FORM 10-KSB

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

(Mark One)
[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934 (FEE REQUIRED) For the fiscal year ended June 30, 1997

                                       OR

[ ]  TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
     EXCHANGE  ACT OF 1934 (NO FEE  REQUIRED)  For the  transition  period  from
     _____________ to _____________

     Commission file number 000-21659

                                   EDnet, INC.
                          ----------------------------
                 (Name of small business issuer in its charter)

          Colorado                                               84-1273795
-------------------------------                            ---------------------
(State or other jurisdiction of                              (I.R.S. Employer
 incorporation or organization)                              Identification No.)

One Union Street, San Francisco, California                           94111
-------------------------------------------                           -----
 (Address of principal executive offices)                           (Zip Code)

                    Issuer's telephone number: (415) 274-8800

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

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

                         Common Stock, par value $0.001
                                (Title of Class)

     Check  whether  the Issuer (1) filed all  reports  required  to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  Registrant was required to file such reports),  and (2)
has been subject to such filing  requirements  for the past 90 days.  Yes [ ] No
[X] (See "Disclosure Items Omitted")

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

     The  Issuer's  revenues  for the twelve  months  ended  June 30,  1997 were
$3,807,370

     As of October 10, 1997,  the aggregate  market value of the Common Stock of
the Registrant  based upon the closing bid prices of the Common Stock, as quoted
on the  OTC  Bulletin  Board,  held  by  non-affiliates  of the  Registrant  was
approximately $3,212,357.

     As of October 10, 1997,  7,858,465 shares of $0.001 par value Common stock,
of the Registrant were outstanding.


<PAGE>


DISCLOSURE ITEMS OMITTED

The financial statements included in Part II Item 7 (the "Consolidated Financial
Statements") are unaudited except for those portions attributable to FY 1996 and
June 30,  1996.  This  Annual  Report on Form  10-KSB will be amended to include
audited financial statements,  in accordance with the Securities Exchange Act of
1934, as soon as is practical.


                                     PART I


ITEM 1    DESCRIPTION OF BUSINESS

Summary of Business

EDnet,  Inc.,  a Colorado  corporation  (the  "Company"),  develops  and markets
integrated    systems   for   the   delivery,    storage   and   management   of
professional-quality   digital  communications  for  media-based   applications,
including  audio and video  production  for the North American  advertising  and
entertainment  industry. The Company has established a private wide-area network
through  strategic  alliances with long distance  carriers,  regional  telephone
companies,  satellite  operators and independent fiber optic  telecommunications
providers,  which enables the exchange of high quality audio,  compressed  video
and multimedia data communications.  The Company provides engineering  services,
application-specific  technical advice, audio, video and networking hardware and
software as part of its business.  Additionally,  the Company provides  Internet
web site development and hosting to businesses conducting Internet commerce.


Industry Overview

The  digital  communications  industry  originated  in the  1970's  based on the
ability  of  digital  technology  to  support  new  and  advanced  communication
capabilities.  Digital data can be compressed,  enabling data-dense applications
such as the  instantaneous  exchange of large  amounts of data and  high-quality
concurrent (or "real-time")  interactive  communication  over any distance.  The
Company's primary expertise is in systems  integration using  telecommunications
and Internet technology.


Business of the Company

Principal  Markets.  The  Company  sells its  services  to the  advertising  and
entertainment  industry,  including  production and  post-production  companies,
advertisers,   producers,   directors  and  actors.  The  Company's   networking
technology makes it possible for producers,  directors and actors to interact in
real time, with less interruption of their schedules,  despite being in separate
locations.  The  Company's  management  ("Management")  believes that this is of
growing importance in the entertainment industry because while the production of
audio and video  entertainment  is inherently a creative  process  requiring the
collaboration  of many parties,  increasingly,  the participants in this process
are in separate locations.  Traditionally,  this fact has accounted for frequent
travel and delay  being a  necessary  element of the audio and video  production
process.  The  Company's  technology  is designed to address  this  situation by
allowing the collaborative process to go forward despite physical separation.

The Company has  established  a "network"  of  recording  studios;  to join this
network a studio  generally  enters into an agreement with the Company to become
part of the  network  for a term of three  years.  Being  part of the  Company's
network allows a studio (which the Company  refers to as an "affiliate  studio")
to establish a link with, and therefore transmit audio and video information to,
any other affiliate  studio.  An affiliate  studio may also participate in joint
promotional  and  advertising  activities  describing  the Company's  network of
affiliate studios, has access to certain technical support described below and a
software  directory of  affiliate  studios.  Affiliate  studios also are charged
lower "link-up" rates than those charged to non-affiliate  studios to connect to
studios with incompatible equipment.  Currently, the network is composed of over
360 studios  across North  America,  with major  concentrations  in  California,
Seattle,  St. Louis,  Chicago,  Minneapolis,  Atlanta and on the East Coast from
Washington,  D.C. to New York and Boston. By granting access to its network, the
Company earns one-time fees from customers for the sale and  installation of its
equipment and ongoing fees for the use of the network.



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Audio and Video Network System Development Process. The Company has standardized
its process for developing  audio and video network  communications  systems for
its customers.  At the time that the Company contracts with a new audio or video
network  customer,  the  Company's  personnel  obtain  and  determine  technical
information  and  specifications  regarding the  customer's  existing  facility,
equipment and communications  requirements.  Based on those specifications,  the
Company determines the configuration of the new system,  selects the appropriate
equipment  components,  makes  necessary  modifications  to the software  and/or
hardware  and  performs  final  quality  control  procedures.  The Company  then
packages and ships the system to the  customer.  Installation  of the system can
usually be performed by  affiliated  technicians  with  telephonic  support from
Company  engineers.  Upon  installation of the system,  the Company's  technical
personnel  typically  perform a routine series of system checks and  diagnostics
from its  headquarters  facilities via the remote  network  connection to ensure
that the newly-installed equipment functions properly.

Technical  Support.  As part of a customer's monthly network connection fee, the
Company  maintains a staff of technical support personnel to respond to customer
inquiries  during  business  hours.  For emergency  support during  non-business
hours,  domestic customers can contact Company personnel through a toll-free 800
number,   while  a  special  direct-dial   telephone  number  is  available  for
international  customers. The Company generally can resolve the vast majority of
technical support issues directly through its network connection,  which enables
Company  personnel  to  perform  remote  diagnostics  directly  on a  customer's
equipment.  In the event that the  Company is unable to  diagnose  and service a
hardware or software problem via the remote network  connection,  a customer can
ship equipment to the Company for on-site, or "bench," diagnostics and service.

Key Suppliers and Alliances.  The Company  functions as a systems  integrator by
acquiring  other  companies'  technologies  and combining them into an effective
communications  solution. The Company does not manufacture any of the components
used in its  network,  but rather  purchases  digital  communications  equipment
components  directly  from their  manufacturers,  including  Dolby Labs,  Telos,
Musicam  USA,  and APT,  Inc.  The Company  performs  installation  services and
further  equipment  integration.  Because the individual  components used in the
Company's   systems  are  available  from  more  than  one  reliable  source  or
manufacturer, Management believes the risk of an adverse impact to the Company's
business from an interruption in supply from any single supplier is minimal. The
Company also  maintains an ongoing  inventory  of all of the  components  of its
various  communications  products.  Most of the Company's suppliers have offices
and/or distribution points near the Company's San Francisco headquarters. In the
event that the Company does not have sufficient  inventory  on-hand to fulfill a
system  hardware  order,  the Company can usually  order and receive  additional
inventory with turnaround times of as little as twenty-four  hours and generally
no more than four weeks.

Marketing. The Company markets its services through a combination of employing a
direct full-time sales staff and by appearing at industry trade shows.

Description of Current and Developing Products

Audio  Media  Networking  Services.   The  Company  develops  integrated  system
solutions (its "Audio Media  Communications  Service") which provide compression
and  transmission  of studio quality audio signals over fiber optic lines (i.e.,
telephone digital data lines) between separate studios.  The audio data can also
be  accompanied  by time codes so that  operators at the  different  studios can
synchronize  the audio to film  projectors or VCR machines in order to allow the
"real time"  editing of movies and video.  Upon  installation  of an audio media
communications  system and the requisite  sound  equipment,  a studio becomes an
"affiliate studio," equipped with a device to digitize,  compress, send, receive
and decompress audio media (known as a "codec"). In addition, the studio becomes
a part of the Company's network of media production and post production studios.
Outside customers (non-affiliates) seeking to access media production facilities
or otherwise  review or edit an audio clip with the  assistance of a person in a
different  location  can do so through  these  affiliate  studios.  By using the
Company's  Electronic  Directory  Software,  someone in an affiliate  studio can
determine whether that studio, or another affiliate studio,  operates  equipment
that is  compatible  with  the  needs  of the  customer.  Once  the  appropriate
affiliate studio is chosen,  the customer can schedule an appointment to use the
network.  If nearby  studios do not have  compatible  equipment,  the  Company's
personnel in San  Francisco  can digitally  "bridge" the studios  together.  The
customer then pays a network  access fee to the Company.  The purchase  price of
these  audio media  communications  systems  ranges from $5,250 to $18,000.  The
Company pays local telephone service providers telephone connection installation
charges (depending

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upon  bandwidth  requirements,  from  $250  to  $1,000)  and  monthly  recurring
connection  charges  (from $50 to $1,200),  most of which is  reimbursed  to the
Company by its customers.  The primary market for the Audio Media Communications
Service are radio and  television  advertisers,  motion  picture and  television
program production companies and music recording companies.

The  Company  has  also  developed  a  network  application  which  is  designed
especially for the music  recording  industry.  The Company's  "ZeroC" (for zero
compression)   technology  provides   fiber-optic   transmission  of  real-time,
uncompressed  digital audio,  using the true CD standard of 44.1 Khz sampling at
16 bits. The system relays,  in real playback time, the audio bits of an AES/EBU
digital audio datastream with no re-sampling or rate adaption.

Video Media  Networking  Services.  The Company is currently  developing a video
communications  service (its "Fast Forward  Delivery  System" or "FFD") which is
similar to its Audio Media  Communications  Service.  Through the use of similar
equipment located at affiliate studios,  the Company manages the transmission of
approval-quality  video  segments  between  studios.  The Fast Forward  Delivery
System  transmits  information  on a 128 kilobit  ("ISDN") data line,  which has
dial-up  capability,  and  operates  on the same  principle  as the Audio  Media
Communications  Service  except that the  transmission  does not happen in "real
time." However, using this technology, video media producers and their customers
can efficiently and effectively transmit edits,  approvals,  or modifications to
video and other  types of media,  including  special  effects  media and graphic
media (including prints and logos). Management believes its system is similar to
e-mail for video and,  compared to conventional  methods of transmitting  video,
i.e.,  mail or  physical  travel,  can  significantly  increase  the  speed  and
efficiency of the video editing process.

As  with  the   Company's   Audio   Networking   Services,   outside   customers
(non-affiliates)  seeking to access  media  production  facilities  or otherwise
review or edit video with the assistance of a person in a different location can
do so by  paying a fee to use an  affiliate  studio.  The  customer  also pays a
network  access  fee to the  Company.  The  purchase  price of the Fast  Forward
Delivery System ranges from $15,000 to $50,000. The Company pays local telephone
service providers  telephone  connection  installation  charges  (depending upon
bandwidth  requirements,  from $250 to $1,000) and monthly recurring  connection
charges (from $50 to $1,200),  most of which is reimbursed to the Company by its
customers.  The  primary  market  for  the  Fast  Forward  Delivery  System  are
television   advertisers,   motion  picture  and  television  series  production
companies and other  corporate  video users.  During the past year, Fast Forward
Delivery  Systems  have been  used in  several  television  series  projects  in
Australia, Canada and Hollywood, California.

The FFD network can be  significantly  extended from EDnet's  pending  alliances
with  companies  which will provide EDnet with its own private wide area network
for its entertainment clients.  EDnet assists in the engineering,  selection and
provisioning  of the  video  compression  hardware  and  software  needed on the
enterprise local area network (LAN) side of the network.  EDnet and its alliance
partners will design  sophisticated  remote  management  capabilities  into this
private  network which will enable  upgrading and support of the video affiliate
twenty-four hours a day, seven days a week from the Company's  technical support
center in San  Francisco.  If a customer  needs point to point  connectivity  to
start,  EDnet can  provide a  network  access  connection  which  will  allow an
affiliate  to start  small and add to the  network  as it  expands.  If a higher
volume wider bandwidth network connection is required, EDnet can provide it.

Internet Website  Development and Hosting  Services.  The Company is also in the
Internet services marketplace.  In June 1996, in order to increase its potential
to deliver  high-quality  audio and other media over the  Internet,  the Company
consummated a transaction  whereby  Internet  Worldwide  Business  Solutions,  a
California  corporation,  dba Internet Business Solutions  ("IBS"),  an Internet
services  provider  specializing in the development and hosting of web sites for
companies  doing business on the Internet,  merged with and into a subsidiary of
the  Company.  The  Company  thus  improved  its ability to  integrate  numerous
technologies  to  yield  cost-effective  media  communications   solutions.  IBS
provides  interactive  web site  development  services,  specializing in complex
database access and professional graphic appearance for its corporate customers.
Web site  development  services  are  sought by  businesses  that wish to pursue
on-line commerce on the Internet.  Management believes that a key feature of the
Company's  web site  service is the  Company's  ability to provide  interactive,
graphically  appealing  web  pages,  while  many of the web sites  developed  by
competitors  are static and plain.  In  addition  to web site  development,  the
Company offers the following  Internet related  services:  catalog-based  search
engines for custom or existing  databases;  electronic  forms for  customer  and
query

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information  capture;  specialized  on-line ordering systems;  and comprehensive
Internet networking,  integration and consulting. Internet services for web site
development range from $5,000 to $75,000 depending on the content and complexity
of the web site.  Web site host fees  collected by the Company this year average
approximately  $250 per month.  The primary  market for these services are large
and small corporate businesses.

Internet  Audio.  Vastly  improved  technology  now provides the  capability  to
deliver CD quality  audio via the Internet.  Eager to provide it's  professional
customers  with  services  utilizing  this  technology,  EDnet has entered  into
marketing partnerships with Liquid Audiotm and Realtm Audio to sell, support and
host  professional  services  using their encoding and  compression  technology.
EDnet creates  "Virtual  Studios" for these Internet Audio  services.  With this
technology,  users will be able to search for and sample very high quality audio
clips,  make  selections and download the full length audio from an EDnet server
for replaying or further  editing at a convenient  time, even in an uncompressed
form,  if  necessary.   Record  companies,   recording  studios,  producers  and
distributors  of radio and TV  commercials,  artists,  producers,  broadcasters,
Internet  music  shopping  services,  and many other  Internet users can utilize
Virtual  Studios for the  transfer of audio for  direction,  approval,  editing,
production,   distribution,   and  webcasting  -   broadcasting   over  Internet
connections.  Music and  sound  effects  libraries  can  market  to much  larger
audiences,  and musicians will have completely new  opportunities for the direct
consumer  distribution  of new recordings via the world wide web. EDnet provides
all of the  connectivity,  encoding  and decoding  software,  library and server
hosting and access, plus technical and marketing support.


Competition

Audio  and Video  Networking.  Competition  in the  audio  and video  networking
business  is  based  on  the  ability  to  provide  systems   compatibility  and
proprietary   off-the-shelf  codecs.  Due  to  the  difficulty  and  expense  of
developing and maintaining  private digital networks,  Management  believes that
the number of competitors is, and will remain, small.

The Company's principal  competitor in audio networking has been the 3D2 ("3D2")
division of Keystone  Communications,  Inc.  Until March 31,  1995,  3D2 was the
exclusive  North  American  distributor  of apt-X codecs  manufactured  by Audio
Processing  Technology  ("APT"),  which  were in demand in the radio  voice-over
market.  In April 1995,  the Company  became one of APT's few  distributors  and
through aggressive  marketing,  within six months became APT's largest worldwide
distributor.  Management  believes that the Company was able to use its position
as a  distributor  of apt-X  codecs to attract  studios to its  network  because
studios  grew  increasingly  confident  in the  Company's  ability  as a network
service  provider as a result of its  position as an apt-X  codecs  distributor.
Management  estimates  that,  between  July 1995 and June  1996,  as a result of
distributing  apt-X codecs,  approximately  120  additional  studios  joined the
network.

The  Company's  primary  video  networking  competitors  are VYVX, a division of
Williams Co., and Sprint through its DRUMS products. These companies offer their
video networking services utilizing  higher-bandwidth fiber connections,  which,
because  they  do not  have  dial-up  capability,  require  scheduling  and  are
considerably  more  expensive.  Because the Fast Forward  Delivery System has an
optional  ISDN-based  dial-up  capability,  it is generally  less expensive than
sending video materials between studios by courier.


Patents & Trademarks

The  Company  does not own any patents and relies  instead on a  combination  of
statutory and common law  copyright,  trademark and trade secret laws to protect
its rights in its proprietary technologies.  The Company has registered "EDnet,"
"Entertainment  Digital Network," and "ZeroC" as trademarks with the U.S. Patent
and Trademark Office.


Research and Development

During the fiscal years ended June 30, 1997 and June 30, 1996, the Company spent
approximately  $1,017,000 and $42,000  respectively on research and development.
During each of the last two fiscal years, the Company did not spend any funds on
material customer-sponsored research and development.

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Governmental Approvals and Regulation

The Company's networking services are currently not subject to regulation by any
government agency or regulatory body.


History and organization

Background.  Prior to  founding  the  Company,  two of current  Management  were
employed by  Skywalker  Sound  ("Skywalker"),  the post  production  division of
LucasArts/Lucasfilm Ltd. ("LucasArts"). In 1991, while at Skywalker, they made a
breakthrough in the application of digital communications technology.  They were
able to send four  channels of  compressed,  professional-quality  digital audio
over T-1 fiber-optic telephone lines (individual DSO's or channels over a single
line) from a Skywalker  studio in Northern  California to a Skywalker  studio in
Southern  California.  The  group  thereafter  sent the  audio mix for the movie
Backdraft, then under production,  between the two studios on a daily basis. The
result  was that  Backdraft  was the first film in which the  director  reviewed
movie audio from a remote studio on the same day it was produced.

Based  upon  this  success  (and  with the  acknowledgment  of  LucasArts),  the
Company's management organized Entertainment Digital Network ("EDN") as a Nevada
corporation  on June 26, 1992,  and set up a trial  network of seven studios and
developed other proprietary  technology to market T-1 digital  communications to
the music,  movie and  television  industries.  On  January  25,  1993,  EDN was
re-incorporated in the State of California.

Effective  August 27, 1993,  EDN acquired  the assets of Digital  Patch  Systems
("Digital Patch"), an unrelated networking service provider,  for 235,000 shares
of EDN common stock and 140,000  shares of EDN  preferred  stock.  At that time,
Digital  Patch  used  MPEG-based  audio-compression,  switched  56 and ISDN data
lines, which the Company has since adopted as its primary technology. Management
believed  that ISDN,  which had become the  standard  in the  telecommunications
industry in Europe,  Japan and many parts of the  Pacific  Rim,  would  likewise
become the  standard in the U.S.  ISDN is, in fact,  now common in most areas of
the  world.   EDN  also  obtained   non-competition   agreements  from  the  two
shareholders of Digital Patch which prohibited these  individuals from competing
with EDN for a period of five years in areas where  Digital  Patch had  operated
before the transaction.  Following this transaction,  Bert Berdis, who owned 50%
of the  outstanding  shares of Digital  Patch,  became a Director of the Company
and served in such capacity until his resignation in March 1997.

Merger  With  AP  Office  Equipment.  On or  about  September  20,  1995,  EDN's
management  determined  that it was in EDN's best interests to effect a business
combination with a company whose shares were  publicly-traded in order to access
the public capital markets. Toward this end, EDN, its seven largest shareholders
and AP Office Equipment, Inc. ("AP"), an unrelated company, entered into a Stock
Purchase  Agreement  pursuant  to which such  shareholders  exchanged  their EDN
common and preferred  stock for 1,275,818  shares of AP common stock,  par value
$.001 per share (the "Common Stock"). In addition, (a) outstanding non-qualified
options to purchase an  aggregate  of 263,420  shares of EDN common  stock at an
exercise  price of $.10 per share were  converted  into  options to  purchase an
aggregate  of 230,479  shares of Common  Stock at an exercise  price of $.11 per
share,  and (b) outstanding  warrants to purchase an aggregate of 347,343 shares
of EDN common  stock at $2.625 per share,  which  terminated  as of October  31,
1996, were converted into warrants to purchase an aggregate of 303,908 shares of
Common  Stock at an  exercise  price of $3.00 per  share.  The  closing of these
transactions  was contingent  upon the successful  completion by AP of a sale of
1,500,000 shares of Common Stock at a price of $0.665 per share.

By means of an Amendment of Articles of  Incorporation  which was filed with the
Colorado  Secretary  of State on  September  29,  1995,  AP changed  its name to
"EDnet, Inc."

Finally,  pursuant  to a  Stock  Purchase  Agreement  executed  by  the  Company
(formerly AP) and the  remaining  shareholders  of EDN,  dated as of October 18,
1995, such  shareholders  sold their EDN common stock to the Company in exchange
for 243,720 shares of Common Stock. The result was that EDN became, and remains,
a wholly-owned subsidiary of the Company.

IBS Transaction. Pursuant to an Agreement and Plan of Reorganization dated as of
June 24, 1996 (the "IBS Agreement"), the Company acquired all of the outstanding
shares of common stock of IBS, an unrelated Internet services provider,  through
a merger of IBS into a subsidiary  of the  Company.  As

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consideration  for such merger,  the Company  delivered the following to the two
shareholders of IBS, Trevor Stout and Randall Schmitz:  (i) two promissory notes
in the aggregate amount of $250,000 (the "First IBS Notes"); (ii) two promissory
notes in the aggregate  amount of $250,000  (the "Second IBS Notes");  and (iii)
311,284  shares of Common  Stock.  The First IBS Notes  were due sixty (60) days
after the closing of the IBS  Agreement and were repaid by the Company in August
1996.  The Second IBS Notes  originally  provided for interest of eight  percent
(8%) and  maturity  on the  earlier of one year from the  closing  under the IBS
Agreement  or fifteen  (15) days after the  closing of a public  offering by the
Company of its Common Stock. In addition,  pursuant to an earn-out plan, Messrs.
Stout and Schmitz  were  originally  entitled to receive up to an  aggregate  of
500,000 shares of Common Stock if IBS was to meet certain specified  performance
goals during a period  commencing on the effective date of the IBS Agreement and
ending 120 days after  June 30,  1999 (the  "Earnout"),  and  Messrs.  Stout and
Schmitz entered into three-year  employment  agreements with the Company and IBS
(collectively, the "IBS Employment Agreements"). Finally, the Company granted to
three  employees  of IBS options to purchase an  aggregate  of 50,000  shares of
Common Stock under the NSO Plan (as defined  below),  at $1.25 per share,  which
options  vest over a three  year  period.  The  merger  was  accounted  for as a
purchase.  Upon the  closing of the IBS  Agreement,  Mr.  Stout was  appointed a
director of the Company and served in such  capacity  until his  resignation  in
June, 1997.

Subsequently,  the  Company  determined  that  the  cost  of  supporting  IBS in
researching,   developing  and  marketing   certain   software  related  to  the
development, operation and maintenance of world-wide web sites (the "IBS Website
Software")  was, in Management's  view,  prohibitively  expensive.  Accordingly,
pursuant to an Amendment to the Agreement and Plan of Reorganization dated as of
January 31, 1997 and certain  collateral  documents:  (i) IBS  licensed  the IBS
Website  Software to a new entity,  Breakthrough  Software,  Inc.,  a California
corporation ("Breakthrough");  (ii) the Company agreed to lend up to $250,000 to
Breakthrough to be used for specified  purposes,  as represented by an unsecured
promissory note made by  Breakthrough  in favor of the Company,  payable 30 days
after  demand  after  July 1, 1997 or upon the date that  Breakthrough  closes a
financing of not less than $1,000,000;  (iii) Breakthrough issued to the Company
2,000,000  shares of  convertible  Series A Preferred  Stock (the  "Breakthrough
Series A Preferred  Shares")  representing  (after  conversion into Breakthrough
common stock) 40% of Breakthrough's  outstanding common stock; (iv) Breakthrough
issued  to  Messrs.   Stout  and  Schmitz  common  stock   representing  60%  of
Breakthrough's  outstanding  common stock;  (v) the Company  canceled the Second
Notes;  (vi) the Company reduced the number of shares of Common Stock subject to
the  Earnout  from  500,000  to  125,000;  (vii) the IBS  Employment  Agreements
terminated as of December 31, 1996; and (viii) Messrs. Stout and Schmitz entered
into consulting  agreements with the Company to provide  transition  services to
IBS for a period of three months ending March, 1997.

The Breakthrough  Series A Preferred Shares have a liquidation  preference worth
$605,000,  which represented  Management's  estimate of the value to date of the
Company's capital  investment in the IBS Website Software.  So long as 1,500,000
shares of Breakthrough Series A Preferred Shares remain outstanding,  the holder
of the Breakthrough  Series A Preferred Shares is entitled to elect one director
to the  Breakthrough  board of  directors  and the  affirmative  approval of the
Company is required to approve certain events, including but not limited to, any
increase or decrease in the authorized  number of shares of Breakthrough  common
or preferred stock, any amendment of Breakthrough's articles of incorporation or
bylaws which adversely affects the rights of the holders of Breakthrough  Series
A Preferred Shares, any issuance of securities on a parity with or senior to the
Breakthrough  Series A  Preferred  Shares  and any  issuance  of any  additional
securities  to either  Messrs.  Stout and  Schmitz or any trust or other  entity
controlled by either of them.  The rights,  privileges  and  preferences  of the
Breakthrough Series A Preferred Shares are contained in the Amended and Restated
Articles of Incorporation of Breakthrough,  which were filed with the California
Secretary of State on January 31, 1997


ITEM 2    PROPERTY

Description of property

The  Company and its EDN  subsidiary  operate  from two  offices  located in San
Francisco and Los Angeles,  California. The San Francisco office, located at One
Union Street,  San Francisco,  California,  is a 5,000 square foot facility that
operates as administrative headquarters and provides the centralized

                                       7

<PAGE>


network hub for electronically  bridging  affiliate studios,  as well as overall
network  management.  The Company  leases this  facility  pursuant to a Sublease
dated November 1, 1993 with Varitel Video,  Inc.  ("Varitel"),  an  unaffiliated
entity.  This sublease provides for a term of five years commencing November 15,
1993 (with an option to extend for an additional  five year term),  with monthly
lease  payments  of zero during the first  three  months of the term,  $5,653.39
during months four through 24 of the term and $5,992.59 during months 25 through
60 of the term (plus the Company's proportionate share of rent adjustments under
the master  lease).  In lieu of a security  deposit,  the  Company  has  granted
Varitel a  security  interest  in  certain of the  Company's  equipment  with an
aggregate  purchase price of approximately  $75,000.  Varitel may terminate this
sublease  upon 90 days  prior  written  notice  upon a change in the  "principal
ownership"  of the  Company  or in the  event  that  the  Company  engages  in a
"competing  type of film or video  service  business like or similar to Varitel"
excluding,  however,  any  "networking  service  application"  which the Company
engages in  connection  with its audio,  video and other  multimedia  networking
services.  The Los Angeles  office,  located at 3000 Olympic Blvd.,  Suite 2121,
Santa Monica, California, is a 4,000 square foot facility that serves as a sales
and  demonstration  facility and provides  access to many users of the Company's
services from the  entertainment  industry located in Southern  California.  The
Company  leases this  facility  pursuant to an Office  Lease dated June 16, 1993
with  Lantana  Center,  a  California  limited   partnership   ("Lantana"),   an
unaffiliated entity. This lease provides for a term of ten years commencing July
1, 1993, with monthly lease payments of $7,749.50  (subject to a  cost-of-living
adjustment) and  reimbursement  to the Company of up to $61,015 incurred for the
installation of permanent tenant improvements.  As discussed in "Part III - Item
12.  Certain  Relationships  and Related  Transactions  - Short-Term  Loans from
Officers,  Directors and  Shareholders;  Guaranty of Lease" below, the Company's
obligations under this lease have been guaranteed by Mr. Kobayashi, the Chairman
of the Company.

The IBS subsidiary operates from an office located in Mountain View, California.
The  Mountain  View  office,  located at 2083  Landings  Drive,  Mountain  View,
California,  is a 2,000 square foot facility that operates as its administrative
and  operations  headquarters.  IBS leases this facility  pursuant to a Building
Lease dated August 28, 1995, as amended by a  Modification  No. 1 dated February
13, 1996, with Landmark Investments, Limited, an entity unaffiliated with either
IBS or the  Company.  This lease,  as amended,  provides  for a term  commencing
September 15, 1995 and ending March 3, 1997,  with monthly  lease  payments from
September 15, 1995 through  September 30, 1995 of $707.19,  from October 1, 1995
through  March 3, 1996 of $1,580.80 and from March 4, 1996 through March 3, 1997
of $4,348  (subject to a  cost-of-living  adjustment).  The lease has since been
amended to include  2,174  square  feet for a term  expiring  March 3, 2000 at a
current rate of $5,000.00  per month,  increasing  to $6,413.30 on March 4, 1998
and 3% annually thereafter.


ITEM 3    LEGAL PROCEEDINGS

The Company is not a party to any material pending legal  proceedings other than
ordinary  litigation  which, in the opinion of the Management,  is incidental to
the business of the Company.


ITEM 4    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No items were submitted to the shareholders for a vote during the fourth quarter
of fiscal 1997.

                                       8

<PAGE>


                                     PART II


ITEM 5    MARKET  FOR THE  REGISTRANT'S  COMMON  STOCK AND  RELATED  STOCKHOLDER
          MATTERS

Price range of common stock

The Company's common stock is traded on the OTC electronic  bulletin board under
the symbol  "DNET".  The reported high and low bid  information as quoted on the
OTC  bulletin  board for the period  November 13, 1995  (inception  of trading),
through  June 30,  1997,  is shown below.  The high and low bid  information  as
quoted on the OTC bulletin board  represents  prices between brokers and dealers
and  does  not  include  retail   markups,   markdowns  or  commissions  to  the
broker-dealer.


              High and Low Bid Price for Registrant's Common Stock
                     November 13, 1995 through June 30, 1997

Period                                              High           Low
------                                              ----           ---
Quarter ended June 30, 1997                         2.06           .50
Quarter ended March 31, 1997                        2.19          1.06
Quarter ended December 31, 1996                     3.44          1.00
Quarter ended September 30, 1996                    3.75          3.00

Quarter ended June 30, 1996                         7.13          4.63
Quarter ended March 31, 1996                        5.88          2.00
Quarter ended December 31, 1995                     3.69          2.00


The number of holders of record of the  Company's  common stock as of October 1,
1996, was approximately 611.


Dividends

The Company has never paid cash  dividends on its common  stock,  and intends to
utilize  current  resources  to expand its  operations.  Moreover,  the Warrants
restrict  the ability of the Company to pay  dividends.  Therefore,  the Company
anticipates  that cash  dividends  will not be paid on the  Common  Stock in the
foreseeable future.



Recent Sale of Unregistered Securities

Private  Placement of Units. On or about June 26, 1996, the Company  commenced a
private  placement of up to  $3,000,000  of Units (each Unit  consisting  of one
share of Common Stock and one Warrant), for a price per Unit equal to the lesser
of: (i) $3.00;  or (ii) the average closing bid price of the Common Stock during
a consecutive  thirty (30) day period  immediately  preceding the termination of
the offering  minus  thirty  percent  (30%) (the "Stock  Purchase  Price").  The
purchase  price for each Warrant was one-tenth of one cent ($0.001) per Warrant.
Each Warrant is exercisable until July 31, 1999, provided,  however, that in the
event that the average closing bid price of the Common Stock exceeds one hundred
sixty percent  (160%) of the Stock  Purchase  Price for thirty (30)  consecutive
trading days, then the Company may, within three business days following the end
of such  thirty (30) day period,  give  notice of its intent to  repurchase  the
Warrants at a purchase  price of one-tenth of one cent ($0.001) per Warrant,  in
which  case  Holders  will have (30) days  following  the date of the  Company's
notice to exercise the  Warrants.  Each Warrant  entitles the holder to purchase
one share of Common  Stock at an  exercise  price  equal to the  lesser  of: (i)
$4.75;  or (ii) the  average  closing  bid price of the  Common  Stock  during a
consecutive thirty (30) day period immediately  preceding the termination of the
offering  (subject

                                       9

<PAGE>


to  adjustment in certain  circumstances).  Holders of Common Stock and Warrants
have been  granted  piggyback  and Form S-3  registration  rights for the Common
Stock (and the Common Stock underlying the Warrants).

The Common  Stock,  the  Warrants  and the shares  purchasable  pursuant  to the
Warrants  were  offered and sold only to  "accredited  investors"  as defined in
Regulation  D  promulgated  under the  Securities  Act of 1933,  as amended (the
"Securities   Act")  in  a  private   placement  exempt  from  the  registration
requirements  of the  Securities  Act  under  Rule  506  promulgated  under  the
Securities  Act. The Company has agreed to pay the following  fees in connection
with  sales of  Units  as more  fully  described  in Part  III  Item 12  Certain
Relationships  and Related  Transactions  -  Investment  Banking  and  Brokerage
Services - Morgan  Fuller  Capital Group  L.L.C.:  (i) to Morgan Fuller  Capital
Group L.L.C.  ("Morgan Fuller"),  or any other broker selling Units, a brokerage
fee of eight  percent (8%) of the value of Units sold;  (ii) to Morgan  Fuller a
fee of five  percent  (5%) of the value of Units sold by any other  broker;  and
(iii) to Morgan Fuller that number of Warrants  equal to twenty percent (20%) of
the value of Units sold by Morgan Fuller  divided by the market bid price of the
Common  Stock on the day the Units are sold,  at such price.  This  offering was
terminated  on November 30, 1996 and as of such date the Company had itself sold
an  aggregate  of 297,143 of Units  directly at $1.75 per share and  warrants at
$2.50 each and had not paid any brokerage  fees or issued any Warrants to Morgan
Fuller.

Private Placement of Note Participations.  On or about July 3, 1996, the Company
delivered to Morgan Fuller  $1,000,000 of Senior Secured  Promissory  Notes (the
"Senior  Secured  Notes"),  made by the Company,  as debtor,  in favor of Morgan
Fuller,  as lender.  The Senior Secured Notes are secured by a broad lien on the
Company's  assets and provide for interest at the rate of fourteen percent (14%)
per annum and were originally due on November 15, 1996, provided,  however, that
if the  principal  and accrued  interest  was not repaid on such date,  the loan
represented by the Senior Secured Notes would be converted into a term loan with
monthly principal payments of $100,000  commencing December 1, 1996 and interest
at  eighteen  percent  (18%) per annum.  Morgan  Fuller  offered  participations
("Participations")   in  the  Senior   Secured   Notes.   Investors   purchasing
Participations  have also  received  that number of Warrants  equal to one-sixth
(1/6) of the aggregate dollar amount of Participations  purchased divided by the
exercise price (as discussed below), at exercise prices of $4.25 and $3.69. Each
Warrant is exercisable until July 31, 1999, provided, however, that in the event
that the average closing bid price of the Common Stock exceeds one hundred sixty
percent (160%) of the exercise price for thirty (30)  consecutive  trading days,
then the Company  may,  within three  business  days  following  the end of such
thirty (30) day period,  give notice of its intent to repurchase the Warrants at
a purchase  price of one-tenth of one cent  ($0.001) per Warrant,  in which case
Holders  will have  (30)  days  following  the date of the  Company's  notice to
exercise the Warrants. Each Warrant entitles the holder to purchase one share of
Common  Stock at an exercise  price equal to the closing bid price of the Common
Stock  on  the  date  of  the  Note(s)  in  which  the  investor  has  purchased
Participations  (subject to adjustment in certain  circumstances).  The purchase
price for each  Warrant is one-tenth  of one cent  ($0.001)  per Warrant.  As of
March  31,  1997,   Morgan  Fuller  had  sold  an  aggregate  of  $1,000,000  of
Participations.

The  Participations,  the  Warrants and the shares  purchasable  pursuant to the
Warrants have been offered and sold only to "accredited investors" as defined in
Regulation D promulgated under the Securities Act and the original execution and
delivery of the Senior  Secured Notes and the offering of  Participations  was a
private placement of securities exempt from the registration requirements of the
Securities Act under Rule 506  promulgated  under the Securities Act. For Morgan
Fuller's  services in connection  with the Senior  Secured Notes and selling the
Participations,  the  Company  has:  (i) paid  Morgan  Fuller a loan fee of five
percent (5%) of the amount of the Senior Secured Notes;  and (ii) granted Morgan
Fuller 39,255  Warrants to purchase  Common Stock at an exercise price of $4.25,
and 45,205 Warrants at an exercise price of $3.69. Holders of Warrants have been
granted  piggyback  and  Form  S-3  registration  rights  for the  Common  Stock
underlying the Warrants. This offering has been terminated.

Pursuant to that Amendment No. 1 to Senior Secured  Promissory Notes dated as of
November 15, 1996, the Company and Morgan Fuller extended the term of the Senior
Secured  Notes to January 31,  1997.  Pursuant  to an  engagement  letter  dated
November 19,  1996,  in which  Morgan  Fuller  agreed to use its best efforts to
obtain  a 75  day  extension  of the  Participations,  the  Participations  were
extended to January 31, 1997. On January 31, 1997, the indebtedness  represented
by the Senior Secured Notes  converted  into a term loan with monthly  principal
payments  beginning  February 15, 1997. In connection  with the extension of the
Participations, the Company has agreed to pay to Morgan Fuller a cash fee of

                                       10

<PAGE>


one and one-half  percent  (1.5%) of the amount of the Senior  Secured Notes and
granted  Morgan  Fuller  or its  nominees  55,970  three-year  Warrants  with an
exercise price of $2.68.

Pursuant to engagement letters dated May 20, June 25, June 28, June 28, November
19 and November 21, 1996,  and as of June 30, 1997, the Company had: (i) granted
Morgan  Fuller  250,000  Warrants  at an  exercise  price of $6.37 per share for
general  investment  advisory  services;  and (ii) granted  Morgan Fuller 39,255
Warrants at an exercise price of $4.25 and 45,205  Warrants at an exercise price
of $3.69 in connection with the sale of  Participations.  In connection with the
extension  of the  Participations,  the Company  granted  Morgan  Fuller  55,970
three-year Warrants with an exercise price of $2.68.

On February  15,  1997,  the Company  made a $100,000  principal  payment on the
Senior Secured Notes to Morgan Fuller and subsequently  made no further payments
through June 30, 1997. Pursuant to a Loan Modification  Agreement effective June
30, 1997,  accrued  penalties  and interest  were  forgiven,  and the Notes were
converted to a term loan payable in 60 installments  with accrued interest at 6%
commencing September 1, 1997. In connection with the Loan Modification Agreement
the Company  agreed to re-price the Morgan  Fuller  warrants to $1.50 each.  The
notes are collateralized by the Company's assets.

Private Placement of Common Stock. On December 31, 1996, the Company initiated a
private  placement of up to  $5,000,000  of Common Stock at $1.00 per share (the
"December 1996 Private Placement").  This Common Stock was offered and sold only
to  "accredited  investors"  as defined in  Regulation D  promulgated  under the
Securities Act and the offering of such Common Stock was a private  placement of
securities exempt from the registration requirements of the Securities Act under
Rule 506 promulgated under the Securities Act. Holders of this Common Stock have
been granted piggyback and Form S-3 registration  rights. The Company has agreed
to pay to brokers selling Common Stock in this offering a brokerage fee of eight
percent (8%) of the Common Stock sold. The offering was closed on April 30, 1997
at which time the Company had raised $265,000 in this private placement.

Private  Placement of EDnet Series A Preferred  Shares. On February 3, 1997, the
Company  commenced a private  placement  of up to  $1,750,000  of EDnet Series A
Preferred Shares at $1,000 per share to non-United States persons in an offering
exempt from the  registration  requirements  of the  Securities  Act pursuant to
Regulation S promulgated under the Securities Act. The terms of the EDnet Series
A  Preferred  Shares are  described  below.  The Series A  Preferred  Shares are
convertible  into Common Stock at any time until the third  anniversary of their
issuance  at the lesser of 70% of: (i) the  average of the  closing bid price of
the Common  Stock on the five  trading days  preceding  conversion  (the "Market
Price");  or (ii) the average of the closing bid prices for the Common  Stock on
the five trading days  preceding the closing (the "Closing  Price"),  but if the
Market  Price or the  Closing  Price is less  than  $1.43  per share it shall be
deemed to be $1.43 per share (the  "Floor").  The Series A Preferred  Shares are
also subject to mandatory  conversion on the third anniversary of their issuance
at the lesser of 70% of the Market  Price or the Closing  Price,  subject to the
Floor. Upon conversion,  the holders of Series A Preferred Shares will be paid a
6% cumulative dividend measured from the issuance date of the Series A Preferred
Shares through the conversion date, payable in Common Stock valued at the Market
Price. The Series A Preferred Shares have a liquidation preference of $1,000 per
share and all other  stock of the Company are  subordinate  to such  preference.
Holders of Series A Preferred Shares or the underlying  conversion  Common Stock
will be granted  piggyback and Form S-3  registration  rights for the underlying
Common  Stock.  As of April 30,  1997,  the Company had raised  $150,000 in this
private  placement,  at which time the offering was closed. The Company has also
paid NET  Financial  placement  fees  described in "Part III - Item 12.  Certain
Relationships  and Related  Transactions  -  Investment  Banking  and  Brokerage
Services - NET Financial International, Ltd.".

Onggara  Option.   As  discussed  further  in  "Part  III  -  Item  12.  Certain
Relationships and Related Transactions Investment Banking and Brokerage Services
- Century Financial  Partners,  Inc.," EDN entered into a Consulting  Agreement,
dated July 31, 1995,  with Century  Financial  Partners,  Inc.  ("Century").  As
payment for Century's  services,  such  consulting  agreement  provided that EDN
would grant to Mr. Irawan Onggara ("Mr. Onggara"), an investor in Century, and a
shareholder  of the Company  holding an  aggregate  of 100,000  shares of Common
Stock,  an option  to  purchase  1,000,000  shares  of the  common  stock of any
publicly  traded  entity into which EDN would merge,  at $1.25 per share,  which
option shares would be registered "immediately" by EDN with the SEC

                                       11

<PAGE>


on Form S-8.  Management  does not believe that such a  registration  is legally
possible due to the fact that Mr. Onggara is not an employee of the Company.

Subsequent to June 30, 1997, the Company provided  warrants for 1,000,000 shares
of the Company's  Common Stock  exercisable at $1.25 per share and expiring five
years  from the  date of  issuance  as part of a  negotiated  settlement  of Mr.
Onggara's  outstanding  loan to the Company of $340,000 (see Part III - Item 12.
Certain Relationships and Related Transactions - Short-Term Loans from Officers,
Directors and Shareholders; Guarantee of Lease).

IBS  Transaction.  As discussed  more fully in "Part I - Item 1.  Description of
Business - History  and  Organization  - IBS  Transaction,"  pursuant to the IBS
Agreement, the Company acquired all of the outstanding shares of common stock of
IBS, an unrelated  internet  services  provider,  through a merger of IBS into a
subsidiary  of the  Company.  As  consideration  for such  merger,  the  Company
delivered to the two  shareholders  of IBS,  Trevor  Stout and Randall  Schmitz,
among other things, 311,284 shares of Common Stock. In addition,  pursuant to an
earn-out plan, Messrs.  Stout and Schmitz were granted the Earnout,  pursuant to
which they were  entitled  to receive up to an  aggregate  of 500,000  shares of
Common Stock if IBS was to meet  certain  specified  performance  goals during a
period commencing on the effective date of the IBS Agreement and ending 120 days
after June 30, 1999. The Company also granted to three  employees of IBS options
to purchase an aggregate of 50,000  shares of Common Stock under the NSO Plan at
$1.25 per share,  which  options vest over a three year  period.  These sales of
securities were a private placement exempt from the registration requirements of
the  Securities  Act  under  Rule 506  promulgated  under  the  Securities  Act.
Subsequently, the Company entered into an Amendment to the Agreement and Plan of
Reorganization  dated as of January 31, 1997 and certain  collateral  documents,
pursuant to which,  among other things, the Company reduced the number of shares
of Common Stock subject to the Earnout from 500,000 to 125,000.

Liviakis Financial Communications,  Inc. As discussed more fully in " Part III -
Item 12. Certain Relationships and Related Transactions - Investment Banking and
Brokerage Services - Liviakis Financial  Communications,  Inc., the Company is a
party to a Consulting  Agreement,  dated as of January 12, 1996,  with  Liviakis
Financial Communications, Inc. A California corporation, ("Liviakis") for public
relations  consulting services.  As payment for its services,  Liviakis received
390,000  unregistered  shares  of Common  Stock  from the  Company  in a private
placement to an  "accredited  investor" as defined in  Regulation D  promulgated
under the  Securities  Act  exempt  from the  registration  requirements  of the
Securities Act under Rule 506  promulgated  under the Securities Act. At the end
of the term of the  consulting  agreement,  Liviakis may demand that the Company
use its best  efforts to  register  such  shares  with the SEC.  Pursuant  to an
additional  Consulting  Agreement  effective as of January 12, 1997, between the
Company and Liviakis,  Liviakis  agreed to provide public  relations  consulting
services to the  Company  for a term of one year  ending on January 2, 1998.  As
payment for its  services,  Liviakis  received  490,000  unregistered  shares of
Common Stock from the Company in a private placement to an "accredited investor"
as defined in Regulation D promulgated  under the Securities Act exempt from the
registration requirements of the Securities Act under Rule 506 promulgated under
the Securities Act. At the end of the term of the consulting agreement, Liviakis
shall have the same demand  registration rights to register such shares with the
SEC as given to investors in the December 1996 Private  Placement (as defined in
"Private Placement of Common Stock" above.

The  Company  has filed  all  required  filings  on Form D with  respect  to the
transactions discussed above.

Subsequent Events - Charles W. Clark Consulting Agreement. In conjunction with a
consulting  agreement  entered into on June 30, 1997 with Charles W. Clark ("Mr.
Clark") subsequent to June 30, 1997, the Company issued 400,000 shares of Common
Stock with an S-8 registration  under the Securities Act of 1934 as compensation
for   restructuring  the  Company's  Senior  Secured  Notes  and  certain  other
activities  more fully  described in Part III - Item 12 - Certain  Relationships
and Related Transactions - Consulting Agreement With Charles W. Clark.

Subsequent  Events  - T  Bar W  Ranch  Investments,  Inc.  Under  a  subsciption
agreement  signed July 10, 1997,  the Company  received a commitment to purchase
3,750,000 shares of Common Stock at a price of $0.20 per share.  Each share came
with a warrant to purchase an  additional  share of Common  Stock at an exercise
price of $1.00 and an expiration date five years from the date of issuance.

As of October 10, 1997, the total amount  invested by T Bar W Ranch  Investments
is $147,596.  The Company has experienced delays in obtaining the full amount of
the  funding  commitment  described  above,  and is  working  with T Bar W Ranch
Investments  to effect  full  funding.  The Company is

                                       12

<PAGE>


considering  alternative  courses of action  should  the full  amount of T Bar W
Ranch Investment's commitment not be forthcoming.

ITEM 6    MANAGEMENT'S DISCUSSION AND ANALYSIS

The following  discussion and analysis  should be read in  conjunction  with the
financial statements and notes thereto appearing elsewhere in this report.

Overview

EDnet, Inc. develops and markets  integrated  systems for the delivery,  storage
and management of  professional-quality  digital  communications for media-based
applications,  including  audio and  video  production  for the  North  American
entertainment  industry. The Company has established a private wide-area network
through  strategic  alliances with long distance  carriers,  regional  telephone
companies,  satellite  operators and independent fiber optic  telecommunications
providers,  which enables the exchange of high quality audio,  compressed  video
and multimedia data communications.  The Company provides engineering  services,
application-specific technical advice, audio, video and networking hardware and
software as part of its business.  Additionally,  the Company provides  Internet
web site development and hosting to businesses conducting Internet commerce.

On June 24, 1996, the Company acquired  Internet  Worldwide  Business  Solutions
(IBS), an Internet service  provider  specializing in the development and hosing
of web sites.  On  December  31,  1996,  the  Company  amended  the terms of its
previously  consummated  acquisition  of its  wholly-owned  subsidiary,  IBS, by
dividing IBS into two separate  corporations.  IBS's Internet  service  business
continues to operate as IBS. IBS licensed to Breakthrough  Software,  Inc. (BSI)
certain software under development by IBS related to development, operation, and
maintenance of world-wide web sites. The Company retained ownership of 2,000,000
shares of BSI's convertible preferred stock, which represents,  after conversion
into BSI non-voting common stock, 40% of BSI's outstanding common stock.


Liquidity And Capital Resources At June 30, 1997

At June 30, 1997, the Company's principal sources of liquidity included $197,734
of cash and investments and two unsecured $10,000 and $20,000 revolving lines of
credit, which expire in February 1999 and March, 1998.

The  decrease  in  cash  equivalents  of  $155,808  for  fiscal  year  1997  was
principally  due to $508,718 of purchase of property and equipment,  $254,928 of
repayment on notes payable and capital  leases,  and  $1,337,563 of cash used in
operating  activities,  which was not fully offset by gross cash  generated from
financing activities of $1,945,401.

The net cash used in operating  activities  for fiscal year 1997 of  $1,372,562,
was  primarily  due  to  research  and  development  expense  incurred  for  the
development  of the software  product  licensed to BSI at December 31, 1996 (see
Part I - Item 1. History and Organization - IBS Transaction).  Development costs
were also incurred for the Internet  audio products and FFD products (see Part I
- Item 1. Description of Current and Developing Products).

Net cash used in investing  activities  of $508,718 for fiscal year 1997 related
primarily to  expenditures  for purchase of  furniture,  fixture and  equipment.
Financing  activities  provided a net amount of $1,690,473 for fiscal year 1997,
primarily due to  $1,071,489  of proceeds from senior notes,  issuance of common
and  preferred  stock under Reg D and Reg S, less $235,534 of repayment of notes
payable and $19,394 of payment on capital leases.

At June 30, 1997,  the  Company's  accumulated  deficit was  $6,709,227  and its
working  capital  deficit  was  $1,965,496.  The  Company  has not been  able to
generate  any  operating  profit since  inception,  and is  attempting  to raise
additional  funds  as  described  in Part II - Item 7 -  Consolidated  Financial
Statements  - Notes  1 and 13.  However,  if the  Company  is  unable  to  raise
additional funds, it may not have the financial  resouces to continue as a going
concern and may be forced to seek protection from its creditors under Chapter 11
of the bankruptcy code. The financial  statements do not contain any adjustments
that may be needed if the Company is unable to continue as a going concern.

                                       13

<PAGE>

Results Of Operations:  June 30, 1997 Compared to June 30, 1996

The following  table sets forth for the periods  indicated the percentage of net
sales  represented  by  certain  line  items  from  the  Company's  consolidated
statements of income:


                                                  Year Ended June 30,
                                                -------------------- 
                                                1997           1996
                                                -----          ----- 
Revenues                                        100.0%         100.0%
Cost of sales                                    59.8%          83.9%
                                                -----          ----- 
    Gross profit                                 40.2%          16.1%
Operating expenses:
    Research and development                     26.7%           0.0%
    Sales and marketing                          24.9%          39.3%
    General and administrative                   96.8%          21.0%
                                                -----          ----- 
    Total operating  expenses                   148.4%          60.2%
                                                -----          ----- 
    Loss from operations                       -108.2%         -44.1%
                                                -----          ----- 
    Interest expenses                            -3.8%          -1.4%
                                                -----          ----- 
    Income before income taxes                 -112.0%         -45.5%
    Provision for income taxes                    0.1%           0.1%
                                                -----          ----- 
    Net Loss                                   -112.0%         -45.4%
                                                =====          ===== 

Net Sales for 1997  increased  50% to  $3,807,370  as compared to  $2,536,258 in
1996.  Increases in revenue are  attributed  to increases in network  access and
usage fees  associated  with a larger  installed  base and the  addition  of web
development  and hosting  revenues  associated  with the acquisition of IBS. The
equipment component of revenue declined in the period ended June 30, 1997 due to
unavailability of inventory for shipment due to vendor credit restrictions,  and
comparison to unusually  high equipment  sales in the  comparable  period of the
prior year which resulted from equipment promotions.

Gross Profit increased to $1,530,251 or 40.2% of sales, in the period ended June
30, 1997  compared to  $409,517,  or 16.1% of sales in the period ended June 30,
1996.  Increases  in gross  profit as a percentage  of sales are  attributed  to
growth in usage revenues,  which carry a higher profit margin,  and the addition
of web development and hosting revenues, which carry a high profit margin.

Operating expenses  (including  Research & Development,  Sales & Marketing,  and
General & Administrative) increased to $5,650,349 in 1997 compared to $1,527,998
in 1996. The Company  incurred  $1,017,000 of research and  development  expense
during fiscal year 1997. Operating expenses for 1997 also included $2,534,000 of
additional  non-recurring  and corporate costs which  represent  amortization of
goodwill,  non-recurring  legal and  accounting  costs  associated  with the BSI
transaction, the filing of a Form 10-SB registration statement with the SEC, the
Company's  initial  three-year  audit,  amortization  of the Company's  investor
relations consulting agreement, and costs associated with being a public company
that were not  incurred in the prior  fiscal  year.  With these items  excluded,
operating  expenses were  $2,099,349 for 1997,  representing a 37% increase over
$1,527,998  in the  comparable  period  of the  prior  year.  This  increase  is
consistent  with the necessary  addition of  infrastructure  associated with the
Company's increase in sales.

Other expenses  increased to $146,185 in the period ended June 30, 1997 compared
to $34,322 in the last fiscal year.  The  increase in other  expenses was due to
increases in interest  expense and  amortization of

                                       14

<PAGE>


debt issuance costs and note discounts  associated with the Senior Secured Notes
(see Notes 5 and 9 of the Consolidated Financial Statements).

For fiscal year 1997,  the Company  incurred a net loss of $4,269,549 or ($0.86)
per share based on a weighted average of 4,967,539 shares outstanding,  compared
with a net loss of $1,154,403,  or ($0.36) per share based on a weighted average
of 3,181,350 shares outstanding in the prior year.


ITEM 7    FINANCIAL STATEMENTS


The 1997  Consolidated  Financial  Statements  are  unaudited  except  for those
portions  attributable  to FY 1996 and June 30, 1996. This Annual Report on Form
10-KSB will be amended to include audited  financial  statements,  in accordance
with the Securities Exchange Act of 1934, as soon as is practical


The following financial statements are attached to this report and filed as part
thereof;

1)   Table of Contents

2)   Consolidated Balance Sheet, June 30, 1997;

3)   Consolidated  Statements of  Operations  for the years ended June 30, 1997,
     and 1996;

4)   Consolidated  Statements  of  Stockholders  Equity  (Deficit) for the years
     ended June 30, 1997, and 1996;

5)   Consolidated  Statements  of Cash Flows for the years ended June 30,  1997,
     and 1996; and

6)   Notes to Consolidated Financial Statements.


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


There have been no changes in or  disagreements  with the Company's  accountants
regarding accounting and financial disclosure.


                                    PART III


ITEM 9    DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT


The following sets forth the names,  ages and current positions with the Company
held by Directors,  Executive Officers and Significant Employees,  together with
the year such  positions  were assumed.  Tom  Kobayashi,  the Chairman and Chief
Executive Officer,  and David Gustafson,  President and Chief Operating Officer,
are brothers-in law. Other than as described in the preceding sentence, there is
no  immediate  family  relationship  between  or  among  any of  the  Directors,
Executive Officers or Significant  Employees and the Company is not aware of any
arrangement or understanding  between any Director or Executive  Officer and any
other person pursuant to which he was elected to his current position.

Tom Kobayashi,  age 68, has served as the Chairman of the Board of Directors and
a Director of the Company since 1992 and as Chief Executive Officer from 1992 to
present.  From  1986 to 1993,  he was Vice  President  and  General  Manager  of
Skywalker  Sound  division of  LucasArts.  During his tenure at  Skywalker,  the
sending of digital audio over fiber optic  telephone lines was developed and the
idea for an entertainment  digital network was formulated.  In 1992, with George
Lucas's  approval,  Mr.  Kobayashi  utilized the technology  first  developed at
Skywalker to found EDN. Previously,  he was with Glen Glenn Sound, a major sound
recording  studio  in  Hollywood.  He  began  with  Glen  Glenn  in 1964 as Vice
President  of Finance,  later served as Vice  President of Business  Affairs and
Executive Vice President and in 1983 was appointed President and Chief Operating
Officer.  Mr.  Kobayashi is a member of the American  Engineering  Society,  the
Society of Motion Picture and Television Engineers,  the Society of Professional
Audio Recording Studios (of which he has been a member of the Board of Governors
for over seven years),  the Academy of Motion  Picture Arts and Sciences and the
Academy of Television  Arts

                                       15

<PAGE>


and  Sciences.  Mr.  Kobayashi  earned  a  Bachelor  of  Science  degree  at the
University of Southern California.

David Gustafson, age 50, has served as the President and Chief Operating Officer
of the Company from March 1996 to present, and as Vice President,  Marketing and
Sales,  from July 1992 to March 1996. He has served as a Director of the Company
since 1992.  Previously,  he was President and Chief  Operating  Officer of SLT,
Inc., a private New York-based  apparel  manufacturer;  Corporate Vice President
and Director of Wacoal America,  Inc., a $35 million  division of the $1 billion
Wacoal Corp., a multi-national  consumer products company based in Kyoto, Japan,
where his responsibilities  included  Merchandising and Design, Sales, Marketing
and  Advertising;  Vice  President of Marketing and  Merchandising  for the Olga
Company;  Management  Information  Systems  Consultant with Deloitte,  Haskins &
Sells in Los Angeles;  and a computer Systems Engineer and Manager at EDS Corp.,
working in New York,  Miami and Dallas.  Mr.  Gustafson  received his Bachelor's
degree from Westmont  College in Santa Barbara,  California and further training
in Marketing and Executive Management from the graduate business schools at both
the  University  of  California,  Los  Angeles  and the  University  of Southern
California.

Thomas Scott, age 53, has served as the Vice President-Chief  Technology Officer
of the  Company  since  1992.  From  1985 to 1992,  he was  Chief  Engineer  for
Skywalker  Sound,  the post  production  division  of  LucasArts/Lucasfilm  Ltd.
Previously,  he was Chief Engineer of The Record Plant and eventually  worked in
film sound on the picture  Apocalypse  Now.  Mr.  Scott has been  involved  with
motion  pictures  since  then,  being  employed  at  American  Zoetrope,   Dolby
Laboratories  and LucasArts as Director of  Engineering.  During this period Mr.
Scott  received two Oscar  Academy  Awards for Best Sound on the films The Right
Stuff  and  Amadeus.  His last  LucasArts  project  was the  supervision  of the
EditDroid and SoundDroid--revolutionary computer-based picture and sound editing
equipment.  Previously,  he was Chief Engineer and Director of Remote Operations
at Wally Heider Recording,  one of the first independent  recording studios, and
an engineer with the Peace Corps in  Venezuela.  Mr. Scott is active in numerous
professional  organizations  and  standards  committees,  including the American
Engineering  Society,  Society of Motion Picture and Television  Engineers,  the
Society  of  Professional  Audio  Recording  Studios,  the  National  Academy of
Recording Arts and Sciences and the Academy of Motion Picture Arts and Sciences.
Mr. Scott earned his Bachelor of Science degree from the Massachusetts Institute
of Technology.

Alan K. Geddes, age 47, has served as Vice President Finance and Chief Financial
Officer of the Company  since July,  1996.  From 1986 to 1996,  he was the Chief
Financial  Officer of IMAR  Corporation  and  Oncogenetics,  Inc., both emerging
companies  in medical  technology,  in  addition to  founding  his own  company,
California Pacific Leasing,  Inc. Previously,  he served in corporate management
at Bio-Rad Laboratories,  as Corporate Controller at Fiberplastics,  Inc., was a
Financial  Analyst with Litton  Industries  and a Plant  Controller  with Abbott
Laboratories.  Mr.  Geddes has a Masters in Business  Administration  in Finance
from Utah State University.

Mark L. Wallin,  age 27, has served as the  President  of IBS since  February 1,
1997. Previously,  he served as the Technical Director of Web Services from June
1996 to February 1, 1997. From 1992 to 1996, he was a Project Manager, Technical
Team Leader and  Application  Integrator  for IBM. He  graduated  from  Stanford
University in 1993 with a degree in Computer Systems Engineering.

Robert J.  Wussler,  age 59, has served as a Director of the Company since 1995.
From 1994 to the present,  he has been the President and Chief Executive Officer
of Affiliate Enterprises,  Inc., the company formed by ABC Television affiliates
to  pursue   new   business   opportunities,   including   emerging   technology
applications. From 1990 to 1993, he was President and Chief Executive Officer of
COMSAT Video  Enterprises,  where he managed the  acquisition  of the NBA Denver
Nuggets.  Previously,  from 1980 to 1990, he was Senior Vice President of Turner
Broadcasting,  where he oversaw  the launch of CNN,  Headline  News and TNT,  in
addition to serving as President of SuperStation  TBS, and from 1974 to 1978, he
was the President of the CBS Television Network and CBS Sports.

Avi A. Fogel,  age 42, has served as a Director of the  Company  since 1995.  In
1996 Mr. Fogel founded  CommHome Systems  Corporation,  where he serves as Chief
Executive Officer.  From 1995 to December,  1996, he had been the Vice President
of Global Marketing for Digital  Equipment  Corporation in the Network Division.
From 1987 to 1995,  he served in various  roles at Lannet  Data  Communications,
first as Sales and  Marketing  Manager,  then as President  and Chief  Executive
Officer of

                                       16

<PAGE>


Lannet North America and finally as Executive Vice President - Global  Marketing
and Business  Development,  where he guided the development of international and
North American sales and marketing  organizations,  and established customer and
partnership  relationships  with Wellfleet  Communications,  AT&T,  Mitel,  Data
General,  Fore Systems,  Swiss Bank Corp.,  Sprint and General Motors. Mr. Fogel
initiated a $330  million  acquisition  of Lannet Data  Communications  by Madge
Networks.

Charles Clark,  age 42, has served as a Director of the Company since July 1997.
Currently he is senior  partner of Private Client Group,  formed in 1991,  which
works in concert with consulting groups assisting companies in corporate finance
and corporate  reorganizations.  From 1991 to 1995, he worked for Dean Witter as
an account executive. From 1980 to 1990, he worked as agency-based journalist in
Paris and New York, and as a free-lance producer of television documentaries and
news related pieces on social issues.

The directors  named above have been elected for one-year  terms. On January 29,
1997, the Board of Directors removed  Christopher  Desmond for failure to attend
to his duties as a director.  The following  directors  resigned as of the noted
dates;  Bert Berdis on March 18, 1997,  Trevor  Stout on June 12, 1997,  John C.
Kraft on June 19,  1997,  Phil Ramone on June 26, 1997 and Charles E.  Erickson,
(who served for 60 days) on June 7, 1997.

Employment contracts


<TABLE>
The Company maintains  employment contracts with key management and employees as
listed  below.  All  referenced  contracts  contain  identical   non-competition
provisions:

<CAPTION>
Name, Title                                 Date of Agreement          Expiration Date
-----------                                 -----------------          ---------------
<S>                                         <C>                        <C>
Tom Kobayashi, Chairman and CEO             September 1, 1995          December 31, 2000
David Gustafson, President & COO            September 1, 1995          December 31, 2000
Alan Geddes, Vice President & CFO           July 3, 1996               June 30, 1998
Mark Wallin, President COO (IBS)            February 28, 1997          January 31, 2000
Jeff Dobkins, VP Sales (IBS)                February 28, 1997          January 31, 2000
Thomas A. Scott, VP Engineering             July 7, 1997               December 31, 2000
</TABLE>

Each contract  provides that for the designated period following the date of the
employment agreement, the employee will not, directly or indirectly,  within any
county,  city or part  thereof and other  areas in the United  States of America
(collectively,  the "Locations"), so long as the Company continues to be engaged
in the same or similar  business or activity (the  "Business") in such Location:
(i) own,  manage,  operate,  control,  or be  connected  in any manner  with the
ownership, management, operation or control of any person or entity that engages
in the same or similar type of Business as the Business or engages in a business
competitive with the Business (a "Competitive Business"),  which includes but is
not limited to,  acting as a director,  officer,  agent,  employee,  consultant,
partner or  stockholder of a Competitive  Business;  (ii) engage in any activity
which is the same as,  similar to or in  competition  with the  Business;  (iii)
interfere  with,  disrupt  or  attempt to  disrupt  the  business  relationship,
contractual,  employment or  otherwise,  between the Company and any customer or
prospective  customer,  supplier,  lessee or employee of the Company,  including
without limitation the customers and suppliers of the Business prior to the date
of the employment agreement;  (iv) solicit employment for or of employees of the
Company or induce any employee to leave the employ of the  Company;  (v) lend or
allow his name or reputation to be used by or in connection with any Competitive
Business; or (vi) otherwise allow his skill,  knowledge or experience to be used
in or by any Competitive  Business.  Each employment agreement provides that the
employee may invest in up to 5% of the shares of any public corporation  without
violating  the  non-competition   provisions,   and  that  such  non-competition
provisions will survive the termination of the employment agreement,  other than
where (a) the employee exercises his right to terminate the employment agreement
upon a sale or transfer of substantially all of the assets of the Company,  or a
change in control of the Company,  (b) when the Company  exercises  its right to
terminate  the  employment  agreement  upon 30 days written  notice,  or (c) the
Company  breaches the employment  agreement and fails to cure such breach within
thirty  (30)  days of  receipt  of  written  notice  thereof.  A court  applying
California  law  may  decline  to  enforce  (or  may  partially  enforce)  these
non-competition provisions.


Compliance with section 16(a) of the exchange act

                                       17

<PAGE>


Under the Securities  Laws of the United States,  the Company's  Directors,  its
Executive (and certain other)  Officers,  and any persons  holding more than ten
percent  (10%) of the  Company's  Common  Stock are  required  to  report  their
ownership of the Company's Common Stock and any changes in that ownership to the
Securities  and Exchange  Commission  and the NASDAQ stock market.  Specific due
dates for these  reports  have been  established  and the Company is required to
disclose in this report any failure to file by these dates during the  preceding
fiscal year. All of these filing requirements were satisfied by its Officers and
Directors and ten percent (10%) holders, except the following: subsequent to the
end of the fiscal year,  Charles  Clark,  a Director,  and John  Wampler,  a 10%
holder by  definition of Section 16,  failed to file with the  Commission,  on a
timely basis, an Initial Statement of Beneficial Ownership of Securities on Form
3. Additionally,  Mr. Clark may have failed to file on a timely basis subsequent
Statements  of  Changes  in  Beneficial  Ownership  on Form 4. In  making  these
statements,  the Company has relied on the  representation  of its Directors and
Officers or copies of the reports that they have filed with the Commission.


ITEM 10   EXECUTIVE COMPENSATION

The following table sets forth  information  concerning all annual  compensation
paid to the Company's Chief Executive  Officer and each of the four highest paid
persons other than the Chief Executive Officer who were officers or directors of
the Company for the fiscal year ended June 30, 1997:

                            Capacities in
    Name of individual      which remunera-                    Aggregate
    or identity of group    tion was received                  remuneration

    Tom Kobayashi           Chairman and Chief                 $132,000(1)
                            Executive Officer and
                            Director

    David Gustafson         President and Chief                $139,000(2)
                            Operating Officer and
                            Director

    Jeffrey Dobkins         Vice President of Sales            $100,000(3)
                            (IBS)

    Alan Geddes             Vice President Finance and         $ 94,000(4)
                            Chief Financial Officer

    Tom Scott               Vice President and                 $ 91,000(5)
                            Chief Technical Officer

    Total of above                                             $556,000
-----------

(1)  Mr.  Kobayashi has an Employment  Agreement with the Company which provides
     for a five-year  term  expiring  December 31,  2000,  with a base salary of
     $10,416 per month from  September  1, 1995 to February  28,  1996,  with an
     increase to "market  rate" at March 1, 1996 and every year  thereafter.  FY
     1997 compensation includes $8,400 of deferred payroll.

(2)  Mr.  Gustafson has an Employment  Agreement with the Company which provides
     for a five-year  term  expiring  December 31,  2000,  with a base salary of
     $10,416 per month from  September  1, 1995 to February  28,  1996,  with an
     increase to "market  rate" at March 1, 1996 and every year  thereafter.  FY
     1997 compensation includes $8,400 of deferred payroll.

(3)  Mr. Dobkins has an Employment Agreement with the Company which provides for
     a three-year  term expiring  January 31, 2000, with a base salary of $5,833
     per month plus commissions.

(4)  Mr. Geddes has an Employment  Agreement with the Company which provides for
     a two-year term  expiring  June 30, 1998,  with a base salary of $8,333 per
     month beginning July 1, 1996,  increasing to $9,167 per month on January 1,
     1997, and $10,416 per month on July 1, 1997. FY 1997 compensation  includes
     $9,800 of deferred payroll.

                                       18

<PAGE>


(5)  Mr. Scott has an Employment Agreement with the Company which provides for a
     three-and-one-half-year term expiring December 31, 2000, with a base salary
     of $7,500 per  month.  FY 1997  compensation  includes  $7,100 of  deferred
     payroll.

Directors of the Company do not receive any  compensation  for their services as
directors other than  reimbursement  by the Company of reasonable  out-of-pocket
travel  expenses  incurred in connection  with  attending  director  meetings in
person.


Stock options

The Company  maintains a  nonstatutory  stock option plan entitled The 1995-1996
Nonstatutory Stock Option Plan (the "NSO Plan"). The NSO Plan is administered by
a committee appointed by the board of directors,  consisting of two members. The
NSO Plan reserves a total of 565,000 shares of Common Stock for option grants to
key  employees  and  consultants  (including  directors)  of the Company and its
subsidiaries and provides that the option price may be equal to or less than the
fair market value of the Common Stock on the grant date,  provided,  however, in
the event  that the  option  price is less than 85% of the then  current  market
value of the Common  Stock,  the Board of  Directors  must  approve  such option
grant. In addition,  the NSO Plan provides that no option period exceed five (5)
years after the grant date.  As of June 30,  1997,  options to purchase  459,550
shares of  Common  Stock had been  issued  under the NSO Plan.  The NSO Plan was
approved by the Board of  Directors  on  November  10,  1995.  In  addition,  in
connection  with the  merger  with AP,  non-qualified  options  to  purchase  an
aggregate of 263,420 shares of EDN common stock at an exercise price of $.10 per
share issued under EDN's 1993  Flexible  Stock  Incentive  Plan (the "EDN Option
Plan") were converted into options to purchase an aggregate of 230,479 shares of
Common  Stock at an exercise  price of $.11 per share,  which  options are fully
vested.  Other than as discussed herein,  the Company does not have any pension,
profit-sharing,  stock bonus, or other benefit plans.  In addition,  the Company
makes available certain  non-monetary  benefits to its executive officers with a
view to  acquiring  and  retaining  qualified  personnel  and  facilitating  job
performance.  The Company  considers such benefits to be ordinary and incidental
business costs and expenses.

The following  table sets forth certain  information  concerning the granting of
stock  options  during  the  last  completed  fiscal  year to each of the  named
executive officers:


                        Number of     % of Total
                        Securities    Options
                        Underlying    Granted to
                        Options       Employees       Exercise
Name                    Granted (#)   in Fiscal Year  Price      Expiration Date
----                    -----------   --------------  -----      ---------------
Tom Kobayashi            72,413         23.4%         $1.25       12/31/02
                                                              
David Gustafson          72,412         23.4%         $1.25       12/31/02
                                                              
Alan Geddes              50,000         16.1%         $1.25        6/30/02
                                                              
Mark Wallin              50,000         16.1%         $1.25        6/30/02
                                                              
Jeffrey Dobkins          40,000         12.9%         $1.25        6/30/02
                        -------         ----                

       Total            284,825
                        -------


There were no options exercised during the fiscal year.


ITEM 11   SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS

The following table sets forth  information,  as of October 10, 1997,  regarding
shares of Common  Stock (a) held of record and (b) that the named  owner has the
right to acquire within sixty days from options,  warrants,  rights,  conversion
privilege or similar  obligations  by: (i) officers or directors of the Company;
(ii) all officers and directors as a group;  and (iii) each shareholder who owns
more than 5% of any class of the Company's  securities,  including  those shares
subject  to  outstanding  options  and  warrants.   Unless

                                       19

<PAGE>


expressly  indicated  otherwise,  each  shareholder  exercises  sole  voting and
investment power with respect to the shares owned.

                                                  Amount Owned or
  Title         Name and Address                  Right to Acquire  Percent
  of Class      of Owner                          Within 60 Days    of Class (1)

  Common        Tom Kobayashi                     461,614(2)           5.87%
                One Union Street
                San Francisco, CA  94111

  Common        David Gustafson                   237,821(3)           3.03%
                One Union Street
                San Francisco, CA  94111

  Common        Tom Scott                         172,802(4)           2.20%
                One Union Street
                San Francisco, CA  94111

  Common        Alan Geddes                        33,300(5)           0.42%
                One Union Street
                San Francisco, CA  94111

  Common        Robert Wussler                     50,000(6)           0.64%
                One Union Street
                San Francisco, CA  94111

  Common        Avi Fogel                          50,000(6)           0.64%
                One Union Street
                San Francisco, CA  94111

  Common        Charles Clark                     400,000              5.09%
                One Union Street
                San Francisco, CA  94111

  Common        Liviakis Financial              1,405,537             17.89%
                Communications, Inc.
                2118 "P" Street, Suite C
                Sacramento, CA  95816

  Common        T Bar W Ranch Investments       1,476,000(7)          18.78%
                101 E Brand
                Mineola, TX 75773

  Common        All officers and
                directors as a group (3)        1,405,537             17.89%


  Series A      Corner Bank Ltd.                      150(8)         100.00%
  Preferred     via Canova 16
                P.O. Box 2835-6901
                Lugano, Switzerland
-----------

(1)  Based  upon  7,858,465  shares of Common  Stock and 150  shares of Series A
     Preferred Stock issued and outstanding on October 10, 1997.

(2)  Includes right to acquire 36,566 shares within 60 days from options.

(3)  Includes right to acquire 102,060 shares within 60 days from options.

(4)  Includes right to acquire 7,917 shares within 60 days from options.

(5)  Includes right to acquire 33,300 shares within 60 days from options.

(6)  Includes right to acquire 50,000 shares within 60 days from options.

(7)  Includes right to acquire 738,000 shares within 60 days from warrants.

                                       20

<PAGE>


(8)  Includes right to acquire 150,000 shares within 60 days upon conversion.


ITEM 12   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Investment Banking and Brokerage Services

All of the agreements  described  below were  negotiated  with  unrelated  third
parties on an arms-length basis.

Century Financial Partners, Inc. Pursuant to a Consulting Agreement,  dated July
31, 1995, between EDN and Century,  EDN hired Century to advise EDN with respect
to a merger of EDN with an entity whose  securities were publicly  traded.  Such
consulting  agreement granted Century the exclusive right to represent EDN, on a
best efforts basis, to prospective investors for financing and general corporate
advisory  services for a period of three years,  and a right of first refusal to
provide investment banking services for a period of three years. Century advised
the  Company  with  respect  to the  transaction  with AP (see "Part I - Item 1.
Description  of  Business - History  and  Organization  - Merger  with AP Office
Equipment").  Century has verbally  consented to the Company's  agreements  with
Morgan Fuller and others (described  below). As payment for Century's  services,
the Century  consulting  agreement provided that EDN would grant to Mr. Onggara,
an investor in Century, and a shareholder of the Company holding an aggregate of
100,000 shares of Common Stock,  an option to purchase  1,000,000  shares of the
common stock of any publicly  traded entity into which EDN would merge, at $1.25
per share, which option shares would be registered "immediately" by EDN with the
SEC on Form S-8. Management does not believe that such a registration is legally
possible  due to the fact that Mr.  Onggara is not an employee  of the  Company.
Subsequent to June 30, 1997, the Company provided  warrants for 1,000,000 shares
of the  Company's  common  stock at  $1.25  per  share  as part of a  negotiated
settlement  of Mr.  Onggara's  outstanding  loan to the Company of $340,000 (see
Short-Term Loans from Officers,  Directors and Shareholders;  Guarantee of Lease
below).  When Mr.  Onggara has received this stock issue and the  warrants,  and
assuming the exercise of those  warrants  (though the warrants are divisible and
transferable),  he may become a shareholder holding more than ten percent of the
outstanding Common Stock.

Liviakis  Financial  Communications,  Inc.  Pursuant to a Consulting  Agreement,
dated as of January 12, 1996, between the Company and Liviakis,  Liviakis agreed
to provide public relations consulting services to the Company for a term of one
year ending on January 11, 1997. As payment for its services,  Liviakis received
390,000  unregistered shares of Common Stock from the Company. At the end of the
term of the consulting  agreement,  Liviakis may demand that the Company use its
best efforts to register such shares with the Securities and Exchange Commission
(the "SEC").  Pursuant to an  additional  Consulting  Agreement  effective as of
January 12, 1997,  between the Company and Liviakis,  Liviakis agreed to provide
consulting  services  to the Company for a term of one year ending on January 2,
1998. As payment for its services, Liviakis received 490,000 unregistered shares
of  Common  Stock  from the  Company.  At the end of the term of the  consulting
agreement,  Liviakis shall have the same demand  registration rights to register
such shares with the SEC as given to  investors  in the  December  1996  Private
Placement  as defined in Part II - Item 5.  Market For The  Registrant's  Common
Stock And Related Stockholder Matters - Recent Sales of Unregistered Securities.
Private Placement of Common Stock.

Subsequent  to June 30,  1997  Liviakis  resigned  as  EDnet's  investor  public
relations consultant.

Morgan Fuller Capital Group L.L.C.  Pursuant to engagement letters dated May 20,
June 25,  June 28, June 28,  November  19 and  November  21,  1996,  the Company
retained  Morgan  Fuller to provide  investment  banking  services to, and raise
capital for, the Company.  As discussed  more fully in "Part II - Item 5. Market
For The Registrant's Common Stock And Related Stockholder Matters - Recent Sales
of  Unregistered  Securities",  as of October 10,  1997,  the Company  had:  (i)
granted Morgan Fuller  250,000  Warrants at an exercise price of $6.37 per share
for general  investment  advisory  services;  (ii)  delivered the Senior Secured
Notes (as defined) payable to Morgan Fuller in the aggregate principal amount of
$1,000,000;  (iii) paid  Morgan  Fuller a loan fee of five  percent  (5%) of the
amount of the Senior  Secured  Notes;  and (iv)  granted  Morgan  Fuller  39,255

                                       21

<PAGE>


warrants to purchase Common Stock ("Warrants") at an exercise price of $4.25 and
45,205  Warrants at an exercise  price of $3.69 in  connection  with the sale of
Participations  (as defined).  The June 28, 1996 engagement letter provides that
in the event that the Company  fails to proceed with a  subsequent  Regulation S
financing,  the  Company  is  obligated  to pay to  Morgan  Fuller a cash fee of
$140,000 and $200,000 in aggregate amount of Warrants at an exercise price equal
to the lesser of: (i) $3.00;  or (ii) sixty percent (60%) of the average closing
bid  price of the  Common  Stock  during  a  consecutive  ten  (10)  day  period
immediately preceding the issuance date of the Warrants. Because the Company has
engaged  another broker in connection  with such an offering (see "NET Financial
International,  Ltd." below),  the Company has had oral  discussions with Morgan
Fuller  regarding  Morgan Fuller's waiver of this provision.  In connection with
the extension of the Participations,  the Company agreed to pay to Morgan Fuller
a cash fee of one and  one-half  percent  (1.5%)  of the  amount  of the  Senior
Secured  Notes and granted  Morgan  Fuller  55,970  three-year  Warrants with an
exercise  price of  $2.68.  In  connection  with a Loan  Modification  Agreement
effective June 30, 1997 (see "Part II Item 5 Market for the Registrant's  Common
Stock and Related Stockholder  Matters Recent Sale of Unregistered  Securities -
Private  Placement of Note  Participations")  the Company  amended its agreement
with Morgan Fuller and agreed to re-price the Morgan Fuller warrants to $1.50.

LBC Capital  Resources,  Inc. Pursuant to an engagement letter dated October 17,
1996 (the "LBC Letter Agreement") between the Company and LBC Capital Resources,
Inc. ("LBC"),  the Company retained LBC to solicit a broad range of transactions
on behalf of the Company,  including  equity and debt  financings and to provide
advice with respect to potential merger and acquisition transactions.  LBC would
be paid fees only upon the successful closing of any such transaction. Such fees
would be  comprised  of (i) a cash fee in the amount of six percent  (6%) of the
gross amount of such  transaction  (to be paid as such  proceeds are received by
the Company)  and (ii)  warrants as  described  in the next  sentence.  Upon the
completion of one or more transactions,  for each $1,000,000 of such transaction
amount, after transactions aggregating at least $1,000,000 have been closed, LBC
would be entitled to purchase  from the Company for $2,500 a seven year  warrant
to purchase one hundred twenty thousand  (120,000) shares of Common Stock, at an
exercise price per share equal to one hundred  twenty-five percent (125%) of the
average  closing price for the five (5) trading days  preceding the execution of
the LBC Letter  Agreement.  The term of the LBC Letter  Agreement  is sixty (60)
days and thereafter, will remain in effect until terminated by either party upon
ten (10) days written notice.  Upon execution of the LBC Letter  Agreement,  the
Company also paid to LBC a $2,500 non-accountable expense allowance.

Subsequent to June 30, 1997, the Company terminated this agreement by giving LBC
ten days written notice.

NET Financial International,  Ltd. On January 31, 1997, the Company entered into
a Consulting Agreement with NET Financial International, Ltd. ("NET Financial"),
pursuant to which NET Financial agreed to act as placement agent for the sale of
up to  $5,000,000  of EDnet  Series A  Convertible  Preferred  Stock (the "EDnet
Series  A  Preferred  Shares")  to  non-United  States  persons  in one or  more
offerings  exempt  from the  registration  requirements  of the  Securities  Act
pursuant to Regulation S  promulgated  under the  Securities  Act in two phases,
with the first phase  commenced on February 3, 1997.  For a description  of this
offering,  see "Part II - Item 5.  Recent  Sales of  Unregistered  Securities  -
Private  Placement of EDnet Series A Preferred Shares" below. The Company agreed
to pay NET  Financial  fees  equal to 10% of the  total  capital  raised  in the
financing  as  well  as  issuing  to it a  warrant  (with  registration  rights)
exercisable for two years allowing the purchase of shares of Common Stock with a
value  on the  date of the  closing  equal to 6% of the  capital  raised  in the
financing,  at an  exercise  price  equal to the closing bid price of the Common
Stock on the date of the closing of the financing.  The NET Financial consulting
agreement  has a term of three months and  thereafter  is  terminable  by either
party upon ten days prior  written  notice.  In addition,  in the event that the
Company  seeks  additional  financing  during the twelve  month period after the
execution of the NET Financial consulting  agreement,  the Company must give NET
Financial the right of first refusal to obtain such additional  financing,  upon
the compensation terms described above.

Subsequent to June 30, 1997, the Company terminated this agreement by giving NET
Financial ten days written notice.

Consulting  Agreement  with  Charles W.  Clark.  On June 30,  1997,  the Company
entered into a consulting agreement with Mr. Clark,  pursuant to which Mr. Clark
agreed to serve the Company in advising and assisting in the structuring of debt
and liabilities, joint venture, acquisitions or merger

                                       22

<PAGE>


partners,  business  development and developing long term financial  plans.  The
Company has agreed to pay Mr. Clark for  re-structuring  and  re-organizing  the
Company's  senior notes and debts on the  Company's  balance  sheet four hundred
thousand (400,000) shares of Common Stock. These shares were issued to Mr. Clark
and  registered  with the  Securities  and  Exchange  Commission  under Form S-8
registration  on July 25, 1997.  The term of the Agreement is for five (5) years
and can be  terminated  by either  party with a thirty (30) day  written  notice
under certain conditions.


Short-Term Loans from Officers, Directors and Shareholders; Guaranty of Lease

Several of the officers and  directors of the Company have made short term loans
to the Company  pursuant to promissory  notes each providing for maturity ninety
days after the date thereof and simple interest of 6% on unpaid principal.  Such
promissory  notes are overdue.  Mr. Kobayashi made loans in the aggregate amount
of  $36,000,  as  evidenced  by  promissory  notes  dated from June 11,  1993 to
February  10, 1994.  As of June 30,  1997,  1997,  unpaid  principal  (excluding
interest)  of $24,000 was due on Mr.  Kobayashi's  notes.  Mr.  Scott,  the Vice
President  and  Chief  Technical  Officer  of the  Company,  made  loans  in the
aggregate amount of $43,050,  as evidenced by promissory notes dated from August
6, 1993 to June 12,  1995.  As of June 30,  1997,  unpaid  principal  (excluding
interest) of $16,550 was due on Mr. Scott's notes. Each of these individuals has
agreed not to declare a default under these notes for an  indefinite  period and
to accept repayment by the Company at a future date.

Mr.  Onggara  has made three  loans to the  Company in the  aggregate  amount of
$425,000, pursuant to: (a) a promissory note in the principal amount of $250,000
dated  February 8, 1996 with a maturity date of August 8, 1996; (b) a promissory
note in the  principal  amount of $100,000  dated April 18, 1996 with a maturity
date of October 18, 1996; and (c) a promissory  note in the principal  amount of
$75,000 dated May 20, 1996 with a maturity  date of November 20, 1996.  All such
promissory  notes provide for interest of 7% on unpaid principal and are secured
by a subordinate  security interest in the accounts  receivable,  chattel paper,
accounts and certain  other assets of the Company.  In August 1996,  the Company
made aggregate  principal payments of $120,000 to Mr. Onggara on the first note.
Mr. Onggara has verbally agreed to extend the maturity date of such notes for an
indefinite  period and to accept  repayment by the Company at a future date, and
readvanced  $35,000 to the Company  under the first note.  As of June 30,  1997,
unpaid  principal  (excluding  interest)  of $340,000  was due on Mr.  Onggara's
loans.

Subsequent to June 30, 1997, an agreement was reached with Mr.  Onggara  whereby
the $340,000  loan plus accrued  interest of $35,000 was  converted to shares of
the Company's  Common Stock at $.375 per share,  resulting in 1,000,000  shares.
EDnet  addressed  an  unresolved  commitment  of options  by  issuing  1,000,000
warrants priced at $1.25 each (see Part II - Item 5. Market for the Registrant's
Common  Stock and  Related  Stockholder  Matters - Recent  Sale of  Unregistered
Securities - Onggara Option).  The warrants are convertible over 3 years and are
transferable and divisible.

Mr. Kobayashi executed a Guaranty of Lease in favor of Lantana pursuant to which
Mr. Kobayashi  personally  guaranteed EDN's  obligations under its lease for the
Company's Los Angeles office premises.  Mr.  Kobayashi's  guaranty is limited to
$48,225 for so long as he remains the chief  executive  officer,  and  maintains
voting control,  of the Company.  Because Mr.  Kobayashi does not currently have
voting  control of the  Company,  his  guarantee  is  therefore  unlimited.  Mr.
Kobayashi  has had  verbal  discussions  with  Lantana  regarding  amending  the
Guaranty of Lease to eliminate the voting control condition.


ITEM 13   EXHIBITS AND REPORTS ON FORM 8-K

Exhibit No.       Type of Exhibit
-----------       ---------------
(2)      (a) Articles of Incorporation, as amended. PREVIOUSLY FILED.

         (b) Bylaws, as amended. PREVIOUSLY FILED.

         (c)  Certificate of Designation,  filed with the Colorado  Secretary of
         State on February 2, 1997. PREVIOUSLY FILED.

                                       23

<PAGE>


(3)      (a)      Security  Agreement  dated  as of  July 5,  1996,  made by the
                  Company,  in favor  of  Morgan  Fuller  Capital  Group  L.L.C.
                  PREVIOUSLY FILED.

         (b)      Amendment  No. 1 to Security  Agreement  dated as of August 1,
                  1996. PREVIOUSLY FILED.

         (c)      Form of  Senior  Secured  Promissory  Note in favor of  Morgan
                  Fuller Capital Group L.L.C.,  executed on the following  dates
                  for the following amounts:

                  1. dated July 5, 1996,  in the amount of  $500,000; 
                  2. dated July 22, 1996,  in the amount of  $200,000;  and 
                  3. dated July 22, 1996, in the amount of $300,000.

         PREVIOUSLY FILED.

         (d)      Amendment No. 1 to Senior Secured  Promissory Notes,  dated as
                  of  November  15,  1996,  executed  by the  Company and Fuller
                  Capital Group L.L.C. PREVIOUSLY FILED.

         (e)      Promissory  Note  dated  February  8,  1996 in favor of Irawan
                  Onggara,  in the  principal  amount  of  $250,000.  PREVIOUSLY
                  FILED.

         (f)      Promissory  Note  dated  April  18,  1996 in favor  of  Irawan
                  Onggara,  in the  principal  amount  of  $100,000.  PREVIOUSLY
                  FILED.

         (g)      Promissory Note dated May 20, 1996 in favor of Irawan Onggara,
                  in the principal amount of $75,000. PREVIOUSLY FILED.

         (h)      Form of  Promissory  Note dated June 24, 1996 in the principal
                  amount of  $125,000,  payable to each of Randall  Schmitz  and
                  Trevor Stout. PREVIOUSLY FILED.

         (i)      Breakthrough Software,  Inc. Convertible Promissory Note dated
                  January  31,  1997  in the  principal  amount  not  to  exceed
                  $250,000 payable to the Company. PREVIOUSLY FILED.

         6        Material Contracts

         (a)      Agreement and Plan of Reorganization by and among EDnet, Inc.,
                  EDN Sub, Inc. and Internet Worldwide Business Solutions, dated
                  as of June 24, 1996. PREVIOUSLY FILED.

         (b)      Stock Purchase Agreement, dated September 22, 1995, between AP
                  Office Equipment,  Inc.,  Entertainment  Digital Network, Inc.
                  and certain  shareholders of  Entertainment  Digital  Network,
                  Inc. PREVIOUSLY FILED.

         (c)      Stock  Purchase  Agreement,  dated  October 18, 1995,  between
                  EDnet, Inc. and certain shareholders of Entertainment  Digital
                  Network, Inc. PREVIOUSLY FILED.

                                       24

<PAGE>


         (d)      Employment  Agreement  between the  Company and Tom  Kobayashi
                  dated September 1, 1995. PREVIOUSLY FILED.

         (e)      Employment  Agreement  between the Company and David Gustafson
                  dated September 1, 1995. PREVIOUSLY FILED.

         (f)      EDnet, Inc. Incentive Stock Option Plan. PREVIOUSLY FILED.

         (g)      EDnet,  Inc.   1995-1996   Nonstatutory   Stock  Option  Plan.
                  PREVIOUSLY FILED.

         (h)      Entertainment  Digital  Network 1993 Flexible Stock  Incentive
                  Plan. PREVIOUSLY FILED.

         (i)      Form  of  Entertainment  Digital  Network  Nonqualified  Stock
                  Option Agreement. PREVIOUSLY FILED.

         (j)      Form of Entertainment  Digital Network Stock Purchase Warrant.
                  PREVIOUSLY FILED.

         (k)      Form of EDnet, Inc. Warrant. PREVIOUSLY FILED.

         (l)      Consulting  Agreement,  dated as of January 12, 1996,  between
                  the  Company  and  Liviakis  Financial  Communications,   Inc.
                  PREVIOUSLY FILED.

         (m)      Consulting Agreement, effective as of January 12, 1997 between
                  the  Company  and  Liviakis  Financial  Communications,   Inc.
                  PREVIOUSLY FILED.

         (n)      Financial  Advisory  Agreement,  dated  as of July  31,  1995,
                  between EDN and Century Financial  Partners,  Inc.  PREVIOUSLY
                  FILED.

         (o)      Engagement  letter  dated May 20, 1996 between the Company and
                  Morgan Fuller Capital Group L.L.C. PREVIOUSLY FILED.

         (p)      Engagement  letter dated June 25, 1996 between the Company and
                  Morgan Fuller Capital Group L.L.C. PREVIOUSLY FILED.

         (q)      Engagement  letter dated June 28, 1996 between the Company and
                  Morgan Fuller Capital Group L.L.C. PREVIOUSLY FILED.

         (r)      Engagement  letter dated June 28, 1996 between the Company and
                  Morgan Fuller Capital Group L.L.C. PREVIOUSLY FILED.

                                       25

<PAGE>


         (s)      Engagement  letter dated  October 17, 1996 between the Company
                  and LBC Capital Resources, Inc. PREVIOUSLY FILED.

         (t)      Form of Subscription,  Representation and Securities  Transfer
                  Restriction  Agreement  between the Company and  investors  in
                  Units. PREVIOUSLY FILED.

         (u)      Engagement  letter dated November 19, 1996 between the Company
                  and Morgan Fuller Capital Group L.L.C. PREVIOUSLY FILED.

         (v)      Engagement  letter dated November 21, 1996 between the Company
                  and Morgan Fuller Capital Group L.L.C. PREVIOUSLY FILED.

         (w)      Consulting  Agreement  dated  January  31,  1997  between  the
                  Company  and  Net  Financial  International,  Ltd.  PREVIOUSLY
                  FILED.

         (x)      Form of Subscription,  Representation and Securities  Transfer
                  Restriction  Agreement  between  Morgan  Fuller  Capital Group
                  L.L.C. and investors in Participations. PREVIOUSLY FILED.

         (y)      Form of Subscription,  Representation and Securities  Transfer
                  Restriction  Agreement  between the Company and  investors  in
                  Common Stock. PREVIOUSLY FILED.

         (z)      Form of Subscription,  Representation and Securities  Transfer
                  Restriction  Agreement  between the Company and  investors  in
                  EDnet Series A Preferred Shares. PREVIOUSLY FILED.

         (aa)     Amendment No. 1 to the Agreement and Plan of Reorganization by
                  and among EDnet,  Inc.,  EDN Sub, Inc. and Internet  Worldwide
                  Business Solutions, dated as of September 13, 1996. PREVIOUSLY
                  FILED.

         (ab)     Amendment No. 2 to the Agreement and Plan of Reorganization by
                  and among EDnet,  Inc.,  EDN Sub, Inc. and Internet  Worldwide
                  Business Solutions,  dated as of January 31, 1997.  PREVIOUSLY
                  FILED.

         (ac)     Breakthrough  Software,  Inc. Stock Purchase  Agreement by and
                  among Breakthrough Software, Inc. and EDnet, Inc., dated as of
                  January 31, 1997. PREVIOUSLY FILED.

         (ad)     Technology  License Agreement by and among Internet  Worldwide
                  Business Solutions and Breakthrough  Software,  Inc., dated as
                  of January 31, 1997. PREVIOUSLY FILED.

         (ae)     Form of Consulting Agreement by and among EDnet, Inc. and each
                  of Randall  Schmitz and Trevor Stout,  dated as of January 31,
                  1997. PREVIOUSLY FILED.

(27)     Financial Data Schedule. FILED HEREWITH.

                                       26

<PAGE>


                                   SIGNATURES

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

                                                            EDnet, INC.

                                                            (Registrant)



Date:    October 15, 1997                            By: /s/Tom Kobayashi
                                                         -----------------------
                                                         Tom Kobayashi,
                                                         Chairman
                                                         Chief Executive Officer


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



Date:    October 15, 1997                            By: /s/Tom Kobayashi
                                                         -----------------------
                                                         Tom Kobayashi,
                                                         Chairman
                                                         Chief Executive Officer


Date:    October 15, 1997                            By: /s/David Gustafson
                                                         -----------------------
                                                         David Gustafson,
                                                         President
                                                         Chief Operating Officer

                                       27

<PAGE>


                                  EDNET, INC.

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



                       CONSOLIDATED FINANCIAL STATEMENTS

                        as of June 30, 1997 and for the

                       years ended June 30, 1996 and 1997




<PAGE>


                                  EDNET, INC.

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



                                    CONTENTS


                                                                           Page
                                                                           ----
Consolidated Balance Sheet                                                  3


Consolidated Statements of Operations                                       4


Consolidated Statements of Stockholders' Equity                             5


Consolidated Statements of Cash Flows                                       6


Notes to Consolidated Financial Statements                                  7-19

                                       2

<PAGE>


<TABLE>
                                                            EDnet, Inc.
                                                    CONSOLIDATED BALANCE SHEETS
                                               As of June 30, 1997 and June 30, 1996


<CAPTION>
                                                               ASSETS
                                                                                                  6/30/97                   6/30/96
                                                                                               ( Unaudited )
                                                                                                -----------------------------------
<S>                                                                                             <C>                     <C>        
CURRENT ASSETS
        Cash                                                                                    $    31,067             $   186,875
        Accounts Receivable, net                                                                    445,121                 478,076
        Inventories                                                                                 202,913                 147,409
        Other Current Assets                                                                        193,949                  49,298
                                                                                                -----------------------------------
                TOTAL CURRENT ASSETS                                                                873,050                 861,658

        PROPERTY AND EQUIPMENT, NET                                                                 556,533                 488,943
        GOODWILL, NET                                                                                    (0)              1,088,568
        OTHER ASSETS                                                                                  5,478                  79,342
                                                                                                -----------------------------------
        TOTAL ASSETS                                                                            $ 1,435,061             $ 2,518,511
                                                                                                ===================================

                                           LIABILTIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES
        Accounts payable                                                                        $ 1,648,167             $   659,709
        Accrued expenses                                                                            466,455                 390,002
        Deferred revenue                                                                             69,193                  69,623
        Line of credit                                                                               34,628                  16,638
        Notes payable                                                                               592,286                 990,991
        Current portion of capital lease obligations                                                 27,817                  24,493
                                                                                                -----------------------------------
                TOTAL CURRENT LIABILITIES                                                         2,838,546               2,151,456

LONG TERM LIABILITIES                                                                               770,904                  43,622
                                                                                                -----------------------------------
        TOTAL LIABILITIES                                                                         3,609,450               2,195,078


STOCKHOLDERS' EQUITY (DEFICIT)
        Common stock; par value $.001 per share
        Authorized 50,000,000 shares, 5,720,465 and
        4,468,322 shares issued and outstanding as of
        June 30, 1997 and June 30,1996 respectively                                                   5,720                   4,468

        Preferred Stock; par value $1,000 per share
        Authorized 1,750 shares, 150 shares issued and
        outstanding as of June 30, 1997                                                             117,541                    --   

        Common stock warrants                                                                          --   
        Capital paid in excess of par value of common stock                                       4,411,577               2,758,644

        Accumulated Deficit                                                                      (6,709,227)             (2,439,679)
                                                                                                -----------------------------------
        TOTAL STOCKHOLDERS' EQUITY (DEFICIT)                                                     (2,174,389)                323,433

        TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                                    $ 1,435,061             $ 2,518,511
                                                                                                ===================================

<FN>
                      The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>

                                                                  3

<PAGE>


                                  EDnet, Inc.
                       CONSOLIDATED STATEMENTS OF INCOME
                For the Twelve Months ended June 30, 1997 & 1996

                                                        1997            1996
                                                     --------------------------
Revenues:
        Equipment sales and installation             $ 1,010,179    $ 1,713,622
        Site development and services                    869,946           --   
        Access, Usage, and Hosting fees                1,799,346        637,262
        Other fees                                       127,899        185,374
                                                     --------------------------
                                                       3,807,370      2,536,258

Cost of sales                                          2,277,119      2,126,741
                                                     --------------------------

        Gross Profit                                   1,530,251        409,517


Research & Development                                 1,017,233           --   
Sales and Marketing expenses                             948,548        995,917
General and Administrative expenses                    3,684,568        532,081
                                                     --------------------------
                                                       5,650,349      1,527,998

        Loss from operations                          (4,120,098)    (1,118,481)
                                                     --------------------------

Other income (expense):
        Interest income (expense)                       (145,332)       (34,322)
        Gain (loss) on sales of fixed assets                (853)          --   
                                                     --------------------------

        Total other income (expense), net               (146,185)       (34,322)
                                                     --------------------------

        Loss before provision for income taxes        (4,266,283)    (1,152,803)

Income taxes                                               3,266          1,600
                                                     --------------------------

        Net Loss                                     $(4,269,549)   $(1,154,403)
                                                     ==========================

Net Loss Per Common Share                            $     (0.86)   $     (0.36)
                                                     ==========================

Weighted Average Number
        of Shares Outstanding                          4,967,539      3,181,350
                                                     ==========================

   The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                       4

<PAGE>


<TABLE>
                                                EDnet, Inc.
                              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                for the years ended June 30, 1997 and 1996

<CAPTION>
                                                         Common Stock                Preferred Stock
                                                  -----------    -----------    -----------   -----------
                                                    Shares         Amount         Shares         Amount
                                                  -----------    -----------    -----------   -----------
<S>                                                 <C>          <C>                    <C>   <C>
Beginning balance, July 1, 1996                     4,468,322    $     4,468

Share issued under Reg D Offering                     562,143            562

Shares issued under IBS earnout agreement             125,000            125

Shares issued pursuant to consulting agreement        500,000            500

Shares issued under conversion of Viscorp Notes        65,000             65

Shares issued under Reg S Offering                                                      150       117,54

Net loss
                                                  -------------------------------------------------------

Ending balance, June 30, 1997                       5,720,465    $     5,720            150   $   117,541
                                                  =======================================================
</TABLE>


<TABLE>
<CAPTION>
                                                Additional
                                                  Paid-In    Accumulated
                                                  Capital      Deficit         Total
                                                -----------   -----------    -----------  
<S>                                             <C>           <C>            <C>        
Beginning balance, July 1, 1996                 $ 2,758,644   $(2,439,679)   $   323,433
                                                                                          
Share issued under Reg D Offering                   755,812                  $   756,374
                                                                                          
Shares issued under IBS earnout agreement           195,188                      195,313
                                                                                          
Shares issued pursuant to consulting agreement      652,000                      652,500
                                                                                          
Shares issued under conversion of Viscorp Notes      49,935                       50,000
                                                                                          
Shares issued under Reg S Offering                                               117,541

Net loss                                                       (4,269,549)    (4,269,549)
                                                -----------------------------------------

Ending balance, June 30, 1997                   $ 4,411,578   $(6,709,228)   $(2,174,389)
                                                =========================================

<FN>
          The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>

                                                    5

<PAGE>


<TABLE>
                                                            EDnet, Inc.
                                               CONSOLIDATED STATEMENTS OF CASH FLOWS
                                         for the Twelve Months ended June 30, 1997 and 1996

<CAPTION>
                                                                                                   6/30/97               6/30/96
                                                                                                ( Unaudited )
                                                                                                 ----------------------------------
<S>                                                                                              <C>                    <C>         
Cash flows from operating activities:

        Net loss                                                                                 $(4,269,549)           $(1,154,403)

        Adjustments to reconcile net loss to
        cash used in operating activities:

                Depreciation and amortization                                                      1,308,342                136,823
                Increase (decrease) in Provision
                        for doubtful accounts                                                         (2,061)                 6,142
                Noncash compensation expenses                                                        485,833                465,377
                Decrease (increase) in other current assets                                           95,880                (72,844)
                Decrease (increase) in accounts receivable                                            35,016               (163,237)
                Increase in inventory                                                                (55,504)              (147,409)
                Increase in accounts payable
                        and accrued expenses                                                       1,064,910                 77,793
                Decrease in deferred revenue                                                            (430)              (161,078)
                                                                                                 ----------------------------------

                        Net cash used in operating activities                                     (1,337,563)            (1,012,836)
                                                                                                 ----------------------------------

Cash flows from investing activities:

        Purchase of property and Equipment                                                          (508,718)               (81,638)
        Cash from the acquisition of IBS, net of cash paid                                              --                  113,814
                                                                                                 ----------------------------------

                        Net cash used in investing activities                                       (508,718)                32,176
                                                                                                 ----------------------------------

Cash flows from financing activities:

        Repayment on borrowings                                                                     (235,534)              (277,825)
        Proceeds from borrowings                                                                   1,071,489                400,001
        Repayments on capital leases                                                                 (19,394)                (8,577)
        Issuance of shares under Reg D                                                               756,374                997,500
        Issuance of shares under Reg S                                                               117,538                   --   
                                                                                                 ----------------------------------

                        Net cash provided by financing activities                                  1,690,473              1,111,099
                                                                                                 ----------------------------------

                                Net increase (decrease) in cash                                     (155,808)               130,439
                                                                                                 ==================================


Cash at beginning of period                                                                          186,875                 56,436
                                                                                                 ----------------------------------

Cash at end of period                                                                            $    31,067            $   186,875
                                                                                                 ==================================

Supplemental disclosure of cash flow information:

        Cash paid during the year for interest                                                        73,432                 24,050

        Cash paid during the year for taxes                                                            3,266                    800

<FN>
                       The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>

                                                                 6

<PAGE>


                                  EDNET, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  -----------


1.   The Company:

     Summary of Business:

     EDnet,  Inc. (the Company),  a Colorado  corporation,  and its subsidiaries
     develop  and market  integrated  systems  for the  delivery,  storage,  and
     management of  professional-quality  digital communications for media-based
     applications,  including audio and video  production for the North American
     entertainment industry. The Company, through strategic alliances with long-
     distance carriers,  regional telephone companies,  satellite operators, and
     independent  fiber optic  telecommunications  providers,  has established a
     worldwide  network that enables the exchange of high quality audio,  video,
     multimedia,  and data  communications.  The  Company  provides  engineering
     services and  application-specific  technical  advice,  audio,  video,  and
     networking  hardware  and software as part of its  business.  Additionally,
     through one of its wholly owned subsidiaries, the Company provides Internet
     web site development and hosting service to businesses  conducting Internet
     commerce.

     Organization:

     The Company's principal  subsidiary,  Entertainment  Digital Network (EDN),
     was originally incorporated in the state of Nevada in June 1992. In January
     1993, EDN was  reincorporated in the state of California.  During September
     and October of 1995, EDN's  stockholders  exchanged 100% of their shares of
     common stock for  1,519,538  shares of common stock of AP Office  Equipment
     (APO), a public  company with no operations  and no  significant  assets or
     liabilities.  At the time of the exchange, APO, a Colorado corporation that
     was   incorporated  in  May  1994,  had  747,500  shares  of  common  stock
     outstanding.  Concurrently,  APO sold 1,500,000 shares of common stock to a
     group of investors for $.665 per share. APO then changed its name to EDnet,
     Inc.  EDN  became  a  subsidiary  of  the  Company  as  a  result  of  this
     transaction.  For accounting purposes, this transaction has been treated as
     a  recapitalization  of EDN,  recognizing  the issuance of shares of common
     stock  for  the  net  assets  of  the  Company.  The  historical  financial
     statements prior to this transaction are those of EDN.

     Acquisition of Internet Worldwide Business Solutions:

     On June 24, 1996, the Company acquired all the outstanding shares of common
     stock  of  Internet  Worldwide  Business  Solutions  (IBS)  in  a  business
     combination  accounted  for as a  purchase.  IBS is  primarily  an Internet
     service provider  specializing in the development and hosting of web sites.
     The results of operations of IBS are included in the accompanying financial
     statements since the date of acquisition.  The purchase price of $1,162,568
     included 311,284 shares of the Company's common stock, notes payable in the
     aggregate  amount of $500,000 (Note 5) and $40,000 of  acquisition  related
     costs. The purchase

                                       7

<PAGE>


                                  EDNET, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  -----------


     price exceeded the $74,000  estimated fair value of the net tangible assets
     of IBS by  $1,088,568,  which was  initially  reflected  as goodwill on the
     balance sheet and amortized using the straight-line method over a five-year
     period (see "Goodwill" below).

     In addition,  the Company entered into a performance based stock bonus plan
     to issue up to an  aggregate  of 500,000  shares of its common stock to the
     two former owners of IBS, who became employees of the Company. The plan set
     certain  threshold  levels for revenue  and profit  goals to be realized in
     order for the stock to be issued.  This  agreement  represented an earn-out
     plan and the fair market  value of any  additional  shares  issued would be
     added to goodwill when and if the goals were met.

     In conjunction with the  acquisition,  under the terms of its non statutory
     stock  option plan,  options to purchase an  aggregate of 50,000  shares of
     common stock of the Company were granted to certain IBS  employees at $1.25
     per share.

     Had the  acquisition  occurred  on  October  1, 1995 (the  commencement  of
     operations for IBS), the pro forma  statement of operations for the Company
     for the year ended June 30, 1996 would have been as follows:

                                                      Pro Forma
                                       As Stated     Adjustments     Pro Forma
                                      -----------    -----------    -----------
Revenues                              $ 2,536,258    $   480,030    $ 3,016,288
Cost of sales                               2,126        258,716      2,385,457
                                      -----------    -----------    -----------

Gross profit                              409,517        221,314        630,831

Sales and marketing                           995         64,679      1,060,596
General and administrative                532,081        271,083        803,164
                                      -----------    -----------    -----------

(Loss) income from operations          (1,118,481)    (1,144,488)    (1,232,929)

Other expenses, net                        34,322            832         35,154

(Loss) income before income taxes      (1,152,803)    (1,152,800)    (1,268,083)

Income taxes                                1,600         10,335         11,935
                                      -----------    -----------    -----------

Net (loss) income                     $(1,154,403)   $(1,256,155)   $(1,280,018)
                                      ===========    ===========    ===========

Net (loss) per share                  $     (0.36)                  $     (0.37)
                                      ===========                   ===========

                                       8

<PAGE>


                                  EDNET, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  -----------


     On  December  31,  1996,  the Company  amended the terms of its  previously
     consummated   acquisition  of  IBS,  by  dividing  IBS  into  two  separate
     corporations.  IBS's Internet service business continues to operate as IBS.
     IBS  licensed  to  Breakthrough  Software,   Inc.  (BSI)  certain  software
     developed by IBS related to  development,  operation,  and  maintenance  of
     world-wide  web sites,  and the  Company  agreed to lend BSI up to $250,000
     (represented by an unsecured note) to be used for specified  purposes.  The
     Company  retained  ownership  of  2,000,000  shares  of  BSI's  convertible
     preferred  stock,  which  represents,  after conversion into BSI non-voting
     common stock,  40% of BSI's  outstanding  common stock.  This investment is
     accounted  for using the cost method of  accounting.  Also as a part of the
     amendment,  remaining  acquisition  notes  payable  from the Company to the
     founders of IBS in the amount of $250,000 were canceled,  and the remaining
     term of the earn-out  stock bonus plan to the founders  was  canceled.  The
     Company  amended  its  employment  contracts  with the  founders  of IBS to
     terminate  on December 31, 1996,  and the Company  entered into  consulting
     agreements with the IBS founders to provide transition  services to IBS for
     a period of three months commencing December 31, 1996.

     Going Concern:

     The  Company  and its  subsidiaries  have not  been  able to  generate  any
     operating  profit since  inception.  Through June 30, 1997, the Company and
     its  subsidiaries   have  aggregated   losses  of  $6,709,227  and  current
     liabilities  exceed current  assets by $1,965,496.  Subsequent to year end,
     the Company obtained commitment for additional funding as described in Note
     13, but has experienced  delays in obtaining the full amount of the funding
     commitment therein  described.  Should the Company be unable to raise these
     or other funds,  it may not have the  financial  resources to continue as a
     going concern and may be forced to seek protection from its creditors under
     Chapter 11 of the bankruptcy code. The financial  statements do not contain
     any adjustments  that may be needed if the Company is unable to continue as
     a going concern.

2.   Summary of Significant Accounting Policies:

     Consolidation:

     The consolidated financial statements include the accounts of the Company's
     wholly owned subsidiaries EDN and IBS. Material inter-company  transactions
     and balances have been eliminated.

     Revenue Recognition:

     A significant  component of revenues  relate to the sale of equipment which
     is  recognized  when the  equipment  is  installed.  Installation  fees are
     recognized  when the  installation  has been  completed  and usage fees are
     recognized  over the period  the  equipment  is used based

                                       9

<PAGE>


                                  EDNET, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  -----------


     on the relative usage level. Deferred revenues represent billings in excess
     of revenue recognized.

     Allowance for Doubtful Accounts:

     Bad  debts  are  provided  on the  allowance  method  based  on  historical
     experience and management's evaluation of outstanding accounts receivable.

     Inventories:

     Inventories  are  valued  at the lower of cost or  market  with cost  being
     determined on the first- in, first-out basis.

     Property and Equipment and Leasehold Improvements:

     Property  and  equipment  are  carried at cost and are  depreciated  on the
     straight-line  basis over their  estimated  useful lives,  which range from
     five to seven years. The costs of leasehold improvements are amortized over
     the  lesser of the length of the  related  leases or the  estimated  useful
     lives of the assets.  Expenditures for improvement or expansion of property
     and  equipment  are  capitalized.  Repairs and  maintenance  are charged to
     expense as  incurred.  When the assets are sold or retired,  their cost and
     related  accumulated  depreciation  are removed from the accounts  with the
     resulting gain or loss reflected in the statement of operations.

     Goodwill:

     The Company  evaluates  the recovery of its  goodwill and other  intangible
     assets by comparing the aggregate  estimated cash flows  generated by those
     assets with their carrying  value.  In June,  1997, the Company  recognized
     that  there  had  been  significant  changes  in  technology  and  business
     conditions  in the  Internet  website  development  and  hosting  business.
     Considering  these  changes and the  amendment  to the  acquisition  of IBS
     discussed  above,  the Company  determined  that the carrying  value of the
     goodwill related to the IBS acquisition  exceeded the aggregate  realizable
     cash flow amount, and, in accordance with SFAS 121 (see below), the Company
     eliminated the carrying cost of goodwill related to the IBS acquisition.

     Income Taxes:

     The Company accounts for income taxes using the liability method.  Deferred
     income tax assets and  liabilities  are computed  annually for  differences
     between the  financial  reporting  and tax bases of assets and  liabilities
     that will result in taxable or  deductible  amounts in the future  based on
     enacted  tax  laws  and  rates  applicable  to the  periods  in  which  the
     differences are expected to affect taxable income. Valuation allowances are
     established  when  necessary  to reduce  deferred  tax assets to the amount
     expected to be realized.

                                       10

<PAGE>


                                  EDNET, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  -----------


     Loss Per Share:

     Loss per share has been  calculated  using the weighted  average  number of
     shares  outstanding  for the  period,  which  were  3,181,350  for 1996 and
     4,967,539 for 1997.  Common stock  equivalents  (stock  options,  preferred
     stock and warrants)  have been excluded from the  calculation  because they
     are anti-dilutive.

     Use of Estimates:

     The  preparation  of financial  statements  in  conformity  with  generally
     accepted  accounting  principles  requires management to make estimates and
     assumptions   that  affect  certain   reported   amounts  and  disclosures.
     Accordingly, actual results could differ from those estimates.

     Recent Accounting Pronouncements:

     In March 1995,  the  Statement of Financial  Accounting  Standards No. 121,
     Accounting  for the  Impairment  of  Long-Lived  assets and for  Long-Lived
     Assets to Be Disposed Of,  (SFAS 121) was issued and is  effective  for the
     Company's 1997 fiscal year. SFAS 121 establishes  accounting  standards for
     the impairment of long-lived assets, certain identifiable intangibles,  and
     goodwill related to those assets to be held and used for long-lived  assets
     and certain  identifiable  intangibles to be disposed.  The Company adopted
     this  standard  during  fiscal  year 1996  with no impact on the  financial
     statements. During fiscal year 1997, the Company made the adjustments noted
     above  under   "Goodwill."  The  Company's  policy  related  to  evaluating
     long-lived  assets is included in the goodwill  policy  disclosures  above.

     During  October  1995,  the  Financial  Accounting  Standards  Board issued
     Statement No. 123 (SFAS No. 123), Accounting for Stock-Based  Compensation,
     which  establishes a fair value based method of accounting for  stock-based
     compensation plans. Because the current price of the Company's common stock
     is  significantly  below  the  issuance  price and  exercise  price for the
     majority of stock options issued by the Company, the fair value impact that
     the  Company's  options  would  have  on the  financial  statements  is not
     material.


3.   Accounts Receivable and Allowance for Doubtful Accounts:

     Accounts receivable at June 30, 1997 comprise the following:

     Current trade                                        $379,529
     Rebillable charges                                     97,467
                                                         ---------
                                                           476,996
     Less allowance for doubtful accounts                  (31,875)
                                                         ---------
     Total                                                $445,121
                                                         =========

                                       11

<PAGE>


                                  EDNET, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  -----------

     Allowances are made as a percentage of sales  adjusted  annually based upon
     review of the individual accounts receivable. Accounts are written off when
     deemed to be worthless.  Total bad debt expense was $6,461 and $272,556 for
     the years  ended June 30,  1996 and 1997,  respectively.  The June 30, 1997
     amount  includes 100%  provision for a note  receivable  from  Breakthrough
     Software Inc., in the amount of $250,000.

4.   Property and Equipment:

     Property and  equipment are  summarized by major  category as follows as of
     June 30, 1997:

     Network and related equipment                             $   962,609
     Furniture and fixtures                                        137,737
     Computer software                                               7,954
     Leasehold improvements                                         26,184
                                                               -----------
                                                                 1,134,484
     Depreciation and amortization                                (577,951)
                                                               -----------
     Net property and equipment                                $   556,533
                                                               ===========

     Depreciation  and  amortization  included in the  statements  of operations
     amounted to  $136,823  and  $187,817  for the years ended June 30, 1996 and
     1997,  respectively.  The Company leases some equipment to customers  under
     terms which are  accounted  for as operating  leases.  Under the  operating
     method,  rental revenue from leases are recognized ratably over the life of
     the lease and the  related  equipment  is  depreciated  over its  estimated
     useful life.

<TABLE>
5.   Notes Payable:

<CAPTION>
     Notes payable consist of the following as of June 30, 1997:
<S>                                                                                   <C>
     Senior  collateralized  promissory  notes (Notes)  payable to Morgan Fuller
     Capital  Group  L.L.C.,  with  original  amounts of $500,000,  $200,000 and
     $300,000 and interest  payable  quarterly at 14%  beginning  September  30,
     1996.  The original due date of the Notes was  extended  from  November 15,

                                       12

<PAGE>


                                  EDNET, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  -----------


     1996 to February 15, 1997,  when the Notes  converted into a term loan with
     principal in the amount of $100,000  and  interest at 18% payable  monthly.
     The Company repaid  principal of $100,000 and accrued  interest on February
     15, 1997, but failed to make the March 15, 1997 payment. Effective June 30,
     1997,  accrued  penalties  and interest were  forgiven,  and the Notes were
     converted to a term loan payable in 60 installments  with accrued  interest
     at  6%  commencing   September  1,  1997  (see  Note  13).  The  notes  are
     collateralized by the Company's assets.                                             900,000

     Notes payable to Mr. Irawan Onggara,  a shareholder and financial  advisor,
     with  original  amounts of  $250,000,  $100,000,  $75,000 and $20,000 at 7%
     interest,  collateralized  by assets  of the  Company  subordinated  to the
     senior notes and equipment covered by individual capital leases, due August
     8, 1996, October 18, 1996, and November 20, 1996, respectively. The Company
     has repaid $90,000 and offset accounts  payable in the amount of $15,000 to
     Mr. Onggara.  The Company had obtained  verbal  agreement to extend the due
     dates of the notes,  and,  subsequent  to June 30,  1997,  entered  into an
     agreement  with Mr.  Onggara to convert  the notes to equity (see Note 13).
                                                                                         340,000

     Notes  payable to an officer,  interest at 6% per annum,  uncollateralized.          24,000

     Notes  payable to an officer,  interest  at 6% per annum,  uncollateralized          16,500

     Note  payable to a director,  interest  at 6% per annum,  uncollateralized.          15,000
                                                                                       ---------
                                                                                      $1,295,500
                                                                                       =========
</TABLE>


     The notes  payable to officers  and  director are overdue as of October 21,
     1996.  Each of these  individuals has agreed not to declare a default under
     these notes for an indefinite period and to accept repayment by the Company
     at a  future  date.

     The carrying value of these financial  instruments  approximates fair value
     due to the relatively short maturity.

6.   Line of Credit:

     The Company has a $10,000 line of credit with a financial  institution,  of
     which $9,628 was  outstanding as of June 30, 1997. The line of credit bears
     interest at the institution's monthly periodic rate plus 1.2708% (15.25% as
     of June 30,  1997) and is payable  monthly.  The line of credit  expires on
     February 28, 1999.

                                       13

<PAGE>


                                  EDNET, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  -----------


     The Company's  wholly owned  subsidiary,  IBS, has a $25,000 line of credit
     with a financial  institution,  of which $25,000 was outstanding as of June
     30, 1996. The line of credit bears interest at the  institutions  reference
     rate plus 5.06%  (12.56% as of June 30, 1997) and is payable  monthly.  The
     line of credit expires on March 8, 1998.

7.   Income Taxes:

     The  provision  for  income  taxes  consists  of federal  income  taxes and
     California franchise taxes payable and includes the following:

         Currently payable                    $0.00
         Deferred                               --
                                             --------
         Total provision for income taxes     $0.00
                                             ========

     A  reconciliation  of the expected and reported  provision for income taxes
     follows:

                                                    For the Years Ended June 30,
                                                    ----------------------------
                                                         1996      1997
                                                         -----    ----- 
     Benefit expected based on federal statutory rate     34.0%    34.0%
     State taxes, net of federal benefit                   6.1      6.1
     Nondeductible expenses                                0.2      0.1
     Valuation allowance, net                            (40.2)   (40.2)
                                                         -----    ----- 
                        Net income tax provision           0.1%     0.0%
                                                         =====    ===== 

     The tax effects of significant temporary differences  representing deferred
     tax assets and liabilities are as follows:

                        Net operating loss carryforwards   $ 4,269,549
                        Property and equipment                  15,000
                        Other, net                               4,000
                        Valuation allowance                 (4,288,549)
                                                           -----------
        Net deferred tax asset                                    --
                                                           ===========

     Due to the  uncertainty  of  realization,  a valuation  allowance  has been
     provided to  eliminate  the net  deferred  tax assets.  The increase in the
     valuation  allowance was $3,409,549 in fiscal 1997. The Company has Federal
     and California loss carryforwards  totaling  approximately $6.6 million and
     $3.3  million  expiring  through 2012 and 2002,  respectively,

                                       14

<PAGE>


                                  EDNET, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  -----------

     that may be offset  against future income taxes.  The  utilization of these
     net operating loss  carryforwards  are limited due to a change of ownership
     as defined in the Internal Revenue Code (see Note 1) in November 1995.

8.   Lease Commitments:

     As of June 30, 1997, the Company leases office space and certain  equipment
     under various  noncancelable  capital and operating leases.  Future minimum
     lease payments required under the noncancelable leases are as follows:

                                    Operating          Capital
     Year Ending June 30,             Leases           Leases
     ---------------------           --------          -------
         1998                        164,905           35,347
         1999                        119,961           13,824
         2000                         92,994           10,961
         2001                         92,994             --
         Thereafter                  185,988             --
                                    --------          -------
     Total minimum lease payments    856,960           60,132
                                    ========          =======
     Less amount representing interest                  8,743
                                                      -------
     Present value of net minimum lease payments       51,389
     Less current portion                              29,268
                                                      -------
     Long-term portion                                $22,121
                                                      =======


     As  of  June  30,  1997,   the  Company  has  equipment   purchased   under
     noncancelable  capital  leases  with  a cost  of  $76,990  and  accumulated
     amortization of $35,719.  Total rental expense for all operating leases for
     the years ended June 30, 1997 and 1996  amounted to $230,417 and  $121,584,
     respectively. The Company's obligations under its lease for its Los Angeles
     office premises are guaranteed by its Chairman and Chief Executive Officer.

9.   Options and Warrants:

     Options to Key Employees and Directors:

     On September 19, 1995, EDN granted a total of 263,420 non-qualified options
     to certain  employees and  directors to purchase  shares in EDN at $.10 per
     share.  As a result of the  recapitalization  discussed  in Note 1, the EDN
     options were  converted  into options to purchase the Company's  stock at a
     conversion of .87495 per share for each EDN share. As

                                       15

<PAGE>


                                  EDNET, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  -----------


     a result,  at June 30, 1996,  there were 230,479  options  outstanding at a
     price of $.11 per share.  These options expire on September 29, 2000. There
     were no options exercised during the period.


     Nonstatutory Stock Option Plan:

     On November 10, 1995, the Company adopted a nonstatutory  stock option plan
     whereby  565,000  shares of the  Company's  common  stock was  reserved for
     issuance. Under the terms of the plan, the price shall be determined by the
     Company's  Compensation  Committee  (CC);  the  period of option  shall not
     exceed  five years from the date of grant;  and the option  must be paid in
     cash when exercised unless a payment plan is authorized by the CC.

     As of June 30,  1997,  459,550  options had been  granted  with an exercise
     price of $1.25 per share.


     Investment Banking Warrants:

     In May 1996, the Company  entered into an investment  banking  relationship
     with  Morgan  Fuller  Capital  Group  (Morgan).  Under  the  terms  of  the
     agreement,  Morgan was to  provide  the  Company  with  financial  advisory
     services  as well as  arrange  for  equity  and  debt  funding.  As part of
     Morgan's compensation, they received 250,000 warrants to purchase shares of
     the  Company's  common  stock at a price of $6.37 per share to be exercised
     prior to May 1999.  In  connection  with the  placement  of senior  secured
     promissory  notes  and  selling  of  participations,  Morgan  and  nominees
     received  58,824  warrants  at a price of $4.25 per  share to be  exercised
     prior to July 4, 1999 and 67,806 warrants at a price of $3.687 per share to
     be exercised prior to August 8, 1999 and September 10, 1999,  respectively,
     for debt placement  services.  In connection  with the extension of the due
     date of the Notes from  November 15, 1996 to February 15, 1997,  Morgan and
     nominees  received  55,970  warrants  at a price of $2.68  per  share to be
     exercised  prior to November 14, 1999. The full cost of all warrants issued
     in  connection  with the Morgan  agreement  has been expensed in the fiscal
     year ending June 30, 1997.

     Subsequent to June 30, 1997, additional warrants were issued and the Morgan
     Fuller warrants were re-priced as described in Note 13.

     Pursuant to a Consulting  Agreement  dated July 31,  1995,  between EDN and
     Century Financial Partners,  Inc. (CFP), the Company was obligated to grant
     an option to purchase  1,000,000 shares of common stock at $1.25 per share.
     In connection  with the  conversion  of notes payable to Irawan  Onggara to
     equity that  occurred  subsequent to June 30, 1997,  the Company  addressed
     this unresolved commitment by issuing warrants described in Note 13.

                                       16

<PAGE>


                                  EDNET, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  -----------


     A recap of the options and warrants  outstanding  as of June 30, 1997 is as
     follows:

                                               Quantity
                                     Price     Reserved  Outstanding
                                     -----     --------  -----------
Employee EDN options converted       $0.11       230,479     230,479
Nonstatutory options                 $1.25       565,000     459,550
                                               ---------   ---------
Total options                                    795,479     690,029
                                               =========   =========
Morgan warrants                      $6.37       250,000     250,000
Morgan warrants                      $4.25        58,824      58,824
Morgan warrants                      $3.69        67,806      67,806
Morgan warrants                      $2.68        55,970      55,970
                                               ---------   ---------
Total warrants                                   432,600     432,600
                                               =========   =========

10.  Employment Contracts:

     The Company has entered into  employment  contracts with key management and
     employees  whereby each will receive stated minimum annual salary  adjusted
     at the discretion of the Compensation  Committee of the Board of Directors,
     and stock options as described in Note 9. Some of the contracts provide for
     a minimum annual salary  increase The expiration  date of these  agreements
     ranges from June 30, 1998 to December 31, 2000.

11.  Concentration of Credit Risk:

     The Company and its subsidiaries  maintain cash in bank deposit accounts at
     accredited financial  institutions.  The balances in these accounts may, at
     times, exceed federally insured limits.

12.  Supplemental Disclosures of Noncash Investing and Financing Activities:

     The following  noncash activity  occurred during the referenced  periods as
     follows:

                                       17

<PAGE>


                                  EDNET, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  -----------


     The Company  entered into capital leases for office and computer  equipment
     in the amount of $66,408 and $41,271, for the years ended June 30, 1996 and
     1997, respectively.

     During fiscal year 1996,  the Company  issued  395,228 shares of its common
     stock to officers and employees of the Company in lieu of payroll.

     The Company issued  390,000 of its shares of common stock in  consideration
     for consulting  services  performed during fiscal year 1996. At the time of
     issuance these shares were valued at $414,375.

     The Company issued  490,000 of its shares of common stock in  consideration
     for consulting  services  performed during fiscal year 1997. At the time of
     issuance these shares were valued at $643,125.

     In  conjunction  with the  acquisition of IBS during fiscal year 1996 (Note
     1), the Company issued notes payable  totaling  $500,000 and 311,284 shares
     of common  stock  valued at  $622,257.  $250,000 of the notes  payable were
     canceled in the subsequent amendment to the acquisition agreement.

     In conjunction with the earnout  provision of the IBS acquisition (Note 1),
     during fiscal year 1997 the Company issued 125,000 shares of common stock.

     In conjunction  with the conversion to equity of a $50,000  short-term loan
     from Visual Information Service Corp., an Illinois corporation, the Company
     issued 65,000 shares of Common Stock valued at $50,000.

13.  Subsequent Events:

     Issuance of Stock Under a Consulting Agreement

     In conjunction  with a consulting  agreement  entered into on June 30, 1997
     with Charles Clark the Company  issued  400,000 shares of Common Stock with
     an S-8 registration under the Securities Act of 1934.

     Investment by T Bar W Ranch Investments

     Under a subscription agreement signed July 10, 1997, the Company received a
     commitment to purchase 3,750,000 shares of Common Stock at a price of $0.20
     per  share.  Each  share  would be issued  with a warrant  to  purchase  an
     additional  share of  Common  Stock at an  exercise  price of $1.00  and an
     expiration date five years from the date of issuance.

     As of  October  10,  1997,  the  total  amount  invested  by T Bar W  Ranch
     Investments was $147,596.  The Company has experienced  delays in obtaining
     the full amount of the funding  commitment  described above, and is working
     with T Bar W Ranch  Investments  to effect  full  funding.  The  Company is
     considering alternative courses of action should the full amount of T Bar W
     Ranch Investment's commitment not be forthcoming.

                                       18

<PAGE>


                                  EDNET, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  -----------


     Restructuring of Onggara Notes

     Subsequent to June 30, 1997, an agreement was reached whereby the Company's
     note payable to Mr. Onggara in the amount of $340,000 plus accrued interest
     of $35,000 was converted to shares of the  Company's  Common Stock at $.375
     per share,  resulting  in an  issuance  of  1,000,000  shares.  The Company
     addressed an  unresolved  commitment  of options to Mr.  Onggara by issuing
     1,000,000  warrants priced at $1.25 each. The warrants are convertible over
     3 years and are transferable and divisible.

     Restructuring of Senior Notes

     Subsequent  to June 30, 1997 the Company  reached an agreement  with Morgan
     Fuller to convert the Notes to a term loan payable in 60 installments  with
     accrued  interest at 6% commencing  September 1, 1997. In conjunction  with
     the  restructuring,  Morgan Fuller agreed to forgive accrued  penalties and
     interest and the Company agreed to re-price all warrants  previously issued
     to Morgan Fuller to an exercise price of $1.50.

                                       19