<PAGE>   1
 
   
     AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 12, 1997.
    
================================================================================
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
 
                                   FORM 10K/A
                                AMENDMENT NO. 2
 
(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)
 
<TABLE>
<S>                                            <C>
                   DELAWARE                                      95-4275106
       (State or other jurisdiction of                        (I.R.S. Employer
        incorporation or organization)                      Identification No.)
</TABLE>
 
                    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.
 
   
    
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<PAGE>   2
 
ITEM 6. SELECTED FINANCIAL DATA.
 
     The following is a summary of selected financial data. See the financial
statements included herein for more detailed information.
 
   
<TABLE>
<CAPTION>
                                                           FISCAL YEAR ENDED SEPTEMBER 30,
                                       ------------------------------------------------------------------------
                                           1996           1995           1994           1993           1992
                                       ------------   ------------   ------------   ------------   ------------
<S>                                    <C>            <C>            <C>            <C>            <C>
INCOME STATEMENT DATA
Revenue..............................  $ 17,326,603   $ 12,773,384   $  9,377,059   $  4,792,527   $    773,861
Operating, selling, general and
  administrative expenses............    30,460,622     22,166,898     20,558,849     17,726,103     27,306,904
Depreciation and amortization........     1,883,415      1,341,775      1,065,666        790,229        565,694
Loss on disposal of DMX-Europe
  N.V................................     7,153,278             --             --             --             --
                                       ------------   ------------   ------------   ------------   ------------
Net operating loss...................   (22,170,712)   (10,735,289)   (12,247,456)   (13,723,805)   (27,098,737)
Equity earnings in Galactic/TEMPO....       197,227        306,640        223,852        143,622        283,889
Equity loss in DMX-Europe N.V........   (11,852,650)   (13,271,599)    (4,746,239)    (3,553,932)            --
Interest income (expense), net.......      (188,507)        73,540         38,168         85,943        482,974
Other income (expense), net..........       159,865        547,179        226,461        640,197       (108,530)
                                       ------------   ------------   ------------   ------------   ------------
Net loss.............................  $(33,854,777)   (23,079,529)   (16,505,214)   (16,407,975)   (26,440,404)
                                       ============   ============   ============   ============   ============
Loss per share.......................  $      (0.68)         (0.60)         (0.48)         (0.52)         (0.90)
                                       ============   ============   ============   ============   ============
BALANCE SHEET DATA
  (AT END OF YEAR)
Current assets.......................  $  7,719,069     12,122,658      9,650,493      3,102,741     10,972,178
Investments in Galactic/TEMPO Sound
  Partnership........................       504,156        456,929        450,289        476,448        332,826
Goodwill, net of accumulated
  amortization.......................     4,535,658             --             --         15,459         41,960
Other assets, net of accumulated
  depreciation.......................        99,148        166,419         55,169         54,000        219,141
Property and equipment, net of
  accumulated depreciation...........     5,893,988      4,336,378      4,443,995      3,225,093      2,388,227
                                       ------------   ------------   ------------   ------------   ------------
Total assets.........................  $ 18,752,019     17,082,384     14,599,946      6,873,741     13,954,332
                                       ============   ============   ============   ============   ============
Current liabilities..................  $ 16,636,107      3,250,042      3,405,082      3,714,835      3,198,719
Royalty payable......................     1,773,275      1,251,983        713,421        267,770         37,162
Deferred revenue.....................       295,461        376,395        418,540             --             --
Capital lease obligation.............     1,401,426      1,446,085      1,502,990             --             --
Notes payable........................            --             --        201,090        382,545             --
Investment in DMX-Europe N.V.........            --     15,886,116      8,175,171      3,428,932             --
                                       ------------   ------------   ------------   ------------   ------------
Total liabilities....................    20,106,269     22,210,621     14,416,294      7,794,082      3,235,881
Net stockholders' (deficit) equity...    (1,354,250)    (5,128,237)       183,652       (920,341)    10,718,451
                                       ------------   ------------   ------------   ------------   ------------
Total liabilities and stockholders'
  equity.............................  $ 18,752,019     17,082,384     14,599,946      6,873,741     13,954,332
                                       ============   ============   ============   ============   ============
</TABLE>
    
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.
 
SUMMARY OF PERFORMANCE.
 
     The net loss for the fiscal year ended September 30, 1996 was $33.8 million
or $0.68 per share compared to $23.1 million or $0.60 per share for the fiscal
year ended September 30, 1995. The increase in the net loss of $10.7 million
primarily resulted from the Company's accrual for estimated loss on disposal of
DMX-E of $7.2 million and the increased net loss resulting from DMX-E's
operations of $3.5 million. The Company has entered into agreements which
provide for the disposition of DMX-E to Mr. Jerold H. Rubinstein, its Chairman
and Chief Executive Officer. 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
 
                                       20
<PAGE>   3
 
place them in receivership. Accordingly, the Company has estimated the loss on
the disposal of DMX-E in the accompanying consolidated statements of operations.
 
     The increase in revenues of $4.5 million or 35.6% was primarily attributed
to the growth in commercial subscribers and growth in residential subscribers
resulting from the launch of DMX on PrimeStar in the first quarter of the fiscal
year.
 
     The Company continues to focus on expanding its market share in the
commercial arena and continues to develop third party distribution
relationships. In the first quarter of the 1996 fiscal year, DMX was launched by
two third party distributors: PrimeStar and TML-Bluestar. PrimeStar initially
offered eight DMX formats as a basic service to all PrimeStar subscribers for a
per subscriber fee, and will be expanding the DMX format offerings to include
both basic and premium tier options. TML-Bluestar is offering 40 music formats
to all MultiChoice basic subscribers in Sub-Saharan Africa for a per subscriber
license fee. The Company does not incur any incremental costs in providing the
signal to TML-Bluestar for distribution, nor is it responsible for the payment
of music rights. Additionally, DMX was launched on AlphaStar Television Network
Inc. as a basic service for a per subscriber license fee in the latter part of
the 1996 fiscal year.
 
RESULTS OF OPERATIONS.
 
REVENUE DMX INC.
 
     The Company's revenues were generated from affiliated cable system
subscriber fees for cable distribution of DMX to residential and commercial
subscribers; affiliated cable system subscribers fees for DBS distribution to
commercial subscribers; subscriber fees from third party DBS distributors;
subscriber fees from the Company's DBS distribution through its DMX for
Business, commercial national account sales program and owned and operated sales
program; subscriber fees from the Company's launch of a DTH service through its
DMX-Direct sales program; fees from the Company's recent launch of on-premise
business music service, DMX-Disc; and fees earned from licensing and royalty
arrangements in foreign markets.
 
     Total revenues for the fiscal year increased to $16.5 million in 1996 from
$12.8 million in 1995. The $3.7 million or 29.1% increase was primarily
attributed to: (i) increased residential subscriber fees resulting from the
launch of DMX on PrimeStar in the first fiscal quarter of 1996 (this added
source of revenue did not exist in the prior year); (ii) continued growth in
commercial subscriber fee revenue as a result of increased sales and marketing
activity in the affiliate sales, national accounts, and O&O groups; and (iii)
increased other revenue representing equipment sales and lease revenue related
to the growth and increased sales and marketing activity of the commercial sales
group. In June, 1994, the Company launched on the Ku-Band satellite which
enabled DMX for Business to gain access to nearly 100% of the business
marketplace in the United States. Concurrent with this launch, the Company's
commercial division implemented its national accounts sales program, and in May
1995 launched its first owned and operated sales group ("O&O") in the Southern
California business market.
 
     Commercial subscriber fees represented approximately 36.0% as compared to
30.7% of total subscriber fee revenue for the fiscal years ended September 30,
1996 and 1995, respectively. Residential subscriber fees represented
approximately 64.0% and 69.3% of total subscriber fee revenue for the fiscal
years ended September 30, 1996, and 1995, respectively. Subscriber fee revenue
from TCI and its affiliates represented approximately 55% and 61% of total
subscriber fees, for the years ended September 30, 1996 and 1995, respectively.
 
     Total revenues for the 1995 fiscal year increased to $12.8 million from
$9.4 million in 1994. The $3.4 million or 36.2% increase was primarily
attributed to increased commercial subscriber fees of 103% and an increase in
residential subscriber fees of approximately 16.9%. Commercial subscriber fees
represented approximately 31% and 20% of total subscriber fee revenue for the
fiscal years ended September 30, 1995 and 1994, respectively. Residential
subscriber fees represented approximately 69% and 80% of total subscriber fee
revenue for the fiscal years ended September 30, 1995 and 1994, respectively.
Subscriber fee revenue from TCI and its affiliates represented approximately 61%
and 65% of total subscriber fees for the years ended September 30, 1995 and
1994, respectively.
 
                                       21
<PAGE>   4
 
REVENUE DMX-E.
 
   
     The Company has not previously consolidated the operations of DMX-E and as
such amounts for 1996 represent the activities from acquisition date of May 17,
1996 through September 30, 1996. As discussed below, the Company has decided to
dispose of or cease the operations of DMX-E.
    
 
OPERATING EXPENSES -- DMX INC.
 
     Total operating expenses increased to $39.5 million for the fiscal year
ended September 30, 1996 from $23.5 million for 1995. The $16.0 million or 68%
increase was primarily attributed to the inclusion of operating expenses and
estimated loss on disposal of DMX-E. Additionally, the increase was attributable
to increased sales and marketing expense of $1.1 million resulting from the
expansion of the national accounts sales program and the O&O sales group;
increased studio and programming expense of $1.2 million resulting from an
increase in music rights commensurate with the growth in subscribers and fee
revenue; the increased number of music formats from 69 to over 90 channels and
increased satellite and uplink costs due to double illumination in December 1995
through February 1996, while the Company migrated from the AT&T Telstar 401
Ku-Band satellite to the AT&T Telstar 402R Ku-Band satellite.
 
     Total operating expenses increased to $23.5 million for the fiscal year
ended September 30, 1995 from $21.6 million for 1994. The $1.9 million or 8.8%
increase was primarily attributed to increased studio and programming expense of
$2.3 million, reflecting the transponder and uplinking expenses due to the
Ku-Band satellite launch in June 1994 and increased music rights expense
corresponding to subscriber fee revenue growth; increased sales and marketing
expense of $969,000, due to new commercial sales programs; and an increased
general and administrative expense of $614,000 primarily due to an increase in
the provision for doubtful accounts. These increases were partially offset by
the decrease in stock bonus expense of $2.0 million.
 
  General and Administrative Expenses.
 
     General and administrative expenses include costs incurred to operate the
Company's corporate office facilities, such as rent and insurance, personnel
costs associated with the general corporate and finance staff, as well as
outside professional fees for legal, audit and tax services.
 
     General and administrative expenses increased to $5.8 million for the
fiscal year ended September 30, 1996 from $5.5 million for 1995. The $291,000
net increase was primarily attributed to net increases in personnel cost of
$290,000 which included an increased performance bonus paid to the Chairman, a
reclassification of a certain executive's compensation from sales and marketing
to general and administrative, and increases due to additional staff which all
occurred in the first half of the fiscal year and was partially offset by
decreases in salaries because of an executive officer and other staff leaving
the Company in the second half of the fiscal year. Other net changes in general
and administrative expenses included increased legal fees of $161,000 and
increased printing and investor materials of $100,000 due to the DMX-E merger
and special shareholders meeting regarding such merger and other business
development activities; partially offset by a reduction in occupancy expense of
$77,000 which resulted from the negotiation of more favorable lease terms;
decreased consultant fee expense of $74,000; decreased other shareholder
relations expense of $63,000 and decreased public relations expense of $26,000.
 
     General and administrative expenses increased to $5.5 million for the
fiscal year ended September 30, 1995 from $4.9 million for 1994. This $614,000
or 12.5% net increase was primarily attributed to the increase in provision for
doubtful accounts of $543,000; an increase in personnel costs of $286,000, due
to the use of temporary consultants and addition and replacement of staff, a
performance bonus paid to the Chairman and normal salary adjustments; increase
in rent of $49,000; less reductions in legal expense of $164,000 and public
relations expense of $75,000 as the Company relied less on outside firms and
established a public relations department internally.
 
                                       22
<PAGE>   5
 
  Sales and Marketing Expenses.
 
     Sales and marketing expenses include costs incurred for both the
residential and commercial sales divisions in connection with new cable system
launches of DMX; the related cooperative funding provided to systems to assist
their marketing efforts; the costs related to the marketing of DMX for Business;
the accrual of the Scientific-Atlanta royalties; the sales and support staff and
related expenses; and the development of marketing campaigns and materials.
 
     Sales and marketing expense increased to $8.6 million for the fiscal year
ended September 30, 1996 from $7.4 million for 1995. The $1.1 million or 14.9%
increase represented an increase of $477,000 in salaries and commissions
resulting from increased sales and marketing activities of the Company's
commercial division, which added sales and support staff for the national
account sales program and the O&O group. Other sales and marketing expense
increases primarily represented increased office, rent and telephone of $221,000
related to the commercial division expansion; increased travel and entertainment
and convention and conferences totaling $363,000, reflecting growth in the sales
force and direct marketing activities for both the residential and commercial
divisions, including the Company's contribution and marketing activities related
to the 1996 Summer Olympics.
 
     Sales and marketing expense increased to $7.4 million for the fiscal year
ended September 30, 1995 from $6.5 million for 1994. The increase of $969,000 or
15.0% primarily represented increased salaries and commissions of $930,000 from
the launch of the Company's DMX-Direct sales program during the year and the
reallocation of the related executive's salary in charge of that program from
general and administrative expense in the prior year and the building of the
sales and support staff for the national account sales program and owned and
operated sales program.
 
     Other fluctuations in sales and marketing expense during the fiscal year
ended September 30, 1995 included an increase in installation costs of $100,000
related to commercial sales; an increase in the Scientific-Atlanta royalty
accrual of $93,000 commensurate with the growth in cable subscriber revenue;
increases in travel & entertainment expense of $100,000, postage and shipping of
$96,000 and other miscellaneous office expense of $67,000, as the sales force
grew and direct marketing for both residential and commercial divisions played a
more significant role as compared to expenses incurred for new cable system
launches and related cooperative funding provided to the cable systems in prior
years. Marketing expenses related to new cable system launches and related
cooperative funding provided to the systems decreased by $470,000.
 
  Studio and Programming Expenses.
 
     Studio and programming expenses include costs incurred for music
performance royalties, music research and programming of DMX formats, studio
facility overhead, satellite transponder and uplinking expenses.
 
     Studio and programming expense increased to $9.0 million for the fiscal
year ended September 30, 1996 from $7.8 million for 1995. The $1.2 million or
15.4% increase represented increased music rights expense of $776,000
commensurate with the growth in subscribers and fee revenue; increased uplink
and satellite cost of $156,000, representing the cost of double illumination as
the Company migrated from the AT&T Telstar 401 Ku-Band satellite to the AT&T
Telstar 402R Ku-Band satellite in the second quarter of the fiscal year. The
remainder of the net increase of $231,000 represented increased salaries,
program consultant expenses and the direct costs related to the Company's
increase in music formats from approximately 69 to over 90 over the last year
and DMX-Disc production cost incurred to establish the new on-premise DMX-Disc
product line.
 
     Studio and programming expense increased to $7.8 million for the fiscal
year ended September 30, 1995 from $5.5 million for 1994. The increase of $2.3
million or 41.8% primarily represented an increase in satellite transponder and
uplinking expense of $1.4 million attributed to the Ku-Band satellite launch in
June 1994; an increase in music rights expense of $616,000 commensurate with the
growth in subscribers and fee revenue; and an increase in salaries of $243,000
reflecting added studio and programming personnel to manage the expansion to
over 90 channels by the end of the year.
 
                                       23
<PAGE>   6
 
  International Development Expenses.
 
     International development expenses include costs incurred for the continued
development of DMX distribution opportunities outside of the United States.
 
     International development expense decreased to $2,000 for the fiscal year
ended September 30, 1996 from $168,000 for 1995 as the Company did not focus on
new development of DMX distribution in foreign companies, outside of Europe, as
it had in previous years.
 
     International development expense increased to $168,000 for the fiscal year
ended September 30, 1995 from $61,000 for 1994. The increase was primarily due
to consulting fees and increased travel expenses related to business
development, and the demonstration of DMX to potential foreign partners.
 
  Research and Development Expenses.
 
     Research and development expenses include costs incurred for the ongoing
development of new technologies and refinements of existing technology used in
the distribution of DMX both in the U.S. and in Europe including the DTH
technology developed for DMX-E's launch on the ASTRA satellite in 1995. Overhead
and project development costs of the engineering department are allocated on a
shared benefit basis with DMX-E.
 
     Research and development expense of $778,000 for the fiscal year ended
September 30, 1996 remained comparable with the prior year's expense of $725,000
as the infrastructure for both the Company and DMX-E has been established and
new development of major projects was curtailed.
 
     Research and development expense decreased to $725,000 for the fiscal year
ended September 30, 1995 from $990,000 for 1994. The decrease was primarily
attributed to the research and development department dedicating resources to
the development of DTH technology for DMX-E which was charged to DMX-E.
 
  Stock Bonus and Options Compensation.
 
     Stock bonus and option compensation expense for the fiscal years ended
September 30, 1996 and 1995 was $550,000 and related to the extension of the
exercise date to December 31, 1996 on options to purchase 350,000 shares of
common stock granted to the Chairman in October 1990. The decrease in stock
bonus and option compensation expense of $2.1 million to $500,000 for the fiscal
year ended September 30, 1995 from $2.6 million for 1994 represented the
compensation related to a stock bonus granted the Chairman in 1991.
 
OPERATING EXPENSES -- DMX-E.
 
     The Company has not previously consolidated the operations of DMX-E and
such amounts for 1996 represent the activities from acquisition date of May 17,
1996 through September 30, 1996. As discussed below, the Company has decided to
dispose or cease the operations of DMX-E.
 
OTHER INCOME (EXPENSE).
 
     Other income (expense) includes the Company's earnings or losses from its
investment activities as well as miscellaneous other income and expense.
 
  Other Income.
 
     Other income decreased to $172,000 for the fiscal year ended September 30,
1996 from $780,000 and represents lease income from DMX-E for the equipment
lease.
 
     Other income increased to $780,000 for the fiscal year ended September 30,
1995 from $332,000 for 1994. The increase was primarily attributed to the
reversal of an accrued liability of $300,000 which was recorded as an estimated
liability in 1990 related to pre-manufacturing prototype testing and
enhancements to the digital audio tuner which the Company no longer has an
obligation to pay.
 
                                       24
<PAGE>   7
 
  Other Expense.
 
     Other expense for the fiscal year ended September 30, 1996 totaled $12,000
as compared to $233,000 for 1995. The decrease related to an accrual for music
performance royalties of $220,000 in the fiscal year 1995 as settlement of a
contract negotiation.
 
     Other expense for the fiscal year ended September 30, 1995 totaled $233,000
as compared to $106,000 for the fiscal year ended September 30, 1994. This
increase relates to an accrual related to music performance royalties of
$220,000 as settlement of a contract negotiation.
 
Disposal of DMX-E.
 
     The Company has entered into definitive agreements providing for the
disposition of DMX-E to Mr. Jerold Rubinstein, the Company's 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
distribute the DMX music service in Europe, the former Soviet Union, and in the
Middle East and will have the right to use the Company's trademarks for two
years. In addition, Mr. Rubinstein has agreed to guaranty certain obligations of
the European operations for satellite-uplink capacity. The Company had
previously determined to cease financial support for DMX-E operations and, in
the absence of some other arrangements to provide financial support to DMX-E, to
place them in receivership. Mr. Rubinstein will seek to reorganize the
operations of DMX-E and will seek new equity investors. If DMX-E cannot be
reorganized, then Mr. Rubinstein intends to organize a new company to distribute
the music service on essentially the same terms and the Company will subscribe
for a ten percent equity interest in the new venture.
 
     At September 30, 1996 the estimated loss on disposal of DMX-E was accounted
for in the Company's consolidated financial statements. The estimated loss on
the disposal of DMX-E includes the Company's net investment in these
subsidiaries of $5.7 million and other obligations guaranteed by the Company of
$1.4 million.
 
     The net loss from DMX-E operations increased to $16.8 million for the
fiscal year ended September 30, 1996 from $13.3 million for 1995. The increase
of $3.5 million was attributed to the Company recording 100% of DMX-E net loss
for the fiscal year ended September 30, 1996 as compared to recording 100% of
DMX-E loss for the fourth quarter of the fiscal year ended September 30, 1995
and 51% for the first three quarters of the fiscal year 1995. In the fiscal year
ended September 30, 1995, DMX-E fully utilized all funds available under the
TCI-E credit facility. In the fourth quarter of the fiscal year ended September
30, 1995, the Company funded operating losses of DMX-E and accordingly the
equity in loss of DMX-E included operating losses funded by the Company in
excess of its guaranteed portion of the debt.
 
     The equity in loss of DMX-E increased to $13.3 million for the fiscal year
ended September 30, 1995 from $4.7 million for 1994. The increase of $8.6
million was attributed to DMX-E's increased net loss due to increased technical,
legal and administrative expenses incurred to develop the necessary
infrastructure to provide 83 DMX channels for the DTH launch on the ASTRA
satellite system. DMX was launched in August 1995 in Germany, Austria and
Switzerland and marked the beginning of the Pan European launch of DMX
distribution.
 
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.
 
                                       25
<PAGE>   8
 
   
     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. At December 31, 1996, the
Company was obligated to purchase 8,300 Comstream DR-200 Digital Satellite
Receivers at an aggregate cost of approximately $3,000,000. To the extent not
otherwise satisfied by approved customers or affiliates of the Company, the
Company intends to utilize a portion of the proceeds of the TCI loan to fund
such purchase commitment. The Company is negotiating to extend the term of the
purchase commitment and may also seek to obtain additional financing, if
necessary, for such tuner purchases. However there can be no assurances that
such extension or financing can be obtained. 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 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 11 to the Company's
consolidated financial statements and in Discontinued Operations of DMX-E above,
the Company has ceased funding the operations of DMX-E and 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.
    
 
INFLATION.
 
     Management believes that the effect of inflation has not been material to
the Company. However, inflation in the costs of personnel, marketing,
programming or certain other operating expenses could significantly affect the
Company's future operations. Current economic conditions indicate a relatively
low inflationary period and as a result, inflation is not expected to materially
affect the Company in fiscal 1997.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
     See Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K for the Company's Consolidated Financial Statements, the notes thereto, the
Consolidated Financial Statements of DMX-Europe N.V. and subsidiary, the notes
thereto and Schedules filed as part of this report.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.
 
     None.
 
                                       26
<PAGE>   9
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
 
     The Company's Certificate of Incorporation and Bylaws provide that the
number of directors shall be determined from time to time by the Board of
Directors but may not be less than three. The Board of Directors is currently
composed of seven members. The Bylaws further provide for the division of the
directors into three classes of approximately equal size, with directors in each
class elected for a three-year term and approximately one-third of the directors
elected each year.
 
     None of the directors or executive officers were selected pursuant to any
arrangement or understanding, other than with the directors and executive
officers of the Company acting within their capacity as such. There are no
family relationships among directors or executive officers of the Company as of
the date hereof.
 
     The following table sets forth biographical information of the directors of
the Company.
 
<TABLE>
<CAPTION>
                                                                                      YEAR FIRST
                                                                                        BECAME
                                        PRINCIPAL OCCUPATION OR EMPLOYMENT            DIRECTOR/
        DIRECTORS           AGE       AND OCCUPATION FOR THE PAST FIVE YEARS         TERM EXPIRES
        ---------           ---       --------------------------------------       ----------------
<S>                         <C>   <C>                                              <C>
Kent Burkhart.............  62    Chairman of Burkhart/Douglas and Associates       1990/1998
                                  since 1973. He is also President and a Director
                                  of Degree Communications.(1)
Donne F. Fisher...........  58    Director of TCI Communications, Inc. since 1980   1996/1996
                                  and of Tele-Communications, Inc. since June of
                                  1994. Mr. Fisher is also a director of General
                                  Communication, Inc. and United Video Satellite
                                  Group Inc.
Leo J. Hindery, Jr........  49    Founder, Managing General Partner and Chief       1996/1997
                                  Executive Officer of InterMedia Partners since
                                  1988. Mr. Hindery is a Director of InterMedia
                                  Partners and Home Shopping Network, Inc.
Bhaskar Menon.............  62    Formerly Chairman and Chief Executive Officer     1991/1997
                                  of EMI Music Worldwide from 1979 through July
                                  1990; President and Chairman of the
                                  International Federation of the Phonographic
                                  Industry (IFPI) from 1989 through June 1991;
                                  private businessman since June 1991; Chairman
                                  of I.M.I. Incorporated since 1995.
Jerold H. Rubinstein......  58    Chairman of the Board and Chief Executive         1986/1996
                                  Officer of the Company since May 1986; Director
                                  of United Services Advisors, Inc. since 1989;
                                  Director of Spatializer Audio Laboratories,
                                  Inc. since 1992; Chairman of the Board of
                                  DMX-Europe since May 1993.
James R. Shaw, Sr.........  62    Founder, President and Chief Executive Officer    1993/1998
                                  of Shaw Communications Inc. since 1970.
</TABLE>
 
---------------
 
<TABLE>
<S>                         <C>   <C>                                              <C>
(1) A radio venture, which Mr. Burkhart was involved with through Degree Communications, defaulted
    on its loan obligation in the amount of $6,000,000. The secured lender asserted its rights to
    have a receiver appointed in August 1991. The receivership closed September 29, 1992.
</TABLE>
 
                                       27
<PAGE>   10
 
   
     The Company sub-leases space on a U.S. domestic communications satellite
known as C-3 Transponder 24. The sub-lease was entered into in December 1992
with WTCI, which in turn leases the satellite transponder from GE American
Communications, Inc. WTCI's monthly charge for the satellite, uplink and
management fee is approximately $204,000.
    
 
     The Company sub-leases space on a Ku-Band satellite known as AT&T TELSTAR
402R. The sub-lease was entered into in March 4, 1994 with WTCI, which in turn
leases the transponder from AT&T Corp. Monthly sub-lease charges for the
transponder and uplink is approximately $166,000.
 
DIRECTOR COMPENSATION.
 
     The Company does not pay fees to its directors for their service on the
Board of Directors or for attendance at meetings of the Board or committees.
Directors who were not full-time salaried employees of the Company or its
subsidiaries received a grant in fiscal 1996 of options to acquire 50,000 shares
of Common Stock, under the DMX Inc. 1993 Stock Option Plan, upon their effective
date of service as a director and after each twelve month period of continuous
service as director of the Company thereafter, received an additional option to
acquire 50,000 shares up to a maximum of two such periods.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
 
     The following table sets forth the beneficial ownership of Common Stock as
of December 31, 1996 by each person known to the Company to be the beneficial
owner of more than five percent of the outstanding shares of Common Stock by
each executive officer and director of the Company, and by all directors and
executive officers as a group.
 
   
<TABLE>
<CAPTION>
                                                                  AMOUNT AND NATURE          PERCENT
                            NAME                              OF BENEFICIAL OWNERSHIP(1)   OF CLASS(2)
                            ----                              --------------------------   -----------
<S>                                                           <C>                          <C>
Tele-Communications, Inc....................................         27,249,575(3)            45.73%
Shaw Communications Inc.....................................          7,600,000(4)            12.21%
Jerold H. Rubinstein, Chairman of the Board and Chief
  Executive Officer.........................................          3,025,828(5)             4.96%
Kent Burkhart, Director.....................................            200,000(6)                *
V. Bhaskar Menon, Director..................................            200,000(7)                *
James R. Shaw, Sr., Director................................          8,468,000(8)            14.18%
J.C. Sparkman, Director.....................................            350,000(9)                *
Otis Smith, Executive Vice President........................            83,333(10)                *
Douglas G. Talley, Executive Vice President.................           133,333(11)                *
Lon Troxel, Executive Vice President........................           133,333(12)                *
Directors and Executive Officers............................        12,600,894(13)            20.30%
  (a group of 9 persons)
</TABLE>
    
 
  *  Less than 1%
 
 (1) Each named person has sole voting and investment power with respect to the
     shares listed, except as noted below and provided by community property
     laws, where applicable.
 
 (2) Shares which the person (or group) has the right to acquire within 60 days
     after December 31, 1996, are deemed to be outstanding in calculating the
     percentage ownership of the person (or group) but are not deemed to be
     outstanding as to any other person (or group).
 
 (3) Shares held by Tele-Communications, Inc. and its subsidiaries and
     affiliates were based upon a Schedule 13D, Amendment No. 3, filed on June
     6, 1996. The business address of Tele-Communications, Inc. is 5619 DTC
     Parkway, Englewood, Colorado 80111.
 
 (4) Based upon a Schedule 13D, filed on March 15, 1995, and a Form 4 filed on
     January 9, 1996. Does not include 276,080 shares held by James R. Shaw
     Securities Limited, 110,580 shares held by Brasha Holdings Ltd., 110,580
     shares held by Jay-Shaw Holdings Ltd., 110,580 shares held by Julmar
     Holdings Ltd., and 110,580 shares held by Shawnee Estates Ltd., which
     entities are affiliates of Shaw Communications Inc. Shaw Communications
     Inc. is a public company whose non-voting securities are
 
                                       32
<PAGE>   11
 
     listed on the Toronto Stock Exchange and the Alberta Stock Exchange. Mr.
     Shaw, Sr. and members of his family and members of Leslie E. Shaw's (Mr.
     Shaw, Sr.'s brother) family hold directly and indirectly, a majority of the
     voting shares of Shaw Communications Inc. and such shares are governed by
     the terms of a voting trust. Mr. Shaw, Sr. and members of his family do
     not, directly or indirectly, hold a majority of the publicly traded
     non-voting shares. The business address of Shaw Communications Inc. is
     630-3rd Avenue, Suite 900, Calgary, Alberta T2P4L4.
 
   
 (5) Includes 9,000 shares owned of record by Mr. Rubinstein's wife and minor
     child and 1,386,667 shares which Mr. Rubinstein has the right to acquire
     within 60 days of December 31, 1996, by the exercise of vested stock
     options. Mr. Rubinstein's business address is 11400 West Olympic Boulevard,
     Suite 1100, Los Angeles, California 90064-1507.
    
 
 (6) Represents 200,000 shares which Mr. Burkhart has the right to acquire
     within 60 days of December 31, 1996, by the exercise of vested stock
     options.
 
 (7) Represents 200,000 shares which Mr. Menon has the right to acquire within
     60 days of December 31, 1996, by the exercise of vested stock options.
 
 (8) Includes the following shares, to which Mr. Shaw, Sr. disclaims beneficial
     ownership: 7,600,000 shares held by Shaw Communications Inc., 276,080
     shares held by James R. Shaw Securities Limited, 110,580 shares held by
     Brasha Holdings Ltd., 110,580 shares held by Julmar Holdings Ltd., 110,580
     shares held by Shawana Estates Ltd., and 110,580 shares held by Jay-Shaw
     Holdings Ltd. Mr. Shaw, Sr. holds a majority of the shares of Jay-Shaw
     Holdings Ltd., Brasha Holdings Ltd. and Shawana Estates Ltd. The remaining
     shares of each such entities, other than certain preferred shares held by
     Julmar Holdings Ltd., a corporation wholly owned by Mr. Shaw, Sr., are held
     by children of Mr. Shaw, Sr. Each of the children has reached the age of
     majority. Mr. Shaw, Sr. holds 48% of the voting shares of James R. Shaw
     Securities Limited. The balance of voting shares are held by and for the
     benefit of Mr. Shaw, Sr.'s family members. Includes 100,000 shares which
     Mr. Shaw, Sr. has the right to acquire within 60 days of December 31, 1996,
     by the exercise of vested stock options. Mr. Shaw, Sr.'s business address
     630-3rd Avenue, Suite 900, Calgary, Alberta T2P4L4.
 
 (9) Includes 200,000 shares which Mr. Sparkman has the right to acquire within
     60 days of December 31, 1996, by the exercise of vested stock options.
 
   
(10) Includes 83,333 shares which Mr. Smith has the right to acquire within 60
     days of December 31, 1996, by the exercise of vested stock options.
    
 
(11) Includes 133,333 shares which Mr. Talley has the right to acquire within 60
     days of December 31, 1996 by the exercise of vested stock options.
 
   
(12) Includes 133,333 shares which Mr. Troxel has the right to acquire within 60
     days of December 31, 1996, by the exercise of vested stock options.
    
 
   
(13) Includes 2,493,333 shares which members of the group have the right to
     acquire within 60 days of December 31, 1996, by the exercise of vested
     stock options. Includes those shares described in note 8, to which Mr.
     Shaw, Sr. has disclaimed beneficial ownership.
    
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
     Tele-Communications, Inc. ("TCI"), beneficially owns 43.54% of the
outstanding shares of Common Stock which includes 2,000,000 shares acquired at
$2.50 per share in a private placement on August 29, 1995 and 4,500,000 shares
acquired at $2.00 per share in a private placement on May 17, 1996. As a result
of the merger in 1996 of TCI-E into the Company upon the terms set forth in the
Agreement and Plan of Merger among TCI-E, United Artists Programming
International, Inc. ("UAPI") and the Company, UAPI, an affiliate of TCI, was
issued 10,841,624 shares of Common Stock.
 
     The Company under an agreement with Western Tele-Communications, Inc.
("WTCI"), a subsidiary of TCI, has a capital lease to lease equipment for its
studio and uplinking facility in Littleton, Colorado. The obligation under the
capital lease at September 30, 1996 was $1,492,550 with terms which extend to
2000 at an interest rate of 9.5%. The Company is also obligated to WTCI under
various operating leases for uplinking
 
                                       33
<PAGE>   12
 
                                    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
</TABLE>
    
 
                                       F-1
<PAGE>   13
 
                          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
12 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 12. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
    
 
   
     As discussed in Note 10 to the consolidated financial statements, the
Company changed its method of accounting for income taxes in the year ended
September 30, 1994.
    
 
                                            KPMG Peat Marwick LLP
 
Los Angeles, California
January 15, 1997
 
                                       F-2
<PAGE>   14
 
                                    DMX INC.
                                AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                          SEPTEMBER 30, 1996 AND 1995
 
                                     ASSETS
 
   
<TABLE>
<CAPTION>
                                                                  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      12,122,658
                                                                              -------------
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 4)                         504,156         456,929
Property and equipment, net (note 6)                              4,418,799       4,336,378
Property and equipment DMX-Europe N.V., net (note 6)              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 (note 7)                                    4,886,837       1,449,938
  Accrued loss on disposal -- DMX-Europe N.V. (note 5)            1,468,530              --
  Short-term note payable to bank (note 8)                               --          45,000
  Note payable (note 8)                                                  --         201,090
  Current portion of capital lease obligation (note 11)             410,108         371,136
                                                              -------------   -------------
         Total current liabilities continuing operations          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 11)                                         1,773,275       1,251,983
Investment in DMX-Europe N.V. (note 5)                                   --      15,886,116
Capital lease obligation (note 11)                                1,401,426       1,446,085
Stockholders' deficit (note 9):
  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 11)                                  --              --
                                                              -------------   -------------
         Total Liabilities and Stockholders' Deficit          $  18,752,019   $  17,082,384
                                                              =============   =============
</TABLE>
    
 
See accompanying notes to consolidated financial statements
 
                                       F-3
<PAGE>   15
 
                                    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 5)                       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 5)        5,741,325             --             --
  Loss on disposal of DMX - Europe N.V. (note 5)          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 5)          (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 5)                (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>   16
 
                                    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 9)           --          --        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 9)           --          --        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 9)           --          --        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>   17
 
                                    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>   18
 
                                    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 5. In connection with the
anticipated disposal of operations and considering the terms of such agreements
goodwill has been reduced by $5,685,000 due 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 beginning at inception of
service ratably over 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
 
                                       F-7
<PAGE>   19
 
                                    DMX INC.
                                AND SUBSIDIARIES
 
   
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
    
 
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.
 
     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>
 
     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
 
                                       F-8
<PAGE>   20
 
                                    DMX INC.
                                AND SUBSIDIARIES
 
   
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
    
 
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.
 
Reclassifications.
 
     Certain reclassifications of prior period amounts have been made to conform
to the current year's reporting format.
 
                                       F-9
<PAGE>   21
 
                                    DMX INC.
                                AND SUBSIDIARIES
 
   
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
    
 
   
(3) ALLOWANCE FOR DOUBTFUL ACCOUNTS.
    
 
   
     A summary of the activity of the allowance for doubtful accounts for the
years ended September 30, 1996, 1995 and 1994 follows:
    
 
   
<TABLE>
<CAPTION>
                                                    FOR THE YEAR ENDED SEPTEMBER 30,
                                                   -----------------------------------
                                                      1996          1995        1994
                                                   -----------    --------    --------
<S>                                                <C>            <C>         <C>
Balance, beginning of year                         $   856,802     156,802          --
Provision for doubtful accounts                        643,148     700,000     156,802
Accounts charged-off                                (1,248,703)         --          --
                                                   -----------    --------    --------
Balance, end of year                               $   251,247     856,802     156,802
                                                   ===========    ========    ========
</TABLE>
    
 
   
(4) 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>
    
 
   
(5) 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,
                                            -------------------------------------------
                                                1996            1995           1994
                                            ------------    ------------    -----------
<S>                                         <C>             <C>             <C>
STATEMENTS OF OPERATIONS DATA:
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>
    
 
                                      F-10
<PAGE>   22
 
                                    DMX INC.
                                AND SUBSIDIARIES
 
   
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
    
 
     The summarized balance sheet date of DMX-E as of May 17, 1996 follows:
 
<TABLE>
<CAPTION>
                                                                    AT
                                                               MAY 17, 1996
                                                                (UNAUDITED)
                                                              ---------------
<S>                                                           <C>
BALANCE SHEET DATA:
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.
 
   
     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.
    
 
                                      F-11
<PAGE>   23
 
                                    DMX INC.
                                AND SUBSIDIARIES
 
   
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
    
 
   
(6) 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.
 
   
(7) ACCRUED LIABILITIES.
    
 
   
     Accrued liabilities at September 30, 1996 and 1995 were comprised of the
following:
    
 
   
<TABLE>
<CAPTION>
                                                               1996            1995
                                                            ----------      ----------
<S>                                                         <C>             <C>
Accrued music right royalties                               $1,574,449      $  776,562
Accrued marketing credits                                    2,575,408              --
Accrued employee benefits                                      205,347         352,408
Other accrued expenses                                         531,633         320,968
                                                            ----------      ----------
                                                            $4,886,837      $1,449,938
                                                            ==========      ==========
</TABLE>
    
 
   
(8) 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
 
                                      F-12
<PAGE>   24
 
                                    DMX INC.
                                AND SUBSIDIARIES
 
   
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
    
 
$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.
 
   
(9) STOCKHOLDERS' DEFICIT.
    
 
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.
 
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
 
                                      F-13
<PAGE>   25
 
                                    DMX INC.
                                AND SUBSIDIARIES
 
   
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
    
 
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.
 
   
(10) 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.
 
   
(11) 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
 
                                      F-14
<PAGE>   26
 
                                    DMX INC.
                                AND SUBSIDIARIES
 
   
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
    
 
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 Payables.
    
 
     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
DMX-DJ's. The Company was not obligated to purchase or guarantee the purchase of
any minimum number of tuners or DMX-DJ'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.
    
 
   
     The Company licenses rights to rerecord and distribute music from a variety
of sources and pays royalties to songwriters and publishers through contracts
negotiated with performing rights societies such as the American Society of
Composers, Authors and Publishers ("ASCAP"), Broadcast Music, Inc. ("BMI") and
the Society of European Stage Authors and Composers ("SESAC"). The Company has
separate agreements with ASCAP, BMI and SEASAC for residential and commercial
distribution. Certain of the agreements are being negotiated on an industrywide
basis mainly over new rate structures that may require retroactive rate
increases.
    
 
                                      F-15
<PAGE>   27
 
                                    DMX INC.
                                AND SUBSIDIARIES
 
   
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
    
 
   
     The Digital Performance Right in Sound Recordings Act of 1995 ("1995 Act")
was signed into law on November 1, 1995. The 1995 Act establishes the right of
owners of the performance rights, such as the performers and record companies,
to control digital transmission of sound recordings by means of subscription
service digital transmissions. The 1995 Act provides a compulsory license for
noninteractive subscription services. An arbitration proceeding relating to
residential digital music distribution is pending before the United States
Copyright Office. The purpose of the proceeding is to determine the statutory
license royalty rate to be paid under the 1995 Act by the Company and other
digital music residential subscription services on services transmitted to
non-business subscribers. The rate charged is retroactive to February 1996 and
is contingent on the negotiated rate agreed to as result of the arbitration
proceeding. The Company has been accruing at an estimated rate of 3% of
residential subscriber fee revenue since such date.
    
 
   
     Although the Company cannot predict the outcome of rate negotiations and
proceedings, the Company has been accruing for the potential increases in rates.
To the extent the actual negotiated rates exceed the rate estimates used in the
accrual, additional amounts may be incurred.
    
 
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.
 
                                      F-16
<PAGE>   28
 
                                    DMX INC.
                                AND SUBSIDIARIES
 
   
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
    
 
   
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.
 
   
(12) 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 its 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. At December 31, 1996, the
Company was obligated to purchase 8,300 Comstream DR-200 Digital Satellite
Receivers at an aggregate cost of approximately $3,000,000. To the extent not
otherwise satisfied by approved customers or affiliates of the Company, the
Company intends to utilize a portion of the proceeds of the TCI loan to fund
such purchase commitment. The Company is negotiating to extend the term of the
purchase commitment, and may also seek to obtain additional financing, if
necessary, for such tuner purchases. However there can be no assurances that
such extension or financing can be obtained. 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
 
                                      F-17
<PAGE>   29
 
                                    DMX INC.
                                AND SUBSIDIARIES
 
   
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
    
 
   
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 11 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.
    
 
   
(13) 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>   30
 
                                DMX-EUROPE N.V.
 
                       CONSOLIDATED FINANCIAL STATEMENTS
                       SEPTEMBER 30, 1996, 1995 AND 1994
                       WITH INDEPENDENT AUDITORS' REPORT
 
                                      F-19
<PAGE>   31
 
                          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 September 30, 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.
    
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of DMX-Europe
N.V. and subsidiary at 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 in the United States.
 
   
     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. Management's plans in regard to these matters
are also described in Note 8. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
    
 
KPMG
Chartered Accountants                                            London, England
Registered Auditors                                              January 9, 1997
 
                                      F-20
<PAGE>   32
 
                                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>   33
 
                                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>   34
 
   
                                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>   35
 
                                DMX-EUROPE N.V.
 
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
             FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
 
   
<TABLE>
<CAPTION>
                                                                                              TOTAL
                                     COMMON    PREFERENCE    ACCUMULATED    TRANSLATION   STOCKHOLDERS'
                                     STOCK        STOCK        DEFICIT      ADJUSTMENT       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>   36
 
                                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 flow's 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>   37
 
                                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.
 
  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.
 
                                      F-26
<PAGE>   38
 
                                DMX-EUROPE N.V.
 
   
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
    
            (FORMING PART OF THE CONSOLIDATED FINANCIAL STATEMENTS)
 
  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.
 
(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 N.V. 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-27
<PAGE>   39
 
                                DMX-EUROPE N.V.
 
   
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
    
            (FORMING PART OF THE CONSOLIDATED FINANCIAL STATEMENTS)
 
(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:
 
   
<TABLE>
<S>                                                       <C>
Fiscal year ending 30 September:
     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.
 
   
(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
 
                                      F-28
<PAGE>   40
 
                                DMX-EUROPE N.V.
 
   
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
    
            (FORMING PART OF THE CONSOLIDATED FINANCIAL STATEMENTS)
 
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-29
<PAGE>   41
 
                                   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
                                              ----------------------------------
                                                  Chairman of the Board and
                                                   Chief Executive Officer
 
Date: June 12, 1997
 
     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
                      ---------                                       ----                       -----
<C>                                                    <S>                                 <C>
/s/ JEROLD H. RUBINSTEIN                               Chairman of the Board and Chief          June 12, 1997
-----------------------------------------------------    Executive Officer
 
/s/ J. WENDY KIM                                       Chief Financial Officer and              June 12, 1997
-----------------------------------------------------    Corporate Secretary
</TABLE>