    (000)    Exercise Price
                                              ------   --------------    ------   --------------
<S>                                           <C>          <C>           <C>        <C>   
Outstanding at beginning of year              1,987        $ 3.37        1,536      $ 2.98

Granted                                         320        $ 2.80          491        4.45

Exercised                                                                  (40)      (1.79)
                                                 --            --

Forfeited                                      (155)       ($2.86)          --          --
                                              -----                      -----

Outstanding at end of year                    2,152         $2.99        1,987        3.37
                                              -----       --------       ------     -------
                                              -----       --------       ------     -------

Options exercisable at year-end               1,228        $ 3.03        1,224        3.34
                                              -----       --------       ------     -------
                                              -----       --------       ------     -------

Weighted-average fair value
of options granted during the year                         $ 1.37                   $ 1.85
                                                           ------                   ------
                                                           ------                   ------
</TABLE>

On December 9, 1998, the exercise price for 560,200 other stock options held by
non-director employees was restated to $2.86. The original exercise prices for
these options range from $4.00 to $4.81.

The following table summarizes information related to options outstanding at
December 31, 1998:

<TABLE>
<CAPTION>
                              Options Outstanding               Options Exercisable
                              -------------------               -------------------
                                                                            Weighted-
      Range          Number        Weighted-      Weighted-     Number       Average
     Exercise     Outstanding       Average       Average    Exercisable    Exercise
      Prices      At 12/31/98      Remaining      Exercise    At 12/31/98     Price
                                  Contractual      Price
                                     Life
<S>                  <C>              <C>           <C>          <C>          <C>
     $1.10 -
      $2.86          2,979             6            $2.80        1,675        $2.76
     $4.50 -
      $4.57            100             8            $4.52           25        $4.50
                     -----                                       -----
     $1.10 -
      $4.57          3,079             6            $2.85        1,700        $2.78
                     -----                                       -----
                     -----                                       -----
</TABLE>

                                      F-18
<PAGE>

5.  STOCKHOLDERS' EQUITY (CONTINUED)

The fair value of each warrant and option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1998 and 1997: expected
volatility of thirty-seven (37%) percent to forty seven (47%) percent, risk-free
interest rates ranging from 4.21% to 6.49%, and expected life ranging from 3 to
10 years.

The Company applies APB Opinion 25 and related Interpretations in accounting for
its options. Accordingly, no compensation cost has been recognized for its stock
option grants. The effect of applying SFAS No. 123 on 1998 and 1997 pro forma
net income is not necessarily representative of the effects on reported net
income for future years due to, among other things, (1) the vesting period of
stock options and (2) the fair value of additional stock options in future
years. Had compensation costs for the Company's stock option grants been
determined based on the fair value at the grant dates for awards consistent with
the method of FASB Statement 123, the Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated below (in
thousands except per share data.)

<TABLE>
<CAPTION>

                                                     1998       1997
                                                     ----       ----
<S>                                 <C>             <C>        <C>   
Net income                          As reported     $  110     $1,347
                                    Pro forma       ($ 156)    $  718
Net income (loss) per basic
         common share               As reported     $(0.01)    $  .21
                                    Pro forma       $(0.05)    $  .10
Net income (loss) per diluted
         common share               As reported     $(0.01)    $  .19
                                    Pro forma       $(0.05)    $  .10

</TABLE>


Capital shares reserved for future issuance include the following (in
thousands):

<TABLE>

<S>                                                    <C>  
Exercise of options granted                            3,079
Exercise of warrants issued                            2,270
Options available for grant under the Plan               298
Issuable upon conversion of convertible notes          3,177
Warrants issuable upon conversion of certain
   10% convertible notes                                 683
Issuable upon conversion of Preferred Stock            1,671
                                                      -------
                                                      11,178
                                                      -------
                                                      -------

</TABLE>


                                      F-19

<PAGE>


6. FINANCIAL INSTRUMENTS

Other than cash and cash equivalents the Company's financial instruments consist
of the bank line of credit, 10% convertible subordinated notes and variable rate
notes described in Note 4 and notes receivable from common stock and convertible
preferred stock sales described in Note 5. Management believes that based on the
current interest rate, and provision for future adjustment of such rate, the
fair value of the variable rate notes and 10% convertible subordinated notes
approximates their face value. The fair value of the notes receivable from
common stock and convertible preferred stock sales is not readily determinable.

7. INCOME TAXES

The provision for income taxes for 1998 consists of current Federal and State
income taxes of $-0- and $59,000, respectively, and deferred taxes of $107,000.
The provision for income taxes for 1997 consists of current federal and state
taxes of $22,000 and $57,000, respectively and deferred taxes of $867,000.
Deferred income taxes reflect the impact of temporary differences between the
amounts of assets and liabilities for financial reporting purposes and the tax
law treatments of such amounts. The principal items comprising deferred taxes
are differences in accounts receivable valuation reserves, film inventory
amortization and the net operating loss carryover.

The deferred tax assets (liabilities) as of December 31, 1998, in thousands, are
as follows:

<TABLE>

<S>                                          <C>
Accounts receivable and general reserves         248
Film inventory amortization                   (2,702)
Net operating loss carryforwards               1,053
Other items                                      297
                                             -------
Net                                          $(1,104)
                                             -------


</TABLE>


A reconciliation between the actual income tax expense and income taxes computed
by applying the Federal income tax rate to income before taxes, in thousands, is
as follows:

<TABLE>
<CAPTION>

                                    1998             1997
                                    ----             ----
<S>                                 <C>              <C> 
Computed at federal
statutory rate of 34%               $ 94             $780
Permanent differences                 61               65
State taxes, net of
federal benefit                        7               94
Other                                  4                7
                                    ----             ----
                                    $166             $946
                                    ----             ----

</TABLE>


At December 31, 1998, net operating loss carryforwards available to reduce
future federal taxable income amounted to approximately $2,633,000, expiring at
various dates through 2018.


                                      F-20

<PAGE>


8. OPERATING LEASES

The Company leases office facilities and certain equipment under non-cancelable
operating lease agreements expiring through January 2007. Total lease expense
for the years ended December 31, 1998 and 1997 were $571,000 and $506,000,
respectively. The Company also has various equipment under capital leases.


Minimum future payments, in thousands, as of December 31, 1998 are:


<TABLE>
<CAPTION>

                                                     Operating      Capital
                                                     ---------      -------
<S>                                                  <C>            <C>
            1999.................................       671            98
            2000.................................       800            98
            2001.................................       762            92
            2002.................................       726            16
            2003.................................       677
            2004 and later.......................       994
                                                     -------          ----
            Total lease payments.................    $4,630           304
                                                     ------
                                                     ------
            Amount representing interest.........                     (43)
                                                                     -----
                                                                     $261
                                                                     -----
                                                                     -----

</TABLE>


Included in the above minimum future payments, is the cost of certain executive
offices, occupied pursuant to an office sharing arrangement with an affiliate at
the monthly base rate of $2,700. The capital lease obligation of $261,000 is
included in accrued expenses.

9. COMMITMENTS AND OTHER MATTERS

Credit risk exists with respect to accounts receivable which are primarily due
from video distributors, television stations and pay cable channels. One
customer in 1998 accounted for 10% of revenues and one customer in 1997
accounted for 12%.

As of December 31, 1998, commitments for advances and guaranteed royalties
amounted to $7,000,000.

The Company is involved in legal proceedings which it considers to be incidental
to its business. The Company believes that any liability which may arise as a
result of any such proceedings will not have a material adverse effect on its
financial condition.

The Company has a 401(K) defined contribution plan which covers substantially
all employees. Participants may contribute up to 15% of compensation, as
defined, subject to limitations. Company matching contributions are
discretionary. The Company's contributions amounted to $15,000 in 1997.

10. RELATED PARTY TRANSACTIONS

General and administrative costs include $133,000 and $132,000 for services
rendered by an affiliate for the years ended December 31, 1998 and December 31,
1997, respectively.


                                      F-21

<PAGE>

11. ACQUISITIONS

In March 1997 the Company acquired all of the capital stock of Miramar Images,
Inc. ("Miramar"), a producer and distributor of music videos and audio
recordings primarily for the New Adult Contemporary market, for 313,500 shares
of the Company's common stock valued at $1,400,000 and by assuming certain
obligations of $964,000 and $736,000 of other costs. The acquisition of Miramar
was accounted for as a purchase and the Company recorded $3,100,000 of excess 
cost over fair value of net assets in connection with the acquisition which 
is being amortized over 20 years. The operating results of Miramar have been 
included in the consolidated statement of operations from the date of 
acquisition.

In connection with the acquisition, the Company entered into a four-year
employment agreement with the then president of Miramar providing for, among
other things, an annual salary of $125,000 per year, a performance bonus equal
to 5% of Miramar's pre-tax profit (as defined), and one-half of one percent of
the increase of the gross revenues of Miramar over its revenues for the
immediately preceding year. In addition, for each fiscal year commencing on or
after January 1, 1998, if such increase in revenues is equal to or greater than
20% of such preceding year's gross revenues, then the president also will
receive one-half of one-percent of the excess of such previous year's gross
revenues over the gross revenues realized by Miramar during the second
immediately preceding fiscal year. The Company also issued an aggregate of
210,000 stock options to Miramar employees and consultants (including the
current president). Each option entitles the holder to purchase one share of the
Company's common stock at an original purchase price of $4.375 (i.e. $.125 
above the market price of the Company's common stock on the closing date of 
the acquisition), subject to the holder's continuing to be employed by the 
Company. 170,000 options were subsequently restated to $2.86. The options have
a term of ten years, but subject to certain exceptions, will not be 
exercisable for a period of 9.5 years unless Miramar's operations attain 
certain earnings thresholds.

Assuming the acquisition of Miramar had taken place on January 1, 1997, the
proforma revenue and net income for the Company for 1997 would have been as
follows (in thousands, except per share amounts):

<TABLE>

<S>                                    <C>    
Revenues                               $32,561
                                       -------
                                       -------
Net income                             $ 1,159
                                       -------
                                       -------

Net income (loss) per common share:

 Basic                                 $   .18
                                       -------
 Diluted                               $   .16
                                       -------

</TABLE>


During 1998 the Company increased its ownership in The Jazz Store, Inc. to 90%
through the conversion of $300,000 in outstanding convertible notes and the
issuance of 75,000 shares of common stock valued at $176,000. The acquisition
was accounted for as a purchase and accordingly the results of operations of the
acquired entity were included in the consolidated statements of operations from


                                      F-22

<PAGE>


11. ACQUISITIONS (CONTINUED)

the date of acquisition. The pro forma results of operations for 1998 and 1997
assuming the acquisition had been made at the beginning of 1997 would not be
materially different from reported results.


12. EXPORT SALES

<TABLE>
<CAPTION>

                             1998        1997 
                            ------      ------
<S>                         <C>         <C>   
Europe                      $2,833      $3,260
Asia                         1,377       1,070
Latin America                  979         968
Africa                         167         356
Middle East                    403         329
Other                       $  554      $  375
                            ------      ------
                           $ 6,313     $ 6,358
                            ------      ------
                            ------      ------

</TABLE>


Export sale contracts are generally denominated in US dollars. For the years
ended December 31, 1998 and 1997, there were no significant foreign exchange
gains or losses.


13. OTHER EXPENSES

Non recurring costs of $333,000 in 1998 represent costs incurred primarily for
termination and relocation expenses.


                                      F-23