<PAGE>
 
 As filed with the Securities and Exchange Commission on January 14, 1997.

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549
                                       
                                   FORM 10-K/A      
(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 September 30, 1996
                                       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 0-18806

                                    DMX INC.
             (Exact name of registrant as specified in its charter)

          Delaware                                          95-4275106
(State or other jurisdiction of                          (I.R.S. Employer
 incorporation or organization)                          Identification No.)

                   11400 West Olympic Boulevard, Suite 1100
                      Los Angeles, California              90064-1507
              (Address of principal executive offices)      Zip code

      Registrant's telephone number, including area code:  (310) 444-1744
       Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01
Par Value


Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes [X]  No [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K.  [_]

Unless otherwise specifically indicated, all monetary references in this filing
are in U.S. dollars.

As of December 31, 1996 the aggregate market value of the Common Stock held by
non-affiliates of the Registrant was approximately $23,080,987.

Number of shares of Common Stock of the Registrant outstanding as of December
31, 1996: 59,586,594 shares, including 85,630 shares held as Treasury Stock.


This report includes a total of 35 pages, excluding exhibits.  The exhibit index
appears on page 36.

<PAGE>

ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K.
           --------------------------------------------------------------

   (a) Exhibits. Following is a list of Exhibits filed with this report.
       --------

Exhibit
-------
Number    Description
------    -----------

23.1      Consent of KPMG Peat Marwick LLP



                                      2  

<PAGE>
 
                                  SIGNATURES
                                  ----------

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

          DMX INC.
          (Registrant)

    
By: /s/ Jerold H. Rubinstein                           Date:   January 29, 1997
        Chairman of the Board and                                             
        Chief Executive Officer       

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

<TABLE>     
<CAPTION> 
        Signature                     Date                   Title
        ---------                     ----                   -----
<S>                              <C>                   <C> 

/s/ Jerold H. Rubinstein         January 29, 1997      Chairman of the Board and
                                                       Chief Executive Officer

/s/ J. Wendy Kim                 January 29, 1997      Chief Financial Officer 
                                                       and Corporate Secretary

/s/ Kent Burkhart                January 29, 1997      Director

/s/ Donne F. Fisher              January 29, 1997      Director

/s/ Leo J. Hindery, Jr.          January 29, 1997      Director

    Bhaskar Menon                January   , 1997      Director

/s/ James R. Shaw, Sr.           January 29, 1997      Director

/s/ J.C. Sparkman                January 29, 1997      Director

</TABLE>      


                                       3

<PAGE>
 
                                   DMX INC.
                               AND SUBSIDIARIES

                  Index to Consolidated Financial Statements


<TABLE>     
<CAPTION>
                                                                       Page
                                                                       ----
<S>                                                                    <C>
Independent Auditors' Report on Consolidated Financial Statements 
 and Financial Statement Schedules...................................  F-2


Consolidated Financial Statements of DMX Inc.:

       Consolidated Balance Sheets - September 30, 1996
        and 1995.....................................................  F-3

       Consolidated Statements of Operations -
        Years ended September 30, 1996, 1995 and 1994................  F-4

       Consolidated Statements of Stockholders' Deficit -
        Years ended September 30, 1996, 1995 and 1994................  F-5

       Consolidated Statements of Cash Flows -
        Years ended September 30, 1996, 1995 and 1994................  F-6

       Notes to Consolidated Financial Statements....................  F-7


Financial Statement Schedules have not been provided as any
  information has been included in the financial statements
  and notes thereto


Consolidated Financial Statements of DMX-Europe N.V..................  F-19

 
Independent Auditors' Report.........................................  F-20

Consolidated Balance Sheets - Assets.................................  F-21

Consolidated Balance Sheets - Liabilities and Stockholders' Equity...  F-22

Consolidated Statements of Operations................................  F-23

Consolidated Statement of Stockholders' Equity.......................  F-24

Consolidated Statements of Cash Flows................................  F-25

Notes to Consolidated Financial Statements...........................  F-26-30
</TABLE>      

                                      F-1

<PAGE>
 
                            INDEPENDENT AUDITORS' REPORT      


    
The Board of Directors 
DMX Inc.:      
    
We have audited the consolidated financial statements of DMX Inc. and 
subsidiaries as listed in the accompanying index. These consolidated financial 
statements are the responsibility of the Company's management. Our 
responsibility is to express an opinion on these consolidated financial 
statements based on our audits.      
    
We have conducted our audits in accordance with generally accepted auditing 
standards. Those standards require that we plan and perform the audit to obtain 
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting 
the amounts and disclosures in the financial statements. An audit also includes 
assessing the accounting principles used and significant estimates made by 
management, as well as evaluating the overall financial statement presentation. 
We believe that our audits provide a reasonable basis for our opinion.      
    
In our opinion, the consolidated financial statements referred to above present 
fairly, in all material respects, the financial position of DMX Inc. and 
subsidiaries as of September 30, 1996 and 1995 and the results of their 
operations and their cash flows for each of the years in the three-year period 
ended September 30, 1996, in conformity with generally accepted accounting 
principles.      
    
The accompanying consolidated financial statements have been prepared assuming 
that the Company will continue as a going concern. As discussed in Note 10 to 
the consolidated financial statements, the Company has experienced recurring 
losses from operations and has a net capital deficiency that raise substantial 
doubt about its ability to continue as a going concern. Management's plans in 
regard to these matters are also described in Note 10. The consolidated 
financial statements do not include any adjustments that might result from the 
outcome of this uncertainty.      
    
As discussed in Note 8 to the consolidated financial statements, the Company 
changed its method of accounting for income taxes in the year ended September 
30, 1994.      


    
Los Angeles, California                                 
January 15, 1997                                KPMG Peat Marwick LLP      



                                      F-2


<PAGE>
 
                                   DMX INC.
                               AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                          SEPTEMBER 30, 1996 AND 1995
<TABLE>     
<CAPTION>
 
                                              ASSETS                                                       1996             1995
                                                                                                     ------------------------------
<S>                                                                                                  <C>              <C>
Current assets:
  Cash and cash equivalents                                                                          $     928,399    $   8,622,119
  Securities held to maturity                                                                                    -          165,000
  Prepaid expenses                                                                                         464,545          112,281
  Equipment inventory                                                                                      438,163          264,895
  Accounts receivable:
    Trade related party                                                                                  1,828,973        1,876,453
    Other trade                                                                                          2,732,018        1,893,020
    Other                                                                                                        -           45,692
    Allowance for doubtful accounts                                                                       (251,247)        (856,802)
                                                                                                     -------------    -------------
            Total current assets                                                                         6,140,851        2,958,363
 
Current assets DMX-Europe N.V.:
  Cash                                                                                                     192,635                -
  Prepaid expenses                                                                                         851,586                -
  Equipment inventory                                                                                       98,517                -
  Accounts receivable (net)                                                                                435,480                -
                                                                                                     -------------    -------------
            Total current assets DMX-Europe N.V.                                                         1,578,218                -
                                                                                                     ------------------------------
            Total current assets                                                                         7,719,069       12,122,658

Investment in Galactic/TEMPO Sound (note 3)                                                                504,156          456,929
Property and equipment, net (note 5)                                                                     4,418,799        4,336,378
Property and equipment DMX-Europe N.V., net (note 5)                                                     1,475,189                -
Goodwill, net                                                                                            4,535,658                -
Other assets                                                                                                99,148          166,419
                                                                                                     ------------------------------
                        TOTAL ASSETS                                                                 $  18,752,019    $  17,082,384
                                                                                                     ==============================
 
             LIABILITIES AND STOCKHOLDERS' DEFICIT
 
Current liabilities: 
  Accounts payable                                                                                   $   1,097,476    $   1,182,878
  Accrued liabilities                                                                                    4,886,837        1,449,938
  Accrued liabilities - loss on disposal DMX-Europe N.V. (note 4)                                        1,468,530                -
  Short-term note payable to bank (note 6)                                                                       -           45,000
  Note payable (note 6)                                                                                          -          201,090
  Current portion of capital lease obligation (note 9)                                                     410,108          371,136
                                                                                                      ------------    -------------
            Total current liabilities                                                                    7,862,951        3,250,042

Current liabilities DMX-Europe N.V.: 
  Accounts payable                                                                                       7,284,664                -
  Accrued liabilities                                                                                    1,488,492                -
                                                                                                     -------------    -------------
            Total current liabilities DMX-Europe N.V.:                                                   8,773,156                -
                                                                                                     ------------------------------
            Total current liabilities                                                                   16,636,107        3,250,042

Deferred revenue                                                                                           295,461          376,395
Royalty payable (note 9)                                                                                 1,773,275        1,251,983
Investment in DMX-Europe N.V. (note 4)                                                                           -       15,886,116
Capital lease obligation (note 9)                                                                        1,401,426        1,446,085
 
Stockholders' deficit (note 7):
  Common Stock, $.01 par value. Authorized 100,000,000 shares; issued 59,672,224 shares in 1996 and
   43,680,600 shares in 1995                                                                               596,722          436,806
  Paid-in capital                                                                                      136,758,259       99,210,706
  Accumulated deficit                                                                                 (138,078,913)    (104,224,136)
  Foreign currency translation reserve                                                                     (52,315)          26,390
  Treasury stock, 85,630 shares, at cost                                                                  (578,003)        (578,003)
                                                                                                     ------------------------------
            Net stockholders' deficit                                                                   (1,354,250)      (5,128,237)

 
Commitments and contingencies (note 9)                                                                           -                -
 
                        TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT                                  $  18,752,019    $  17,082,384
                                                                                                     ==============================
</TABLE>      
See accompanying notes to consolidated financial statements

                                      F-3

<PAGE>
 
                                   DMX INC.
                               AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                 YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>     
<CAPTION>
 
                                                    1996           1995           1994
                                               ------------------------------------------
<S>                                            <C>             <C>            <C>
Subscriber fee revenues - related party        $  9,086,434      7,695,978      6,095,088
Subscriber fee revenues - other                   6,972,671      4,920,380      3,281,971
Other revenue, net                                  431,060        157,026              -
Revenue--DMX-Europe N.V. (note 4)                   836,438              -              -
                                                -----------------------------------------
                                                 17,326,603     12,773,384      9,377,059
 
Operating expenses:
  General and administrative                      5,803,043      5,511,615      4,897,948
  Sales and marketing                             8,570,141      7,438,023      6,468,848
  Studio and programming                          9,016,760      7,773,759      5,455,766
  International development                           1,598        168,629         61,251
  Research and development                          778,047        725,164        990,445
  Compensation to affiliates                              -              -        122,654
  Stock bonus and option compensation               549,708        549,708      2,561,937
  Depreciation and amortization                   1,883,415      1,341,775      1,065,666
  Operating expenses--DMX-Europe N.V. (note 4)    5,741,325              -              -
  Loss on disposal of DMX-Europe N.V. (note 4)    7,153,278              -              -
                                                -----------------------------------------
                                                 39,497,315     23,508,673     21,624,515
 
            Net operating loss                  (22,170,712)   (10,735,289)   (12,247,456)
 
Other income (expense):
  Galactic/TEMPO Sound                              197,227        306,640        223,852
  Equity in loss of DMX-Europe N.V. (note 4)    (11,852,650)   (13,271,599)    (4,746,239)
  Interest income                                   111,610        282,234        190,899
  Interest expense                                 (246,181)      (208,694)      (152,731)
  Interest expense--DMX-Europe N.V. (note 4)        (53,936)             -              -
  Other income                                      172,270        779,866        332,368
  Other expense                                     (12,405)      (232,687)      (105,907)
                                                -----------------------------------------
                                                (11,684,065)   (12,344,240)    (4,257,758)
                                                -----------------------------------------
 
  Net loss                                     $(33,854,777)   (23,079,529)   (16,505,214)
                                                ========================================= 
Loss per share                                 $       (.68)          (.60)          (.48)
                                                ========================================= 
Weighted average number of shares                49,675,569     38,505,107     34,436,464
                                                ========================================= 
</TABLE>      
See accompanying notes to consolidated financial statements

                                      F-4

<PAGE>
 
                                   DMX INC.
                               AND SUBSIDIARIES
               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
                 YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>     
<CAPTION>
 
                                                                                                         
                                     Common Stock                                                        Foreign
                                 ---------------------                                                  currency
                                 Number of                  Paid in       Accumulated      Treasury    Translation
                                   shares      Amount       capital         deficit         stock        reserve          Total
                                 --------------------------------------------------------------------------------------------------
<S>                              <C>          <C>        <C>             <C>              <C>          <C>           <C>
Balance at September 30, 1993    32,031,480   $320,315   $ 63,976,740    $ (64,639,393)   $(578,003)   $      -      $    (920,341)

Issuance of common stock          3,530,000     35,300     14,951,725                -            -           -         14,987,025
Cost of issuance                          -          -        (62,409)               -            -           -            (62,409)

Issuance of common stock as
 compensation to affiliates          34,107        341        122,313                -            -           -            122,654
Issuance of common stock as
 compensation                       685,013      6,850      2,005,379                -            -           -          2,012,229
Accrued compensation (note 7)             -          -        549,708                -            -           -            549,708
Net loss                                  -          -              -      (16,505,214)           -           -        (16,505,214)

                                 --------------------------------------------------------------------------------------------------
Balance at September 30, 1994    36,280,600    362,806     81,543,456      (81,144,607)    (578,003)          -            183,652
Issuance of common stock          7,400,000     74,000     17,188,500                -            -           -         17,262,500
Cost of issuance                          -          -        (70,958)               -            -           -            (70,958)
Accrued compensation (note 7)             -          -        549,708                -            -           -            549,708
Foreign currency translation
 reserve                                  -          -              -                -            -      26,390             26,390
Net loss                                  -          -              -      (23,079,529)           -           -        (23,079,529)
                                 --------------------------------------------------------------------------------------------------
Balance at September 30, 1995    43,680,600    436,806     99,210,706     (104,224,136)    (578,003)     26,390         (5,128,237)
Issuance of common stock         15,991,624    159,916     37,237,643                -            -           -         37,397,559
Cost of issuance                          -          -       (239,798)               -            -           -           (239,798)
Accrued compensation (note 7)             -          -        549,708                -            -           -            549,708
Foreign currency translation
 reserve                                  -          -              -                -            -     (78,705)           (78,705)
Net loss                                  -          -              -      (33,854,777)           -           -        (33,854,777)
                                 --------------------------------------------------------------------------------------------------
Balance at September 30, 1996    59,672,224   $596,722   $136,758,259    $(138,078,913)   $(578,003)   $(52,315)     $  (1,354,250)
                                 ==================================================================================================
</TABLE>      
See accompanying notes to consolidated financial statements

                                      F-5

<PAGE>
 
                                   DMX INC.
                               AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                 YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>     
<CAPTION>
 
                                                                                      1996           1995           1994
                                                                                  -----------------------------------------
<S>                                                                               <C>            <C>            <C>
Cash flows from operating activities:
 Net loss                                                                         $(33,854,777)  (23,079,529)   (16,505,214)
 Adjustments to reconcile net loss to net cash used in operating activities:
 Depreciation and amortization                                                       2,229,646     1,341,775      1,065,666
 Loss on retirement of property and equipment                                                -             -        107,806
 Dividend from Galactic/TEMPO Sound                                                    150,000       300,000        250,011
 Equity in earnings of Galactic/TEMPO Sound                                           (197,227)     (306,640)      (223,852)
 Equity in loss of DMX-Europe N.V.                                                  11,853,686    13,271,599      4,746,239
 Loss on disposal of DMX-Europe N.V.                                                 7,153,278             -              -
 Compensation expense for stock issued to affiliates                                         -             -        122,654
 Compensation expense for stock bonus and options                                      549,708       549,708      2,561,937
 Provision for doubtful accounts                                                       643,148       700,000        156,802
 Decrease in deferred compensation                                                           -             -       (370,095)
 (Increase) decrease in prepaid and other current assets                              (947,596)       76,315       (427,852)
 Decrease in advances to DMX-Europe N.V.                                                     -       490,296        161,387
 (Increase) in receivables                                                          (1,077,525)     (715,015)    (1,283,119)
 Decrease (increase) in other assets                                                    93,157      (111,250)        (1,169)
 (Decrease) increase in deferred revenue                                               (80,934)      (42,145)       418,540
 Increase in royalty payable                                                           521,292       538,562        445,651
 Increase (decrease) in accounts payable and accrued liabilities                     4,035,653       (33,365)        37,941
                                                                                  -----------------------------------------
    Net cash used in operating activities                                           (8,928,491)   (7,019,689)    (8,736,667)

Cash flows from investing activities:
 Purchase of property and equipment, net                                            (1,519,444)     (954,101)      (540,105)
 Advances to DMX-Europe N.V., net                                                     (681,846)   (2,044,311)             -
 Investment in preferred stock of DMX-Europe (UK) Limited                           (6,440,000)   (3,500,000)             -
 Purchase of securities held to maturity                                                     -      (165,000)    (2,244,781)
 Proceeds from matured securities held to maturity                                     165,000     2,279,738        490,043
                                                                                  -----------------------------------------
    Net cash used in investing activities                                           (8,476,290)   (4,383,674)    (2,294,843)
 
Cash flows from financing activities:
  Issuance of common stock, net                                                     10,346,094    17,191,542     14,924,616
  Repayment of note payable to bank                                                    (45,000)     (240,000)      (240,000)
  Repayment of note payable                                                                  -      (181,455)      (181,455)
  Repayment of principal portion of capital lease obligation                          (397,398)     (228,225)       (71,419)
                                                                                  -----------------------------------------
    Net cash provided by financing activities                                        9,903,696    16,541,862     14,431,742
                                                                                  -----------------------------------------
    Net (decrease) increase in cash and cash equivalents                            (7,501,085)    5,138,499      3,400,232
 
Cash and cash equivalents, beginning of year                                         8,622,119     3,483,620         83,388
                                                                                  -----------------------------------------
Cash and cash equivalents, end of year                                            $  1,121,034     8,622,119      3,483,620
                                                                                  =========================================
 
</TABLE>      
See accompanying notes to consolidated financial statements

                                      F-6

<PAGE>
 
                                   DMX INC.
                               AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          SEPTEMBER 30, 1996 AND 1995


(1)  INCORPORATION AND NATURE OF BUSINESS.
     ------------------------------------ 

     DMX Inc. (the "Company"), formerly International Cablecasting Technologies
     Inc. ("ICT"), was incorporated under the laws of the state of Delaware in
     May 1990, to accomplish a corporate reorganization which effected a change
     of situs of its predecessor company of the same name (ICT-Canada). ICT-
     Canada was incorporated pursuant to the Company Act (British Columbia) on
     April 26, 1979, by registration of its Memorandum and Articles under the
     name Can-Am Entertainment Corporation. On November 14, 1986, its name was
     changed to International Cablecasting Technologies Inc. On April 27, 1995,
     the Company changed its name to DMX Inc.


(2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
     ------------------------------------------ 

     ACCOUNTING PRINCIPLES AND CONSOLIDATION.
     --------------------------------------- 

     The consolidated financial statements include the accounts of the Company
     and its wholly owned subsidiaries, TEMPO Sound, 450714 B.C. Ltd. and DMX-
     Europe N.V. and subsidiary ("DMX-E"). All material intercompany balances
     and transactions have been eliminated.

     GOODWILL.
     -------- 

     Goodwill was calculated as the purchase price of DMX-E less the fair value
     of net assets acquired and is being amortized over 20 years. Goodwill will
     be eliminated upon the ultimate disposition of DMX-E pursuant to the
     Company's plan to dispose of its operations as described in note 4. In
     connection with the anticipated disposal of operations and considering the
     terms of such agreements, goodwill has been reduced by $5,685,000 due to
     the impairment of its value.

     REVENUE RECOGNITION AND ALLOWANCE FOR DOUBTFUL ACCOUNTS.
     ------------------------------------------------------- 

     The Company recognizes revenue based upon subscriber levels for affiliate
     sales and the contract terms for its direct sales. The calculation of
     subscriber levels for affiliate sales is based on billing and sales
     information provided by its affiliates. Direct sales revenue is recognized
     at inception of service in accordance with the contract terms. The Company
     analyzes subsequent cash receipts and other data to determine the adequacy
     of its allowance for doubtful accounts.

     Accounts receivable and subscriber fee revenue from related party consists
     of receivables and revenues due from Tele-Communications, Inc. ("TCI"), and
     its affiliates. At September 30, 1996, TCI held 45.42% of the outstanding
     common stock of the Company. Total subscriber fee revenue from TCI for the
     fiscal years ended September 30, 1996, 1995 and 1994 represented
     approximately 56%, 61% and 65%, respectively, of total subscriber fee
     revenue.

     INVESTMENT IN GALACTIC/TEMPO SOUND PARTNERSHIP.
     ---------------------------------------------- 

     The Company's 50% investment in Galactic/TEMPO Sound, a partnership with
     Galactic Radio Partners, Inc., is accounted for using the equity method.
     The 50-50 joint venture commenced July 16, 1990, providing basic cable
     audio programming to cable television system operators.

     DISPOSITION OF DMX-EUROPE N.V. AND SUBSIDIARY.
     ---------------------------------------------

     On December 13, 1996, the Company announced that its board of directors had
     approved the disposition of DMX-Europe N.V. and its subsidiary, DMX-Europe
     (UK) Limited collectively, ("DMX-E") to Jerold H. Rubinstein, Chairman and
     Chief Executive Officer of the Company. The Company had previously
     determined to cease financial support of DMX-E and, in the absence of some
     other arrangements to provide financial support to those Companies, to
     place them in receivership. The Company has since entered into definitive
     agreements with Mr. Rubinstein providing for such disposition.

                                      F-7

<PAGE>
 
                                   DMX INC.
                               AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


     DISPOSITION OF DMX-EUROPE N.V. AND SUBSIDIARY, CONTINUED.
     -------------------------------------------------------- 

     Mr. Rubinstein will seek to reorganize the operations of DMX-E and will
     seek new equity investors. In the event DMX-E cannot be reorganized, Mr.
     Rubinstein intends to organize a new company to distribute the music
     service on essentially the same terms. DMX Inc. will retain or obtain a ten
     percent equity interest in the European companies which would have an
     exclusive, five year, royalty-free license to distribute the DMX service in
     Europe, the former Soviet Union, and in the Middle East.

     The Company has accounted for the effects of this disposal and accordingly
     has estimated the loss on the disposal of DMX-E in the accompanying
     consolidated statements of operations. The loss on disposal was estimated
     as the net investment of DMX-E of $5,720,000 and the incurrence of certain
     potential liabilities of $1,469,000 in conjunction with such disposal
     activities.

     DMX-E was formed by the Company to provide the necessary management,
     marketing services and operating structure for the distribution of Digital
     Music Express(R) ("DMX(R)"), throughout Europe. In 1993, TCI-Euromusic,
     Inc. ("TCI-E"), an indirect affiliate of Tele-Communications, Inc. ("TCI"),
     acquired a 49% equity interest in DMX-E through the purchase of 49% of the
     outstanding common stock of DMX-E for $120,100, in addition to providing a
     $24.4 million credit facility which was used for the start-up costs and
     initial operations of DMX-E . The Company partially guaranteed the credit
     facility, and would be liable for one-half of the TCI-E's "loss" as
     defined, which may be payable at the option of the Company, in the
     Company's Common Stock.

     On May 17, 1996, DMX Inc. consummated the merger of TCI-Euromusic, Inc.
     ("TCI-E") pursuant to the terms of the Agreement and Plan of Merger ("the
     Agreement"), dated August 28, 1995, as amended as of November 1, 1995 and
     January 17, 1996 among the Company, TCI-E and United Artists Programming
     International, Inc. ("UAPI"), an indirect affiliate of TCI and owner of the
     outstanding shares of TCI-E. As a result of the merger, the Company
     acquired the remaining 49% interest in DMX-E.

     The merger was accounted for as a purchase and the Company issued
     10,841,624 shares of its Common Stock to UAPI at a purchase price totaling
     $27,104,060. The purchase price less the fair value of TCI-E net assets
     acquired, resulted in goodwill of $10,415,701 which is being amortized over
     20 years and was calculated as follows:

<TABLE>
<S>                                                                                                <C>
Purchase price                                                                                     $27,104,060
Less book value of TCI-E net assets acquired                                                        (3,479,694)
                                                                                                   -----------
                                                                                                    23,624,366

Purchase price adjustments:
     To adjust the investment in DMX-E for losses recorded by TCI-E, which were
      also recognized by DMX Inc. based on the modified equity method of accounting                 (9,026,263)

To reverse allowance for uncollectible interest recorded by TCI-E @ 49% of the
 interest accrued on the notes receivable                                                           (4,213,793)

Other                                                                                                   31,391
                                                                                                   -----------

Goodwill                                                                                           $10,415,701
                                                                                                   ===========
</TABLE>

                                      F-8

<PAGE>
 
                                   DMX INC.
                               AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


     DISPOSITION OF DMX-EUROPE N.V. AND SUBSIDIARY, CONTINUED.
     --------------------------------------------------------

     The accompanying consolidated balance sheet of the Company at September 30,
     1996 is consolidated with the accounts of DMX-E and the accompanying
     consolidated statements of operations and cash flows of the Company were
     consolidated with the accounts of DMX-E for the period from May 18, 1996
     through September 30, 1996. Prior to May 18, 1996, the Company accounted
     for its investment in DMX -E using the equity method of accounting.

     PROPERTY AND EQUIPMENT.
     ---------------------- 

     Property and equipment is carried at cost and is depreciated over three to
     six years using the straight-line method. Leasehold improvements are
     carried at cost and are depreciated over the shorter of the estimated five-
     year useful life of the related asset or the term of the lease.

     INCOME TAXES.
     ------------ 

     Effective October 1, 1993, the Company adopted the provisions of Statement
     of Financial Accounting Standards (SFAS") No. 109. SFAS No. 109 requires
     the "asset and liability" method of accounting for income taxes. The
     adoption of SFAS No. 109 did not have any effect on the results of
     operations for 1994.

     FOREIGN CURRENCY TRANSLATION RESERVE.
     ------------------------------------ 

     Unrealized gains and losses resulting from the translation of financial
     statements are reflected as a separate component of stockholders' equity.

     LOSS PER SHARE.
     -------------- 

     The loss per share has been calculated by dividing the loss for the year by
     the weighted average number of common shares issued and outstanding during
     the period. Outstanding share options, warrants, awards and shares
     contingently issuable under equity participation agreements have not been
     considered in the computation as their impact on the net loss per common
     share would be antidilutive.

     CASH EQUIVALENTS.
     ---------------- 

     Cash equivalents include highly liquid investments with an original
     maturity of three months or less.

     CASH FLOW INFORMATION.
     --------------------- 

     Cash payments for interest in fiscal 1996, 1995 and 1994 were
     $246,200, $236,500 and $152,700,  respectively.

     USE OF ESTIMATES.
     ---------------- 

     In preparing financial statements in conformity with generally accepted
     accounting principles, management is required to make estimates and
     assumptions that affect the reported amounts of assets and liabilities and
     the disclosures of contingent assets and liabilities at the date of the
     financial statements and revenues and expenses during the reporting period.
     Actual results could differ from those estimates.


     CONCENTRATION OF CREDIT RISK.
     ---------------------------- 

     The Company's accounts receivable balance is comprised primarily of amounts
     due from cable system operators, with the majority due from its largest
     customer, TCI.

                                      F-9

<PAGE>
 
                                   DMX INC.
                               AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


     RECLASSIFICATIONS.
     ----------------- 

     Certain reclassifications of prior period amounts have been made to conform
     to the current year's reporting format.


(3)  INVESTMENT IN GALACTIC/TEMPO SOUND PARTNERSHIP.
     ---------------------------------------------- 

     The summarized balance sheet and operating data for the twelve month
     periods ended September 30, 1996 and 1995 of the Galactic/TEMPO Sound
     partnership follows:

<TABLE>
<CAPTION>
 
                                       1996          1995
                                    (Unaudited)   (Unaudited)
                                    -------------------------
<S>                                 <C>           <C>
Current assets                      $   890,383       828,804
Non-current assets                      143,797       186,747
Current liabilities                      26,021       101,694
Partners' capital                     1,008,159       913,857
Partners' draws for the period         (300,000)     (600,000)
Revenues                              2,226,753     1,903,178
Operating expenses                   (1,832,299)   (1,289,898)
Net income                          $   394,454       613,280
                                    =========================
</TABLE>

                                     F-10

<PAGE>
 
                                   DMX INC.
                               AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


(4)  INVESTMENT IN DMX-EUROPE N.V. AND SUBSIDIARY.
     -------------------------------------------- 

     The summarized operating data for the years ended September 30, 1996 ,1995
     and 1994, of DMX-Europe N.V. and subsidiary follows:

<TABLE>
<CAPTION>
 
                                                                                            For the year ended September 30,
STATEMENTS OF OPERATIONS DATA:                                                            1996             1995            1994
                                                                                     ---------------------------------------------
 
<S>                                                                                  <C>                 <C>            <C>
Revenue                                                                              $  1,559,262            151,176        51,274
Operating, selling, general and administrative expenses                                15,594,979         16,500,784     8,057,052
Depreciation and amortization                                                             909,022            541,678       125,697
                                                                                     ---------------------------------------------
Operating loss                                                                        (14,944,739)       (16,891,286)   (8,131,475)
Interest expense                                                                       (3,115,621)        (2,876,252)   (1,217,452)
Other                                                                                      22,851             54,519        22,892
                                                                                     ---------------------------------------------
Net loss                                                                             $(18,037,509)       (19,713,019)   (9,326,035)
                                                                                     =============================================
</TABLE> 
 
     The summarized balance sheet date of DMX-E as of May 17, 1996 follows:

<TABLE> 
  
                                                                                                     At May 17, 1996
BALANCE SHEET DATA:                                                                                    (Unaudited)
                                                                                                     ---------------
<S>                                                                                                  <C> 
Current assets                                                                                          $  2,146,889
Property and equipment net of accumulated depreciation                                                     1,668,368
                                                                                                     ---------------
Total assets                                                                                            $  3,815,257
                                                                                                     ===============
Trade accounts payable and accrued expenses                                                             $  7,940,963
Intercompany - payables due parent                                                                         2,726,157
Long-term debt                                                                                            30,792,911
                                                                                                     ---------------
Total liabilities                                                                                         41,460,031
Net stockholders' deficit                                                                                (37,644,774)
                                                                                                     ---------------
Total liabilities and stockholders' deficit                                                             $  3,815,257
                                                                                                     ===============
</TABLE>

     Long-term debt at September 30, 1996 of $34,393,318 represents intercompany
     debt which included the original principal amount of the TCI-E note of
     $24,436,000, the intercompany payables at May 17, 1996 of $2,726,157 and
     related accrual interest of $7,231,161 thereon. Amounts were eliminated in
     the accompanying consolidated balance sheets.

     For the period from October 1, 1995 through May 17, 1996 and for the year
     ended September 30, 1995, the Company charged DMX-E for certain expenses
     totaling $682,000 and $3,816,000, respectively, related to salaries,
     programming, marketing, equipment lease and research and development
     expenses incurred by the Company on DMX-E's behalf. Amounts are included in
     the accompanying consolidated statements of operations.

     For the period from May 17, 1996 through September 30, 1996, the Company
     charged DMX-E for certain expenses totaling $269,000, related to salaries,
     programming, marketing, equipment lease and research and development
     expenses incurred by the Company on DMX-E's behalf; $51,000 for royalties
     and $874,000 for interest on intercompany debt. These amounts along with
     the intercompany balances were eliminated in consolidation in the
     accompanying consolidated balance sheet and statement of operations.

                                     F-11

<PAGE>
 
                                   DMX INC.
                               AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

         
     INVESTMENT IN DMX-EUROPE N.V. AND SUBSIDIARY, CONTINUED.      
     ------------------------------------------------------- 

     In 1996, the Company was issued 10,000,000 shares of redeemable non-
     cumulative, convertible, preferred stock by DMX-Europe (UK) Limited and had
     advanced $3,377,000 for subscriptions to additional shares. These funds
     were used to fund the operations of DMX-E.

(5)  PROPERTY AND EQUIPMENT.
     -----------------------

     Property and equipment as of September 30, 1996 and 1995 consist of the
     following:

<TABLE>
<CAPTION>
 
                                                       1996          1995
                                                    ------------------------
<S>                                                 <C>           <C>
Furniture and equipment                             $ 3,957,369     2,041,147
Leasehold improvements                                  181,348       186,573
Studio equipment                                      6,144,707     4,041,594
Music library                                           918,126       845,218
Computer system                                       1,251,460       498,411
                                                    -------------------------
                                                     12,453,010     7,612,943
                                                    -------------------------
Less accumulated depreciation and amortization       (6,559,022)   (3,276,565)
                                                    -------------------------
 
                                                    $ 5,893,988     4,336,378
                                                    =========================
</TABLE>

     At September 30, 1996, studio equipment included approximately $245,000 in
     equipment, net of accumulated depreciation of $475,000, that is being
     leased to DMX-E for a monthly fee of approximately $23,000. Lease income
     related to leased equipment to DMX-E for the period from October 1, 1995
     through May 17, 1996, and the fiscal years ended September 30, 1995 and
     1994 was approximately $172,000, $245,000 and $215,000, respectively, and
     is included in other income. For the period from May 18, 1996 through
     September 30, 1996, the lease income of approximately $103,000 was
     eliminated in consolidation.

     Studio equipment of $1,247,000, net of accumulated depreciation of
     $919,000, at September 30, 1996 was financed under the capital lease
     obligation.

     During the fiscal year ended September 30, 1994, the Company moved its
     studio and uplinking facility from Douglasville, Georgia to Littleton,
     Colorado.  As a result, the Company retired equipment that would not be
     used in operations at its new location.  The Company retired equipment with
     a net book value of $107,806, resulting in a loss recorded during the
     fiscal year ended September 30, 1994 included in other expense in the
     accompanying consolidated statements of operations.


(6)  NOTES PAYABLE.
     ------------- 

     At September 30, 1995, note payable to bank of $45,000 was secured by a
     certificate of deposit included in securities held to maturity. The note
     bore interest at one percent (1%) over the interest earned on the
     certificate of deposit, or 6.2%. The note was repaid in the first quarter
     of 1996.

     At September 30, 1995, note payable of $201,090 was payable to TCI-
     Euromusic, Inc. and bore interest at the rate of nine percent (9%) per
     annum. The studio equipment purchased with the original proceeds of
     $564,000 from this loan, is leased to DMX-E. The note was repaid in
     connection with the merger with TCI-Euromusic, Inc. on May 17, 1996.

                                     F-12

<PAGE>
 
                                   DMX INC.
                               AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


(7)  STOCKHOLDERS' (DEFICIT) EQUITY.
     ------------------------------ 

     STOCK OPTIONS AND COMMITMENTS.
     ----------------------------- 

     The Company has issued options to purchase Common Stock to certain
     directors, officers and employees under various stock option plans. The
     option prices represent fair market values at the date of grant.
     Transactions in stock options under these plans are summarized as follows:

<TABLE>
<CAPTION>
 
                                   Shares                            Option price
                                 ---------    ----------------------------------------------------------------
<S>                              <C>          <C>
Outstanding options at
September 30, 1993               2,401,667    $1.95 - $8.875 per share, expiring on various dates, 
                                                 December 31, 1995 to July 1, 2006.
 
Options issued                     825,000    $3.50 - $5.375 per share
Options exercised                  (30,000)   $4.59 - $4.18 per share
Options expired and terminated    (100,834)   $4.18 - $8.875 per share
                                 --------- 
Outstanding options at
September 30, 1994               3,095,833    $1.95 - $6.25 per share, expiring on various dates, 
                                                 December 31, 1996 to July 1, 2006.
 
Options issued                   1,631,250    $2.00 - $3.25 per share
Options expired and terminated    (331,250)   $3.25 - $5.625 per share
                                 ---------  
Outstanding options at
September 30, 1995               4,395,833    $1.95 - $6.25 per share, expiring on various dates,
                                                 December 31, 1996 to July 1, 2006
 
Options issued                     100,000    $2.563 per share
Option expired and canceled       (230,000)   $2.563 - $4.180 per share
Option exercised                  (150,000)   $1.95 per share
                                 ---------  
Outstanding options at
September 30, 1996               4,115,833    $1.95 - $6.25 per share, expiring on various dates,
                                                 December 31, 1996 to July 1, 2006
</TABLE>

     At September 30, 1996, options to purchase 3,157,500 shares were
     exercisable at prices ranging from $1.95 to $6.25 per share. 2,891,250 of
     the exercisable options were held by officers and directors of the Company.

     EQUITY PARTICIPATION AGREEMENTS WITH AFFILIATES.
     ----------------------------------------------- 

     The Company entered into equity participation agreements with certain
     affiliated cable companies during the fiscal years ended September 30, 1989
     through 1992. Pursuant to the terms of those agreements, the Company issues
     shares of Common Stock in exchange for the distribution of DMX, based on
     distribution goals. Compensation to affiliates expense is calculated at the
     fair market value of the Common Stock issued at the date the affiliated
     cable company complied with the terms of the agreement. For the fiscal
     years ended September 30, 1996 and 1995, no shares of Common Stock were
     earned by the affiliated cable companies. In 1994, a total of 34,107
     shares, were earned and issued.

                                     F-13

<PAGE>
 
                                   DMX INC.
                               AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


     STOCK BONUS AND OPTION COMPENSATION.
     ----------------------------------- 

     Stock bonus expense included $549,708 of compensation for each of the years
     in the three-year period ended September 30, 1996, related to the 1992
     extension of the exercise date of an option issued in October 1990. The
     exercise date was extended from 1993 to December 31, 1996 and is an option
     to purchase 350,000 shares of common stock granted to Jerold H. Rubinstein,
     Chairman and Chief Executive Officer ("Chairman and CEO").  During the
     fiscal year ended September 30, 1996, options to purchase 150,000 shares
     were exercised.

     Stock bonus expenses included $2,012,229 of compensation for the year ended
     September 30, 1994, related to a stock bonus granted the Chairman and CEO
     in 1991.  The grant was for 1,027,520 shares of Common Stock at $5.875 per
     share with original vesting at one-third per year.  During the fiscal year
     ended September 30, 1993, the Stock Bonus Agreement was amended to change
     the vesting schedule, whereby two-thirds or 685,013 of the 1,027,520 shares
     granted would all vest in 1994.  As consideration for the Chairman and
     CEO's agreement to defer the vesting of the shares, the Company granted the
     Chairman and CEO a non-qualified option, pursuant to the 1993 Option Plan,
     to purchase 70,000 shares of Common Stock at $5.00 per share (the fair
     market value of the Common Stock on the date of grant).

     COMMON STOCK.
     ------------ 

     During 1996, the Company completed private placements with certain related
     parties. Stephen A. Wynn, a director of the Company, acquired 500,000
     shares at 2.00 per share on March 15, 1996. TCI acquired 4,500,000 shares
     at 2.00 per share on May 17, 1996 and was issued 10,841,624 shares valued
     at $2.50 per share in the Company merger with TCI-E. In addition, TCI
     bought Stephen A. Wynn's 5,200,000 shares in the Company for 2.00 per
     share.

     During 1995, the Company completed private placements with certain related
     parties. Tele-Communications, Inc. acquired 2,000,000 shares, at $2.50 per
     share on August 29, 1995. Shaw Communications Inc. acquired 1,100,000
     shares, at $2.13 per share on March 9, 1995, and acquired 2,000,000 shares
     at $2.50 per share on August 25, 1995. J.C. Sparkman, a director of the
     Company, acquired 100,000 shares at $2.50 per share on September 21, 1995.
     Stephen A. Wynn, a director of the Company, acquired 2,200,000 shares at
     $2.13 per share on February 21, 1995.


(8)  INCOME TAXES.
     ------------ 

     At September 30, 1996, the Company had approximately $82,900,000 of net
     operating loss carryforwards for U.S. Federal income tax reporting
     purposes, expiring in years 2002 through 2011. The net operating loss
     carryforward for U.S. Federal income tax purposes does not include
     deductions for the following: equity in loss of DMX-E and option
     compensation, offset partially by a deduction of executive compensation
     resulting from the exercise of stock options for U.S. Federal income tax
     purposes. The amount of U.S. income tax loss carryforwards available to
     offset U.S. taxable income in any year may be limited under Section 382 of
     the Internal Revenue Code of 1986 ("Code"), as amended, which limits the
     amount of loss carryforwards that may be utilized in any particular tax
     period when a "change of control" of the Company has occurred for U.S. tax
     purposes.

     Any deferred tax amount relating to the net operating loss carryforwards,
     or any other deferred tax asset, has been fully offset by a valuation
     allowance. Accordingly, no income tax benefit has been recorded.

                                     F-14

<PAGE>
 
                                   DMX INC.
                               AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


(9)  COMMITMENTS AND CONTINGENCIES.
     ----------------------------- 

     CAPITAL LEASE WITH RELATED PARTY.
     -------------------------------- 

     During fiscal 1995 the Company entered into an Agreement (the "Agreement")
     with Western Tele-Communications, Inc. ("WTCI"), a subsidiary of TCI, to
     lease up to $2.2 million of equipment on a draw-down basis. As of September
     30, 1996, the Company had drawn $2,166,000 to finance equipment for its
     studio and uplinking facility in Littleton, Colorado. This amount is
     included in Property and Equipment in the accompanying consolidated balance
     sheets. The Agreement term extends through the year 2000, at an interest
     rate of 9.5%.

     OPERATING LEASE COMMITMENTS.
     --------------------------- 

     The Company is obligated under various operating leases for office space,
     uplinking and satellite services. Certain leases are cancelable subject to
     penalties. Total expenses under these leases were approximately $5,324,000
     in 1996, $5,097,900 in 1995 and $4,185,000 in 1994 and are included in
     general and administrative, sales and marketing and studio expenses in the
     accompanying consolidated statements of operations.

     Minimum lease payments under the capital and operating leases at September
     30, 1996 follows:

<TABLE>
<CAPTION>

                                                                  Operating          Operating
              Fiscal year ending                   Capital       Leases with        Leases with
                 September 30:                      Lease      Related Parties         Others
-----------------------------------------------------------------------------------------------
<S>                                              <C>           <C>                   <C>
1997                                             $  622,173    $ 4,516,200           $  607,900
1998                                                622,173      4,516,200              727,200
1999                                                610,550      4,516,200              703,500
2000                                                407,906      3,316,800              679,300
2001                                                 73,778      2,258,400              666,900
Thereafter                                                -      7,904,400                    -
                                                 ----------------------------------------------
Total minimum lease payments                     $2,336,580    $27,028,200           $3,384,800
                                                 ==============================================
Less amounts representing interest                 (525,046)
                                                 ----------
Present value of net minimum lease payments      $1,811,534
                                                 ==========
</TABLE>

     The operating leases with related parties include the lease of studio 
     facilities in Colorado and uplinking and satellite services from WTCI. 
     Total expenses under leases with related party were $4,831,000 in 1996,
     $4,489,000 in 1995 and $3,678,000 in 1994.

     MANUFACTURING COMMITMENTS AND ROYALTY PAYABLE.
     --------------------------------------------- 

     The Company and Scientific-Atlanta, Inc. ("S-A"), had an agreement with 
     respect to the manufacture, distribution and servicing of the DM-2000 
     tuners and DMXsDJ's. The Company was not obligated to purchase or 
     guarantee the purchase of any minimum number of tuners or DMXsDJ's, but 
     S-A was the exclusive tuner manufacturer in the U.S. and Canada and 
     earned a royalty of approximately five percent (5%) of the Company's 
     premium audio service revenues until August 1996. No payments are 
     required until the Company achieves "operating breakeven", as defined in
     the agreement.

     The Company and Comstream Corporation ("Comstream"), have an agreement with
     respect to the manufacture, distribution and servicing of the DR-200
     Digital Satellite Receiver. The Company has guaranteed the purchase of
     50,000 digital satellite receivers by it, its approved customers and/or
     affiliates within 42 months after commencement of the agreement.

                                     F-15

<PAGE>
 
                                   DMX INC.
                               AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


     401(k) SAVINGS PLAN.
     ------------------- 

     The Company maintains a qualified defined contribution 401(k) savings plan.
     Prior to January 1, 1995 eligible participants vested 100% in employer
     matching contributions of 10% of the participants pretax deferrals invested
     in the Company's common stock. Subsequent to January 1, 1995, eligible
     participants vest in employer matching contributions of 10% of the
     participants pretax deferrals invested in the Company's common stock in
     accordance with the vesting schedule as defined in the agreement. The
     discretionary employer matching contribution was 10 percent of the
     participants pretax deferrals invested in the Company's common stock. For
     the fiscal year ended September 30, 1996, the Company's employee benefit
     expense for matching contributions totaled $5,160.

     PARENT GUARANTEES.
     ----------------- 

     The Company has guaranteed certain contracts of DMX-E related to their
     uplink services agreement and subscriber management services agreement. To
     the extent DMX-E is unable to perform under the agreements, certain
     creditors of DMX-E may pursue claims against the Company under the
     guarantees. A claim under the guaranty of DMX-E's obligation to indemnify
     British Sky Broadcasting under the uplink services agreement could
     potentially approximate $1.3 million which is included in the loss on
     disposal of DMX-E in the accompanying consolidated statement of operations.
     The Company has also guaranteed certain other obligations of DMX-E under
     the Subscriber Management Services Agreement between DMX-E and Selco
     Servicegesellschaft Fur Elektronische Kommunikation mbH and the related
     side letter agreement. The Company cannot estimate the amount of any
     potential claims at this time under such guarantee; however, such
     liabilities could have a material adverse effect upon the financial
     position and results of operation of the Company.

     As described in note 2, "Discontinued Operations of DMX-Europe N.V. and
     subsidiary", the Company has ceased funding the operations of DMX-E and has
     entered into agreements providing for the disposition of DMX-E to Jerold
     Rubinstein, Chairman and Chief Executive Officer of the Company. Mr.
     Rubinstein will seek to reorganize the operations of DMX-E and also seek
     new equity partners. To the extent a reorganization cannot be achieved and
     in the absence of some other arrangement to provide financial support to
     DMX-E, the European companies will be placed into receivership. In such
     circumstances, claims may be filed under the guarantees discussed above or
     other claims may be asserted.

     LEGAL ACTIONS.
     ------------- 

     From time to time the Company may be a party to legal actions arising in
     the ordinary course of business, including claims by former employees. In
     the opinion of the Company's management, after consultation with counsel,
     except as set forth in the next paragraph, disposition of such matters are
     not expected to have a material adverse effect upon the financial position,
     results of operations or liquidity of the Company.

     On September 8, 1996, a purported class action lawsuit entitled
     Brickell Partners v. Jerold H. Rubinstein, Donne F. Fisher, Leo J. Hindery,
     ---------------------------------------------------------------------------
     Jr., James R. Shaw, Sr., Kent Burkhart, J.C. Sparkman, Menon Bhaskar, DMX
     -------------------------------------------------------------------------
     Inc., and Tele-Communications, Inc. (Civil Action No. 15206) was filed in
     -----------------------------------                                      
     the Delaware Chancery Court alleging, among other things, that the proposed
     acquisition of the Company by TCI is wrongful, unfair and harmful to
     the Company's public stockholders and seeking to enjoin the consummation of
     the Merger.  The Company believes that this action is without merit and
     intends to defend it vigorously.

                                     F-16

<PAGE>
 
                                   DMX INC.
                               AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


(10) LIQUIDITY AND CAPITAL RESOURCES.
     ------------------------------- 

     The Company has historically funded its operations primarily through the
     sale of its common stock. During the fiscal year ended September 30, 1996,
     the Company generated funds through financing activities that included
     proceeds of $10.3 million resulting from the sale of $1.0 million of its
     Common Stock to a former director-shareholder, the sale of $9.0 million of
     Common Stock to TCI and $293,000 from the exercise of options by the Chief
     Executive Officer to purchase 150,000 shares of Common Stock at $1.95 per
     share. The decrease in cash of $7.5 million for the year was the net result
     of $10.3 million of cash raised in financing activities less cash used in
     investing activities of $8.5 million, relating primarily to the funding of
     DMX-E losses, and cash used in operating activities of $8.9 million.

     With the discontinuation of the operations of DMX-E, management believes
     that the Company will begin to generate cash from it's operating activities
     on a prospective basis, and has reduced its operating expenses to extend
     the U.S. operation's working capital. However, the Company will need
     additional funding to meet certain obligations related to the
     discontinuance of operations of DMX-E and to continue to expand and develop
     the Company's business pursuant to management's current plans. The Company
     is negotiating with TCI for a $3.5 million loan to fund past and future
     tuner purchases. However, the Company is not seeking additional financing
     at this time to fund its other operational requirements and its obligations
     related to the discontinuance of the operations of DMX-E due to the
     pendency of the TCI acquisition proposal and management's belief that with
     the closure of the Company's European operations, its domestic cash flow
     should be sufficient to meet the Company's cash requirements. However, if
     such assumption is not accurate or if future financing is required and is
     not available, then management would seek to continue to reduce operating
     expenses and capital spending as necessary as a means to stem cash
     shortfalls. These operating expenses include both discretionary spending,
     such as sales and marketing expenses and overhead costs, such as general
     and administrative expenses. Such expenses will continually be evaluated
     giving consideration to the cash flow generated from subscriber fee
     revenue, anticipated growth in such revenue and available working capital.
     There can be no assurance that the Company will be able to reduce its
     operating expenses sufficiently to meet its available cash resources while
     maintaining its competitive position.
    
     The accompanying consolidated financial statements have been prepared
     assuming that the Company will continue as a going concern. The Company has
     experienced reoccurring losses from operations and has a net capital
     deficiency. While the Company believes it will be able to generate cash
     from its operating activities on a prospective basis, there can be no
     assurance that such cash, if any, combined with other financings will be
     sufficient to meet the Company's existing and future obligations. The
     consolidated financial statements do not include all potential adjustments
     that could result from potential claims under the above noted parent
     guarantees or other obligations of DMX-E. As described in notes 2 and 9 to
     the Company's consolidated financial statements and in "Disposal of DMX-E"
     above, the Company has ceased funding the operations of DMX-E and the
     Company has entered into agreements providing for the disposition of DMX-E
     to Jerold Rubinstein, Chairman and Chief Executive Officer of the Company.
     Mr. Rubinstein will seek to reorganize the operations of DMX-E and also
     seek new equity partners. To the extent a reorganization cannot be achieved
     and in the absence of some other arrangement to provide financial support
     to DMX-E, the European companies will be placed into receivership. In such
     circumstances, claims may be filed under the guarantees. Such adjustments
     could have a material adverse effect upon the financial position and
     results of operations of the Company.      

                                     F-17

<PAGE>
 
                                   DMX INC.
                               AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


(11) RECENT DEVELOPMENTS.
     ------------------- 

     On August 30, 1996, the Company received an unsolicited proposal from TCI
     proposing the merger of the Company with a TCI subsidiary. Following
     receipt of the proposal, the Company established a special committee of its
     Board of Directors to consider the proposal and retained Houlihan Lokey
     Howard & Zukin to act as its financial advisor. The Company is currently
     negotiating the terms of a definitive merger agreement with TCI, which owns
     approximately 45% of DMX Inc.'s outstanding stock. The merger agreement
     would provide for a merger in which DMX Inc. would be acquired by a new
     corporation ("Music Co.") to be formed by TCI pursuant to which the
     shareholders of DMX Inc. would receive Class A Common Stock of Music Co.
     representing approximately 19.25% of the total outstanding shares of Music
     Co.'s Class A Common Stock and Class B Common Stock The Class A Common
     Stock would be identical to the Class B Common Stock to be held by TCI
     except that each share of Class B Common Stock would have ten votes on all
     matters while shares of Class A Common Stock would have one vote. In
     connection with the merger and the issuance of the Class B Common Stock to
     TCI, TCI would cause certain affiliates to contribute and transfer to Music
     Co. all of their respective rights, title and interest in certain specified
     assets. To the extent that Music Co.'s Class A Common Stock does not trade
     at or above $2 per share, for at least twenty consecutive trading days
     during the first year following the merger, holders of the Class A Common
     Stock would have the right, exercisable during the 30 day period beginning
     on the first anniversary of the merger, to require TCI to purchase such
     Class A Common Stock at a price of $2.00 per share, payable at TCI's option
     either in cash or shares of TCI's TCI Group Series A Common Stock. In
     connection with the merger negotiations, the Company is negotiating with
     TCI for a $3.5 million loan to purchase, or reimburse the Company for the
     purchase of, tuners and related equipment.

                                     F-18

<PAGE>
 
                  DMX-EUROPE N.V.

                  CONSOLIDATED FINANCIAL STATEMENTS

                  September 30, 1996, 1995 and 1994

                  With Independent Auditors' Report


                                     F-19

<PAGE>
 
       PO Box 695
       8 Salisbury Square
       London EC4Y 8BB



  Independent auditors' report

  To the Board of directors and stockholders of DMX-Europe N.V.

  We have audited the accompanying consolidated balance sheets of DMX-Europe
  N.V. and subsidiary as of September 30, 1996 and 1995 and the related
  consolidated statements of operations, stockholders' equity, and cash flows
  for each of the years in the three year period ended 30 September 1996.  These
  consolidated financial statements are the responsibility of the company's
  management.  Our responsibility is to express an opinion on these consolidated
  financial statements based on our audits.

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

  The accompanying financial statements have been prepared assuming that the
  company will continue as a going concern.  As discussed in Note 8 to the
  financial statements, the company has suffered recurring losses from
  operations and has a net capital deficiency that raise substantial doubt about
  its ability to continue as a going concern.  In addition, during 1996, DMX
  Inc. stated that it would no longer financially support DMX-Europe.  In
  December 1996, DMX Inc.'s board of directors approved the disposal of DMX-
  Europe N.V. and subsidiary to Mr Jerold Rubinstein, its Chairman and Chief
  Executive Officer.  Mr Rubinstein's plans in regard to these matters are also
  described in note 8.  The financial statements do not include any adjustments
  that might result from the outcome of this uncertainty.

  Because of the significance of the uncertainty discussed in the preceding
  paragraph, we are unable to express, and we do not express, an opinion on the
  accompanying financial statements.


    
  KPMG
  Chartered Accountants
  Registered Auditors                                           London, England
                                                                January 9, 1997
                                                                                
                                     F-20


<PAGE>
 
DMX-Europe N.V.

Consolidated Balance Sheets
as of September 30, 1996 and 1995

Assets
<TABLE> 
<CAPTION> 
                                                             1996          1995
                                                                $             $
<S>                                                    <C>            <C>
Current assets
Cash and cash equivalents                                 192,635       694,079
Prepaid expenses                                          851,586       971,998
Trade accounts receivable                                 435,480        96,712
Inventories                                                98,517       226,525
                                                       ----------     ---------
Total current assets                                    1,578,218     1,989,314
                                                       ----------     ---------
Fixed assets
Equipment                                               3,080,294     2,806,647
Less accumulated depreciation and amortization         (1,605,105)     (697,413)
                                                       ----------     ---------
                                                        1,475,189     2,109,234
                                                       ----------     ---------
Total assets                                            3,053,407     4,098,548
                                                       ==========     =========
</TABLE>

See accompanying notes to the consolidated financial statements.

                                     F-21

<PAGE>
 
DMX-Europe N.V.

Consolidated Balance Sheets
as of September 30, 1996 and 1995

Liabilities and Stockholders' Equity

<TABLE> 
<CAPTION> 
                                                           1996            1995
                                                              $               $
<S>                                                 <C>             <C>
Current liabilities
Trade accounts payable                                7,284,664       3,761,246
Due to parent company                                   355,152       2,044,311
Accrued expenses                                      1,495,546       1,899,710 
                                                    -----------     -----------
Total current liabilities                             9,135,362       7,705,267
                                                                               
Long term debt (note 3)                              34,393,318      28,664,046 
                                                    -----------     -----------
Total liabilities                                    43,528,680      36,369,313
                                                    -----------     -----------

Stockholders' equity/(deficit)
Common stock 10 Dutch Florins par value, 
 authorised 100,000 shares, issued 39,216 shares        245,100         245,100
Minority interests - non-cumulative, non-voting, 
convertible, redeemable 5% preference shares of 
$1 each of DMX-Europe (UK) Limited owned by DMX
Inc., authorised 10,000,000 shares:
-  subscribed and issued                             10,000,000               -
-  subscribed and unissued                            3,377,000       3,500,000
                     
Accumulated deficit                                 (54,045,058)    (36,007,549)
Cumulative translation adjustment                       (52,315)         (8,316)
                                                    -----------     -----------
Net stockholders' deficit                           (40,475,273)    (32,270,765)
                                                    -----------     -----------
Total liabilities and stockholders' equity            3,053,407       4,098,548
                                                    ===========     ===========
</TABLE>

See accompanying notes to the consolidated financial statements.

                                     F-22

<PAGE>
 
DMX-Europe N.V.

Consolidated Statements of Operations
for the years ended September 30, 1996, 1995 and 1994

<TABLE>
<CAPTION>
 
 
                                           1996            1995           1994
                                              $               $              $
<S>                                 <C>             <C>             <C>
Revenues
Subscriber fees                       1,357,733         151,176         51,274
Other revenue                           201,529               -              -
                                    -----------     -----------     ----------
                                      1,559,262         151,176         51,274
Operating expenses
General and administrative            3,386,993       3,117,943      1,979,256
Sales and marketing                   3,109,790       3,259,442      1,125,124
Studio and programming                8,766,981       8,148,891      4,135,345
Research and development                331,215       1,974,508        817,327
Depreciation and amortization           909,022         541,678        125,697
                                    -----------     -----------     ----------
                                     16,504,001      17,042,462      8,182,749
                                    -----------     -----------     ----------
Loss from operations                (14,944,739)    (16,891,286)    (8,131,475)
 
Other income/(expenses)
Interest income                          22,851          54,519         22,892
Interest expense                     (3,115,621)     (2,876,252)    (1,217,452)
                                    -----------     -----------     ----------
Net loss                            (18,037,509)    (19,713,019)    (9,326,035)
                                    ===========     ===========     ==========
</TABLE>

See accompanying notes to the consolidated financial statements.

                                     F-23

<PAGE>
 
DMX-Europe N.V.

Consolidated Statement of Stockholders' Equity
for the years ended September 30, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                             Common    Preference     Accumulated    Translation            Total      
                                              Stock         Stock         Deficit     Adjustment    Stockholders'  
                                                                                                           Equity     
                                                  $             $               $              $                $        
<S>                                        <C>        <C>            <C>             <C>            <C>            
Balance October 1, 1993                     245,100             -      (6,968,495)        32,312       (6,691,083) 
Movement year ended                                                                                                
 September 30, 1994                               -             -               -        (12,630)         (12,630) 
Net loss for the year ended                                                                                        
 September 30, 1994                               -             -      (9,326,035)             -       (9,326,035) 
                                            -------    ----------     -----------        -------      -----------  
Balance October 1, 1994                     245,100             -     (16,294,530)        19,682      (16,029,748) 
Movement year ended                                                                                                
 September 30, 1995                               -             -               -        (27,998)         (27,998) 
Subscribed and unissued                                                                                            
 preference shares                                -     3,500,000               -              -        3,500,000  
Net loss for the year ended                                                                                        
 September 30,1995                                -             -     (19,713,019)             -      (19,713,019) 
                                            -------    ----------     -----------        -------      -----------  
Balance October 1, 1995                     245,100     3,500,000     (36,007,549)        (8,316)     (32,270,765) 
Movement year ended                                                                                                
 September 30, 1996                               -             -               -        (43,999)         (43,999) 
Authorised and subscribed                                                                                          
 preference shares                                -    10,000,000               -              -       10,000,000  
Conversion of unissued to                                                                                          
 issued preference shares                         -    (3,500,000)              -              -       (3,500,000) 
Subscribed and unissued                                                                                            
 preference shares                                -     3,377,000               -              -        3,377,000  
Net loss for the year                                                                                              
 September 30, 1996                               -             -     (18,037,509)             -      (18,037,509) 
                                            -------    ----------     -----------        -------      -----------  
Balance September 30, 1996                  245,100    13,377,000     (54,045,058)       (52,315)     (40,475,273) 
                                            =======    ==========     ===========        =======      ===========  
</TABLE>


                                     F-24

<PAGE>
 
DMX-Europe N.V.

Consolidated Statements of Cash Flows
for the years ended September 30, 1996, 1995 and 1994

<TABLE> 
<CAPTION> 
                                                                                   1996            1995           1994      
                                                                                      $               $              $        
<S>                                                                         <C>             <C>             <C>           
CASH FLOW FROM OPERATING ACTIVITIES                                                                                      
Net loss                                                                    (18,037,509)    (19,713,019)    (9,326,035)  
                                                                                                                         
ADJUSTMENTS TO RECONCILE NET LOSS TO NET                                                                                 
 CASH USED IN OPERATING ACTIVITIES:                                                                                      
Depreciation and amortization                                                   909,022         541,678        125,697   
Change in prepaid expenses                                                      133,140        (520,647)       (54,974)  
Change in accounts receivable                                                  (364,432)        (67,496)        (6,885)  
Change in inventories                                                           123,943        (227,292)             -   
Change in accounts payable                                                    3,539,707       3,510,898       (276,604)  
Change in accrued liabilities                                                  (379,443)      1,073,850        206,877   
Change in intercompany liability with DMX Inc.                               (1,689,159)      1,554,015       (161,386)  
Change in accrued interest liability with TCI - Euromusic                    (4,228,046)      2,849,368      1,217,425   
Change in accrued interest liability with DMX Inc.                              874,250               -              -   
                                                                            -----------     -----------     ----------   
NET CASH USED IN OPERATING ACTIVITIES                                       (19,118,527)    (10,998,645)    (8,275,885)  
                                                                            -----------     -----------     ----------   
CASH FLOWS FROM INVESTING ACTIVITIES                                                                                     
Purchase of equipment                                                          (288,174)     (2,277,906)      (246,180)  
                                                                            -----------     -----------     ----------   
NET CASH USED IN INVESTING ACTIVITIES                                          (288,174)     (2,277,906)      (246,180)  
                                                                            -----------     -----------     ----------   
CASH FLOWS FROM FINANCING ACTIVITIES                                                                                     
                                                                                                                         
Note payable DMX Inc.                                                        33,519,068               -              -   
Loan principal (assignments)/drawdowns                                      (24,436,000)      9,436,000      9,500,000   
Subscribed preference stock                                                   9,877,000       3,500,000              -   
                                                                            -----------     -----------     ----------   
NET CASH PROVIDED BY FINANCING ACTIVITIES                                    18,960,068      12,936,000      9,500,000   
                                                                            -----------     -----------     ----------   
Effect of exchange rate changes on cash                                         (54,811)        (29,004)         5,337   
                                                                                                                         
NET CHANGE IN CASH AND CASH EQUIVALENTS                                        (501,444)       (369,555)       983,272   
                                                                                                                         
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                    694,079       1,063,634         80,362   
                                                                            -----------     -----------     ----------   
CASH AND CASH EQUIVALENTS, END OF YEAR                                          192,635         694,079      1,063,634   
                                                                            ===========     ===========     ========== 
</TABLE> 

No interest or tax was paid in any of the periods presented.

                                     F-25

<PAGE>
 
DMX-Europe N.V.

Notes to consolidated financial statements
(forming part of the consolidated financial statements)


1  INCORPORATION AND NATURE OF BUSINESS

   DMX-Europe N.V. was incorporated under the laws of the Netherlands on
   February 17, 1992. DMX-Europe N.V.'s primary business is to market premium
   digital audio channels of music programming, known as Digital Music
   Express(R) ("DMX(R)"), throughout Europe to cable, and direct-to-home
   subscribers.

   DMX-Europe N.V. owns 100% of the outstanding share capital of DMX-Europe (UK)
   Limited, a United Kingdom company.

   DMX Inc., a Delaware corporation, owns 100% of the outstanding common stock
   having acquired the 49% shareholding previously held by TCI-Euromusic Inc.,
   ("TCI-E"), a Colorado corporation and a subsidiary of Tele-Communications
   Inc., ("TCI"), as part of the merger transaction on May 17, 1996 whereby DMX
   Inc. acquired all the outstanding equity of TCI-E.


2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   BASIS OF PREPARATION

   The company and its subsidiary, DMX-Europe (UK) Limited have suffered
   recurring losses from operations, have negative working capital and a net
   stockholders' deficit. In addition, during 1996, DMX Inc. stated that it
   would no longer financially support DMX-Europe. In December 1996, DMX Inc.'s
   board of directors approved the disposal of DMX-Europe N.V. and subsidiary,
   DMX-Europe (UK) Limited ("DMX-E") to Mr Jerold Rubinstein, its Chairman and
   Chief Executive Officer. DMX Inc. will retain a ten percent equity interest
   in the companies which would have an exclusive five year, royalty free
   license to use DMX Inc.'s music in Europe, the former Soviet Union, and in
   the Middle East. It is Mr Rubinstein's intention to seek to reorganize the
   operation of DMX-E and seek new equity investors. However, there can be no
   assurances that the proposed reorganization will take place or that new
   equity investors will be found. Accordingly there is significant doubt as to
   the company's ability to continue as a going concern. The financial
   statements do not include any adjustment that might result from the outcome
   of this uncertainty.

   ACCOUNTING PRINCIPLES AND CONSOLIDATION

   These consolidated financial statements are prepared in accordance with
   generally accepted accounting principles in the United States. The
   consolidated financial statements include the accounts of the company and its
   wholly owned subsidiary, DMX-Europe (UK) Limited. All material intercompany
   transactions have been eliminated.

                                     F-26

<PAGE>
 
DMX-Europe N.V.

Notes (continued)


2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

   CASH EQUIVALENTS

   Cash equivalents of approximately $193,000 at September 30, 1996, (1995:
   $694,000) consist of balances held by banks.

   The company considers short-term, highly liquid investments with original
   maturities of three months or less to be cash equivalents.

   RESEARCH AND DEVELOPMENT

   Research and development costs are expensed as incurred and amounted to
   $334,000 during 1996 (1995: $1,988,000).

   EQUIPMENT

   Equipment is stated at cost and depreciated over 3 to 5 years using the
   straight line method.

   INVENTORIES

   Inventories are stated at the lower of cost and net realisable value.

   FOREIGN CURRENCY

   The financial statements of DMX-Europe N.V. and its subsidiary are maintained
   in their functional currencies, US Dollars and British Pound Sterling,
   respectively. Translation gains have been recorded in a separate section of
   stockholders' equity. Exchange gains resulting from foreign currency
   transactions, amounting to $69,042 (1995: $13,930), have been included in the
   consolidated statement of operations.

   INCOME TAXES

   These financial statements adopt the provisions of Statement of Financial
   Accounting Standards ("SFAS") No. 109. SFAS No. 109 requires the "asset and
   liability" method of accounting for income taxes.

                                     F-27

<PAGE>
 
DMX-Europe N.V.

Notes (continued)


3  LONG TERM DEBT

   Long term debt at September 30, 1996, and September 30, 1995 consists of
   the following:

<TABLE>
<CAPTION>
 
                                                          1996          1995
                                                             $             $
   <S>                                              <C>           <C>         
   Loan draw-downs from TCI-Euromusic Inc.                   -    24,436,000 
   Interest on the above loan                                -     4,228,046 
   Note payable DMX Inc.                            33,519,068             - 
   Accrued interest on the above                       874,250             - 
                                                    ----------    ---------- 
                                                    34,393,318    28,664,046 
                                                    ==========    ==========  
</TABLE>

   On May 19, 1993, the company entered into a financing agreement with its then
   49% shareholder, TCI-E. Under the terms of this agreement, TCI-E agreed to
   provide a maximum loan facility of $24,436,000 to the company. As at
   September 30, 1995, DMX-Europe N.V. had drawn down the maximum amount,
   $24,436,000, available under this facility.

   On May 17, 1996 TCI-E was fully merged with and into DMX Inc. the parent
   company of DMX-Europe NV. As a result of this merger the loan principal of
   $24,436,000 together with the related accrued interest outstanding as at May
   17, 1996 of $6,356,911 was assigned to DMX Inc.

   These assigned loan and accrued interest amounts, together with the
   intercompany liability of $2,726,157 due to DMX Inc. as at May 17, 1996, were
   converted into a note payable totalling $33,519,068 in favour of DMX Inc. The
   terms and conditions attaching to this note payable have yet to be finalised
   and incorporated into a formal loan agreement. In the interim, an interest
   charge of 7% per annum is being accrued on the total amount of the note
   payable outstanding.

   As at September 30, 1996 accrued interest of $874,250 was due and payable to
   DMX Inc. as part of this interim arrangement.

                                     F-28

<PAGE>
 
DMX-Europe N.V.

Notes (continued)


4  COMMITMENTS

   The company is obligated under various operating leases for office space,
   uplinking and satellite services, which include sub leases for Astra digital
   subcarriers and associated advertising and marketing commitments. Certain
   leases are cancellable subject to penalties. The company is also obligated
   under various agreements for the provision of subscriber management services.
   Total expenses under these leases and agreements were approximately
   $8,937,000 in 1996 (1995: $8,263,000) and are included in general and
   administrative, studio and programming, and sales and marketing costs in the
   accompanying consolidated statements of operations. As of September 30, 1996,
   minimum annual lease commitments were as follows:

   Fiscal year ending 30 September:
   
<TABLE> 
<CAPTION> 
                                                   $
   <S>                                    <C>
   1997                                    9,902,000
   1998                                    6,567,000
   1999                                    5,950,000
   2000                                    6,252,000
   2001                                    6,094,000
   Thereafter                              6,157,000
                                          ----------
   Total minimum lease commitments        40,922,000
                                          ==========
</TABLE>

5  RELATED PARTY TRANSACTIONS

   DMX-Europe N.V. has incurred expenses of approximately $1,036,997 (1994:
   $2,392,181) for salaries, programming, marketing and research and development
   costs recharged from DMX Inc. These are included in the consolidated
   financial statements as part of operating expenses.


6  INCOME TAXES

   As at September 30, 1996 the company and its subsidiary have net operating
   losses carried forward for Dutch and UK tax authority purposes. These have
   still to be quantified with the relevant fiscal authority. However any
   deferred tax asset relating to net operating losses carried forward, or any
   other deferred tax asset, will be fully offset by a valuation allowance.
   Accordingly, no income tax benefit has been recorded.

                                     F-29

<PAGE>
 
DMX-Europe N.V.

Notes (continued)
 
 
7  SEGMENTAL ANALYSIS

<TABLE> 
<CAPTION> 
                                               1996       1995      1994
                                                  $          $         $
   <S>                                    <C>          <C>        <C>
 
   UK and Eire                              229,114     18,125     8,503
   Germany, Austria and Switzerland       1,087,378          -         -
   Scandinavia                               59,797     78,250    42,458
   Rest of Europe                           162,973     54,801       313
   Asia Pacific rim                          20,000          -         -
                                          ---------    -------    ------
                                          1,559,262    151,176    51,274
                                         ==========    =======    ====== 
</TABLE>

8  LIQUIDITY AND CAPITAL RESERVES

   The company and its subsidiary, DMX-Europe (UK) Limited have suffered
   recurring losses from operations, have negative working capital and a net
   stockholders' deficit. In addition, during 1996, DMX Inc. stated that it
   would no longer financially support DMX-Europe. In December 1996, DMX Inc.'s
   board of directors approved the disposal of DMX-Europe N.V. and subsidiary,
   DMX-Europe (UK) Limited ("DMX-E") to Mr Jerold Rubinstein, its Chairman and
   Chief Executive Officer. DMX Inc. will retain a ten percent equity interest
   in the companies which would have an exclusive five year, royalty free
   license to use DMX Inc.'s music in Europe, the former Soviet Union, and in
   the Middle East. It is Mr Rubinstein's intention to seek to reorganize the
   operation of DMX-E and seek new equity investors. However, there can be no
   assurances that the proposed reorganization will take place or that new
   equity investors will be found. Accordingly there is significant doubt as to
   the company's ability to continue as a going concern. The financial
   statements do not include any adjustment that might result from the outcome
   of this uncertainty.

                                     F-30