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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM 10-KSB
         (MARK ONE)

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

        For the fiscal year ended June 30, 1998


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

              For the transition period from ________ to __________

                         Commission file number: 0-29050

                            TOMORROW'S MORNING, INC.
                 (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

        CALIFORNIA                                          95-4379805
(STATE OR OTHER JURISDICTION OF                         (I.R.S. EMPLOYER
 INCORPORATION OR ORGANIZATION)                          IDENTIFICATION NO.)

       125 SOUTH BARRINGTON PLACE, LOS ANGELES, CALIFORNIA     90049
            (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)        (ZIP CODE)

                    ISSUER'S TELEPHONE NUMBER: (310) 440-2778

         SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:

    TITLE OF EACH CLASS              NAME OF EACH EXCHANGE ON WHICH REGISTERED
           None                                       None

          SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
                           Common Stock, no par value
                                (TITLE OF CLASS)

                   Redeemable Common Stock Purchase Warrants,
             exercisable at $6.50 per share until February 10, 2000
                                (TITLE OF CLASS)

Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.

         Yes / X /      No /  /

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

Issuer's revenues for its most recent fiscal year (ended June 30, 1998) were
$218,983.

The aggregate market value of the 2,194,271 shares of common stock held by
non-affiliates of the issuer, based upon the average bid and asked price of such
stock on September 15, 1998, as reported by the OTC Bulletin Board, was
approximately $1,645,700. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes. The number of outstanding shares of the issuer's Common
Stock on September 15, 1998 was 3,212,690.

DOCUMENTS INCORPORATED BY REFERENCE         NONE

TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):  /  / YES   / X / NO

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                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

THE FOLLOWING DISCUSSION CONTAINS TREND INFORMATION AND OTHER FORWARD-LOOKING
STATEMENTS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. THE ACTUAL RESULTS
OF TOMORROW'S MORNING, INC. (THE "COMPANY") COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY INCLUDE, BUT ARE NOT LIMITED TO, THOSE IDENTIFIED
IN "ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - OVERVIEW".

COMPANY BACKGROUND AND PHILOSOPHY. The Company was founded to develop and
publish a weekly newspaper for children ages 8 to 14 called TOMORROW'S MORNING
(the "Newspaper") and engage in various other publishing, video, electronic,
multimedia and merchandising lines based on the Newspaper. The Company's
philosophy can be summarized in the fusion of three concepts: (i) doing well by
doing good, (ii) developing multiple, synergistic sales through existing and
newly developing marketing channels and (iii) addressing a major market
need/opportunity. The Company's goal is to enhance the education and world-view
of children in the United States while simultaneously building a profitable,
multi-product business.

The Company believes that there is a clear need for a children's weekly
newspaper and innovative multimedia products in the United States. Given the
evidence that American children are not very well-informed or knowledgeable
about the world, and that newspaper readership is dramatically declining
(especially among the younger age groups), the Newspaper is based on the premise
that an independent, authoritative paper written for children can make a
difference. In June 1990, the Times Mirror Center for the People and the Press
published a survey entitled "The American Media: Who Reads, Who Watches, Who
Listens, Who Cares." Its various studies revealed that young Americans, 18 to
30, know less and care less about news and public affairs than any other
generation of Americans in the past 50 years. By getting to children earlier
(when they're 8 to 14), the Newspaper can help to change that.

Le Journal des Enfants ("LJDE"), the inspiration for the Newspaper, has
flourished in France since its founding in 1985. It has 180,000 subscribers and
over 550,000 readers, mostly children. Through a personal visit to study its
operation in August 1991, and consultation with LJDE's management, the Company
has translated the best of LJDE's experience and success to its own
American-tailored formulation.

The Company has also studied a substantial body of research on moral development
during preadolescence. Since news and current affairs are absent or remote in
the lives of most 8- to 14-year olds, connections must be made to their personal
concerns. In the Company's opinion, children in this age group begin to develop
communal attitudes of empathy and reciprocity, and providing news information at
this stage can truly create a sense of shared experience. As they move from
self-absorption to caring and compassion for others, the Newspaper is there as a
conduit for them to experience with other children. Given the increase in a
child's cognitive capabilities during this developmental period, the Newspaper
and its proposed family of products are in a position to not only establish
"brand loyalty," but also to help children really learn about the world.

The Company believes the main reason for the current growth in children's
magazines is the growing number of well-educated parents and grandparents who
want to give every advantage to their children and grandchildren. As a result,
the Newspaper and the product lines to be derived from it are designed to fill
that need. At the same time, by promoting the Newspaper and its planned CD-ROM
spin-offs as an interactive enterprise between parent and child, the Company can
address what is considered by teachers to be the most serious school problem:
parents' low involvement in their children's education.

The Company believes that the Newspaper, its READING PARTNERS PROGRAM
Adopt-a-School Program, its SCOOP-TM- journalism game now being developed, its
potential TV show(s), its on-line interactive publishing activities, and its
proposed ancillary publishing (such as supplemental educational materials,
calendars, posters, playing cards and games), as described below, will also
address what it believes to be another fundamental need in the marketplace: that
society needs children who are socially competent, who know how to learn and
have confidence in their learning ability.

The Company was incorporated in California in June 1992. The Company's principal
executive office is located at 125 South Barrington Place, Los Angeles,
California 90049, and its telephone number is (310) 440-2778. The Company
maintains a homepage on the World Wide Web at http://www.morning.com.

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CURRENT BUSINESS.

NEWSPAPER PUBLICATION. Due to a lack of funds, with the exception of two issues
which were published in mid-May 1998, the Company stopped publishing the
Newspaper in paper format on December 22, 1997, although electronic publication
continued at the Company's Web site until March 14, 1998. Founded in 1992, the
Newspaper was a weekly four-page, full-color home/school delivery newspaper
published expressly for children between 8- and 14-years old. Recognizing what
it believes to be a previously unaddressed niche, the Newspaper provided the
news to its targeted audience in a unique fashion, at once serious and
informative, fun, "cool" and irreverent. The Newspaper's unique "voice" and
format have been well-received, and it has been the subject of articles in THE
NEW YORK TIMES, LOS ANGELES TIMES, ROCKY MOUNTAIN NEWS, WASHINGTON POST,
CLEVELAND PLAIN DEALER, CHILD, PARENTING, FAMILY LIFE, SCHOOL LIBRARY JOURNAL,
THE DALLAS MORNING NEWS and John Naisbitt's TREND LETTER. It also received
national recognition in the Columbia University MEDIA STUDIES JOURNAL, and its
graphic format was cited in DESIGNING FOR CHILDREN, by Steven Heller, senior art
director of THE NEW YORK TIMES. In addition, the "Kidstocks" section of the
Newspaper received "Distinguished Achievement Awards" for 1996 and 1997 from the
Educational Press Association of America, an independent association of some
2,500 educational periodicals and interested individuals that promotes the
interests of educational communication. The Newspaper was also the winner of a
1996 "Parents' Choice Group Magazine Award" from PARENTS' CHOICE, a non-profit
consumer guide which annually, through groups of parents, children, teachers,
librarians, psychologists with advice from pediatricians, safety experts and
others who care about children, selects the year's top children's toys, books,
videos, computer programs, audios, magazines, TV programs and rock/pop music.

The Newspaper had formed an eight-person Advisory Board composed of the
following persons:

     DR. GERALD LESSER - Bigelow Professor of Education and Developmental
     Psychology, Harvard University; Chairman of the Board of Advisors for the
     Children's Television Workshop.

     PEGGY CHARREN - Founder and former president of Action for Children's
     Television (ACT); Visiting Scholar in Education at Harvard University's
     Graduate School of Education.

     DR. CAROL D. BERKOWITZ - Director, Pediatric Clinic and Group Practice,
     Harbor/ UCLA Medical Center and Professor of Clinical Pediatrics, UCLA
     School of Medicine.

     GARRY MARSHALL - Writer, director.

     SUSIE BUFFETT - Activist for children's education opportunities.

     BEATRICE D'IRUBE - Founder and Publisher of LJDE.

     GEORGE FOREMAN - World Heavyweight Champ, actor, children's rights
     advocate.

     HECTOR ELIZONDO - Actor, human rights activist.

From time to time, the Newspaper has called upon members of the Advisory Board
for counsel in their specific areas of expertise and experience.

Using the Macintosh Desktop Publishing system, the Newspaper was written and
designed weekly at the Company's offices in Los Angeles. Its weekly edition was
printed in Silver Spring, Maryland and its biweekly classroom edition was
printed in various locations. The editorial and art of each issue of the
Newspaper, plus special features for on-line readers, remain available at the
Company's site on the World Wide Web (http://www.morning.com). The Company has
also published "special editions" of the Newspaper. "Special editions" of the
Newspaper were either editions of the regular paper, but emblazoned with a
client company's logo (i.e., "Brought to you by . . ."), or, more generally, a
single-theme or topic "insert" of two to four pages, underwritten by a client
company or organization, in either case with distribution through the Company's
channels and/or the client's own distribution channels. In the past, the Company
has produced special editions for Patagonia, The Body Shop and MCA/Universal
Home Video.

The Company contracted with Starbright Graphics, Inc. (a shareholder of the
Company) as its agent for printing both the home and classroom editions of the
Newspaper, plus ancillary materials such as the classroom teacher's guide,
promotional flyers, subscriber correspondence and subscription cards. The home
and classroom editions were produced in the same format, but on different
schedules. Material published in the home edition was selected for inclusion in
the classroom edition, which consisted of a series of 16 issues. The terms of
the Company's relationship with Starbright Graphics, Inc. specify that
Starbright Graphics, Inc. has a right of first refusal to provide printing
services for the Company for so long as it is a shareholder.


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The Newspaper's paid circulation has been a blend of home and school
subscriptions. The Newspaper has been sold through home subscriptions at the
rate of $16.17 for a 33-week "introductory" subscription and $24.95 for a full
year subscription. School subscriptions were $2.90 per student for 16 issues
during the September to June school year. Subscriptions have also been sold
through the Company's READING PARTNERS PROGRAM, which established school or
class sponsorships (at the rate of $350 per class for a 40-week school year,
plus teacher's guide) whereby an individual, group or company "adopted" a class
or school and underwrote the cost of delivery of the Newspaper for the school
year. Starting from zero in 1992, at its peak, the Company had approximately
400,000 subscribers. As of its last publication, the Newspaper was being
distributed to 100,000 subscribers in all 50 states, plus Canada, Mexico and
abroad. At that time, over 90% of the Newspaper's circulation was to schools.
Sales of the Newspaper and certain custom-published Newspaper inserts have been
essentially the sole source of the Company's revenues since inception. To the
extent that sales of the Newspaper have been directed at schools, such business
was seasonal, with most sales taking place between September and June.
Seasonality was not believed to be a factor with non-school sales.

Bloomberg Financial Markets, a leading financial news network and publisher
("Bloomberg"), sponsored the Newspaper's "Kidstocks" column in print and
on-line, with reciprocal links between Bloomberg's and the Company's websites.
The Newspaper also featured a special Internet column by Yahooligans!-TM-,
possibly the largest, most well-known and most-visited directory of children's
resources on the World Wide Web, in both the print and on-line versions of the
Newspaper. The Company continues to provide content to Yahooligans!-TM- (see
"Potential Future Products and Services" below).

At this time, the Company plans to resume publication of the Newspaper at such
time, if any, as it obtains the necessary funding. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

BUSINESS IN DEVELOPMENT. The Company is developing a CD-ROM journalism game
called SCOOP-TM-, an innovative learning system that will be interactive and
synergistic with the Newspaper and the Company's other potential products,
including on-line services, books and TV show(s). SCOOP-TM- calls upon its
players to take on progressively more complex investigative reporting
assignments, as they move up the ladder of an imaginary newspaper - from cub
reporter to city desk to foreign bureau to Pulitzer Prize. The game is being
created under the direction of Robit Hairman, who produced "The Brief History of
Time" CD-ROM. Ben Bradlee, formerly Editor of THE WASHINGTON POST, plays the
"Editor" in SCOOP-TM-. Within a personal computer screen environment, players
navigate, investigate, interview, conduct research and file stories using a
natural language engine that will allow the players to "speak" with the
characters. The game will run on either PC or Macintosh platforms, and is
designed to interact via the Internet with the Company's website and server for
research, content updates and publishing of stories. It is designed to be
synergistic with the Newspaper in the sense that it will use the TOMORROW'S
MORNING theme as its context, share content and formatting with the Newspaper,
and will be aimed at the same audience. Also, the game will be described and
promoted, and players may be interviewed, in the Newspaper and on the Company's
website. As of September 1, 1998, the game has been designed, most of the
stories have been outlined (and some are largely complete), the "look and feel"
has been created, 3-D environments have been developed, a demonstration program
has been completed, and original characters have been created. Ben Bradlee has
also been filmed in the "Editor" role, and filming of Larry King as himself is
scheduled.

POTENTIAL FUTURE PRODUCTS AND SERVICES. The Company has established its own site
on the World Wide Web, where it has electronically posted the Newspaper and
where it intends to provide a whole range of activities, services, games,
features, content and interactive elements if and when sufficient funding
becomes available. The Company plans to use its website to offer an archive of
articles, artwork and features from past Newspaper issues, plus supplemental
resources, accessed via a "search engine" according to topic and keywords. In
addition, it is planning to enable children to engage in real-time games
together across the Internet, collaborate on creative story-writing, post local
news stories, view and contribute to an on-line art gallery, create and send
electronic postcards and animations to each other, and receive automated e-mail
greetings on special occasions. The Company also plans to host special on-line
interview sessions with celebrities and journalists. The website will also
feature a TOMORROW'S MORNING on-line store, where children and parents can order
subscriptions to the Newspaper, other products created by the Company and
additional products.

The Company and Yahooligans!-TM-, the children's division of Yahoo!, the largest
directory on the Internet, are developing a facility for providing news content
daily for children on the Yahooligans!-TM- website, with direct links to the
Company's website. The Company also has agreed to establish reciprocal links
between its website and Social Studies School Service's website at
www.socialstudies.com, and is in discussions with a number of other
organizations regarding cross-linking with their sites, with the objective of
increasing awareness of the Company's products and

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services in the marketplace. In addition, the Company plans to create a special
site on-line for interaction with the SCOOP-TM- game, providing updated content,
research resource materials and "chat" sessions for players of the game.

It is anticipated that revenue from the Company's website may in the future be
derived from on-line merchandising, advertising and sponsorships.

The Company is presently marketing a concept for a TV show based on the
Newspaper. Creative Artists Agency, a leading talent agency, is representing the
Company in those marketing efforts. The proposed TV show describes the
adventures of a group of 14-, 15- and 16-year olds who create a "webzine" for
kids. In each episode, the cast goes out to find the story - find the truth -
and ideally learn something about what they're going after, as well as something
about themselves. The show is being developed as a 30-minute live action
production, with TOMORROW'S MORNING staff and TV writer/producer Dan Funk
working on creating the show. The Company has already met with representatives
of The Disney Channel and the Warner Bros. Network and it is anticipated that
the show will be presented to additional broadcast and cable networks.

A source of revenue in the future, tapping the Company's projected circulation
base and others exposed to the Company, may be a wholly-owned or joint-venture
merchandising division, offering "TOMORROW'S MORNING" and SCOOP-TM- logo items,
clothing, characters, a SCOOP-TM- "Reporter's Kit," software, print materials,
back-to-school items and promotional packages.

The Company also plans to develop various "ancillary" publishing products, which
may include printed materials such as supplemental educational materials,
calendars, posters, playing cards and games. Such products may also include
topical guides, anthologies and books which are derived either from material
already published in the Newspaper or new material, written by the Newspaper's
staff, its readers, or outside authors under contract.

Additional products and revenue-generating items may include follow-on CD-ROM
games (eventually comprising a family of products based on the general approach
of the first, but specializing in specific subject areas), books, additional TV
shows (such as a specific "news to kids" show), sponsored one-minute
interstitial news "flashes" televised between shows on Saturday mornings,
licensing of "TOMORROW'S MORNING" characters, and a series of
corporate-sponsored Newspaper inserts with varied distribution channels and
target audiences. Based on an assessment of demand, the Company may also create
a separate version of the Newspaper for the lower elementary age group
(tentatively named "TOMORROW'S DAWN").

The foregoing notwithstanding, there can be no assurance that any additional
products or services will be developed.

MARKETING AND EXPANSION STRATEGY. The Company has marketed the Newspaper through
advertising, telemarketing and direct mail solicitations to school teachers in
the upper elementary and middle school grades. It also markets to corporations
and foundations with an interest in sponsoring distribution of the Newspaper to
schools, and utilizes catalog agents for public library sales. For sales of home
subscriptions, it has marketed through American Express credit card magazine
offers, READER'S DIGEST school marketing programs, its website, and public
relations and referrals. If and when publication resumes, the Company intends to
continue to aggressively market the Newspaper to various target audiences
through a number of means. The Company also may in the future launch targeted
direct mail and telemarketing campaigns to venues where children gather, such as
family-practice doctors' offices, orthodontists' and dentists' offices,
pediatric wards, and after-school "day-care" programs. It may also in the future
create differentiated "home" and "school" editions, with the home editions
marketed via direct mail to targeted demographic areas, and home or school
editions marketed to "home schoolers."

The Company has, from time to time, received sponsorship for the Newspaper from
major corporations, individuals and foundations. The Company will continue to
seek to develop strategic alliances with a number of high-profile companies (in
various industries), foundations and individuals around the country, based in
many cases on long-standing relationships with the Company that have been
maturing over the course of the Company's operating history. An example is the
Company's alliance with EduCap, Inc. (formerly known as University Support
Services), a non-profit organization and the country's largest provider of
private education loans, which has access to thousands of corporate sponsors,
including about 30% of the Fortune 500 companies. Such alliances may be
collaborative, with both parties underwriting the cost and sharing the revenues
from activities jointly entered into, such as the creation of new supplemental
educational materials or a CD-ROM game. They may also be contractual, as with
publishing and distribution projects (such as the Company has done for Patagonia
and MCA/Universal Home Video), with the

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Company being paid a fee for creation, printing and distribution. In addition,
these alliances may be in the form of sponsorships, whereby one or several
companies, or a combination of companies and non-profit organizations, sponsor
delivery of the Newspaper to schools, such as is currently being undertaken by
Amblin/DreamWorks SKG for schools in selected areas around the country. There
can, however, be no assurance that any such alliances will continue to be
developed.

If and when adequate funding becomes available, the Company plans to add staff
and develop and launch additional, synergistic products (as described above),
with the objective of achieving multiple potential sales to each of its
customers. The Company is presently in discussions with a variety of
distribution and sponsorship partners with respect to certain of the proposed
products. The Company anticipates marketing its products through multiple
channels, including direct mail, telemarketing, distribution alliances to
specific markets (e.g., schools), its World Wide Web site, product offers and
catalogs bundled with the Newspaper and the Company's other products, retail
outlets, and special joint-venture marketing. For example, buyers of SCOOP-TM-
will become potential subscribers to the Newspaper, and the game will also be
marketed and sold on the World Wide Web. The Company may also engage in
discussions with major technology and entertainment companies to explore
development and marketing synergies for SCOOP-TM-. When development is
completed, the Company will seek to market this product through various
channels, including retail distribution through major national outlets, mail
order companies and in a demo version bundled with other products. The Company
is also in discussions with a number of major game publisher-distributors
regarding additional marketing ventures, as well as extensions of the game's
concepts and technology into new subject areas. SCOOP-TM- will also be marketed
through the Newspaper's circulation base, using direct mail and/or response
cards in the Newspaper.

Where opportunities and resources allow, the Company may consider expansion
through acquisition of appropriate products and/or companies in related markets
in order to accelerate growth and/or secure its competitive position.

MATERIAL CONTRACTS AND SUPPLIERS. Several of the Company's personnel are
consultants. In addition, two others are provided on a project-by-project basis
by School Market Sales Management of New York under contract with the Company.
See "Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act - Significant Personnel."

The Newspaper's circulation management, subscriber "fulfillment" (i.e.,
preparation of mailing labels, order processing, etc.) and billing have been
provided by Starbright Graphics, Inc. in New York and Specialized Fulfillment
Services in Ohio. Such services have been terminated due to lack of payment
and/or termination of Newspaper publication.

During its publication, the Newspaper was written and designed weekly at the
Company's offices. The home delivery editions were being printed at Presstar in
Silver Spring, Maryland, and the classroom editions were printed at Nielsen Ohio
Valley Litho, in Florence, Kentucky, with oversight by Starbright Graphics, Inc.
as the Company's agent (which has a right of first refusal to provide printing
services for the Company for so long as it is a shareholder of the Company). The
materials used to print the Newspaper (paper and ink) are readily available from
a variety of sources, with the only variable being price, which can be volatile
as to paper.

The SCOOP-TM- journalism game, is being developed for the Company by Robit
Hairman under a Software Development Agreement. Upon completion of the game, Mr.
Hairman will receive a 33% royalty on "product revenues" (as defined in the
agreement) after reimbursement of Company costs, repayment of capital investment
and a priority payment to the Company and/or other parties providing the capital
investment. Should the Company desire to develop a new version of the game, Mr.
Hairman has a right of first refusal to provide his full-time development
services on terms no less favorable than in the original agreement. Should Mr.
Hairman desire not to participate in the development of a new version of the
game (as defined in the agreement), he will receive royalties on that version at
one-half the rate he was receiving on the preceding version. In no event will
Mr. Hairman receive royalties with respect to the game if he fails to provide
maintenance services as specified in the agreement for three years after its
completion. Under the terms of the agreement, the Company can terminate Mr.
Hairman's services "for cause" without further obligation to him. The agreement
can also be terminated by the Company without "cause" prior to completion of a
"Beta" testing version, but only if game development is discontinued altogether
and Mr. Hairman is paid for work performed up to the termination date. As
specified in the agreement, the Company owns all title and proprietary rights in
the game that are developed or created by Mr. Hairman or his subcontractors. The
principal materials and components to be used in the Company's proposed CD-ROM
title(s) include computer media, packaging and user manuals. Manufacturing
involves the duplication of computer media and user manuals, assembly of
components, sample testing the product and final packaging. The Company will
rely upon third parties to manufacture components of its CD-ROM products and
assemble completed packages in accordance with the Company's specifications. The
Company believes that there is


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an adequate supply of and source for the raw materials used in such products and
that multiple sources are available for manufacturing and assembling such
products.

PROPRIETARY RIGHTS, TRADEMARKS AND COPYRIGHTS. The copyright laws of the United
States and most foreign countries grant legal protection to "original works of
authorship" and provide substantial civil and criminal sanctions for
unauthorized duplication and publication of items such as the Newspaper, CD-ROM
titles, books and television shows. The Company plans to take all appropriate
measures to secure copyright protection for its products under the laws of all
applicable jurisdictions.

The Company holds registered trademarks for the name "Tomorrow's Morning" and
its logo. SCOOP-TM-, NEWSFLASH-TM-, KIDTERNET-TM-, and BORN TO READ-TM- are also
trademarks of the Company. The domain names morning.com, tomorrowsmorning.com,
scoopgame.com, scoopville.com, blindjoe.com and scoopclub.com have been
registered with Network Solutions, Inc., the Internet domain naming authority.

COMPETITION.  For the 8- to 14-year old age group  comprising its target market,
the Company's principal print publishing competitors marketing direct to schools
include THE WEEKLY READER, the SCHOLASTIC group of magazines, and TIME FOR KIDS.
Those  products are  published by companies  much larger than the Company,  with
significantly  greater  financial,  marketing  and other  resources.  The WEEKLY
READER and SCHOLASTIC have long been in schools, and TIME FOR KIDS entered the
market two years  ago.  In  general,  these  three  large  publications  compete
"head-to-head" for subscribers and market share.

In terms of weekly home-delivery, while there are presently no direct
competitors, growth of existing or new products may impede the Company's growth
in its target market. Indirect competitors (nearly all monthlies) competing for
sales in the home market for 8- to 14-year olds include SPORTS ILLUSTRATED FOR
KIDS (sports), NICKELODEON (general humor), NATIONAL GEOGRAPHIC WORLD, DISNEY
ADVENTURES, COBBLESTONE (literature), AMERICAN GIRL, ZILLIONS (consumer
information), and many others, covering a wide variety of subjects. While it is
unlikely that any of these will either commence weekly delivery or change to
incorporate current news, such moves could encroach on the Newspaper's potential
audience.

Despite recent high growth rates of subscribership to on-line services and
Internet service providers in general, the Company's current and pending
activities on the World Wide Web face increasing competition from the addition
of more child-oriented content providers or expansion of existing competitors
for the attention of children in the Company's target age group. In electronic
format, the Newspaper currently competes with DISNEY ADVENTURES, TIME, NATIONAL
GEOGRAPHIC WORLD and others.

Competition among CD-ROM titles is intense, and involves many large, established
companies such as Broderbund, Microsoft, Maxis, The Learning Company, Davidson,
LucasArt, Sony and ImageSoft, among others. The technologies to (i) produce and
distribute in a timely fashion high quality time-sensitive printed material
using desktop publishing techniques and (ii) distribute and make graphic and
text information accessible through speedy and universal on-line services, have
allowed for CD-ROM games with links to interactive on-line, and on-screen,
multimedia sources of content. While the Company believes that this will give
its CD-ROM game(s) a distinct competitive advantage by being innovative as a
learning system, with unique content, multimedia synergies and marketing
programs, competition for shelf space is intense. As a result, there can be no
guarantee that the Company's product(s) will be successful in gaining prominent
and sufficient shelf space in the retail market.

Despite the need of TV networks for "FCC friendly" (i.e., quality) children's
programming, the children's TV market is intensely competitive. As a result,
there can be no guarantee that the Company will succeed in getting (and keeping)
its show(s) on the air.

At this time, it is difficult to predict the extent and nature of the
competition which will be faced by the Company's other proposed product lines
(e.g., ancillary publishing and merchandising). However, in certain of those
lines (such as merchandising) competition tends to be intense.

PERSONNEL. The Company presently has seven employees, all of whom are full-time.
One of the full-time employees is the Company's executive officer, with five
more in administration and one more in sales and marketing. In addition to its
employees, the Company has from time to time retained various advisors and
consultants with respect to marketing and public relations. The Company believes
that it maintains an excellent relationship with its personnel.

                                       7
<PAGE>

ITEM 2.  DESCRIPTION OF PROPERTY

The Company's executive office is located in leased premises of approximately
4,600 square feet. The lease commenced on July 1, 1997 and continues until June
30, 2001, with monthly rent of $7,130 beginning September 1, 1997 (subject to
annual base rent increases of 3% commencing July 1, 1998). The Company's
President has personally guaranteed the Company's performance under the lease
pursuant to an agreement that expires after the second year of the lease. The
Company expects that this space will be sufficient for the Company's executive
offices for the foreseeable future.

The Company has also leased a small satellite office in Ann Arbor, Michigan
since May 1997 at a rent of $252 per month.

In the opinion of management, the Company's properties are adequately covered by
insurance.

ITEM 3.  LEGAL PROCEEDINGS

On May 27, 1998, Barrington Plaza Partnership, the Company's landlord, filed an
unlawful detainer action in Los Angeles County Municipal Court seeking
possession of the Company's executive offices and $20,207.67 in past due rent.
The Company intends to contest this action on the basis that the amount sought
by the landlord exceeds the amount actually owed.

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

There were no matters submitted to a vote of security holders during the fourth
quarter of fiscal 1998.

                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

STOCK MARKET AND OTHER INFORMATION. The Company's Common Stock has been quoted
on the OTC Bulletin Board under the symbol "TOMM," since June 2, 1998. Prior to
that, beginning four days after the completion of the Company's initial public
offering in March 1997 until February 10, 1998, the Company's Common Stock was
traded on the Nasdaq SmallCap Market. Prior to the initial public offering,
there was no public trading market for the Company's equity securities. Warrants
to purchase up to 900,000 shares of the Company's Common Stock are also quoted
on the OTC Bulletin Board under the symbol "TOMMW." The terms of the warrants
provide that one warrant plus $6.50 are required to purchase one share of the
Company's Common Stock. Commencing January 1, 1998, at the Company's option, the
warrants became redeemable for $0.35 per warrant upon at least 15 days notice to
the warrant holders if the closing price of the Common Stock has been at least
$6.50 for a period of 30 consecutive trading days ending within 15 days of the
date the notice of redemption is mailed. The warrants expire on February 10,
2000.

The following table sets forth the quarterly high and low bids for the Company's
Common Stock since public trading began, with prices from March 17, 1997 to
February 10, 1998 as reported by the Nasdaq SmallCap Market and since June 2,
1998 as reported by on the OTC Bulletin Board:

<TABLE>
<CAPTION>


FISCAL YEAR 1997                                       HIGH*             LOW*
<S>                                                    <C>               <C>
Third Quarter (starting March 17, 1997).............   $6.00             $4.50

Fourth Quarter .....................................   $6.00             $1.25

</TABLE>

                                       8
<PAGE>

<TABLE>
<CAPTION>

FISCAL YEAR 1998                                           HIGH *          LOW *
<S>                                                       <C>              <C>
First Quarter.........................................    $5.0625          $1.25

Second Quarter........................................    $6.4375          $3.875

Third Quarter.........................................    $5.625           $1.00

Fourth Quarter .......................................    $2.0625          $0.125

</TABLE>

-----------------
     *    These quotations reflect inter-dealer prices, without retail mark-up,
          mark-down or commission, and may not represent actual transactions.

HOLDERS OF RECORD. As of September 15, 1998, there were 52 holders of record of
the Company's Common Stock and 52 holders of record of the Company's warrants.

DIVIDENDS. The Company has never paid any cash dividends on its Common Stock. It
presently intends to retain earnings and capital for use in its business and
does not expect to pay any dividends in the foreseeable future. Any payment of
cash dividends in the future on the Common Stock will be dependent on the
Company's financial condition, results of operations, current and anticipated
cash requirements, plans for expansion, restrictions under debt obligations, as
well as other factors that the Board of Directors deems relevant.

RECENT SALES OF UNREGISTERED SECURITIES.

On June 10, 1998, the Company issued 36,320 shares of Common Stock to James R.
Rosbe pursuant to his exercise of previously granted options by the payment of
$3,995 in cash. Based on Mr. Rosbe's access to information as a Company director
and his level of investment sophistication, the shares were issued in reliance
on the exemption provided in Section 4(2) of the Securities Act because no
public offering was involved.

On June 17, 1998, the Company issued 154,360 shares of Common Stock to Adam
Linter pursuant to his exercise of previously granted options by the payment of
$15,436 in cash. Based on Mr. Linter's access to information as a Company
director and officer and his level of investment sophistication, the shares were
issued in reliance on the exemption provided in Section 4(2) of the Securities
Act because no public offering was involved.

On June 18, 1998, the Company granted options under its Non-Qualified Stock
Option Plan to Kristan Altimus (as to 11,000 shares), Steven Raft (as to 10,000
shares) and David Hamilton (as to 10,000 shares). Each option is exercisable
until June 17, 2000 at an exercise price of $0.2125 per share. Based on each
grantee's relationship with the Company, each of them had access to appropriate
Company information. Based on that access and each grantee's level of investment
sophistication, the options were granted in reliance on the exemption provided
in Section 4(2) of the Securities Act because no public offering was involved.
On June 19, 1998, Ms. Altimus exercised the options as to all 11,000 shares by
the payment of $2,337.50 in cash. Such shares were also issued in reliance on
Section 4(2) of the Securities Act.

On June 23, 1998, the Company issued 25,000 shares of Common Stock to Earl T.
Shannon and 165,000 shares of Common Stock to Ronald W. Tupper, Trustee of the
Winthrop Trust. Each issuance was made in cancellation of Company debt at the
rate of $1.00 per share. Based on each investor's access to Company information
and investment sophistication, the shares were issued in reliance on the
exemption provided in Section 4(2) of the Securities Act in that no public
offering was involved.

On June 25, 1998, in return for a $250,000 loan from Michael Fuchs, the Company
issued to Mr. Fuchs (i) a $250,000 promissory note due December 24, 1998 and
bearing interest at 10% per year and (ii) warrants to purchase 250,000 shares of
Common Stock at $2.00 per share until June 24, 2003. The promissory note is
itself convertible, at the payee's option, into Common Stock at $2.00 per share.
Based on Mr. Fuchs' access to Company information and his investment
sophistication, the issuances were made in reliance on the exemption in Section
4(2) of the Securities Act because no public offering was involved.

                                       9
<PAGE>

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION CONTAINS TREND INFORMATION AND OTHER FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 THAT INVOLVE A NUMBER OF RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY INCLUDE, BUT ARE NOT LIMITED TO, THOSE IDENTIFIED
BELOW IN "OVERVIEW."

OVERVIEW. From inception in June 1992 to June 30, 1998, the Company has
incurred an aggregate of $11,987,623 in operating losses. For the fiscal year
ended June 30, 1998, revenues were $218,983 and the Company experienced a net
loss of $6,273,378, as compared to revenues of $38,166 and a net loss of
$2,955,679 for the fiscal year ended June 30, 1997. On March 28, 1997, the
Company completed its initial public offering which had commenced on February
10, 1997 (the "IPO"). As a result of the IPO, the Company received net
proceeds of $5,347,724 (before deducting certain expenses payable by the
Company). However, those proceeds have now been spent, and the Company
continues to sustain substantial losses, which now threaten its ability to
continue as a going concern. In the long run, the Company's future depends
on: (i) finding a strategic partner, (ii) the development of complementary
products; (iii) completion and successful marketing of the SCOOP-TM-
journalism game; (iv) the formation of joint-marketing alliances for
corporate sponsorship of schools through the Company's READING PARTNERS
PROGRAM and/or the sale of advertising space in the Newspaper when
publication resumes; (v) getting one or more television shows, or
interstitial news "flashes", on the air; and (vi) expansion into ancillary
publishing and merchandising through redirecting the Company's content and/or
licensing the Company's characters and identity. However, as discussed below
in "Liquidity and Capital Resources," because virtually all available cash
has been exhausted due to continuing losses, the Company requires an
immediate infusion of working capital to remain in operation. There can,
however, be no guarantee that the Company will be able to obtain such working
capital.

RESULTS OF OPERATIONS.

YEARS ENDED JUNE 30, 1998 AND JUNE 30, 1997. Revenues for the fiscal year ended
June 30, 1998 were $218,983, compared to $38,166 for fiscal 1997. This
approximately 470% increase was primarily the result of the Company's Spring
1997 and Fall 1997 direct response advertising campaigns (the "1997 Advertising
Campaigns"), which temporarily generated orders for approximately 350,000
subscriptions. Costs and expenses increased to $4,431,874 during the year ended
June 30, 1998, from $2,881,718 for the year ended June 30, 1997. This
approximately 50% change was primarily due to increased costs associated with
increases in Newspaper subscriptions.

Interest expense for fiscal 1998 was $11,460, as compared to $141,482 for fiscal
1997. This approximately 92% decrease is attributable to the IPO, which resulted
in all of the Company's convertible notes being automatically converted into
537,227 shares of Common Stock. Due to those conversions, all interest costs
associated with those notes stopped accruing in March 1997.

For fiscal 1998, the Company experienced a net loss of $6,273,378 an
approximately 110% increase from the $2,955,679 net loss sustained in fiscal
1997. This change in net loss was primarily due to the factors described above
with respect to costs and expenses, partially offset by a decrease in interest
expense.

YEARS ENDED JUNE 30, 1997 AND JUNE 30, 1996. Revenues for the fiscal year ended
June 30, 1997 were $38,166, as compared to $112,672 for fiscal 1996. This
approximately 66% decrease in revenues was primarily the result of the lack of a
formalized marketing effort in fiscal 1997, as compared to the Company's
nationwide telemarketing campaign and direct mail solicitation to schools and
teachers in fiscal 1996 (the "Fall 1995 Marketing Campaign"). Costs and expenses
increased to $2,881,718 during the year ended June 30, 1997 from $2,585,939
during the year ended June 30, 1996. The bulk of this approximately 11% increase
was the result of the increased operational activity after the Company's IPO,
including adding staff and additional marketing and consulting expenditures.

Total interest expense for fiscal 1997 was $141,482, as compared to $137,873 for
fiscal 1996. This approximately 3% increase is attributable to the accrual of
interest on $1,080,207 of the Company's 7% Convertible Notes sold during the
period from September 1, 1995 to June 4, 1996 and amortization of related debt
issuance costs. As a result of the IPO, all of the Company's convertible notes
(6% Convertible Notes due 1996, 6% Convertible Notes due 1997 and 7% Convertible
Notes due 1999) were automatically converted into 537,227 shares of Common
Stock. As a result, all costs associated with those notes were appropriately
charged to capital as of June 30, 1997.

For fiscal 1997, the Company experienced a net loss of $2,955,679, an
approximately 12% increase from the $2,642,296

                                       10
<PAGE>

net loss sustained in the year ended June 30, 1996. The increase in net loss was
primarily due to the factors described above with respect to costs and expenses.

LIQUIDITY AND CAPITAL RESOURCES. To date, the Company's primary capital needs
have been to fund the  development  and growth of the Newspaper  (including  the
costs of the Fall 1995 Marketing  Campaign and the 1997  Advertising  Campaigns)
and the research and development of synergistic children's media products. Prior
to the IPO, the Company's  primary  sources of financing  were proceeds from the
sale of Common Stock and certain promissory notes convertible into Common Stock,
as well as various short-term loans. Since inception, sales of the Newspaper and
certain custom-published Newspaper inserts have been essentially the sole source
of Company  revenue.  To the extent that sales of the Newspaper were directed at
schools,  such  business was  seasonal,  with most sales  taking  place  between
September and June.  Seasonality was not believed to be a factor with non-school
sales.

In June 1997 the Company completed the first phase of its 1997 Advertising
Campaigns, which resulted in the Company receiving orders approximating $150,000
for approximately 50,000 subscriptions. As of September 30, 1997, the second
phase of the 1997 Advertising Campaigns had generated orders for approximately
300,000 additional subscriptions, initially resulting in total orders of
approximately 350,000 generated by the 1997 Advertising Campaigns. However, in
light of the Company's inability to continue publishing, it is anticipated that
all subscriptions will be deemed canceled unless the Company can resume
publication in the near future.

As of June 30, 1998, the Company had current assets of only $266,841. To date,
the Company has utilized all of the IPO proceeds and those subscription
receivables already collected. In the Company's fiscal quarter ended September
30, 1997, the Company began seeking approximately $500,000 to $1 million in
outside debt and/or equity funding in order to be able to complete the
development of SCOOP. To date, the Company has obtained only $125,000 of that
funding. The Company is also in discussions with prospective distributors of
SCOOP, which could result in royalty advances to the Company which could be used
to complete the production of SCOOP. The Company is also experiencing
considerable difficulty in meeting its current financial obligations to certain
creditors, primarily its landlord and the vendor which has printed the
Newspaper. In order to resume publication of the Newspaper and otherwise
continue its normal activities, in addition to the funding for SCOOP, the
Company must immediately raise approximately $500,000 to $1 million in funds
through bank borrowings, public or private debt or equity offerings, or
otherwise. To date, the Company has raised only $250,000 of that financing. In
addition to discussions with prospective lenders, as well as continued
solicitation of Newspaper sponsorships through the READING PARTNERS PROGRAM, the
Company is attempting to raise at least a portion of the needed short-term funds
through the issuance of convertible debt or convertible preferred stock. There
can, however, be no guarantee that any of the above financing will be available
on terms favorable to the Company or its shareholders, if at all.

As to longer-term funding requirements, the Company is continuing to pursue
opportunities for a private equity offering of up to $5 million. In addition,
the Company is also investigating other approaches to obtain long-term operating
funds while also maximizing shareholder value. To date, those approaches
include, but are not limited to, a possible merger with the appropriate entity
or a sale of the Company or its assets. There can be no guarantee that any of
the Company's efforts will be successful or, if successful, that they will
result in a transaction on terms favorable to the Company or its shareholders.
If needed long-term funds are not available, the Company may be required to
curtail its operations, which would have a material adverse effect on the
Company's business, operating results and financial condition.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS. On June 30, 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 130, "Comprehensive Income" ("FAS 130"). FAS 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. FAS 130 is effective for fiscal years
beginning after December 15, 1997 and requires restatement of earlier periods
presented. Management is currently evaluating the requirements of FAS 130.

In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position No. 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use" which provides guidance on
accounting for the costs of computer software developed or obtained for internal
use. SOP 98-1 is effective for financial statements for fiscal years beginning
after December 15, 1998. The Company does not anticipate that the adoption of
this statement will have a material effect on its financial statements.

In April 1998, the AICPA issued SOP No. 98-5 "Reporting on the Costs of Start-Up
Activities." This standard requires companies to expense the costs of start-up
activities and organization costs as incurred. In general, SOP 98-5 is effective

                                       11
<PAGE>

for fiscal years beginning after December 15, 1998. The Company does not
anticipate that the adoption of this statement will have a material effect on
its financial statements.

                                       12
<PAGE>


ITEM 7.  FINANCIAL STATEMENTS

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>

Financial Statements:                                                     PAGE
<S>                                                                       <C>
     Independent Auditor's Report                                           14

     Balance Sheet                                                          15

     Statements of Operations                                               16

     Statement of Shareholders' Equity                                      17

     Statements of Cash Flows                                               20

     Notes to Financial Statements                                          22

</TABLE>


                                       13
<PAGE>

                  [STONEFIELD JOSEPHSON, INC. LETTERHEAD]

Board of Directors
Tomorrow's Morning, Inc.
Beverly Hills, California


We have audited the accompanying balance sheet of Tomorrow's Morning, Inc., (a
development stage enterprise) as of June 30, 1998, and the related statements of
operations, shareholders' deficit and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of Tomorrow's Morning, Inc. as of June 30,
1997 including the statement of shareholders' equity from inception were audited
by other auditors whose report dated August 25, 1997, expressed an unqualified
opinion on those statements.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tomorrow's Morning, Inc. as of
June 30, 1998, and the results of its operations and its cash flows for the year
then ended in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1, the Company
has negative working capital, a shareholders' deficit, has experienced recurring
losses and has had negative cash flows from operations. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans with respect to these matters are described in Note 1 to the
financial statements. These financial statements do not include any adjustments
that might result from the outcome of these uncertainties.





CERTIFIED PUBLIC ACCOUNTANTS

Santa Monica, California
April 24, 2000

                                       14
<PAGE>

                            TOMORROW'S MORNING, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                          BALANCE SHEET - JUNE 30, 1998

<TABLE>
<CAPTION>
                                     ASSETS

<S>                                                                 <C>                <C>
CURRENT ASSETS:
  Cash and cash equivalents                                         $       46,154
  Accounts receivable, net of reserves of $125,614                             445
  Loan receivable, officer-shareholder                                      72,766
  Software development costs                                                95,866
  Prepaid expenses                                                          51,610
                                                                    --------------

          Total current assets                                                         $      266,841

OTHER ASSETS:
  Fixed assets, net of accumulated depreciation of $34,670                 105,732
  Deposits                                                                  32,772
                                                                   ---------------

          Total other assets                                                                  138,504
                                                                                       --------------

                                                                                       $      405,345
                                                                                       ==============


                      LIABILITIES AND SHAREHOLDERS' DEFICIT

CURRENT LIABILITIES:
  Accounts payable and accrued expenses                            $     1,455,237
  Current maturities of contracts payable                                    5,731
  Loans payable, related parties                                           434,195
                                                                   ---------------

          Total current liabilities                                                    $    1,895,163

CONTRACTS PAYABLE, less current maturities                                                     13,449

SHAREHOLDERS' DEFICIT:
  Preferred stock; no par value, 1,000,000 shares
    authorized, no shares issued and outstanding                                 -
  Common stock; no par value, 10,000,000 shares
    authorized, 3,210,372 shares issued and outstanding                 12,850,167
  Deficit accumulated during development stage                         (14,353,434)
                                                                   ---------------

          Total shareholders' deficit                                                      (1,503,267)
                                                                                       --------------

                                                                                       $      405,345
                                                                                       ==============

</TABLE>

See accompanying independent auditors' report and notes to financial statements.


                                       15
<PAGE>


                            TOMORROW'S MORNING, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                                                                       From inception on
                                                         Year ended            Year ended              June 30, 1992 to
                                                        June 30, 1998         June 30, 1997             June 30, 1998
                                                       ---------------       ----------------          ----------------
<S>                                                    <C>                   <C>                       <C>
REVENUE:
  SUBSCRIPTIONS                                        $       218,983       $         38,166          $        549,701

  EDITORIAL, PRODUCTION AND
   DISTRIBUTION COST                                           925,397                782,937                 3,312,446
                                                       ---------------       ----------------          ----------------

GROSS MARGIN                                                  (706,414)              (744,771)               (2,762,745)

OPERATING EXPENSES                                           2,949,601              1,907,281                 8,384,502

RESEARCH AND DEVELOPMENT                                       556,876                191,500                   840,376
                                                       ---------------       ----------------          ----------------

LOSS FROM OPERATIONS                                        (4,212,891)            (2,843,552)              (11,987,623)

NONCASH OPTION COMPENSATION AND
  CONSULTING FEES                                            2,026,204                      -                 2,026,204
LEGAL SETTLEMENT                                                30,000                      -                    30,000
OTHER EXPENSES, NET                                             20,180                  7,417                    57,057
INTEREST EXPENSE                                                11,460                141,482                   313,478
INTEREST INCOME                                                 28,157                 37,572                    65,728
                                                       ---------------       ----------------          ----------------

LOSS BEFORE INCOME TAXES                                    (6,272,578)            (2,954,879)              (14,348,634)

INCOME TAXES                                                       800                    800                     4,800
                                                       ---------------       ----------------          ----------------

NET LOSS                                               $    (6,273,378)      $     (2,955,679)         $    (14,353,434)
                                                       ===============       ================          ================

NET LOSS PER SHARE, BASIC AND DILUTED                  $         (2.23)      $          (1.84)
                                                       ===============       ================

WEIGHTED AVERAGE SHARES OUTSTANDING,
    basic and diluted                                        2,812,944              1,608,412
                                                       ===============       ================
</TABLE>


See accompanying independent auditors' report and notes to financial statements.


                                       16
<PAGE>

                            TOMORROW'S MORNING, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                  STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)


<TABLE>
<CAPTION>
                                                                                                           Deficit
                                                                                                         accumulated
                                                                           Common stock                     during        Total
                                                   Common stock            subscriptions    Treasury     development  shareholders'
                                             Shares            Amount        receivable      stock           stage       deficit
                                           ----------     -----------      ----------     ----------     -----------  -------------
<S>                                        <C>            <C>              <C>             <C>           <C>          <C>
June 30, 1992 (date of inception) to
  June 30, 1993 capital contribution -
  compensation                                             $  100,000      $               $              $             $  100,000
Issuance of common stock                        9,080          25,000                                                       25,000
Issuance of common stock                       90,800          50,000                                                       50,000
Issuance of common stock                      406,330          78,900                                                       78,900
Issuance of common stock                       46,762          50,000                                                       50,000
Issuance of common stock                       17,252          75,000                                                       75,000
Common stock subscribed                                                        50,000                                       50,000
Net loss for the year ended June 30,
  1993, as restated                                                                                         (540,430)     (540,430)
                                           ----------      ----------      ----------      ----------     ----------    ----------

Balance at June 30, 1993                      570,224         378,900          50,000                       (540,430)     (111,530)

Capital contribution - compensation                           100,000                                                      100,000
Stock option compensation                                     292,000                                                      292,000
Capital contribution                                           51,100                                                       51,100
Issuance of common stock                       17,252          50,000         (50,000)
Issuance of common stock                       34,958          50,000                                                       50,000
Issuance of common stock                       38,136         110,000                                                      110,000
Issuance of common stock                        1,816           7,500                                                        7,500
Issuance of common stock                      145,280         275,000         (50,000)                                     225,000
Common stock repurchased and cancelled         (9,080)        (25,000)                                                     (25,000)
Issuance of common stock based on
  anti-dilutive agreements                     35,866
Net loss for the year ended June 30,
   1994, as restated                                                                                        (911,611)     (911,611)
                                           ----------      ----------      ----------      ----------     ----------    ----------

Balance at June 30, 1994                      834,452       1,289,500         (50,000)                    (1,452,041)     (212,541)

</TABLE>

See accompanying independent auditors' report and notes to financial statements.

                                       17
<PAGE>


                            TOMORROW'S MORNING, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                  STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
                                                                                                     Deficit
                                                                                                   accumulated
                                                                        Common stock                 during         Total
                                               Common stock            subscriptions    Treasury   development   shareholders'
                                          Shares         Amount          receivable      stock        stage        deficit
                                        ---------      ----------      -------------    --------   -----------   -------------
<S>                                     <C>            <C>             <C>              <C>        <C>           <C>
Capital contribution - compensation                       200,000                                                   200,000
Common stock subscribed                                                    250,000                                  250,000
Issuance of common stock for services      45,400           2,000                                                     2,000
Issuance of common stock                   61,290         125,000                                                   125,000
Issuance of common stock                   15,890          50,000                                                    50,000
Issuance of common stock                   11,804          50,000                                                    50,000
Commitment to purchase common stock                                                     (65,000)                    (65,000)
Net loss for the year ended June 30,
  1995, as restated                                                                                (1,015,040)   (1,015,040)
                                        ---------      ----------        ---------     --------    ----------    ----------
Balance at June 30, 1995                  968,836       1,716,500          200,000      (65,000)   (2,467,081)     (615,581)

Capital contribution - compensation                       250,000                                                   250,000
Stock option compensation                                 751,290                                                   751,290
Issuance of common stock                   49,032         200,000         (200,000)
Issuance of common stock                   54,026         216,703                                                   216,703
Conversion of 6% convertible notes         45,400          91,500                                                    91,500
Stock issuance costs                                      (37,193)                                                  (37,193)
Common stock repurchased and cancelled    (90,800)        (50,000)                       65,000       (15,000)
Debt issuance costs                                       130,000                                                   130,000
Shareholder loans                                                                                     (27,575)      (27,575)
Net loss for the year ended June 30,
  1996, as restated                                                                                (2,642,296)   (2,642,296)
                                        ---------      ----------        ---------     --------    ----------    ----------
Balance at June 30, 1996                1,026,494       3,268,800                                  (5,151,952)   (1,883,152)

</TABLE>

See accompanying independent auditors' report and notes to financial statements.

                                       18
<PAGE>


                            TOMORROW'S MORNING, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                  STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                                                                                      Deficit
                                                                                                     accumulated
                                                                       Common stock                     during          Total
                                                   Common stock       subscriptions     Treasury     development   shareholders'
                                              Shares         Amount     receivable       stock          stage         deficit
                                            ---------  -------------  -------------   ------------   -----------   ------------
<S>                                         <C>            <C>         <C>            <C>            <C>           <C>
Issuance of common stock                    1,167,277      5,347,724                                                 5,347,724
Stock issuance costs                                        (304,528)                                                 (304,528)
Conversion of 6% convertible notes            105,144        262,500                                                   262,500
Conversion of 7% convertible notes            432,083      1,080,207                                                 1,080,207
Debt issuance costs                                         (202,589)                                                 (202,589)
Capital contribution - compensation                          166,667                                                   166,667
Shareholder loan                                                                                        (69,377)       (69,377)
Stock option compensation                                    733,400                                                   733,400
Issuance of common stock for services          55,000        132,500                                                   132,500
Net loss for the year ended June 30, 1997                                                            (2,955,679)    (2,955,679)
                                           ----------   ------------   ------------   ------------   ----------    -----------

Balance at June 30, 1997                    2,785,998     10,484,681                                 (8,177,008)     2,307,673

Stock option compensation                                  1,935,374                                                 1,935,374
Repayments - shareholder loans                                                                            7,227          7,227
Reclassification - shareholder loans                                                                     89,725         89,725
Stock issued - settlement of litigation         5,000         30,000                                                    30,000
Stock options exercised                       229,374        190,289                                                   190,289
Stock warrants sold                                            1,073                                                     1,073
Shares issued upon conversion of debt         190,000        190,000                                                   190,000
Warrants issued in connection with debt                       18,750                                                    18,750
Net loss for the year ended June 30, 1998                                                            (6,273,378)    (6,273,378)
                                           ----------   ------------   ------------   ------------   ----------    -----------

Balance at June 30, 1998                    3,210,372   $ 12,850,167              -              - $(14,353,434)   $(1,503,267)
                                           ==========   ============   ============   ============   ==========    ===========
</TABLE>
See accompanying independent auditors' report and notes to financial statements.

                                       19
<PAGE>




                            TOMORROW'S MORNING, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                            STATEMENTS OF CASH FLOWS

                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>

                                                                                                          FROM INCEPTION ON
                                                                   YEAR ENDED          YEAR ENDED         JUNE 30, 1992 TO
                                                                  JUNE 30, 1998       JUNE 30, 1997         JUNE 30, 1998
                                                                  -------------       -------------         -------------
<S>                                                             <C>                <C>                  <C>
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
  Net loss                                                      $     (6,273,378)   $    (2,955,679)      $   (14,353,434)

 ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY
   OPERATING ACTIVITIES:
      Depreciation                                                        20,180              7,417                36,966
      Amortization of debt issuance costs                                      -             65,006               138,168
      Amortization of loans payable discount                               3,646                  -                 3,646
      Non-cash litigation settlement                                      30,000                  -                30,000
      Non-cash compensation                                            2,043,124            900,067             4,638,481
      Non-cash payment for services rendered                                   -            132,500               132,500

 CHANGES IN OPERATING ASSETS AND LIABILITIES:
  (INCREASE) DECREASE IN ASSETS:
      Accounts receivable                                                  4,935             (3,122)                 (445)
      Prepaid expenses                                                   356,611           (480,721)             (124,110)
      Software development costs                                         (23,367)                 -               (23,367)
      Deposits                                                            (1,417)           (26,355)              (32,773)

  INCREASE (DECREASE) IN LIABILITIES:
      Accounts payable and accrued expenses                           (1,197,852)          (388,922)            1,459,238
      Deferred revenue                                                   (52,603)            28,794                     -
                                                                ----------------    ---------------       ---------------

          Net cash used for operating activities                      (2,694,417)        (2,721,015)           (8,095,130)
                                                                ----------------    ---------------       ---------------

CASH FLOWS USED FOR INVESTING ACTIVITIES -
  acquisition of fixed assets                                            (73,142)           (44,944)             (142,697)
                                                                ----------------    ---------------       ---------------

CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
  Proceeds from issuance of common stock                                       -          5,347,724             6,749,734
  Proceeds from revolving line of credit                                       -                  -                50,000
  Proceeds from loans and warrants                                       375,000            424,276               799,276
  Proceeds from notes payable                                                  -                  -             1,705,086
  Proceeds from contracts payable                                         71,396             56,005               127,401
  Cash paid for debt issuance costs                                            -                  -              (210,757)
  Proceeds from exercise of stock options                                 82,538                  -                82,538
  Proceeds from exercise of warrants                                       1,073                  -                 1,073
  Repayment of revolving line of credit                                        -            (50,000)              (50,000)
  Repayment of loans payable                                                   -           (359,276)             (423,400)
  Repayment of notes payable                                                   -            (11,456)              (11,456)
  Repayment of contracts payable                                         (83,329)           (24,891)             (108,220)
  Loans payable shareholders                                              24,186            (69,377)              (72,766)
  Cash paid for offering costs                                                 -           (228,723)             (304,528)
  Purchase of treasury stock                                                   -                  -               (50,000)
                                                                ----------------    ---------------       ---------------

          Net cash provided by financing activities                      470,864          5,084,282             8,283,981
                                                                ----------------    ---------------       ---------------

NET INCREASE (DECREASE) IN CASH                                       (2,296,695)         2,318,323                46,154
CASH, beginning of year                                                2,342,849             24,256                     -
                                                                ----------------    ---------------       ---------------

CASH, end of year                                               $         46,154    $     2,342,849       $        46,154
                                                                ================    ===============       ===============

</TABLE>

See accompanying independent auditors' report and notes to financial statements.

                                      20

<PAGE>


                            TOMORROW'S MORNING, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                      STATEMENTS OF CASH FLOWS (CONTINUED)

                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

<TABLE>
<CAPTION>

                                                                                                          FROM INCEPTION ON
                                                                   YEAR ENDED          YEAR ENDED         JUNE 30, 1992 TO
                                                                  JUNE 30, 1998       JUNE 30, 1997         JUNE 30, 1998
                                                                  -------------       -------------         -------------
<S>                                                           <C>                 <C>                   <C>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
  Decrease in debt issuance costs recorded in connection
    with the issuance of convertible notes payable              $              -    $      (202,589)      $       (72,589)
                                                                ================    ===============       ===============
  Conversion of notes payable to common stock                   $        190,000    $     1,342,707       $     1,532,707
                                                                ================    ===============       ===============
  Non-cash compensation                                         $      2,043,124    $             -       $     2,043,124
                                                                ================    ===============       ===============
  Issuance of warrants connected to debt conversion             $         18,750    $             -       $        18,750
                                                                ================    ===============       ===============


</TABLE>
s

See accompanying independent auditors' report and notes to financial statements.


                                       21
<PAGE>


                            TOMORROW'S MORNING, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                          NOTES TO FINANCIAL STATEMENTS

                            YEAR ENDED JUNE 30, 1998




(1)      SUMMARY SIGNIFICANT ACCOUNTING POLICIES:

         NATURE OF BUSINESS:

                  The Company was incorporated in June 1992 in the State of
                  California and is engaged in the publication of a children's
                  weekly newspaper. As of June 30, 1998, the Company is a
                  development stage enterprise, as defined in Financial
                  Accounting Standards Board Statement No. 7. The Company is
                  devoting substantially all of its efforts toward establishing
                  new business and product.

                  In June 1996 the Company filed for an initial public offering
                  ("IPO") of its common stock on Form SB-2 with the Securities
                  and Exchange Commission. That offering was successfully
                  completed in March 1997.

         GOING CONCERN:

                  For the years ended June 30, 1998 and June 30, 1997, the
                  Company had negative cash flows from operations of $2,694,417
                  and $2,721,015, respectively and incurred a net loss of
                  $6,273,378 and $2,955,679, respectively. The Company's
                  expenses continue to greatly exceed its income, and its future
                  depends on: (i) finding a strategic partner; (ii) the
                  development of complementary products; (iii) completion and
                  successful marketing of the SCOOP-TM- CD-ROM journalism game;
                  (iv) the formation of joint-marketing alliances for corporate
                  sponsorship of schools through the Company's Reading Partners
                  Program and/or the sale of advertising space; (v) getting one
                  or more television shows, or interstitial news "flashes", on
                  the air; and (vi) expansion into ancillary publishing and
                  merchandising through redirecting the Company's content and/or
                  licensing the Company's characters and identity. The Company
                  has used all of the net proceeds of its initial public
                  offering and finds that it requires substantial additional
                  funds in order to reach the above long-term goals. In
                  addition, the Company requires an immediate infusion of
                  working capital to continue its present operations. There can,
                  however, be no guarantee that the Company will be able to
                  obtain such additional long- and short-term funds or that, if
                  obtained, it will be able to achieve or sustain significant
                  revenues or profitability in the future.

         REVENUE RECOGNITION:

                  Subscription sales are recorded as deferred revenue at the
                  time of sale. Revenues from subscriptions are recognized
                  ratably over the subscription period as newspapers are
                  delivered. Deferred revenue represents unfulfilled
                  subscription sales at period-end.


See accompanying independent auditors' report.

                                       22

<PAGE>


                            TOMORROW'S MORNING, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                            YEAR ENDED JUNE 30, 1998




(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

         ADVERTISING:

                  The Company expenses the costs of all general advertising in
                  the period incurred. Advertising expense was approximately
                  $83,000 and $85,000 for the years ended June 30, 1998 and
                  1997, respectively. In accordance with the American Institute
                  of Certified Public Accountants' Statement of Position 93-7
                  "Reporting on Advertising Costs", costs associated with the
                  Company's direct response marketing efforts have been deferred
                  and will be amortized over the period in which the related
                  revenue is recognized. At June 30, 1998 there were no deferred
                  advertising costs and at June 30, 1997 the deferred costs were
                  approximately $106,000, with no related amortization.
                  Management periodically reviews the recoverability of deferred
                  advertising costs.

         COMPENSATION EXPENSE:

                  Upon completion of the Company's IPO in March 1997, the
                  Company commenced regular salary payments to its chief
                  executive officer ("CEO") and other employees. Compensation
                  expense deemed earned by the CEO for the period prior to the
                  completion of the IPO has been reflected as noncash
                  compensation and contributed capital in the statements of cash
                  flows and statement of shareholders' equity (deficit),
                  respectively.

         RESEARCH AND DEVELOPMENT:

                  Research and development costs are expensed as incurred.

         INCOME TAXES:

                  The Company accounts for taxes under SFAS No. 109, which
                  requires recognition of deferred tax liabilities and assets
                  for the expected future tax consequences of events that have
                  been included in financial statements or tax returns. Under
                  this tax method, deferred tax assets and liabilities are
                  determined based on differences between financial reporting
                  and tax bases of assets and liabilities and are measured using
                  the enacted tax rates and laws that will be in effect when the
                  differences are expected to reverse. The Company does not have
                  any material differences between financial reporting and tax
                  bases of assets and liabilities. Valuation allowances are
                  established when necessary to reduce deferred tax assets to
                  amounts expected to be realized.


See accompanying independent auditors' report.

                                       23

<PAGE>


                            TOMORROW'S MORNING, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                            YEAR ENDED JUNE 30, 1998



(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

         NET LOSS PER SHARE:

                  The Company has adopted Statement of Financial Accounting
                  Standard No. 128, "Earnings Per Share ("SFAS 128"), which is
                  effective for annual and interim financial statements issued
                  for periods ending after December 15, 1997. In accordance with
                  SFAS No. 128, basic net loss per share is computed by dividing
                  the net loss available to common shareholders for the period
                  by the weighted average number of common shares outstanding
                  during the period. Diluted net loss per share is computed by
                  dividing the net loss for the period by the weighted average
                  number of common and common equivalent shares outstanding
                  during the period. Common equivalent shares are not included
                  in the computation of loss per share for the years ended June
                  30, 1998 and June 30, 1997, because the effect would be
                  anti-dilutive.

         VARIABLE NONDILUTABLE STOCK OPTIONS:

                  The Company records non-cash compensation expense resulting
                  from an increase in fair value of the common stock to be
                  issued upon the exercise of the variable nondilutable stock
                  options outstanding (Note 5).

         DEBT WITH STOCK PURCHASE WARRANTS:

                  The proceeds received from debt issued with stock purchase
                  warrants is allocated between the debt and the warrants, based
                  upon the relative fair values of the two securities. Fair
                  value of the debt element of the financial instrument is
                  determined by discounting the future payments of principal and
                  interest, based upon management's estimate of its borrowing
                  rate for similar financial instruments of this risk (generally
                  20%), and the balance of the proceeds is accounted for as
                  additional paid in capital. The resulting debt discount is
                  amortized to expense over the term of the debt instrument,
                  using the interest method.

         CASH AND CASH EQUIVALENTS:

                  The Company considers cash equivalents to include highly
                  liquid investments purchased with a maturity of less than
                  three months. Cash and cash equivalents are held in a major
                  financial institution and at times, such balances can be in
                  excess of the Federal Deposit Insurance Corporation's
                  insurance limits.

         FINANCIAL INSTRUMENTS:

                  The estimated fair values of cash, accounts receivable,
                  accounts payable, and accrued expenses approximate their
                  carrying value because of the short term maturity of these
                  instruments or the stated interest rates are indicative of
                  market interest rates.

         OFFICE FURNITURE AND EQUIPMENT:

                  Office furniture and equipment is stated at cost and
                  depreciation is computed on a straight-line basis over a
                  period of five years.


See accompanying independent auditors' report.

                                       24
<PAGE>


                            TOMORROW'S MORNING, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                            YEAR ENDED JUNE 30, 1998




(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

         SOFTWARE DEVELOPMENT COSTS:

                  The Company accounts for its software development costs in
                  accordance with Statement of Financial Accounting Standards
                  No. 86, "Accounting for the Costs of Computer Software to be
                  Sold, Leased or Otherwise Marketed." This statement provides
                  for capitalization of certain software development costs once
                  technological feasibility is established. The costs so
                  capitalized are then amortized on a straight-line basis over
                  the estimated product life (generally eighteen months to three
                  years), or on the ratio of current revenue to total projected
                  product revenues, whichever is greater.

         USE OF ESTIMATES

                  The preparation of financial statements in conformity with
                  generally accepted accounting principles requires management
                  to make estimates and assumptions for the reporting period and
                  as of the financial statement date. These estimates and
                  assumptions affect the reported amounts of assets and
                  liabilities, the disclosure of contingent liabilities and the
                  reported amounts of revenues and expenses. Actual results
                  could differ from the estimates.

         RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:

                  On June 30, 1997, the Financial Accounting Standards Board
                  issued Statement of Financial Accounting Standards No. 130,
                  "Comprehensive Income" ("FAS 130"). FAS 130 establishes
                  standards for reporting and display of comprehensive income
                  and its components in a full set of general purpose financial
                  statements. FAS 130 is effective for fiscal years beginning
                  after December 15, 1997 and requires restatement of earlier
                  periods presented. Management is currently evaluating the
                  requirements of FAS 130.

                  In March 1998, the American Institute of Certified Public
                  Accountants issued Statement of Position No. 98-1, "Accounting
                  for Costs of Computer Software Developed or Obtained for
                  Internal Use" which provides guidance on accounting for the
                  costs of computer software developed or obtained for internal
                  use. SOP No. 98-1 is effective for financial statements for
                  fiscal years beginning after December 15, 1998. The Company
                  does not anticipate that the adoption of this statement will
                  have a material effect on its financial statements.

                  In April 1998, the American Institute of Certified Public
                  Accountants issued SOP No. 98-5 "Reporting on the Costs of
                  Start-Up Activities." This standard requires companies to
                  expense the costs of start-up activities and organization
                  costs as incurred. In general, SOP 98-5 is effective for
                  fiscal years beginning after December 15, 1998. The Company
                  does not anticipate that the adoption of this statement will
                  have a material effect on its financial statements.


See accompanying independent auditors' report.

                                       25
<PAGE>


                            TOMORROW'S MORNING, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                            YEAR ENDED JUNE 30, 1998




(2)      LOANS PAYABLE:

<TABLE>


         A summary is as follows:
     <S>                                                                                  <C>
               Unsecured demand loans with no stated interest, due to
                 related parties                                                             $        74,299
               Note payable, net of discount - shareholder due September 9,
                 1998 with stated interest at 10% per annum, 15% per annum
                 if the note is in default, effective interest at 20%                                122,396
               Note payable, net of discount - shareholder due December 24,
                 1998, with stated interest at 10% per annum, 15% per annum
                 if the note is in default, effective interest at 20%                                237,500
                                                                                             ---------------

                                                                                             $       434,195
                                                                                             ===============
</TABLE>

(3)      CONTRACTS PAYABLE:

         The Company has entered into lease contracts to purchase office
         equipment and a telephone system. The contracts provide for a
         fair-market-value purchase at the end of the lease terms. In accordance
         with Statement of Financial Accounting Standards No. 13 (SFAS 13), the
         Company has capitalized the cost of the equipment.

         Lease commitments for capital leases with remaining terms of more than
         one year at June 30, 1998 are as follows:

<TABLE>
<CAPTION>

<S>                                                                                     <C>
               Year ending June 30,
                   1999                                                                      $         5,731
                   2000                                                                                5,731
                   2001                                                                                4,123
                   2002                                                                                3,296
                   2003                                                                                  299
                                                                                             ---------------

                                                                                             $        19,180
                                                                                             ===============

</TABLE>

See accompanying independent auditors' report.

                                       26
<PAGE>


                            TOMORROW'S MORNING, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                            YEAR ENDED JUNE 30, 1998




(4)      COMMITMENTS AND CONTINGENCIES:

         LEASES

         On July 1, 1997, the Company entered into an operating lease for new
         office facilities in Los Angeles. The lease continues until June 30,
         2001 with monthly rent of $7,514 beginning September 1, 1997. The lease
         provides for annual base rent increases of 3% commencing July 1, 1998.
         The chief executive officer of the Company has signed a personal
         guarantee of the lease that expires after the second year of the lease.

         The Company also leases office facilities in Ann Arbor, Michigan on a
         one-year operating lease that commenced May 1997. The monthly rental is
         $252 for twelve months expiring May 31, 1998.

         Rent expense, including additional costs per the leases, for year ended
         June 30, 1998 and June 30, 1997 was $90,168 and $44,750, respectively,
         and $255,918 for the period from inception through June 30, 1998.

         In addition to the above office leases, the Company also leases an auto
         and office equipment under operating leases with remaining terms of
         more than one year.

         Lease commitments for operating leases with remaining terms of more
         than one year at June 30, 1998 are as follows:

<TABLE>
<CAPTION>

<S>                                                                                       <C>
               Year ending June 30,
                   1999                                                                      $       102,640
                   2000                                                                               96,645
                   2001                                                                               98,534
                                                                                             ---------------

                                                                                             $       297,819
                                                                                             ===============
</TABLE>

         SOFTWARE DEVELOPMENT AGREEMENT

         During the year ended June 30, 1996, the Company entered into a
         software development agreement for the development of a CD-ROM
         journalism game called "SCOOP-TM-". Pursuant to the agreement, the
         budgeted costs to develop the CD-ROM game shall not exceed $1,210,000;
         through March 31, 1998, expenditures for "SCOOP-TM-" were approximately
         $908,000 of which $72,500 is included in software development costs.

         LEGAL PROCEEDINGS

         On July 13 1998, the Company was subject to a levy of $26,287 by the
         California Employment Development Department for back taxes. Such levy
         satisfied that agency's claim in full.

         On August 17, 1998, the Company received a notice of levy from the
         Internal Revenue Service as to $30,761 for back taxes. Upon receipt of
         the notice, the Company contacted that agency and negotiated a payment
         plan. As of June 30, 1999, the Company had made payments totaling
         $15,000 toward the amount owed. The amount was subsequently paid in
         full.


See accompanying independent auditors' report.


                                       27
<PAGE>


                            TOMORROW'S MORNING, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                            YEAR ENDED JUNE 30, 1998




(4)      COMMITMENTS AND CONTINGENCIES, CONTINUED:

         LEGAL PROCEEDINGS, CONTINUED

         On May 27, 1998, the Company's landlord filed an unlawful detainer
         action in Los Angeles County Municipal Court seeking possession of the
         Company's executive offices and $20,208 in past due rent. On September
         15, 1998, the Company's landlord filed an unlawful detainer action in
         Los Angeles County Municipal Court seeking possession of the Company's
         executive offices and past due rent. Such action was resolved on
         October 6, 1998 by a stipulated judgment in which the Company agreed to
         pay the landlord $40,429 in cash in two installments and deliver 40,000
         shares of Company Common Stock. The amount owed to the landlord was
         paid in full in December 1998. As part of the stipulated judgment, the
         judgment obtained by the landlord in the action in May 1998 was
         satisfied in full.

         On December 17, 1998, Starbright Graphics, Inc. filed an action against
         the Company in the Superior Court of New Jersey Law Division, Middlesex
         County, seeking $699,231 for services rendered in connection with the
         printing and distribution of the newspaper. This action was dismissed
         in New Jersey by stipulation without prejudice on March 23, 1999, and
         filed in Los Angeles County Superior Court for breach of contract on
         July 13, 1999.

         On March 10, 1999, Peter Li, Inc. filed an action against the Company
         in Los Angeles County Superior Court seeking $33,711 in damages for
         breach of contract in connection with services provided to the Company.

         On May 14, 1999, the Company's landlord filed an action in Los Angeles
         County Superior Court, West District, against the Company and Adam
         Linter, the Chief Executive Officer, seeking $238,519 in connection
         with the Company's breach of its lease payment obligations. In December
         1999, this action was settled by a stipulated judgment providing for
         payments of $125,000 in cash and 20,000 shares of the Company's common
         stock. $30,000 of this amount has subsequently been paid.


(5)      COMMON STOCK, STOCK OPTIONS AND WARRANTS:

         On December 4, 1997, the Company settled litigation with a shareholder
         by issuing 5,000 shares of common stock. The charge to earnings
         regarding this transaction was $30,000.

         On May 15, 1996, the Company adopted a Non-Qualified Stock Option Plan
         ("the Plan"). The aggregate number of shares of common stock to be
         delivered upon the exercise of all options granted under the Plan
         cannot exceed 100,000 shares. At June 30, 1997, no options had been
         granted under the Plan. At June 30, 1998 31,000 options had been
         granted under the Plan.

         The Company has granted non-qualified stock options outside the
         NonQualified Stock Option Plan adopted on May 15, 1996 that allow each
         holder the right to purchase one share of the Company's common stock.
         The Board of Directors determines the exercise price of the options at
         the date of the grant. Options granted to date are fully vested on the
         date of the grant and have expirations ranging from two to five years
         from grant date.


See accompanying independent auditors' report.

                                       28

<PAGE>


                            TOMORROW'S MORNING, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                            YEAR ENDED JUNE 30, 1998




(5)      COMMON STOCK, STOCK OPTIONS AND WARRANTS, CONTINUED:

         The following table summarizes information about options outstanding at
June 30, 1998 and June 30, 1997:

<TABLE>
<CAPTION>
                                                                                   WEIGHTED
                                                                                    AVERAGE         NUMBER OF        DATE
                                                                      TOTAL        EXERCISE          OPTIONS        OPTIONS
                                                                     OPTIONS         PRICE         EXERCISABLE      EXPIRE
                                                               --------------     ----------      -------------   ----------
<S>                                                           <C>               <C>             <C>              <C>
              Options outstanding at June 30, 1996                    776,978         0.53
                1997:
                  Granted - variable nondilutive                      142,400         2.63
                  Granted - other                                      86,714         5.13
                                                               --------------

              Balance at June 30, 1997                              1,006,092         0.88           1,006,092
                                                               --------------

              1998:
                  Granted                                             210,480         0.2125           183,186      6/17/00
                  Exercised                                          (229,374)
                                                               --------------

              Balance at June 30, 1998                                987,198         0.76
                                                               ==============
</TABLE>


         The weighted average exercise price of variable nondilutive options
         outstanding and exercisable was $0.96 at June 30, 1997. The weighted
         average exercise price of the variable nondilutive options decreases as
         more options are granted. As discussed below, the nondiultive options
         were frozen during November, 1997, at an average exercise price of
         $0.57.

         The Company has elected, as permitted by SFAS No. 123, "Accounting for
         Stock Based Compensation"' to account for its stock compensation
         arrangements under the provisions of APB No. 25, "Accounting for Stock
         Issued to Employees". Accordingly, any excess of the market price of
         the underlying stock on the date of grant over the exercise price of
         the Company's employee stock options, has been recognized as
         compensation expense. This resulted in a $16,740 charge to salary
         expense for the year ended June 30,1998. There were no options granted
         to employees for the year ended June 30, 1997.

         Pro forma information regarding the effect on operations is required by
         SFAS 123, and has been determined as if the Company had accounted for
         its employee stock options under the fair value method of that
         statement. Pro forma information using the Black-Scholes method at the
         date of grant based on the following assumptions:

<TABLE>

            <S>                                                                         <C>
                  Expected life (years)                                                    1 year
                  Risk-free interest rate                                                   6.50%
                  Dividend yield                                                                -
                  Volatility                                                                3.273

</TABLE>

See accompanying independent auditors' report.

                                       29
<PAGE>


                            TOMORROW'S MORNING, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                            YEAR ENDED JUNE 30, 1998



(5)      COMMON STOCK, STOCK OPTIONS AND WARRANTS, CONTINUED:

         This option valuation model requires input of highly subjective
         assumptions. Because the Company's employee stock options have
         characteristics significantly different from those of traded options,
         and because changes in the subjective input assumptions can materially
         affect the fair value estimate, in management's opinion, the existing
         model does not necessarily provide a reliable single measure of fair
         value of its employee stock options.

         For purposes of proforma disclosures, the estimated fair value of the
         options is amortized to expense over the option's vesting period. The
         Company's proforma information for the year ended June 30, 1998 is as
         follows:
<TABLE>
<CAPTION>

               <S>                                                            <C>
                  Net loss, as reported                                         $    (6,227,459)
                  Proforma net loss                                             $    (6,232,729)
                  Basic and diluted historical loss per share                   $         (2.21)
                  Proforma basic and diluted loss per share                     $         (2.22)
</TABLE>


         At June 30, 1997, 278,600 of the options outstanding represented
         options to purchase an aggregate of 10% of the common stock which is
         outstanding at the time the options are exercised (i.e. "nondilutable"
         options) which were exercisable for an aggregate price of $267,618 and
         expire in March 2000. As a result, the number of shares represented by
         such options will change as the number of outstanding shares of common
         stock change. The CEO of the Company and other related parties have
         been granted 167,160 and 111,440 of these nondilutable options,
         respectively. As a result of stock issued during the year ended June
         30, 1997, an additional 142,400 options were granted to maintain the
         nondilutive nature of these options, based upon the number of shares
         outstanding at June 30, 1997. In connection with these additional
         nondilutive stock options, the Company recognized $463,700 of
         compensation expense for the year ended June 30, 1997.

         The Company's Variable Non-dilutive Stock Option Agreements were
         amended in November 1997 to remove the variable and non-dilutive
         features, effectively freezing the number of common shares the
         optionees were previously granted. The effect of the amendments was a
         charge to earnings of $1,344,022. Charges related to these options
         totaled $1,918,634 for the year ended June 30, 1998.

         In addition to the above transactions, options granted by the Company
         were exercised by various unrelated parties during the year ended June
         30, 1998. There was a charge to earnings totaling $107,570 in that
         period, with respect to these options.

         In April 1997, the Company granted stock options to purchase 86,714
         shares of common stock at an exercise price of $2.02 per share. In
         connection with these options, the Company recognized compensation
         expense of $269,700 relating to consulting services and investor
         relations. In March 1997, the Company granted warrants to purchase
         116,728 shares of common stock at an exercise price of $8.25 per share.
         Those warrants were granted as compensation to the company acting as
         the managing placement agent in connection with the IPO.

         During the year ended June 30, 1997 the Company granted warrants to
         purchase 50,000 shares of Common Stock at an exercise price of $4.00.
         Those warrants were granted as compensation to an individual acting as
         a public relations consultant. The warrants are subject to a vesting
         schedule over the twelve-month contract entered into with the
         individual.

See accompanying independent auditors' report.

                                       30
<PAGE>


                            TOMORROW'S MORNING, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                            YEAR ENDED JUNE 30, 1998




(5)      COMMON STOCK, STOCK OPTIONS AND WARRANTS, CONTINUED:

         During the year ended June 30, 1997, the Company canceled warrants to
         purchase 45,400 shares of Common Stock.

         In June 1998 the Company  converted  $190,000  of debt owing to
         unrelated  parties  into  190,000  shares of common stock.

         In connection with financing raised during the year ended June 30,
         1998, the Company sold 125,000 warrants exercisable at $2.20 per share
         through March 2003 and 250,000 warrants exercisable at $2.00 per share
         through June 2003.


(6)      INCOME TAXES:

         The Company had deferred tax assets of approximately $4,137,000 and
         $2,665,000 as of June 30, 1998 and June 30, 1997, respectively, which
         have been offset by 100% valuation allowances of $4,137,000 and
         $2,665,000, respectively. The deferred tax assets are primarily due to
         the Company's federal and state net operating loss (NOL's)
         carryforwards available to offset future taxable income, if any, of
         approximately $9,640,000, which expire in years up to 2012. However,
         ultimate utilization of these NOL's is dependent on future taxable
         income of the Company, subject to certain limitations, as defined under
         Section 382 of the Internal Revenue Code.


(7)      RELATED PARTY TRANSACTIONS:

         The printer used by the Company also has an equity interest in the
         Company. Printing expense was approximately $643,000 and $504,000 for
         the years ended June 30, 1998 and 1997, respectively, and $2,235,000
         from the period from inception through June 30, 1997. At June 30, 1998
         and 1997, amounts payable to the printer were approximately $700,000
         and $92,500, respectively.

         Alan G. Dunn, a director, has previously loaned money to the Company,
         with the maximum amount at any one time being approximately $102,800.
         As a result of repayments, the Company's indebtedness to Mr. Dunn at
         June 30, 1998 amounted to approximately $67,800.

See accompanying independent auditors' report.

                                       31
<PAGE>


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

     None, except as previously reported.


                                    PART III

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

DIRECTORS AND OFFICERS. The officers and directors of the Company and their ages
as of September 15, 1998, are as follows:

<TABLE>
<CAPTION>

NAME                            AGE              CORPORATE POSITIONS HELD (1)
----                            ---              ----------------------------
<S>                             <C>            <C>
Adam Linter                     52             Chairman of the Board, President,
                                               Treasurer and Secretary
James R. Rosbe                  49             Director
Rick Nicita (2)                 52             Director
Alan G. Dunn (2)                42             Director

</TABLE>

(1)  Directors are elected for a term that expires at the Company's next annual
     shareholders' meeting.


(2)  These persons are the Company's independent directors. An "independent
     director" is a director who is not an officer or employee of the Company
     and who does not have any relationship with the Company which, in the
     opinion of the Board of Directors, would interfere with the exercise of
     independent judgment in carrying out the responsibilities of a director.

ADAM LINTER, the founder of the Company, has served as Chairman of the Board,
President and Secretary since the Company's inception, and, as Editor-in-Chief
and Publisher, has overall responsibility for all aspects of the Company's
operations. Responsible for a majority of the writing, he has presided over the
growth and finance of the Newspaper and oversees its production every week.
Prior to founding the Company in June 1992, Mr. Linter was active in a variety
of endeavors, including biotechnology, real estate, screenwriting, and
management/consulting. From 1970 to 1976, he formed and operated his own
business management company in New York, and from 1976 to 1985, worked in real
estate and consulting in Los Angeles. From 1985 to 1991, Mr. Linter collaborated
on several venture capital projects in biotechnology involving scientists at
Harvard, Yale, Rutgers, Mt. Sinai and the University of Minnesota. He has a B.A.
in history from George Washington University.

JAMES R. ROSBE, a director since February 1996, and an Associate Publisher of
the Company  from April 1997 to January  1998,  has been active with the Company
since its inception, collaborating on business planning and strategy, as well as
advising on finance, marketing, circulation and synergistic product development,
and  monitoring  commercial  opportunities  on the  Internet  and in  electronic
publishing.  Mr. Rosbe previously served as Vice President-Operations for Online
Technologies  Corporation in Ann Arbor,  Michigan,  an Internet service provider
for which he worked  from  October  1994 to April  1997.  From August 1991 until
September  1993,  Mr. Rosbe was the co-founder of Mobile Metal Services in Troy,
Michigan, a company providing metal stabilization  services.  From 1985 to 1989,
with Mr. Linter (his brother-in-law), he formed a seed venture capital effort to
develop  commercial  opportunities in biotechnology,  and engaged in real estate
finance and analysis. Mr. Rosbe has an M.B.A. in Finance/Strategy from UCLA, and
a B.A. in Political Science from the University of Michigan.

RICK NICITA, a director since March 1997, is the Co-Chairman of Creative Artists
Agency ("CAA") in Beverly Hills, California, one of the leading talent agencies
in the country. Prior to his October 1, 1995, appointment as Co-Chairman, Mr.
Nicita was co-head of the Motion Picture department and head of the Talent
department at CAA. Since joining CAA in 1980, Mr. Nicita has represented many of
the motion picture industry's most renowned actors, actresses and directors. Mr.
Nicita holds a Bachelor of Arts degree from Wesleyan University.

ALAN G. DUNN, a director since March 1997, has been a strategic advisor to the
Company since 1993. Currently, he is President of Gerald E. Dunn, Inc. ("GDI"),
a Huntington Beach, California, company which provides specialized manufacturing
and systems consulting to industrial clients nationwide. Mr. Dunn has worked for
GDI since 1980. Simultaneously, from August 1993 to May 1995, Mr. Dunn was
vice-president of Gemini Management Consulting, a

                                       32
<PAGE>

global consulting firm based in New Jersey. From July 1991 to August 1993, Mr.
Dunn was a partner at Coopers & Lybrand, the international accounting and
management consulting firm, where he was responsible for the firm's
manufacturing consulting practice in the western states. Prior to Coopers &
Lybrand, Mr. Dunn was founder and President of ADI, a manufacturing consulting
and training company, acquired by Coopers & Lybrand in 1991. Mr. Dunn's
consulting clients include a wide variety of publicly-held companies. Mr. Dunn
has conducted training programs across North America, Europe, the Far East and
southeast Asia in the areas of manufacturing systems, information management,
cost management and business finance. He also conducts 24 seminars per year for
senior manufacturing executives at California Institute of Technology (Caltech)
in Pasadena. Mr. Dunn holds a degree in business management from California
State University in Fullerton.

There are no family relationships between the Company's officers and directors
other than between Adam Linter and James R. Rosbe, who are brothers-in-law.

SIGNIFICANT PERSONNEL. The following person has made, and is expected to
continue to make, a significant contribution to the Company:

KRISTAN ALTIMUS, the Company's Art Director and Publication Manager and an
Associate Publisher, has been with the Company since its earliest stages,
serving in both administrative and production capacities, and as a director from
December 1994 until March 1997. Her principal responsibility is the art and
layout of the Newspaper each week. She also creates special editions of the
Newspaper and promotional materials, and oversees administrative and office
functions. From 1985 until joining the Company, Ms. Altimus designed and
marketed T-shirts under the "Altimus Designs" name. Ms. Altimus also has worked
as a freelance photographer and at the office of Creative Artists Agency. She
has a Bachelor of Fine Arts degree from the University of Colorado, Boulder.

ITEM 10.   EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION. Adam Linter has served as the Company's President (Chief
Executive Officer) since its inception. Except as shown below, no executive
officer of the Company received compensation in excess of $100,000 during fiscal
1998.

SUMMARY COMPENSATION TABLE:

<TABLE>
<CAPTION>

                                                                      SECURITIES
NAME AND PRINCIPAL                                                   OTHER ANNUAL     UNDERLYING
POSITION                            YEAR    SALARY      BONUS      COMPENSATION(1)     OPTIONS
------------------                  ----    ------      -----      ---------------    ----------
<S>                                 <C>     <C>         <C>        <C>                <C>
Adam Linter, President(2)           1998    $250,000(3) $ -0-         $8,750(4)             -0-
                                    1997    $83,333     $ -0-               -            85,440
                                    1996    $  -0-      $ -0-               -           154,360


Steven Raft, Chief                  1998    $82,750(3)  $ -0-         $5,500(6)          10,000
Financial Officer(5)                1997    $20,000     $ -0-         $ -0-                  -0-

</TABLE>

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

(1)  The compensation described in this table does not include medical insurance
     and other benefits received by Mr. Linter or Mr. Raft which are available
     generally to all employees of the Company and certain perquisites and other
     personal benefits received by Mr. Linter or Mr. Raft the value of which did
     not exceed 10% of their cash compensation in the table.

(2)  Mr. Linter began receiving a salary on March 27, 1997. His annual salary is
     $250,000. See "Employment Agreements" below.

(3)  Of this amount, the following amounts were accrued but unpaid: Mr. Linter -
     $104,167; Mr. Raft - $30,000.

(4)  Consists of a $730 per month car allowance.

(5)  Mr. Raft became an employee of the Company on April 17, 1997 and resigned
     on May 31, 1998. His annual salary was $96,000.

                                       33
<PAGE>

(6)  Consists of a $500 per month car allowance.

The following table provides information concerning stock options granted to Mr.
Linter and Mr. Raft during the year ended June 30, 1998:

<TABLE>
<CAPTION>

                           NUMBER OF        % OF TOTAL
                           SECURITIES       OPTIONS GRANTED
                           UNDERLYING       TO EMPLOYEES IN        EXERCISE         EXPIRATION
NAME                       OPTIONS          FISCAL YEAR            PRICE ($/SH)       DATE
----                       ----------       ---------------        ------------     ----------
<S>                        <C>              <C>                    <C>              <C>
Adam Linter                     -0-               N/A                  N/A             N/A
Steven Raft                  10,000               48%               $0.2125          6/17/00

</TABLE>


As to Mr. Linter and Mr. Raft, the following table sets forth the number and
value of vested and unvested options held as of June 30, 1998.

<TABLE>
<CAPTION>
                                           NUMBER OF SECURITIES
                                           UNDERLYING UNEXERCISED         VALUE OF UNEXERCISED
                                           OPTIONS                        IN-THE-MONEY
                  SHARES                   ---------------------------    ----------------------------
                  ACQUIRED      VALUE
NAME              ON EXERCISE   REALIZED   EXERCISABLE   UNEXERCISABLE    EXERCISABLE    UNEXERCISABLE
----              -----------   --------   -----------   -------------    -----------    -------------
<S>               <C>           <C>        <C>           <C>              <C>            <C>
Adam Linter       154,360       $100,334     281,113          -0-          $175,696          -0-

Steven Raft       -0-           -0-           10,000          -0-            $6,250          -0-

</TABLE>

STOCK OPTION PLAN. The Company's Non-Qualified Stock Option Plan (the "Option
Plan") was adopted by the Board of Directors and approved by the Company's
shareholders on May 15, 1996. Under the Option Plan (which is administered by
the Company's Compensation Committee), all officers and directors of the
Company, as well as employees and consultants of the Company and any
subsidiaries, are eligible to be selected to participate. The purpose of the
Option Plan is to promote the interests of the Company by providing participants
with an inducement to maintain their status with the Company or a subsidiary and
to further advance the interests of the Company. Options are granted in
consideration of things such as past and potential future contributions to the
Company.

As of June 30, 1998, options as to 31,000 shares have been issued under the
Option Plan. The aggregate number of shares of Common Stock to be delivered upon
the exercise of all options granted under the Option Plan cannot exceed 100,000
shares. In the event of any merger, reorganization, recapitalization, stock
dividend, stock split or reverse split or other act or event which effects a
restructure of the Company's Common Stock (but not including the issuance of
additional shares of Common Stock or preferred stock), the total number of
shares covered by the Option Plan, the exercise price, and number of shares
covered by outstanding options granted pursuant to the Option Plan, and the
rights, preferences and privileges incident to such shares will be appropriately
adjusted as to any remaining options. Any shares covered by options granted
pursuant to the Option Plan which expire or are canceled are available for
reissuance under the Option Plan.

There is no maximum or minimum number of shares which may be subject to options
granted to any one individual under the Option Plan. The exercise price of the
stock covered by each option will be determined by the Compensation Committee;
provided, however, that (i) as to options granted to any person who owns stock
possessing more than 10% of the total combined voting power or value of all
classes of stock of the Company, such exercise price will not be less than an
amount equal to 110% of the "fair value" of the stock (as determined pursuant to
the Option Plan) on the date the option is granted and (ii) as to all other
persons, such exercise price will not be less than an amount equal to 85% of the
fair value of the stock on the date the option is granted. Upon the exercise of
an option granted under the Option Plan, the exercise price is payable in full
at the time of exercise, either in cash or by check or, in the discretion of the
Compensation Committee, in whole or in part in stock of the Company valued at
fair market value at the time of each such exercise.

As a general rule, if the option holder ceases, for any reason, to be an
employee of the Company or any of its

                                       34
<PAGE>

subsidiaries, or a director of the Company, as the case may be, the option
holder will have a right thereafter to exercise the option during a specified
period set forth in the option agreement between the Company and the option
holder, which in the event of termination due to death or permanent disability,
will be no less than six months and which, in all other cases, will be no less
than 30 days in the case of an employee or one year in the case of a director.

Options granted under the Option Plan are not assignable or transferable except
by will or the laws of descent and distribution, and are exercisable during the
option holder's lifetime only by the option holder. No options will be
exercisable more than five years after the date of grant.

Upon the occurrence of certain specified events, including (i) a change in
control of the Company in connection with a cash tender offer, exchange offer,
merger or other business combination, sale of assets or contested election or
(ii) a merger, consolidation or other transaction in which the Company ceases to
be an independent corporation, all options granted under the Option Plan will
become exercisable in full for a period of 30 days following a specified date
and, thereafter, all unexercised options will expire.

Subject to the express provisions of the Option Plan, the terms of each option
granted under the Option Plan, including the exercise price, manner of exercise,
vesting and duration of each option, shall be as specified in the applicable
option agreement between the Company and the option holder; provided, however,
in no event will an option vest over a period of more than five years or at a
rate of less than 20% per year.

Subject to the express provisions of the Option Plan, in most instances the
Compensation Committee will determine the individuals to whom and the times at
which options are granted and the exercise price and terms of, and number of
shares subject to, each option. However, grants of options to members of the
Compensation Committee while members of such committee, or to members of the
Company's Board of Directors, must be approved by the Board of Directors without
counting the vote of the person being granted the options. The Compensation
Committee also has the authority to construe and interpret the Option Plan.

The Board of Directors of the Company may amend, suspend or terminate the Option
Plan at any time. Unless terminated sooner, the Option Plan will terminate on
May 15, 2006 and no options may be granted thereafter. No amendment, suspension
or termination of the Option Plan will, without the consent of the option
holder, be made which would alter or impair any rights or obligations under any
option then outstanding. Upon the dissolution or liquidation of the Company, the
Option Plan will terminate, and any option previously granted thereunder and not
yet exercisable in full will also terminate. In the event, however, that the
Company is succeeded by another corporation, the Option Plan and any remaining
options granted thereunder will be assumed by such successor corporation,
subject to such adjustments as may be necessary due to the capital structure of
the successor corporation.

EMPLOYMENT AGREEMENTS. Mr. Linter and the Company have entered into a five-year
employment agreement (terminating February 28, 2002) which provides for a salary
to Mr. Linter of $250,000 per year. Such agreement also provides for automobile
expense reimbursement, plus such annual salary increases, bonuses and other
perquisites as the Company's Board of Directors may determine. The agreement is
terminable by the Company for "good cause" (as defined in the agreement), upon
Mr. Linter's death or beginning 15 months after his permanent "disability" (also
as defined in the agreement). Under the terms of the agreement, the Company is
prohibited from merging, consolidating or otherwise reorganizing with any other
corporation or business unless the succeeding or continuing entity agrees to
assume the Company's obligations under the agreement.

DIRECTOR COMPENSATION. At this time, the Company does not contemplate paying
fees to its directors for their services solely as directors, although they will
be eligible for options under the Company's Option Plan. See "Stock Option Plan"
above.  It  will  be the  policy  of the  Company  to  reimburse  directors  for
reasonable  travel and lodging  expenses  incurred in attending  meetings of the
Board of Directors.

ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth the beneficial ownership of the Company's Common
Stock as of September 15, 1998 as to (i) each person or entity who is known by
the Company to own beneficially more than five percent of the Company's Common
Stock (the Company's only class of voting stock), (ii) Adam Linter and Steven
Raft, the only executive officers named above in "Item 10. Executive
Compensation," (iii) the Company's directors and (iv) all directors and
executive officers as a group.

                                       35
<PAGE>

<TABLE>
<CAPTION>
                                            NUMBER OF SHARES
NAME                                        BENEFICIALLY OWNED(1)      PERCENTAGE(2)
----                                        ---------------------      -------------
<S>                                         <C>                        <C>
Michael Fuchs(3)                              375,000(4)                   10.5%
Adam Linter(5)                                845,803(6)                   24.2%
Steven Raft                                    11,000                       0.3%
James R. Rosbe(7)                              45,520(8)                    1.4%
Rick Nicita(9)                                 95,138                       3.0%
Alan G. Dunn(10)                               34,958(11)                   1.1%
All directors and executive
 officers as a group (four persons)(12)     1,018,419                      29.1%

</TABLE>

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

(1)  Beneficial ownership is determined in accordance with the rules of the
     Securities and Exchange Commission. In computing the number of shares
     beneficially owned by a person and the percentage ownership of that person,
     shares of Common Stock subject to options or Warrants held by that person
     that are exercisable on or before December 15, 1998 are deemed outstanding.
     Such shares, however, are not deemed outstanding for purposes of computing
     the percentage ownership of any other person. To the Company's knowledge,
     the persons named in the table have sole voting and investment power with
     respect to all shares of Common Stock shown as beneficially owned by them,
     subject to community property laws where applicable and the information
     contained in the footnotes to this table.

(2)  Based on 3,212,690 shares of Common Stock outstanding, excluding (except as
     reflected in footnotes (4), (6)) and (8)), 657,313 shares of Common Stock
     issuable upon the conversion of a promissory note and exercise of
     outstanding options and Warrants, 375,000 of which are held by Michael
     Fuchs, 281,113 of which are held by Adam Linter, and 1,200 of which are
     held by James R. Rosbe.

(3)  Address is 9 West 57th Street, Suite 4220, New York, New York 10019.

(4)  Includes 250,000 shares obtainable upon the exercise of warrants and
     125,000 shares obtainable upon the conversion of a promissory note.

(5)  Address is 125 South Barrington Place, Los Angeles, California 90049.

(6)  Includes 281,113 shares of Common Stock presently obtainable through the
     exercise of options. See "Item 10. Executive Compensation."

(7)  Address is 3364 Tacoma Circle, Ann Arbor, Michigan 48108.

(8)  Includes 1,200 shares of Common Stock obtainable through the exercise of
     Warrants.

(9)  Address is 9830 Wilshire Boulevard, Beverly Hills, California 90212.

(10) Address is 4041 Morningstar, Huntington Beach, California 92649.

(11) All shares are held in the Dunn Family Trust. Mr. Dunn and Jan Dunn are
     trustees with shared voting power with respect to such shares.

(12) Consists of Adam Linter, James R. Rosbe, Rick Nicita and Alan G. Dunn. See
     footnotes (6), (8) and (11).

Except as listed above, there is no shareholder who is known to the Company to
beneficially own more than 5% of the Company's Common Stock.

ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Adam Linter has entered into an employment agreement with the Company, as
described in "Item 10. Executive Compensation - Employment Agreements."

As of June 30, 1998, Mr. Linter owed the Company a total of $72,766 in principal
and interest, with the principal portion

                                       36
<PAGE>

bearing interest at 8% per year. Such amounts are unsecured and are to be paid
in full by March 2000.

James R. Rosbe, a director, was also employed by the Company as an Associate
Publisher. For his services as such, Mr. Rosbe received an annual salary of
$80,000 through January 1998.

Rick Nicita, a director, is the Co-Chairman of Creative Artists Agency, a talent
agency the Company was a client of during the fiscal year ended June 30, 1998
and continues to be a client of in the current fiscal year.

Alan G. Dunn, a director, has previously loaned money to the Company, with the
maximum amount at any one time being approximately $102,800. As a result of
repayments, the Company's indebtedness to Mr. Dunn is now approximately $67,800.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a)      EXHIBITS.  The following exhibits are filed as part of this report:

<TABLE>
<CAPTION>

EXHIBIT                    DESCRIPTION
<S>              <C>
3.1               Articles of Incorporation of the Registrant, as amended *
3.2               Amendment to Articles of Incorporation *
3.3               Amended and Restated Bylaws of the Registrant *
4.1               Form of Warrant Agreement and Certificate *
4.2               Form of Managing Placement Agent's Warrant *
4.3               Form of Warrant issued to Michael Fuchs
10.1              Employment Agreement between the Registrant and Adam Linter *
10.2              Non-Qualified Stock Option Plan *
10.3              Form of Stock Option Agreement *
10.4              Software Development Agreement between the Registrant and Robit Hairman *
10.5              Amendment to Stock Option Agreement appearing below as Exhibit 10.11 *
10.6              Stock Option Agreement dated as of April 14, 1995 between the Registrant and Kristan Altimus *
10.7              Stock Option Agreement dated as of April 14, 1995 between the Registrant and Adam Linter *
10.8              Stock Option Agreement dated as of April 14, 1995 between the Registrant and S-M Investments *
10.9              Stock Option Agreement dated as of April 18, 1994 between the Registrant and S-M Investments *
10.10             Stock Option Agreement dated as of April 18, 1994 between the Registrant and S-M Investments *
10.11             Stock Option Agreement dated as of June 30, 1993 between the Registrant and Jim Rosbe *
10.12             Stock Option  Agreement dated as of October 5, 1994 between the Registrant and Michael Weinstock
                  (as amended January 31, 1996) *
10.13             Stock Option Agreement dated as of May 15, 1996 between the Registrant and S-M Investments *
10.14             Stock Option Agreement dated as of May 15, 1996 between the Registrant and Adam Linter *
10.15             Form of Indemnification  Agreement for directors and officers *
10.16             Warrant Agreement and Certificate  issued to J.E. Liss & Company, Inc.on November 12, 1996 *
10.17             Stock Option Agreement dated as of December 1, 1995 between the Registrant and Philip Brodie,
                  as amended *
10.18             Stock Purchase Agreement between the Registrant and Starbright Graphics, Inc. dated as of
                  January 1, 1993 *
10.19             Amendment to Stock Option  Agreement dated as of April 18, 1997 between the Registrant and Adam
                  Linter
10.20             Second  Amendment to Stock Option  Agreement  dated as of November 3, 1997 between the Registrant
                  and Adam Linter**
10.21             Convertible Promissory Note dated June 25, 1998 by the Registrant in favor of Michael Fuchs
24                Power of Attorney
27                Financial Data Schedule

</TABLE>

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

*    Incorporated by reference to Registration Statement on Form SB-2 (No.
     333-4792-LA). Exhibit numbers from that Registration Statement are
     retained, where applicable.

**   Incorporated by reference to Form 10-QSB for the quarter ended December 31,
     1997 (File No. 0-29050).

                                       37
<PAGE>

(b)  REPORTS ON FORM 8-K. The Company did not file any reports on Form 8-K
     during the quarter ended June 30, 1998.

                                   SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Los Angeles, State of California, on the 2nd day of
May, 2000.

TOMORROW'S MORNING, INC.

By: /s/ Adam Linter
    --------------------------------------
     Adam Linter, President and Treasurer

    (Principal Executive Officer and Principal Financial and Accounting Officer)

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

<TABLE>
<CAPTION>

SIGNATURE                                   TITLE                                       DATE

/s/ ADAM LINTER                          Chairman of the Board,
-------------------------                President, Treasurer and
Adam Linter                              Secretary                                   May 2, 2000


* JAMES R. ROSBE                         Director                                    May 2, 2000
-------------------------
James R. Rosbe


* RICK NICITA                            Director                                    May 2, 2000
-------------------------
Rick Nicita


* ALAN G. DUNN                           Director                                    May 2, 2000
-------------------------
Alan G. Dunn

* By:   /s/ ADAM LINTER
     --------------------
     Adam Linter
     (Attorney-In-Fact)


                                       38
<PAGE>
                                  EXHIBIT INDEX

EXHIBIT
NUMBER                     DESCRIPTION
<S>               <C>
3.1               Articles of Incorporation of the Registrant, as amended                        *
3.2               Amendment to Articles of Incorporation                                         *
3.3               Amended and Restated Bylaws of the Registrant                                  *
4.1               Form of Warrant Agreement and Certificate                                      *
4.2               Form of Managing Placement Agent's Warrant                                     *
4.3               Form of Warrant issued to Michael Fuchs
10.1              Employment Agreement between the Registrant and Adam Linter                    *
10.2              Non-Qualified Stock Option Plan                                                *
10.3              Form of Stock Option Agreement                                                 *
10.4              Software Development Agreement between the Registrant and Robit Hairman        *
10.5              Amendment to Stock Option Agreement appearing below as Exhibit 10.11           *
10.6              Stock Option Agreement dated as of April 14, 1995 between the Registrant
                  and Kristan Altimus                                                            *
10.7              Stock Option Agreement dated as of April 14, 1995 between the Registrant
                  and Adam Linter                                                                *
10.8              Stock Option Agreement dated as of April 14, 1995 between the Registrant
                  and S-M Investments                                                            *
10.9              Stock Option Agreement dated as of April 18, 1994 between the Registrant
                  and S-M Investments                                                            *
10.10             Stock Option Agreement dated as of April 18, 1994 between the Registrant
                  and S-M Investments                                                            *
10.11             Stock Option Agreement dated as of June 30, 1993 between the Registrant
                  and Jim Rosbe                                                                  *
10.12             Stock Option Agreement dated as of October 5, 1994 between the Registrant
                  and Michael Weinstock (as amended January 31, 1996)                            *
10.13             Stock Option Agreement dated as of May 15, 1996 between the Registrant
                  and S-M Investments                                                            *
10.14             Stock Option Agreement dated as of May 15, 1996 between the Registrant
                  and Adam Linter                                                                *
10.15             Form of Indemnification Agreement for directors and officers                   *
10.16             Warrant Agreement and Certificate issued to J.E. Liss & Company, Inc. on
                  November 12, 1996                                                              *
10.17             Stock Option Agreement dated as of December 1, 1995 between the Registrant
                  and Philip Brodie, as amended                                                  *
10.18             Stock Purchase Agreement between the Registrant and Starbright Graphics, Inc.
                  dated as of January 1, 1993                                                    *
10.19             Amendment to Stock Option Agreement dated as of April 18, 1997 between
                  the Registrant and Adam Linter
10.20             Second Amendment to Stock Option Agreement dated as of November 3, 1997
                  between the Registrant and Adam Linter                                         **
10.21             Convertible Promissory Note dated June 25, 1998 by the Registrant in favor of
                  Michael Fuchs
24                Power of Attorney
27                Financial Data Schedule

</TABLE>

*    Incorporated by reference to Registration Statement on Form SB-2 (No.
     333-4792-LA). Exhibit numbers from that Registration Statement are
     retained, where applicable.

**   Incorporated by reference to Form 10-QSB for the quarter ended December 31,
     1997 (File No. 0-29050).


                                       39