<PAGE>

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                               ------------------

                                 Amendment 1 To
                                  FORM 10-KSB/A

(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
    1934
        For the fiscal year ended December 31,1998

[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934
        For the transition period from __________________ to __________________

                         Commission file number 0-17591

                         KALEIDOSCOPE MEDIA GROUP, INC.
                         ------------------------------
              (Exact name of small business issuer in its charter)


                     Delaware                                 93-0957030
                     --------                                 ----------
         (State or other jurisdiction of                   (I.R.S. Employer
          incorporation or organization)                  Identification No.)


                  244 W. 54th Street, New York, New York 10019
                  --------------------------------------------
               (Address of principal executive offices) (Zip Code)

                    Issuer's telephone number (212) 757-0700

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


        Title of each class            Name of each exchange on which registered

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

                          Common Stock, $.001 par value
                          -----------------------------
                                (Title of Class)


         Check whether the issuer (1) filed all reports  required to be filed by
Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 during the past 12
months (or for such  shorter  period  that the issuer was  required to file such
reports),  and (2) has been subject to such filing  requirements for the past 90
days. Yes _X_  No ____

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

         Issuer's revenues for the year ended December 31, 1998 are
$1,137,675.

         The aggregate market value of the voting and non-voting common stock
held by nonaffiliates of the issuer is $7,028,043 (as of March 31, 1999).

         The number of shares outstanding of the issuer's common stock is
40,955,960 (as of March 31, 1999).


<PAGE>
                                     PART I

Item 1. Description of Business

         This amendment contains information subsequent to the original filing.
Except as otherwise indicated, information contained herein has not been updated
since the Company's initial filing of the Form 10-K. The financial statements
have been amended in their entirety.

Corporate History

         Kaleidoscope Media Group, Inc. (the "Company"), then called BNN
Corporation ("BNN") and a publicly traded corporation without operations,
acquired all of the outstanding shares of Kaleidoscope Media Group, Inc., a
private corporation (now called HSPSMM, Inc. and referred to herein as "HSPS"),
on October 22, 1996. The transaction was effected by issuing shares of common
stock of the Company in an amount that resulted in the original HSPS
shareholders receiving approximately 40.3% of the then outstanding shares of the
Company. For financial reporting purposes, the transaction was recorded as a
recapitalization of HSPS. HSPS is the continuing, surviving entity for
accounting purposes, but the Company is the continuing entity for legal
purposes. On December 3, 1997, the Company, a Nevada corporation, was
reincorporated in the State of Delaware under its present name.

         HSPS was formed on May 3, 1996 by the issuance of approximately 59.8%
of its outstanding shares (equivalent to 5,685,688 shares of common stock of the
Company) for approximately 91% of the outstanding shares of SeaGull
Entertainment, Inc., ("SeaGull") and the issuance of approximately 40.2% of its
outstanding shares (equivalent to 3,814,312 shares of common stock of the
Company) for all of the outstanding shares of two affiliated corporations
constituting the Kaleidoscope Sports Group ("KSG")). For financial reporting
purposes, this transaction was recorded as a purchase of HSPS by SeaGull. In
1996, SeaGull acquired as treasury stock, the remaining 9% of its outstanding
shares not then owned by HSPS. In 1997, the Company disposed of substantially
all of its sports related properties of KSG.


Introduction

         At the beginning of 1998, The Company was a diversified entertainment,
sports and direct marketing company that operated, under three divisions through
subsidiaries.

         In December 1998 the Company determined to curtail all significant
operations of both the sports and direct marketing divisions. While the Company
may market existing content owned by these divisions, for the foreseeable future
it will concentrate its efforts on its entertainment division.

         During 1998 the Company incurred significant losses in the
entertainment division as the introduction of programming was either postponed,
or not introduced at all. In addition, sales of programs were less than
anticipated. As a result, the Company took steps to reduce or eliminate costs by
moving offices to less costly quarters, reducing the number of employees and,
most


                                       1
<PAGE>

important, establishing strategic alliances with production and distribution
companies. The Company determined for the immediate future not to be responsible
for the financing of production costs of its programs unless such financing was
restricted to future distribution of proceeds.

         From April 1999 through August 1999 the Company received $962,500 gross
proceeds in consideration of the sale of convertible notes. The investors
subject to certain conditions which have not been met were required to make
additional payments of $1,250,000. The Company is obligated to repay the Notes
with interest in April 2000. The Company however is negotiating with these
noteholders for additional financing and extension the payment of these notes.

         The principal executive offices of the Company are located at 244 West
54th Street, New York, New York and its telephone number is (212) 757-0700.

Business Strategy

         With respect to its entertainment operations, the Company focuses
primarily on production and distribution of television products. The Company
attempts to use strategic partnerships and pre- sales of distribution rights to
finance production budgets once the Company has identified television properties
to develop and produce. In addition, the Company emphasizes cost-effective
production techniques and the pre-sale of advertising time and foreign
distribution agreements by its television syndication operations to further
attempt to limit or cover the costs of production. This strategy is important in
maximizing the Company's profit from its television production operations and
minimizing the risk of loss of capital. The Company believes that its expertise
in both television production and domestic and foreign syndication is an
important factor in its ability to successfully compete in this area.

         The Company's distribution strategy is to become a leader in the
international distribution of television properties in two categories: (i) one
hour action dramas and mini series and; (ii) children's programming. In
furtherance of achieving its strategic goals, the Company is seeking to expand
its television operations through the acquisition of distribution and other
representation rights to entertainment properties.

         During 1998 and early 1999 the Company entered into arrangements with
(i) Victory Media of Germany for funding of mini-series like "Shaka Zulu" and
"Diamond Hunters"; (ii) Abrams Gentile Entertainment for production of animated
and live action series and specials and; (iii) BKS Entertainment for the
domestic distribution of the Company's product. The latter venture becomes
effective in second quarter of 1999 and should not only reduce costs
significantly, but also strengthen its relationships in the U.S. domestic
market. One of the first programs that BKS will be handling for KMG is the
domestic distribution of "Digital Cafe 2000". This half-hour weekly series
currently airing in the U.S., focuses on the internet, E-commerce and the impact
of the computer on literally every aspect of our daily lives.

 Entertainment Division

         The Entertainment Division (principally consisting of SeaGull's
business activities which is now conducted directly by the Company) is primarily
engaged in the business of distributing domestically and internationally
entertainment properties and exploiting the related licensing and merchandising
opportunities. It also provides consulting services in the development of
specialty television programming and is involved in the distribution of
entertainment library properties.



                                       2
<PAGE>



Programming Produced and Distributed by the Company
---------------------------------------------------

         In 1998, the Company released its made-for-television movie "Merlin:
The Magic Begins" based on that legendary character. The production of this
movie was fully financed by the Company. The title role has been cast with Jason
Connery (son of Sean Connery) and Deborah Moore (daughter of Roger Moore). The
movie was distributed for broadcast in 1998.

         In 1998, The Company acquired the rights to a new children's television
property and toy line entitled "Micronauts." The Company expects that the
television property to be introduced in 2000 as a weekly television series. The
Company also expects that the toy line will begin limited distribution. The
movie and series are based on the popular 1970's Marvel comic book and toy line
of the same name.

         In 1996 SeaGull entered into a joint venture agreement with Keller
Entertainment, Inc. under the name Keller Siegel Entertainment (the "Joint
Venture"). The Joint Venture produced and distributed a two-hour movie pilot and
20 episodes of the "Tarzan: The Epic Adventures" syndicated television series
domestically in 1996 and internationally in 1997. Beginning in the Fall of 1997,
the "Tarzan: The Epic Adventures" series was renewed for another season without
any new production, but previously produced half-hours (made into hours) were
syndicated for the U.S. market only. The Joint Venture continues to maintain the
license from Edgar Rice Burroughs for the "live-action" rights to "Tarzan". The
Tarzan Joint Venture will attempt to distribute these programs to cable and on
domestic syndication in 1999.

         In 1998, the Company signed agreements with Victory Media, one of
Germany's leading entertainment financing groups and producer of over 200 hours
of quality programming and 30 interactive CD-ROMS. Two $20 million mini-series
"Shaka Zulu" and the "Diamond Hunters" will be the foundation of this important
relationship. Victory Media has raised through private tax shelters in Germany
millions of dollars that financed production of high budgeted mini-series and
quality children programs. Victory has appointed the Company to be its exclusive
North American distributor as well as for other territories outside the U.S. in
which KMG has important relationships. Furthermore, because all projects are
fully financed before production begins the Company will be able in 1999 to be
paid as soon as signed distribution agreements are obtained by the Company. The
new "Shaka Zulu" four-hour mini-series which has an international cast of stars
including Baywatch's David Hasselhoff and Raiders Of The Lost Ark's Karen Allen,
began production in January 1999. The original Shaka mini-series was produced
over 10 years ago.

         During the year the Company abandoned efforts to complete production
and distribution of Team Extreme because of its inability to obtain financing
sufficient for the completion and distribution of this series.

The Television Market


         The entertainment industry is an approximately $30 billion per year
industry which is presently undergoing strategic changes as new technologies
proliferate in both the development and production of projects and in the
electronic distribution of entertainment programming. The


                                       3
<PAGE>



development and growth of the 500 channel cable system, DBS (Direct Broadcast
Satellite), Pay Cable, home video, CD-ROMs and other interactive multimedia are
creating many more opportunities for the distribution of entertainment
programming to the consumer, while at the same time reducing the overall market
share for any one program. Even with these changes, management believes that the
creative content of the programming will continue to drive the market share.
Consequently, management believes there is, and is likely to continue to be, a
growing demand for quality content-based entertainment products that can be
produced more efficiently.

         The United States television market is served by network affiliated
stations, independent stations and cable TV operators. During prime time hours
(primarily 8 P.M. to 11 P.M. in the Eastern and Pacific time zones and 7 P.M. to
10 P.M. in the Central and Mountain time zones), network affiliates primarily
broadcast programming produced for the network. In non-prime time, network
affiliates telecast network programming, off-network programming (reruns), first
run programming (programming produced for distribution on a syndicated basis)
and local programming produced by the local stations themselves. Independent
television stations, during both prime and non-prime time, produce their own
programs, telecast off-network programs or acquire first-run programs from
independent producers or "syndicators." A syndicator is generally a company that
sells programming to independent television stations and network affiliates.
Programming acquired by stations on a syndicated basis is generally acquired
either for cash license fees or an exchange commercial advertising time within
the program which is retained by the syndicator for sale ("barter") or for a
combination of cash and barter.

         The international television market continues to grow as the continued
growth and development of international television distribution channels
increases the demand for quality programming. International sales of programming
are made to television distributors on a cash basis. An initial cash down
payment is made upon the agreement of the international channel to display the
programming. The balance of the cash licensing fee is generally paid upon the
delivery of the programming. Sales of advertising time are retained by the
international television network.



                                        4
<PAGE>



         Television Distribution
         -----------------------

         Barter syndication is the process whereby a syndicator obtains
commitments ("clearances") from television stations to broadcast a program at a
certain time; retains advertising time in the program in lieu of receiving a
cash licensing fee and sells such retained advertising time for its own account
to national advertisers at rates based on projected ratings and viewer
demographics. From time to time, certain stations may require cash consideration
from the Company, in addition to programming, in exchange for advertising time.
By placing the program with televisions stations throughout the United States,
the syndicator creates an "ad hoc" network of stations that have agreed to carry
the program. The creation of the "ad hoc" network of stations, normally
representing a penetration of at least 70% of the total United States television
households (calculated by means of a generally recognized system as measured by
A.C. Nielsen), enables the syndicator to sell the commercial inventory to
sponsors desiring national coverage. The rates charged by a syndicator for
advertising time are generally at a lower cost per thousand viewers than those
which national advertisers are normally charged by the networks for similar
demographics.

         Fees paid by national advertisers for barter advertising are
established on the basis of household audience ratings or, more frequently, on
the basis for delivery of a certain demographic category of the viewing
audience, but may vary depending on the conditions in the general market for
television advertising. The desired household rating or demographic delivery, as
the case may be, is negotiated in advance with the advertiser or its
representative. In general, if the television program does not deliver at least
the agreed-upon audience, the distributor is obligated to make available
additional advertising time on the same program or other programs at no
additional cost or to refund that portion of the advertising fee attributable to
the failure to deliver the agreed-upon audience.

         Cable Network Licenses
         ----------------------

         Television programming can be licensed for telecast by cable networks,
such as the ESPN Lifetime, USA and Arts & Entertainment basic cable networks and
the Disney and HBO pay cable networks. The production and distribution of
programming for initial exhibition on cable networks is similar to that for
broadcast networks, although the license fees paid by cable networks are
typically considerably lower than those paid by the broadcast networks.

         International Television Production and Distribution
         ----------------------------------------------------

         Based on industry sources, the Company believes revenues from the
distribution of U.S. television programs industry wide to foreign markets have
increased significantly in recent years. Development in the European television
industry, such as the present trend towards increasing the number of privately
owned channels and greater channel capacity, may cause foreign sales to become a
more important component of the distribution of programs produced by the United
States television industry. There is no assurance that the Company's productions
will reflect such increase.


                                        5
<PAGE>

         New Programming
         ---------------

         In general, the Company earns a fee for distributing programs for
others based on a percentage of the license fees paid by television stations for
the right to broadcast particular programs. In certain domestic cases, all or a
portion of such license fee may be payable in television advertising time. The
advertising time is then sold by the Company to national advertisers.

         In addition to United States television broadcast rights, the Company
has in the past acquired, where available on acceptable terms, world-wide
broadcast television and non-standard television distribution rights (such as
cable and videocassette rights) to the programs it distributes. These
acquisitions are typically on a long-term exclusive basis, often between three
and twelve years, in some cases with various renewal options, and may provide
that the Company has the right to undertake production of the program in the
event the producer fails to deliver the contracted programming. As an example,
the Company has retained the rights for the worldwide videocassette distribution
of the "Tarzan: The Epic Adventures".

         Entering into arrangements for distribution of new material or
properties for television and new multimedia productions is essential to the
future growth of the Company. The Company may obtain new properties from several
sources: (i) distribution agreement with the owner of a property; (ii)
acquisition of existing properties; (iii) co-development of new properties; and
(iv) development of new properties internally. As long as the Company
experiences capital shortages, it will concentrate on acquiring distribution
rights as opposed to being responsible for financing of a project.



                                        6
<PAGE>





         Revenue Sources
         ---------------

         The Company's television programming business generates two significant
sources of revenue, distribution fees and the sale of advertising time.

         Distribution Fees

         In most cases, the Company's distribution revenues are based on a
percentage of the net revenues derived from the sale of advertiser sponsorships
or on cash license fees. Generally, the Company advances all distribution costs
of items such as advertising, promotion, tape shipping and tape duplication and
recovers such expenses from the program revenues. In some instances, these
expenses are assumed by the Company as part of its distribution fee. The
Company's fee for distribution is generally between 30% and 40% of net revenues
and its fee for advertiser sales representation is generally between 5% and 10%
of net revenues. However, each fee arrangement is separately negotiated and may
be subject to variation. The sums in excess of the Company's fees and expenses
and profit positions (where applicable) are remitted to the producers of the
programs which in certain cases may also be the Company.




                                        7
<PAGE>




         Sales of Advertising

         Fees for advertising time are established on the basis of a certain
assumed level of audience ratings and, in some cases, an assumed demographic
make-up of the viewing audience. While it is in the interest of the Company to
establish as high an assumed rating and as favorable demographic make up as
possible, there can be no assurance in advance that the actual rating or
demographic make-up of a particular program will support the fee initially
charged for advertising time on such program. If the television program does not
achieve the assumed rating or demographic make up (as determined by A.C.
Nielsen or similar ratings services), the Company may be obligated to offer the
advertiser additional time ("make goods") on the same program or on other
programs to fulfill any short fall in the actual rating or demographic
assumptions. Alternatively, the Company may be obligated to refund a portion of
the advertising fee. "Make goods" are the predominant means whereby the Company
satisfies such obligations to advertisers.

         Among the sponsors that have in the past purchased participation in the
Company's programs are: General Motors, Proctor & Gamble, Kraft/General Foods,
Hershey and Bristol Meyers. Sales are made through the Company's sales force and
through advertising agencies representing the sponsors. The Company's barter
syndication licenses provide that the Company retains a negotiated amount of
commercial time per program (usually 7 minutes per hour or 50% of the total
commercial time) for sale to national advertisers, with the remaining commercial
time retained by the station for local sale. Generally, the Company's fee for
sales of advertising time is between 5% and 10% of net revenues.

Sports Division

         In March 1997, the Company and Sports Marketing, Inc. reached an
agreement to create a joint venture to develop, produce and distribute boxing
tournaments both domestically and internationally. The two companies
collaborated on "Boxcino", a series of round robin boxing matches featuring
fighters from eight Latin American countries. The quarter- and semi-finals aired
on ESPN2 in May and July 1997, respectively, and the finals in each weight class
aired on ESPN in September 1997. The Company expected to continue this franchise
as well as to stage other boxing matches in 1998. While the Company believed
that boxing would be a major source of revenues in the future, the Company's
joint venture was unable to establish boxing matches in 1998. This division is
now dormant.

         The Company also has the worldwide distribution rights to two daily
fitness series ("Crunch" and "Cyberfit") currently being broadcast on ESPN2 and
available for distribution in territories outside the United States. The Company
believes that "Crunch" and "Cyberfit" are two of ESPN2's highest rated fitness
series because of their high energy and employment of state of the art fitness
techniques. The Company has derived a small amount of revenue from these
operations.






                                       8
<PAGE>

Direct Marketing Division

         The Direct Marketing Division was initiated in January 1997 when the
Company entered into a joint venture agreement with HSN Direct to form Hollywood
Connection LLC ("HC LLC"). HC LLC produced and distributed "Hollywood
Discoveries," a one-hour daily shopping program, which was broadcast in the
United States by over-the-air broadcasters and cable and satellite systems.
"Hollywood Discoveries" is designed to provide home shopping programming using
stage, screen, television, music and sports personalities to market merchandise
via taped programming in the domestic and international markets. The program met
with limited success in the United States and an operation has been discontinued
in the United States and all costs associated with the division have been
written off. The Company will nevertheless seek to offer, internationally, a
weekly "best of" episode(s) and/or format rights to broadcast entities, with
product fulfillment to be handled by the various international companies
associated with HSN Direct.

Competition

         Competition in the production and distribution of television
programming is intense. The Company's is a minor participant in the television
distribution business. The Company's programming competes with other first-run
programming, network reruns and programs produced by local television stations.
The Company competes with many other companies that have been acquiring,
producing and distributing programs for a longer period of time than the
Company, and most of these companies have greater financial resources than those
of the Company. These competitors include large television and film studios such
as Paramount Communications Inc., Columbia Pictures Television, 20th Century Fox
Film Corp., MCA Inc., and Warner Bros. Inc., as well as other television
distribution companies such as King World Productions, Inc., All-American
Television Inc. and Viacom International, Inc. The Company also competes with
other companies for the sale of television advertising time, including Tribune
Broadcasting Co./Entertainment Co., Viacom International, Inc., All-American and
King World.

         The Company's success is highly dependent upon such various
unpredictable factors as the viewing preferences of television audiences. Public
taste is unpredictable and a shift in demand could cause the Company's
programming to lose its appeal. Television programming also competes for
audiences with many other forms of entertainment and leisure time activities,
some of which include new areas of technology (e.g., video games and home
video). The impact of these on the Company's operations cannot be predicted.

                                        9
<PAGE>




Principal Customers

         No customers accounted for more than 10% of the Company's net revenues
during the year ended December 31, 1998.

Employees

         At December 31, 1998, the Company employed nine (9) persons all of whom
were full-time employees, these 4 were engaged in sales and marketing five (5)
in management, finance and administration. As at October 15, 1999 the Company
had six employees all of whom were full-time employees. The Company has no
collective bargaining agreement with its employees and believes that its
relationship with its employees is good.

Item 2. Description of Property

         The Company's principal executive offices are located at 244 West 54th
Street, New York, New York and consist of approximately 2,000 square feet at a
rental of $6,000. The Company occupies this space pursuant to a month to month
sublease that expires in 2002.

         The Company leases approximately 1,500 square feet of office space in
Los Angeles under a lease that expires in September 2000. The annual base rent
for such space is approximately $1,600 per month. The company no longer
maintains an office at this address.


Item 3. Legal Proceedings

         On June 21, 1996, an action, entitled International Sports Marketing,
Inc. v. Saatchi & Saatchi, et al. was filed in the Wayne County Circuit Court
against two of the Company's inactive subsidiaries and other unrelated parties
seeking to enforce a default judgment of $21,000,000 entered in 1995 for a prior
action in 1988. The subsidiaries have vigorously defended themselves in this
litigation. Furthermore, management believes that if any subsidiary were found
liable for a judgment, its subsidiaries would be able to obtain indemnification
from the prior owner of the former affiliate's business, a major advertising
agency. In a recent decision, the court found no liability for plaintiff's claim
against the subsidiaries and at the same time found that the advertising agency
may be liable to the plaintiff pursuant to aforesaid indemnity agreement. The
plaintiff and the advertising agency have submitted arguments to reargue and the
Company believes they intend to appeal in any event. While no assurance can be
given, based in the foregoing, management believes that the litigation will not
have a material effect on the Company's financial position.

         The Company is a defendant in ACC Entertainment GMBH Co. v.
Kaleidoscope Media Group, Inc. commenced October 27, 1998 (United District Court

                                       10
<PAGE>



for the District of California by AAC Entertainment GMBH Co. ("ACC") for alleged
breach of contract seeking damages of $250,000. The contract provided for
certain rights to the Company's Merlin film to be produced by the Company in
return for an investment of $375,000. ACC claims that the Company failed to
properly deliver the film. The Company has counterclaimed for damages. ACC has
also claimed that the Company executed an additional agreement for Team Extreme.

         On October 28, 1998 Paul Cioffari commenced an action against the
Company and its subsidiary claiming failure of the Company to perform its
agreement to pay Mr. Cioffari agreed consideration for entertainment property
allegedly delivered by Mr. Cioffari to the Company. Cioffari vs. BNN Company
(Supreme Court New York County). Defendants seek damages up to $700,000 on a
variety of claims. The Company denies all liability.

         On October 1999 the Company settled an action by Jack Woolf commenced
in Supreme Court for the State of California in Los Angeles entitled Jack Woolf
vs. BNN Corporation. Mr. Woolf had alleged a breach of an agreement with the
Company's former subsidiary Celebrity Shopping Network.

         On August 5, 1998 Mr. Barry Synter commenced an action against the
Company in the Supreme Court of the State of New York - County of New York.
(Synter vs. BNN Corporation) Mr. Synter seeks damages of up to $1,500,000 for
the Company's alleged failure to permit transfer by Mr. Synter of stock
certificates allegedly owned by him. The Company has alleged Mr. Synter was not
entitled to the certificate.

         The Company satisfied a default judgment taken by Tokyo Broadcasting
Systems against the Company for approximately $22,000 for non-payment of a note
in connection with an action commenced in Supreme Court of the State of New York
for New York County.

         A default judgment has also been obtained by Darrell N. Griffin against
Paul Siegel, an officer and director of the Company, in the amount of
approximately $166,000 in an action pending in the Supreme Court of the State of
California. The claim arises out of action for salary allegedly payable to a
plaintiff purportedly an employee of the Company's former subsidiary Celebrity
Showcase Network. Judgment was taken after Mr. Siegel's counsel failed to
respond to discovery requests. The court of appeals rejected Mr. Siegel's appeal
of the lower court's decision. Mr. Siegel has commenced an action against his
former attorney for malpractice. The Company is obligated to indemnify Mr.
Siegel in accordance with Delaware law.

         An action has also been commenced by Eric Ashenberg a former officer of
Celebrity Showcase Network, its prior subsidiary for damages arising from the
Company's failure to approve the transfer of a certificate allegedly owned by
Mr. Ashenberg. Mr. Ashenberg has also named Henry Siegel and Paul Siegel as
defendants. The Company has agreed to indemnify Messrs. Siegel to the full
extent provided by law. Mr. Ashenberg seeks damages in the amount of $450,000.
The Company denies that Mr. Ashenberg was entitled to his certificates. The
Company and Mr. Ashenberg have in principle agreed to settle this action.



                                       11
<PAGE>


         On December 19, 1997, the Company filed an action in the United States
District Court Southern District of New York entitled Kaleidoscope Media Group,
Inc. v. Entertainment Solutions, Inc., James K. Isenhour, Andrew S. Varni. The
complaint seeks damages for breach of contract and fraudulent inducement of
contract, among other claims, arising out of a venture that the Company entered
into with defendants to promote a sports tournament of Latin American boxing in
1997 called "Boxcino." The Company seeks damages of at least $500,000 plus
punitive damages in the action. Defendants James Isenhour and Entertainment
Solutions, Inc. had answered the complaint, asserting various affirmative
defenses and two counterclaims, for breach of contract and quantum meruit,
seeking damages of not less than $250,000. In September 1999 the Company
obtained a default judgement against all defendants which also dismissed all
counterclaims.

Item 4. Submission of Matters to a Vote of Security Holders

         No matter was submitted.



                                       12
<PAGE>


                                    PART II


Item 5. Market for Common Equity and Related Stockholder Matters

         The Company's common stock (the "Common Stock") is quoted on the OTC
Bulletin Board under the symbol "KMGG".

         Set forth below are the approximate high and low bids for the Common
Stock on the OTC Bulletin Board as published by the National Quotation Bureau,
Inc. Such quotations reflect interdealer prices without retail mark-up,
mark-down or commissions, and may not reflect actual transactions.



                                       Common Stock
                                       ------------
                                       High   Low
                                       ----   ----
          1998
          ----
          Fourth Quarter                 .86       .25
          Third Quarter                 1.25       .38
          Second Quarter                1.75       .71
          First Quarter                 2.00       .79

          1997
          ----
          Fourth Quarter               $ .94     $ .42
          Third Quarter                 1.22       .75
          Second Quarter                2.22       .88
          First Quarter                 2.56       .50

         As of December 31, 1998, there were approximately 213 recordholders of
the Common Stock, although the Company believes that there are more than 400
beneficial owners of the Common Stock.

Sales of Securities
-------------------

         The following sets forth information relating to all securities of the
Company sold from October 1, 1998 through December 31, 1998 without registering
the securities under the Securities Act of 1933, as amended (the "Securities
Act"):

         From October 1, 1998 to December 31, 1998 the Company issued 1,156,504
shares of its common stock to investors for $1,156,500. The shares were issued
pursuant to an exemption from the registration requirements of the Securities
Act pursuant to Section 4(2) thereof.



                                       13
<PAGE>

Dividends
---------

         The Company plans to retain any future earnings for use in its business
and, accordingly, the Company does not anticipate paying dividends in the
foreseeable future to the holders of the Common Stock. Payment of dividends is
within the discretion of the Company's Board of Directors (the "Board of
Directors") and will depend, among other factors, upon the Company's earnings,
financial condition and capital requirements.




                                       14
<PAGE>



Item 6. Management's Discussion and Analysis of Financial Condition and Results
         of Operations

         Reference is made to Note 2 of the Company's Consolidated Financial
Statements for a discussion of significant accounting policies, including
revenue recognition.

Forward Looking Statements

         The following statements and certain other statements contained in this
annual report on Form 10-KSB are based on current expectations. Such statements
are forward looking statements that involve a number of risks and uncertainties.
Factors that could cause actual results to differ materially include the
following (i) general economic conditions, (ii) competitive market influences,
(iii) audience appeal and critical reviews of its television programs and (iv)
the ability to identify, acquire the rights to, and to develop quality
properties.

Results of Operations

         Year Ended December 31, 1998 as Compared with Year Ended December 31,
         1997

         During 1997 the Company disposed of its Kaleidoscope Sports Group
operations in stages and received a total of $6,000,000. In addition, its
operations for such year reflect revenues from such operations for a portion of
1997. During 1998 the Company's revenues were primarily derived from the
distribution of films by its entertainment division. No revenues were derived
from the sports and direct market division which have now suspended operations.

         Net revenues consist of total billings (less any agency fees and media
costs) and accruals for earned fees. Net revenues decreased by $1,603,717, or
60%, to $1,137,675 in 1998 from $2,741,392 in 1997. This decrease is due
substantially to the decline in entertainment division revenues resulting from
delays in the introduction of and reduced sales of the Company's programs. In
addition, the sports and direct marketing divisions did not generate any
revenues.

         Amortization of program cost and other direct project costs increased
$2,507,896 from $2,063,503 in 1997 to $4,571,399 in 1998. The increases resulted
from the write off of capitalized costs of the sports and direct marketing
division as well as programs of the entertainment division which were either
abandoned or had in a lower value than anticipated. Direct project cost include
costs necessary to create or produce and market a property. During 1997, there
was amortization of program costs relating to "Boxcino," "Hollywood
Discoveries," "Tarzan: The Epic Adventures" and some smaller projects.

         Salaries and benefits decreased by $330,223, or 22%, to $1,183,355 in
1998 from $1,513,578 in 1997. This decrease is due substantially to the
reduction in personnel.

         General and administrative expenses increased by $261,942, or 18%, to
$1,715,719 in 1998 from $1,453,777 in 1997. This increase is due substantially
to significant fees related to professional


                                       15
<PAGE>



services including the legal fees incurred in defense and prosecution of several
new actions in 1998.

         Amortization of goodwill increased by $754,250 to $831,414 in 1998 from
$77,164 in 1997. This increase is due to the acceleration of amortization of
goodwill retained by the Company after sale of its sports division because the
retained operation was suspended.

         Interest expense was $41,090 in 1998 due to borrowing including loans
from an officer. The Company capitalized all interest cost in 1997.

         Loss from operations increased by $4,735,903 reflecting a loss of
$7,393,960 in 1998 to a loss of $2,658,057 in 1997. The increase was primarily a
result of the amortization of program costs and goodwill as well as other
factors discussed above.

         Company's equity in the income of its joint venture decreased $188,658.
As compared to $317,721 in 1997. The Joint Venture's only revenue producing
project to date has been "Tarzan: The Epic Adventures" which earned most of its
revenues in 1996 when it was first released. Management's estimate of the
ultimate revenues from "Tarzan: The Epic Adventures" have been revised downward.
The $1,204,188 decrease was partially offset by the Company's $249,621 equity in
the income of KS&E during the period April 1, 1997 through August 15, 1997 when
the Company had a 49% interest, in this entity, KS&E was engaged in sports
business including the contribution of certain sporting projects, formerly
conducted by the Company's subsidiaries.

         In 1997, the Company realized a gain of $3,512,836 from the sale in two
transactions of a significant portion of its Sports Division.

         Income before income taxes decreased by $8,561,985 to a loss of
$7,389,485 in 1998 from income of $1,172,500 in 1997. This decrease was a result
of the factors described above.

         The Company had no provision for income tax benefit in 1998 as compared
to the Income Tax Expense of $1,452,594 in 1997. The income tax expense for 1997
does not bear the expected relationship between pretax income and the federal
corporate tax rate of 34% because of (a) the effect of state and local income
taxes as described below and (b) the amortization of goodwill, the write-off of
goodwill associated with the sale of KS&E in the amount of $2,386,115 as
described below and certain other expenses are not deductible for income tax
purposes.

         The goodwill written off in connection with the sale of KS&E had been
originally created, for financial reporting purposes, in the tax free
transaction in which SeaGull had acquired, for accounting purposes, KSG. As a
result of the tax free nature of that transaction, the goodwill was not
recognized for tax purposes. Consequently, the Company will have to report
$5,899,951 ($6,000,000 of proceeds less $101,049 of direct costs) as the gain in
the 1997 income tax returns. For federal income tax purposes, this gain is
offset on the Company's consolidated tax return by net operating loss
carryforwards ("NOLs"), resulting in no federal tax payment due. The Company's
subsidiary, P&P, is required to record the sale for state and local income tax
purposes. However,


                                       16
<PAGE>
P&P can only offset the gain with a limited amount of NOLs and as a result will
have to pay approximately $751,000 in 1997 state and local income taxes. In
addition to the Company's accrual of these tax payments, the Company is required
to record deferred income tax expenses because the utilization of the NOLs in
offsetting a portion of the gain from the sale of KS&E reduces the future income
tax benefits that would otherwise be available.

         The Company's net loss amounted to $8,065,915, or $0.27 per share, for
the year ended December 31, 1998, as compared to net loss of $280,094, or $0.01
per share, for the year ended December 31, 1997, respectively.

Net Operating Loss Carryforwards

         Because of its losses the Company has written off deferred income
benefit. Nevertheless, at December 31, 1998, NOLs of the Company amounted to
approximately $8,537,500 for federal income tax purposes. The NOLs are not
available for state income tax purposes. The NOLs begin to expire starting in
2011. The Company's subsidiaries file separate income tax returns in various
states and localities. The losses of one subsidiary cannot be used to offset the
losses of another subsidiary for state purposes. Certain of the Company's
subsidiaries have substantial NOLs available for state and local income tax
purposes. In addition, certain of the Company's subsidiaries have approximately
$175,000 of NOLs that can only be used to offset future taxable income (for
federal and certain state purposes) of the specific subsidiaries to which they
pertain. These NOLs are further limited by the operation of Section 382 of the
Internal Revenue Code. The subsidiaries are only allowed to use a maximum of
approximately $27,000 of these carryforwards each year.


Liquidity and Capital Resources

         As of December 31, 1998 the Company had a working capital deficit of
$1,361,067 compared to working capital of $651,603 as of December 31, 1997. The
decrease in working capital was primarily due to a reduction in value of program
cost inventory as a result of write offs in 1998 as well as a decrease in net
income. As of December 31, 1998, the Company had cash of $4,865 compared with
$252,260 as of December 31, 1997. Operating activities generated a net cash
outflow of $3,617,953. The principle source of cash during 1998 was from the
sale of shares which generated net cash in the amount of $3,201,231.

         The Company has taken steps to reverse the Company's history of losses
which contributed to its liquidity problem. First it has reduced costs
particularly overhead. As a result the Company closed offices, terminated
several employees, reduced the salary of other employees. It also has entered
into an arrangement with an independent third party to perform certain services
for the distribution formerly performed by the Company. The Company is also
seeking additional programs to distribute without incurring increased financing
costs.

         The Company historically received funds from the sale of equity
securities and from operations. In addition, in 1997 it received substantial
proceeds from the sale of its KSE division. Subsequent to March 31, 1999, the
Company was able to obtain funds from the sale of convertible Notes in April and
August 1999. Some of these same investors had agreed to fund $1,250,000
principal amount of Notes in two installments if certain conditions were met.
These conditions included the effectiveness of a registration statement by a
date in August 1999. This condition was not fulfilled and investors have no
further obligation to make an additional investment in this Company. Moreover,
if they do not convert their Notes the Company will have to repay an additional
962,000 plus interest in April 2000. The Company is negotiating substitute
financing and an extension with their investors.

         The Company presently requires additional capital from equity, loans,
or from operations to continue in business. While the Company has entered into
distribution arrangements which are anticipated to result in revenues, the
Company requires approximately $500,000 to $750,000 in additional working
capital. The Company is attempting to obtain additional capital from private
capital sources including investors of its convertible notes. If it does not
obtain sufficient funds it will not be able to operate.

                                       17
<PAGE>


         Net cash used in operating activities was $3,617,953 in 1998 compared
with $984,388 in 1997. The increase in cash used in operating activities was
primarily the result of the $2,633,565 increase in the operating loss described
above offset by noncash charges for deprecation and amortization and the
conservation of cash through the increase of various operating liabilities.

         Net cash used by investing activities in 1998 was $7,973 compared to
the net cash provided by investing activities of $1,232,964 in 1997. This change
was due primarily due to proceeds of $6,000,000 from the sale of a portion of
the Sports Division in 1997, offset by the expenditures for programs costs of
$4,907,329.

         Net cash provided by financing activities amounted to $3,378,531 for
the year ended December 31, 1998 as compared to $150,322 used by financing
activities for the same period in 1997. The increase in cash provided by
financing activities was primarily the result of the receipt of cash for equity
transactions in 1998.



Inflation

         The Company believes that the relatively moderate rates of inflation in
recent years have not had a significant impact on its net revenues or its
profitability.

Year 2000 Compliance

         The Company's computer programs are not Y-2K Compliant. The Company has
made arrangements to correct its programs by October 1999.

Item 7. Financial Statements

         Reference is made to pages     through      comprising a portion of
this Annual Report on Form 10-KSB.

Item 8. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure

         There have been no changes in accountants due to disagreements on
accounting and financial disclosure during the 24 months prior to December 31,
1998.




                                       18
<PAGE>



                                    PART III


Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
        with Section 16(a) of the Exchange Act

         As March 31, 1999 the directors and executive officers of the Company
were as set forth below. Ray Volpe subsequently resigned as a director.

        Name             Age      Position
        ----             ---      --------
Henry Siegel             58       Chief Executive Officer, Chairman of the Board

Paul Siegel              58       President and Director

Ray Volpe                57       Director

Martin Miller            59       Director

Irving Greenman          63       Vice President, Chief Financial Officer


         Henry Siegel has been Chairman of the Board, Chief Executive Officer
and Director of the Company since 1995 and has been an officer of SeaGull, a
subsidiary of the Company, since that company's inception in 1994. Mr. Siegel
began his career at Grey Advertising and in 1974 was placed in charge of its
media operation, managing all areas of media planning, research and execution.
In 1976, Mr. Siegel founded Lexington Broadcasting Services ("LBS"), where he
pioneered the concept of barter syndication (advertiser-supported television).
As Chairman and chief executive officer of LBS, he launched numerous successful
television series, including "Fame" and "Baywatch." In 1988, Mr. Siegel, with
Warburg, Pincus Capital Company, purchased Grey Advertising's interest in LBS.
LBS entered into bankruptcy in 1991 and emerged from bankruptcy in 1993, soon
after merging with All American Communications in 1992. In July 1994, Mr. Siegel
formed SeaGull.

         Paul Siegel has been a director of the Company since 1995, the
President of the Company as of January 1, 1997 and an officer of SeaGull since
its inception in 1994. In 1964, Mr. Siegel started work at S&S, a direct
marketing firm which manufactured and distributed toy and craft products. Mr.
Siegel left S&S in 1982 to establish another direct marketing toy and hobby
company known as Creative Crafts. In 1994, Mr. Siegel changed the name of his
company to Creative Discovery and expanded the product line to include
educational software products. Paul Siegel joined his brother Henry Siegel at
LBS in 1986 to serve as Executive Vice President. LBS entered into bankruptcy in
1992 and emerged from bankruptcy in 1993. LBS was merged with AAC in 1992, and
Mr. Siegel served as Executive Vice President of its All-American Television
subdivision of until he left in 1994 to form SeaGull.




                                       19
<PAGE>

         Irving Greenman has been Chief Financial Officer and Secretary of the
Company since January 1998. For ten years prior thereto Mr. Greenman was Chief
Financial Officer for Medica Media and Healthcare International, both companies
being in the healthcare field. Mr. Greenman is a New York and Florida Certified
Public Accountant.

         Ray Volpe had been a director of the Company since 1995 until his
resignation in July 1999. Mr. Volpe had served as President and co-Chief
Executive Officer of the Company since its inception in 1995 but resigned such
positions in May 1997 to become the Chief Executive Officer of KS&E which
operates certain former businesses conducted by the Sports Division of the
Company. Mr. Volpe, who began his career at Doyle Dane Bernbach in 1964, was the
Executive Vice President of the National Hockey League and the first
commissioner of the Ladies Professional Golf Association. In 1981, Mr. Volpe and
his partner, Don Ohlmeyer formed Ohlmeyer Communications Company, a sports and
entertainment subsidiary of Nabisco Brands Inc., where, from 1981 to 1990, Mr.
Volpe worked as an independent television producer and media consultant,
representing manufacturers, televisions networks, major syndicators and
advertising agencies engaged in entertainment and sports programming. Mr. Volpe
has been the Chief Executive Officer of HSPS since 1990. During the period from
August 1994 through June 1995, while HSPS was owned by Ventura, Mr. Volpe was
President, Co-Chief Executive Officer and a Director of Ventura.

         Martin Miller has been a director of the Company since February 1995.
Mr. Miller, for the past five years, has been a manager of corporate finance for
Millport Ltd., presently a Bahamian based investment advisor of foreign
investors. Mr. Miller is a director of Teltran International Group, Ltd. a
publicly traded Company.

         Executive officers serve at the discretion of the Board of Directors.

         Henry Siegel and Paul Siegel are brothers.


Item 10. Executive Compensation

         The following table sets forth information concerning compensation paid
or accrued by the Company or its subsidiaries for services rendered during the
fiscal years ended December 31, 1996, 1997 and 1998 to the Company's Chief
Executive Officer and to each executive officer whose compensation exceeded
$100,000 during its fiscal year ended December 31, 1998:



                                       20
<PAGE>


                           Summary Compensation Table


                                                               Annual
                                                            Compensation
           Name and                                         ------------
      Principal Position             Year                      Salary
---------------------------        --------                 ------------
Henry Siegel                         1998                     $350,000*
 Chief Executive Officer             1997                     $350,000
                                     1996                     $125,000


Paul Siegel                          1998                     $275,000*
 President                           1997                     $275,000
                                     1996                     $125,000


Irving Greenman                      1998                     $164,215
 Chief Financial Officer
-------------
* Partial 1998 and 3 months salaries in 1999 were not paid but accrued.

      The following table sets forth all grants of stock options to each of the
named executive officers of the Company during the fiscal year ended December
31, 1998.

                       Option Grants in Last Fiscal Year

<TABLE>
<CAPTION>
                 Number of Shares           Per Cent of Total
                 of Common Stock            Options Granted to
                 Underlying Options         Employees in Fiscal
    Name             Granted                       Year            Exercise Price    Expiration Date
---------------- -------------------        -------------------    --------------    ---------------
<S>                     <C>                         <C>                  <C>              <C>
Henry Siegel            0                           ---                 ---               ---

Paul Siegel             0                           ---                 ---               ---

</TABLE>


                                       21
<PAGE>


         The following table sets forth information as to options exercised by
each of the named executives during the fiscal year ended December 31, 1998 and
the value of in-the-money options held by such executives at December 31, 1998.

         Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
<TABLE>
<CAPTION>

                         Number of
                         Shares of
                         Common
                           Stock                         Number of Shares of Common
                        Acquired on        Value        Stock Underlying Unexercised    Value of In-the-Money Options at
   Name                  Exercise         Realized          Options at 12/31/98                    12/31/98
-----------            -------------      ---------     -----------------------------   ---------------------------------
                                                        Exercisable   Unexercisable     Exercisable      Unexercisable
                                                        -----------   -------------     -----------      -------------
<S>                         <C>              <C>           <C>             <C>              <C>               <C>
Henry Siegel                 0              ---            ---             ---              ---               ---

Paul Siegel                  0              ---            ---             ---              ---               ---
</TABLE>
------------

Employment Agreements

         The Company entered into employment agreements as of January 1, 1997
with Henry Siegel, Chief Executive Officer of the Company, and Paul Siegel,
President of the Company. Each agreement has a three-year term which renews for
an additional year on each anniversary of the agreement, and provides for an
annual base compensation of $350,000, with annual increases subsequent to the
three year term in an amount to be determined by the Board of Directors.. In
addition, Henry Siegel and Paul Siegel are each entitled to such bonuses as may
be awarded by the Board of Directors in its discretion. Each agreement also
provides for the payment of benefits, including payment of automobile expenses.
In the event of the death or total disability of either executive, the Company
has agreed to pay his estate or the executive the unpaid portion of his annual
base compensation, but in no event less than six months base compensation. The
agreement also contains a non-competition provision covering the term of the
agreement plus two years following termination or expiration of the agreement.
The Company did not pay salary under then agreements from November 1999 to March
31, 1999. From April 1, 1999 to June 30, 1999 each received salary payments at a
reduced rate of $20,000 per month. No salary payments were made subsequent to
that date.

         On July 1, 1999 Mr. Paul Siegel ceased to be an employee and became a
consultant. He is receiving fees of $10,000 per month plus an automobile
allowance. His employment agreement has been terminated.

Stock Option Plan

      The Company has adopted a 1996 Stock Option Plan (the "1996 Plan") for
officers, employees and consultants of the Company or any of its subsidiaries
and other entities in which the Company has an interest. The 1996 Plan provides
for the granting of options which are intended to qualify either as incentive
stock options (the "Incentive Stock Options") within the meaning of Section 422
of the Internal Revenue Code of 1986 or as options which are not intended to
meet the requirements of such section (the "Nonstatutory Stock Options" and
collectively with the Incentive Stock Options, the "Options"). As of December
31, 1997, Options to purchase 835,000 shares of Common Stock had been granted.



                                       22
<PAGE>


     The 1996 is administered by the Board of Directors or a committee of the
Board of Directors (the "Administrator"). The Administrator has discretionary
authority (subject to certain restrictions) to determine, among other things,
the individuals to whom and the times at which the Options will be granted; the
number of shares of Common Stock underlying the Options; and the exercise price
and the vesting periods of the Options.

      The Options are evidenced by a written agreement containing the above
terms and such other terms and conditions consistent with the 1996 Plan as the
Administrator may impose. The exercise price of Incentive Stock Options may not
be less than 100% of the fair market value of the Common Stock at the date of
grant (110% in the case of Incentive Stock Options granted to holders of 10% of
the voting power of the Company's capital stock). The aggregate fair market
value of Common Stock (determined at time of option grant) with respect to which
Incentive Stock Options become exercisable for the first time in any year cannot
exceed $100,000. Each Option, unless sooner terminated, shall expire no later
than 10 years from the date of the grant (five years in the case of Incentive
Stock Options granted to holders of 10% of the voting power of the Company's
capital stock), as the Administrator may determine.

      The 1996 Plan (but not Options previously granted thereunder) shall
terminate on December 2001. Subject to certain limitations, the 1996 Plan may be
amended or terminated at an earlier date by the Board of Directors or by a
majority of the outstanding shares entitled to vote thereon.



                                       23
<PAGE>



Compensation of Directors

      Directors who are not employed by the Company will be paid a fee of $100
for each Board of Directors meeting attended and $100 for each committee meeting
attended. All directors are reimbursed for expenses incurred on behalf of the
Company.

Item 11. Security Ownership of Certain Beneficial Owners and Management

         The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of December 31, 1998 by (i) each stockholder
known by the Company to be the beneficial owner of more than 5% of the
outstanding Common Stock, (ii) each director of the Company, (iii) each
executive officer named in the Summary Compensation Table above and (iv) all
directors and executive officers as a group. Except as otherwise indicated, the
Company believes that the beneficial owners of the Common Stock listed below,
based on information furnished by such owners, have sole investment and voting
power with respect to such shares, subject to community property laws where
applicable.


Name and address of Beneficial       Number of Shares
            Owner                   Beneficially Owned     Percentage of Class
------------------------------      ------------------     -------------------
Henry Siegel                            3,055,000                  8%
244 West 54th Street
New York, New York

Paul Siegel                             3,055,000                  8%
5777 West Century Boulevard
Suite 725
Los Angeles, California 90045

Ray Volpe                               3,055,000                  8%
136 Madison Avenue
New York, New York

Martin Miller (1)                              --                 --
57 The Circle
Glen Head, New York


All directors and executive
    officers as a group (4 persons)     9,165,000                 24%

------------
(1) Does not include 90,000 shares owned by Mr. Miller's wife. Mr. Miller
    disclaims beneficial ownership of such shares.
(2) Does not options and securities which may have been acquired subsequent to
    March 31, 1999.




                                       24
<PAGE>


Item 12. Certain Relationships and Related Transactions

         Pursuant to an agreement, dated as of April 1, 1997, between the
Company and By-The-Way Corporation ("BTW"), a corporation wholly-owned by Ray
Volpe, a former director of the Company, BTW granted to the Company in
perpetuity the right at any time to develop, produce, distribute, market,
license or otherwise exploit (the "Exploitation Rights") all entertainment
properties (other than properties licensed to KS&E) in consideration of an
option payment consisting of $112,500 previously advanced and additional
payments to be made by the Company to BTW of $150,000 per year. Such option
payment will be offset against fees or amounts payable by the Company for any
Exploitation Rights granted to the Company by BTW. During the year ended
December 31, 1997, the Company paid BTW $150,000.

         Commencing in April 1997, KS&E sublet approximately 42% of the
Company's office space in New York City for a prorata share of the rent. In
addition, KS&E pays the Company 42% of certain overhead that it utilizes in New
York City. During the fiscal year ended December 31, 1998, the Company received
approximately $361,904 from KS&E for such rent and overhead. Ray Volpe, a former
director of the Company, is Chief Executive Officer of KS&E.

         During 1998 pension trust for the benefit of Henry Siegel advanced the
Company $150,000.

         The Company received loans, represented by 8% one year notes, in the
principle amount of $412,217 and $600,000 during the years ended December 31,
1997 and 1996, respectively, from foreign clients of Millport Ltd. (the
"Millport Clients"), a Bahamian domiciled investment advisor. All of such loans
were repaid as of December 31, 1997. As additional consideration for granting
these loans to the Company, the Millport Clients have received two year warrants
to purchase an aggregate of 4,048,866 shares of Common Stock at $.25 per share.
Millport Clients also have purchased 4,732,220 shares of Common Stock from the
Company for an aggregate of $2,484,415. In addition, some of the Millport
Clients have purchased shares of Common Stock in the open market. Pursuant to a
settlement agreement, the Company and several of these clients issued 5,285,000
warrants to purchase the Company's common stock at $.10 per share. These clients
settled claims against the Company and agreed to pay indebtedness of the Company
upon excess of 2,000,000 warrants. Millport clients have accepted warrants to
purchase Company's common stock. Martin Miller is a director of the Company and
a director of corporate finance of Millport Ltd. The Millport Clients are not
affiliates of Mr. Miller or Millport Ltd.




                                       25
<PAGE>

Item 13. Exhibits and Reports on Form 8-K

(a) Exhibits

   2.01     Plan and Agreement of Reorganization, dated as of October 22, 1996,
            among the Company and the shareholders of HSPS (1)

   3.01(5)  Certificate of Incorporation of the Company

   3.02(5)  By-Laws of the Company

   4.01(5)  Specimen Certificate representing the Common Stock, per share

  10.01*    1996 Stock Option Plan.(2)

  10.02*(5) Employment Agreement entered into between the Company and Henry
            Siegel

  10.03*(5) Employment Agreement entered into between the Company and Paul
            Siegel

  10.06(5)  Joint Venture Agreement, dated as of October 1, 1995, between
            SeaGull Entertainment, Inc. and Keller Entertainment Group, Inc.

  10.07     Amended and Restated Limited Liability Company Agreement, dated as
            of April 30, 1997, among the Company, Interpublic Group of
            Companies, Inc., 345 Park Avenue PAS Sports, Inc. and People &
            Properties, Inc.(3)

  10.08     Agreement dated as of August 20, 1997, among, Interpublic Group of
            Companies, Inc., 345 PAS Sports, Inc., and People & Properties,
            Inc.(4)

  10.9(5)   Vendor Agreement, dated December 18, 1996, between the Company and
            HSN Direct Int. LTD. and addendum thereto, dated March 31, 1997

  10.10(5)  Joint Venture Agreement, dated as of June 1995, between the Company
            and BV Sports Marketing, Inc.

  10.11     Distribution Agreement between Global Entertainment Productions and
            Kaleidoscope Media Group Incorporated, dated November 19, 1998.

  10.12     Form of Subscription Agreement -- April 1999

  10.13     Agreement as of December 23, 1998 between Abrams Gentile
            Entertainment, the Company and Glochi Preziosi, Ltd.

  21.01     Subsidiaries of the Company

  23.1      Consent of Independent Certified Public Accountants

  27.01     Financial Data Schedule
------------
* Management contract or compensatory plan or arrangement.

(1) Such Exhibit was filed with the Company's Current Report, dated October 22,
    1996, and is incorporated herein by reference

(2) Such Exhibit was filed with the Company's Proxy Statement for the Annual
    Meeting held on December 2, 1997 and is incorporated herein by reference.

(3) Such Exhibit was filed with the Company's Current Report, dated May 5, 1997,
    and is incorporated herein by reference.

(4) Such Exhibit was filed with the Company's Current Report, dated August 20,
    1997, and is incorporated herein by reference.

(5) Such Exhibits were filed with Company's Annual Report on 10K, for 1997
    and are incorporated herein by reference.

(6) filed herewith

(b) Reports on Form 8-K

     None


                                       26
<PAGE>


                         KALEIDOSCOPE MEDIA GROUP, INC.
                           (Formerly BNN Corporation)
                                AND SUBSIDIARIES


                            FINANCIAL STATEMENTS WITH
                          INDEPENDENT AUDITORS' REPORT


                 FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997




<PAGE>



                         KALEIDOSCOPE MEDIA GROUP, INC.
                           (Formerly BNN Corporation)
                                AND SUBSIDIARIES



                                    CONTENTS
                                                                  PAGE #
                                                                 -------

Independent Auditors' Report                                        1


Financial Statements:

       Consolidated Balance Sheets as of December 31,
          1998 and 1997.                                          3 - 4

       Consolidated Statements of Operations For the
          years ended December 31, 1998 and 1997.                   5

       Consolidated Statement of Stockholders' Equity
         For the years ended December 31, 1998 and 1997.            6

       Consolidated Statements of Cash Flows
         For the years ended December 31, 1998 and 1997.          7 - 8

       Notes to Consolidated Financial Statements                 9 - 26



<PAGE>

                         LIEBMAN GOLDBERG & DROGIN LLP
                          Certified Public Accountants
                         591 Stewart Avenue, Suite 450
                          Garden City, New York 11530
                                  -----------
                               Tel (516) 228-6600
                               Fax (516) 228-6664




                          INDEPENDENT AUDITORS' REPORT


Board of Directors
Kaleidoscope Media Group Inc.



We have audited the accompanying consolidated balance sheets of Kaleidoscope
Media Group, Inc. (formerly BNN Corporation) and Subsidiaries as of December 31,
1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit. The consolidated
financial statements of Kaleidoscope Media Group Inc. (formerly BNN Corporation)
at December 31, 1997 was audited by Paneth, Haber & Zimmerman, LLP whose
report dated April 14, 1998, expressed an unqualified opinion on those
statements.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Kaleidoscope Media Group, Inc. (formerly BNN Corporation) and Subsidiaries as of
December 31, 1998, and the results of their operations and their cash flows for
the year then ended in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 15 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 15. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.







Garden City, New York
April 14, 1999



<PAGE>

                         KALEIDOSCOPE MEDIA GROUP, INC.
                           (formerly BNN Corporation)
                                AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>

                                     ASSETS


                                                                        December 31,
Current Assets:                                                  1998                1997
                                                              ----------          ----------
<S>                                                           <C>                 <C>
       Cash                                                   $    4,865          $  252,260
       Accounts receivable, less allowance for
           doubtful accounts of $507,143 and
           $116,539 in 1998 and 1997, respectively               323,325             746,681
       Program cost inventory - current portion, net
           of accumulated amortization                           650,929           2,876,975
       Deferred income taxes                                          --             266,000
       Other current assets                                       55,006             129,153
                                                              ----------          ----------

            Total current assets                               1,034,125           4,271,069

Program Cost Inventory, less current portion,
    net of accumulated amortization                              801,006           2,287,892

Loans and Advances Receivable -
    Officers and Shareholders                                      9,000              36,300

Property and Equipment, at cost, less
    accumulated depreciation                                      28,458              82,782

Investment in Joint Venture                                      989,452           1,376,500

Deferred Income Taxes                                                 --             356,600

Goodwill, net of accumulated amortization                             --             831,414

Other Assets                                                      11,592              24,116
                                                              ----------          ----------

                                                              $2,873,633          $9,266,673
                                                              ==========          ==========

</TABLE>

                       See notes to financial statements.

                                       3
<PAGE>
                         KALEIDOSCOPE MEDIA GROUP, INC.
                           (formerly BNN Corporation)
                                AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                      LIABILITIES AND STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                                                             December 31,
Current Liabilities:                                                                 1998                  1997
                                                                                ------------           ------------
<S>                                                                             <C>                    <C>
       Cash overdrafts                                                          $     13,051           $    194,148
       Notes payable, current portion                                                190,000                 40,000
       Accounts payable and accrued liabilities                                    1,242,090              1,656,384
       Income taxes payable                                                          906,301                839,496
       Option agreement payable - current portion                                     43,750                150,000
       Deferred rent - current portion                                                  --                   42,405
       Deferred income and client advances                                              --                  697,033
                                                                                ------------           ------------
            Total current liabilities                                              2,395,192              3,619,466

Security Deposit Payable                                                              10,552                   --

Option Agreement Payable, less current portion                                          --                   37,500

Deferred Rent, less current portion                                                     --                  277,134
                                                                                ------------           ------------

            Total liabilities                                                      2,405,744              3,934,100
                                                                                ------------           ------------

Stockholders' Equity:
       Common stock, $0.001 par value, 100,000,000 shares
            authorized; 38,660,960 and 26,027,082 shares issued
            and  outstanding at December 31, 1998 and 1997,
            respectively                                                              38,661                 26,027
       Preferred stock, $0.001 par value, 15,000,000
            shares authorized, none issued and outstanding
            in 1998 and 1997                                                              --                     --
       Additional paid-in capital                                                  9,386,258              6,197,661
       Accumulated deficit                                                        (8,957,030)              (891,115)
       Stock subscriptions receivable less allowance for doubtful accounts
            of $1,111,542 and $438,075 in 1998 and 1997, respectively                     --                     --
       Treasury stock 529,000 shares in 1998 and 1997 at cost                             --                     --
                                                                                ------------           ------------

            Total stockholders' equity                                               467,889              5,332,573
                                                                                ------------           ------------

            Total liabilities and stockholders' equity                          $  2,873,633           $  9,266,673
                                                                                ============           ============


</TABLE>


                       See notes to financial statements.

                                        4
<PAGE>

                         KALEIDOSCOPE MEDIA GROUP, INC.
                           (formerly BNN Corporation)
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS



<TABLE>
<CAPTION>
                                                                               For the years ended
                                                                                   December 31,
                                                                            1998                  1997
                                                                        -----------           -----------
<S>                                                                     <C>                   <C>
Net Revenue                                                             $ 1,137,675           $ 2,741,392
                                                                        -----------           -----------

Direct Project Costs:
       Amortization of program costs and
         other direct project costs                                       4,571,399             2,063,503
                                                                        -----------           -----------

            Total direct project costs                                    4,571,399             2,063,503
                                                                        -----------           -----------

Gross Profit (Loss)                                                      (3,433,724)              677,889
                                                                        -----------           -----------

Expenses:
       Amortization of program costs relating to joint venture              188,658               291,427
       Salaries and benefits                                              1,183,355             1,513,578
       General and administrative                                         1,715,719             1,453,777
       Amortization of goodwill                                             831,414                77,164
       Interest                                                              41,090                  --
                                                                        -----------           -----------

            Total expenses                                                3,960,236             3,335,946
                                                                        -----------           -----------

Operating (Loss)                                                         (7,393,960)           (2,658,057)

Gain on Sale of Assets                                                           --             3,512,836

Gain on Lease Cancellation                                                  193,133                    --
                                                                        -----------           -----------

Income (Loss) before Equity in Income of Joint
       Ventures and Provison for Income Taxes                            (7,200,827)              854,779

Income (Loss) of Joint Venture                                             (188,658)              317,721
                                                                        -----------           -----------

Income (Loss) before Provision for Income Taxes                          (7,389,485)            1,172,500

Provision for Income Taxes                                                  676,430             1,452,594
                                                                        -----------           -----------

Net (Loss)                                                              $(8,065,915)          $  (280,094)
                                                                        ===========           ===========

Basic (Loss) Per Share                                                  $     (0.27)          $     (0.01)
                                                                        ===========           ===========

Diluted (Loss) Per Share                                                $     (0.27)          $     (0.01)
                                                                        ===========           ===========


</TABLE>



                       See notes to financial statements.

                                        5
<PAGE>

                         KALEIDOSCOPE MEDIA GROUP, INC.
                           (formerly BNN Corporation)
                                AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY





<TABLE>
<CAPTION>
                                                                   Additional
                                     Shares          Common         Paid-in     Accumulated
                                     Issued          Stock          Capital       Deficit           Total
                                  -----------    -----------     -----------    -----------     -----------
<S>                               <C>           <C>             <C>            <C>             <C>
Balance - January 1, 1997          23,557,082    $   146,731     $ 5,207,506    $  (611,021)    $ 4,743,216

Issuance of shares                  2,470,000         24,700         560,300           --           585,000

Issuance of warrants (Note 13)           --             --           284,451           --           284,451

Adjustment of par value upon
    reincorporation of KMG               --         (145,404)        145,404           --              --

Net loss                                 --             --              --         (280,094)       (280,094)
                                  -----------    -----------     -----------    -----------     -----------

Balance - December 31, 1997        26,027,082         26,027       6,197,661       (891,115)      5,332,573

Issuance of shares                 12,633,878         12,634       3,188,597           --         3,201,231

Net loss                                 --             --              --       (8,065,915)     (8,065,915)
                                  -----------    -----------     -----------    -----------     -----------

Balance - December 31, 1998        38,660,960    $    38,661     $ 9,386,258    $(8,957,030)    $   467,889
                                  ===========    ===========     ===========    ===========     ===========

</TABLE>


529,000 shares of treasury stock were recognized in the KMG recapitalization
without a cost assigned. 500,000 of these shares, represent shares issued to
SeaGull Entertainment prior to the recapitalization which are accounted for as
treasury stock in the consolidated financial statements.




                       See notes to financial statements.

                                        6
<PAGE>

                         KALEIDOSCOPE MEDIA GROUP, INC.
                           (formerly BNN Corporation)
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                  For the years ended
                                                                                       December 31,
Cash Flows from Operating Activities:                                         1998                  1997
                                                                          -----------           -----------
<S>                                                                       <C>                   <C>
Net (loss)                                                                $(8,065,915)          $  (280,094)
Adjustment to reconcile net (loss) to net cash
    (used in) operating activities:
       Amortization and depreciation                                          893,711             1,098,749
       Equity in income of joint venture                                      188,658              (317,721)
       Fee income from joint venture recorded as
         an increase in the investment                                             --              (186,300)
       Deferred income tax expense                                            622,600               736,400
       Deferred rent                                                         (319,539)              (43,653)
       Gain from sale of assets                                                    --            (3,512,836)
       Change in assets and liabilities:
            Accounts receivable                                               423,356                60,664
            Expenditures billable to clients                                       --               228,071
            Other current assets                                               74,147                68,714
            Investment in joint venture                                       198,390                    --
            Security deposits payable                                          10,552                    --
            Options payable                                                  (143,750)                   --
            Other assets                                                       12,524                (3,000)
            Cash overdraft                                                   (181,097)              194,148
            Accounts payable and accrued liabilities                         (414,294)               12,368
            Write-down of program cost inventory                            3,712,932                    --
            Income taxes payable                                               66,805               672,575
            Deferred income and client advances                              (697,033)              287,527
                                                                          -----------           -----------

                         Net cash (used in) operating activities           (3,617,953)             (984,388)
                                                                          -----------           -----------

Cash Flows from Investing Activities:
       Distributions from joint venture                                            --               285,422
       Advances and loans to officers and stockholders                             --               (49,218)
       Expenditures for program costs                                              --            (4,907,329)
       Acquisition of property and equipment                                   (7,973)              (17,547)
       Proceeds from sale of property and equipment                                --                22,685
       Payment of expenses relating to the sale of assets                          --              (101,049)
       Proceeds from sale of assets                                                --             6,000,000
                                                                          -----------           -----------

                         Net cash provided by (used in)
                             investing activities                              (7,973)            1,232,964
                                                                          -----------           -----------

</TABLE>


                       See notes to financial statements.

                                        7
<PAGE>

                         KALEIDOSCOPE MEDIA GROUP, INC.
                           (formerly BNN Corporation)
                                AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)



<TABLE>
<CAPTION>


                                                                                For the years ended
                                                                                     December 31,
                                                                             1998                   1997
                                                                         -----------           -----------
<S>                                                                       <C>                  <C>
Cash Flows from Financing Activities:
       Deferred offering costs                                                    --               (79,869)
       Repayments of loans payable - stockholders                             27,300                    --
       Proceeds from notes payable                                           150,000               582,766
       Repayments of notes payable                                                --            (1,488,925)
       Principal payments on capitalized lease obligations                        --               (33,745)
       Issuance of common stock                                            3,201,231               585,000
       Issuance of warrants                                                       --               284,451
                                                                         -----------           -----------

            Net cash provided by (used in) financing activities            3,378,531              (150,322)
                                                                         -----------           -----------

Increase (decrease) in cash                                                 (247,395)               98,254

Cash - January 1,                                                            252,260               154,006
                                                                         -----------           -----------

Cash - December 31,                                                      $     4,865           $   252,260
                                                                         ===========           ===========



</TABLE>


                       See notes to financial statements.

                                        8






<PAGE>


                         KALEIDOSCOPE MEDIA GROUP, INC.
                           (Formerly BNN Corporation)
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 1998



Note 1 - Organization and Description of Business:


           On October 22, 1996, Kaleidoscope Media Group, Inc. ("KMG"), which
           changed its name from BNN Corporation in December 1997 (upon
           reincorporating as a Delaware corporation - it had been a Nevada
           corporation) and was a publicly traded corporation without
           significant operations, acquired all of the outstanding share of
           HSPSMM, Inc. ("HSPS") which changed it name from Kaleidoscope Media
           Group, Inc. in November 1997. The transaction was effected by issuing
           additional KMG shares in an amount that resulted in the original HSPS
           shareholders receiving approximately 40.3% of the outstanding shares
           of BNN. The original HSPS shareholders owned additional shares of KMG
           from before the October 22, 1996 transaction. After the consummation
           of the transaction, they owned approximately 47% of the outstanding
           shares, and with the other 53% scattered, had effective control.


           For financial reporting purposes, the transaction was recorded as a
           recapitalization of HSPS. HSPS is the continuing, surviving, entity
           for accounting purposes, but adopted the capital structure of KMG
           which is the continuing entity for legal purposes. All references to
           shares of common stock have been restated to reflect the equivalent
           number of KMG shares.

           To clarify the corporate names discussed above, the parent company,
           formerly called BNN Corporation, has adopted the name of the former
           subsidiary, Kaleidoscope Media Group, Inc. which in turn changed its
           name to HSPSMM, Inc. All references in these financial statements to
           KMG refer to the "new" KMG; all references to HSPS refer to the "old"
           KMG.


           HSPS was formed in May of 1996, at which time it issued 5,685,688
           common shares to acquire approximately 91% of the outstanding shares
           of SeaGull Entertainment, Inc. ("SeaGull") and 3,814,312 common
           shares to acquire 100% of the outstanding stock of the Kaleidoscope
           Group ("KG"), a marketing and consulting company engaged primarily in
           sports and event marketing. Since, as a result of the transaction,
           stockholders of SeaGull owned a majority of the common stock of HSPS,
           the acquisition of SeaGull by HSPS was accounted for as a
           recapitalization of SeaGull. Accordingly, the historical financial
           statements are those of SeaGull. The acquisition of KG was accounted
           for as a purchase of KG by SeaGull. The shares issued to acquire KG
           were assigned a value of $2,900,000, based upon the fair value of
           KG's net assets. At the date of acquisition, KG had a stockholders'
           deficit of approximately $539,670, resulting in the recording of
           goodwill of $3,439,670. The goodwill is being amortized, using the
           straight line method over a period of twenty years, and amounted to
           $2,608,256 for the years ended December 31, 197. KG's results of
           operations are included in the consolidated financial statements.


           During 1998, KG discontinued operations of this division. Any
           remaining unamortized goodwill related to the acquisition was written
           off.


                                        9


<PAGE>

                         KALEIDOSCOPE MEDIA GROUP, INC.
                           (Formerly BNN Corporation)
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 1998

Note 1  - Organization and Description of Business (Continued):

           Kaleidoscope Media Group, Inc. and Subsidiaries (the "Company")
           operated three divisions:


           The Entertainment Division (principally consisting of SeaGull's
           business activities) is primarily engaged in the business of the
           development, production and domestic and international distribution
           of entertainment properties as well as exploiting the related
           licensing and merchandising opportunities. It also provides
           consulting services in the development of specialty television
           programming and is involved in the acquisition and distribution of
           entertainment library properties.

           The Sports Division (principally consisting of KG's business
           activities) was primarily engaged in sports and event marketing and
           consulting including event management, sponsor and event
           representation, event related sales promotions, event related media
           and publicity, advertising and sponsorship sales and specialty
           publishing. Most of the Company's projects in these areas were sports
           related. The remaining portion of the sports division's properties
           and operations that were not sold during 1997, were discontinued in
           1998.


           The Direct Marketing Division was initiated in January, 1997 and is
           engaged in the production of home shopping programming. This division
           was discontinued in 1998.

Note 2  - Summary of Significant Accounting Policies:

           Principles and Consolidation:


           The consolidated financial statements include the accounts and
           transactions of KMG and its wholly owned subsidiaries. All material
           intercompany accounts and transactions have been eliminated. KMG's
           investment in its 50% owned joint venture is accounted for on the
           equity method. Accordingly, KMG's share of the earnings (loss) of
           the joint venture are included in the consolidated statement of
           operations.


           Program Cost Inventory:

           Program cost inventory is stated at the lower of amortized cost or
           estimated realizable value. Television productions and participation
           costs are amortized based on the ratio of the current period's gross
           revenues to estimated total gross revenues from all sources (the
           "ultimate" revenue) on an individual production basis. Estimates of
           total gross revenues can, and usually do, change significantly due to
           the level of market acceptance of television products. In addition,
           because of uncertainties inherent in the process of estimating costs,
           estimates of the ultimate costs of episodic television programming
           can change significantly in the near term. Accordingly, the estimates
           of ultimate revenue and costs are reviewed periodically and are
           adjusted upward or downward as additional information is learned.
           Amortization expense is consequently adjusted. Such adjustments could
           have a material effect on results of operations in future period.

           In the case of episodic television programming, the Company considers
           each season to be a single product for the estimation of ultimate
           revenues and costs.


                                       10

<PAGE>

                         KALEIDOSCOPE MEDIA GROUP, INC.
                           (Formerly BNN Corporation)
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 1998

Note  2 - Summary of Significant Accounting Policies (Continued):

           Program Cost Inventory (Continued):

           Interest is capitalized as part of program cost inventory when it is
           incurred during the same time period as the expenditures for the
           program costs. During the years ended December 31, 1998 and 1997,
           $-0- and $651,198 of interest cost was capitalized as part of program
           cost inventory.

           During 1998, $3,712,932 of program cost inventory was written off
           because of lowered estimates of revenues or discontinued projects.

           Revenue Recognition:

           Revenue from the licensing or distribution of a television program is
           recognized when the licensee of the program has the legal right to
           exhibit or broadcast the program and the program is deliverable to
           the licensee.

           Revenue from the barter syndications of television programming (the
           sale of television programming in exchange for advertising time) is
           recognized when the program has been licensed, the licensee has the
           legal right to broadcast the program, the program is deliverable to
           the licensee, noncancelable contracts have been signed with both the
           station and the purchaser of the advertising time and appropriate
           allowances can be estimated for rating shortfalls (" make goods").
           The estimation process has inherent uncertainties. Accordingly,
           management's estimate of the allowance for rating shortfalls may
           change in the near term. Such changes could have a material effect on
           results of operations in future periods.

           Revenue is recognized from Company owned events when the event takes
           place. Revenue from consulting and management of events owned by
           others if recognized over the period during which the services are
           rendered. Revenue from sponsorship sales and representation for a
           specific event is recognized when the event occurs. Revenue from
           sponsorship sales and representation for organizations or an ongoing
           series of events is recognized as the organization or owner of the
           events is entitled to bill the sponsor. Television production revenue
           is recognized upon completion of the production.

           Expenditures Billable to Clients:

           Expenditures billable to clients represent direct costs incurred by
           the Company, in connection with its various contracts, that are
           either specifically billable to the clients under the contracts, or
           related to contracts for which the fees have not yet been filled or
           earned. Payroll and related costs, including those relating to
           specific client work, are expenses as incurred.

           Deferred Revenue:

           Deferred revenue presents amounts received from or billed to clients
           in accordance with certain contracts prior to the Company's
           completion of the earning process in accordance with its revenue
           recognition policy. Upon completion of the earning process, the
           amounts are included in revenue.


                                       11


<PAGE>

                         KALEIDOSCOPE MEDIA GROUP, INC.
                           (Formerly BNN Corporation)
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 1998


Note 2  - Summary of Significant Accounting Policies (Continued):

           Depreciation:


           Property and equipment are stated at cost and are depreciated on
           straight-line and accelerated methods over the estimated useful lives
           indicated in Note 9. Leasehold improvements are amortized over the
           term of the lease.


           Goodwill:


           The excess of the acquisition price of KG over the net value of
           specifically identified assets and liabilities at the acquisition
           date was recognized as goodwill. At the date of the sale of assets to
           IPG (see Note 3), the goodwill was allocated between the properties
           sold and the properties retained. The goodwill is being amortized on
           a straight-line basis over twenty years. The Company reviews the
           recoverability of goodwill on an annual basis primarily on an
           analysis of undiscounted projected cash flows from the related
           operations.


           Cash Overdrafts:

           KMG and the various subsidiaries maintain most of their cash balances
           in the same bank but in separate accounts owned by the different
           corporations. The Company's practice has generally been to view the
           group of accounts at the same bank as one balance and to move funds
           from one account to another, with the bank's cooperation, as funds
           are needed to pay checks as presented. Because there is no legal
           right of offset of one subsidiary's positive balance with another's
           overdraft balance, generally accepted accounting principles require
           that the overdraft balances be shown separately as a liability.

           Incentive Stock Option Plan:

           Stock based compensation is recognized using the intrinsic value
           method under which compensation cost for stock options is measured as
           the excess, if any, of the quoted market price of the Company's stock
           at the measurement date over the exercise price. For disclosure
           purposes, pro-forma net income and earnings per share are provided as
           if the fair value method had been applied.

           Use of Estimates:

           The preparation of financial statements in conformity with generally
           accepted accounting principles requires management to make estimates
           and assumptions that affect the reported amounts of assets and
           liabilities and disclosure of contingent assets and liabilities at
           the balance sheet dates and the reported amounts of revenues and
           expenses during the years then ended. Actual results could differ
           from those estimated.



                                       12


<PAGE>

                         KALEIDOSCOPE MEDIA GROUP, INC.
                           (Formerly BNN Corporation)
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 1998


Note 2  - Summary of Significant Accounting Policies (Continued):


           Loss Per Common Share:

           Basic loss per common share is based upon the weighted average
           number of common shares outstanding during the year. Diluted earnings
           (loss) per common share include the effects of potential dilution
           that would occur if securities (such as warrants) or other contracts
           (such as options) to issue common stock were exercised or converted
           into common stock. Such instruments that are convertible into common
           stock are excluded from the computation in periods in which they have
           an anti-dilutive effect. Inclusion of the contingent shares
           potentially issuable as a result of the KMG transaction (see Note 5)
           would have an anti-dilutive effect on earnings (loss) per share. As a
           result it was not used in the earnings per share calculation. The
           weighted average number of common shares used to calculate loss per
           common share during 1998 and 1997 was 29,779,026 and 25,393,438,
           respectively.

           The Company adopted Financial Accounting Standards Board (FASB)
           Statement No. 128, "Earnings per Share". The Statement establishes
           standards for computing and presenting earnings per share (EPS). It
           replaced the presentation of primary EPS with a presentation of basic
           EPS and also requires dual presentation of basic and diluted EPS on
           the face of the income statement.


           Income Taxes:


           Income tax expense (benefit) consists of income taxes currently due
           or refundable arising from the period's operations as adjusted by the
           deferred tax expense (benefit). The deferred tax expense (benefit)
           arises from those changes in the Company's deferred tax assets and
           liabilities relating to operations. Deferred tax assets and
           liabilities result from temporary differences between the amounts of
           assets and liabilities recorded on the financial statements and the
           amounts recorded for income tax purposes. Deferred tax assets also
           result from certain income attributes existing at the balance sheet
           date that can provide future income tax benefits including net
           operating loss carryforwards which can be used to offset future
           taxable income. The deferred tax assets and liabilities are
           calculated based on the currently enacted tax rates that apply to the
           periods that the temporary differences are expected to reverse or the
           tax attributes are expected to be utilized. Deferred tax assets are
           reduced by a valuation allowance when, in the opinion of management,
           it is likely that some portion or all of the deferred tax assets will
           not be realized.


           The Company files consolidated federal income tax returns, including
           all the subsidiaries (i.e., they are taxed as if they were one
           company). KMG and each of the subsidiaries files separate state and
           local income tax returns in the jurisdictions where they are subject
           to tax. Accordingly, when one subsidiary has taxable income, the tax
           losses of another subsidiary cannot be used to offset that
           subsidiary's taxable income for state and local purposes. State and
           local taxes must be paid even though the consolidated entity has a
           loss.



                                       13

<PAGE>

                         KALEIDOSCOPE MEDIA GROUP, INC.
                           (Formerly BNN Corporation)
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 1998


Note 3 -   Sale of Assets:

           In May, 1997, the Company consummated an agreement, effective April
           1, 1997, with the Interpublic Group of Companies ("IPG") for the
           formation of a new venture, Kaleidoscope Sports & Entertainment LLC
           ("KS&E"). Pursuant to the agreement, the Company formed KS&E as a
           wholly-owned subsidiary, contributed a substantial portion of its
           sports properties and operations to KS&E and then sold a 51% interest
           in KS&E to IPG. IPG also acquired an option to buy the remaining 49%
           interest. IPG paid $2,400,000 and assumed an obligation to make
           certain contingent payments to the Company if income targets were met
           by KS&E during the ensuing three years.


           In August, 1997, IPG exercised its option to buy the remaining 49%
           of KS&E and also obtain a release of its obligation to make
           contingent payments pursuant to the original transaction. In the
           August transaction, IPG paid an additional $3,600,000 making the
           total purchase price for KS&E $6,000,000. The Company's carrying
           value of the assets sold was $2,386,115 consisting principally of
           goodwill. The Company also incurred $101,049 of expenses directly
           relating to the sale, resulting in a net gain of $3,512,836.


           After the sale to IPG, the Company intended to retain several of its
           sports related properties and become involved in additional sports
           projects. However as discussed in Note 1, the remaining portion of
           the sports division properties and operations were discontinued.

Note 4  -  Major Customers:

           During the year ended December 31, 1997, approximately 21% of the
           Company's revenue was derived from services provided to one U.S.
           automobile company. There were no major customers in 1998. The
           revenue from this customer was earned in the sports division
           operations acquired in the KG transaction on May 3, 1996. The
           contracts and relationships with this customer was part of the assets
           contributed to the KS&E joint venture (Note 3) which was eventually
           sold and discontinued.

Note 5 -   KMG Transaction/Recapitalization:


           As described in Note 1, KMG acquired HSPS on October 22, 1996, in a
           transaction recorded as a recapitalization of HSPS. The transaction
           was recorded as an issuance of 13,528,082 shares (14,057,082 less
           529,000 treasury shares) in exchange for the cancellation of
           $1,336,018 payable to KMG, that had resulted from cash previously
           advanced, and a $588,000 deferred tax asset. The amount recorded as
           the capital contribution was reduced by $93,781 of related costs. In
           September, 1997 an additional 130,000 shares were issued to settle
           the claims of certain individuals who claimed to have rights to
           shares of KMG arising from transactions with KMG prior to its legal
           acquisition of HSPS. Because this was a contingency existing at the
           time of the transaction, no accounting loss was recorded upon the
           issuance of the shares.





                                       14
<PAGE>

                         KALEIDOSCOPE MEDIA GROUP, INC.
                           (Formerly BNN Corporation)
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 1998


Note 5 -   KMG Transaction/Recapitalization (Continued):

           As part of the acquisition of HSPS, KMG agreed to a "Market Value
           Adjustment" under which HSPS will grant additional shares to the
           former HSPS shareholders to the extent that the original 9,500,000
           shares are worth less than $50,000,000 on the sixteenth (16th)
           business day following the filing of the Company's Form 10K for 1997.
           The number of additional shares will be the number whose aggregate
           market value equals the difference between $50,000,000 and the
           aggregate market value of the original 9,500,000 shares. The
           adjustment will only apply if certain income targets are met for
           1997. There is provision for partial application of the adjustment at
           reduced income levels.

Note 6  -  Program Cost Inventory:

           Program cost inventory consisted of the following:

                                                            December 31,
                                                        1998           1997
                                                    -----------    -----------
           Released, less accumulated amortization  $ 1,451,935    $ 1,730,942

           In-process                                         0      3,433,925
                                                    -----------    -----------
                                                      1,451,935      5,164,867
           Less: Current portion                       (650,929)    (2,876,975)
                                                    -----------    -----------

           Noncurrent portion                       $   801,006    $ 2,287,892
                                                    ===========    ===========

Note 7  - By-The-Way Agreement:


           Included in program cost inventory at December 31, 1997 is $412,500
           consisting of $225,000 of payments made to, and $187,500 of
           additional obligations incurred to, By-The-Way Corporation ("BTW"), a
           corporation wholly owned by a Ray Volpe, a director of the Company
           and owner of approximately 12% of the Company's outstanding common
           stock at December 31, 1997. These advances were made pursuant to a
           contract between the Company and BTW, dated April 1, 1997, whereby
           the Company made payments of $6,250 (semi-monthly) for the period
           April 1, 1997 through December 31, 1998 and applied $112,500 of loans
           made prior to April 1, 1997. $43,750 is a current liability for the
           period ended March 31, 1999. These payments give the Company, in
           perpetuity, the right to acquire, and a right of first refusal with
           respect to, all entertainment properties licensed or owned by BTW
           (other than those properties licensed to KS&E). If the Company should
           acquire a property, it can apply the advances made against any
           amounts due. The Company had recorded these advances as an asset
           because management had estimated that it was probable the advances
           made as of December 31, 1997 would be used to acquire some of the
           properties and the value of the properties so acquired would equal or
           exceed the carrying amount. Due to the inherent uncertainty as to
           whether the advances would be used to acquire properties of
           sufficient value, it is possible that this estimate will change in
           the near term and that some or all of the advances will be
           written-off and charged as a reduction of income.



                                       15
<PAGE>

                         KALEIDOSCOPE MEDIA GROUP, INC.
                           (Formerly BNN Corporation)
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 1998


Note 8  - Loans and Advances Receivable - Officers and Stockholders':


           These loans and advances to officers and stockholders' do not bear
interest and have no definite due date.


Note 9 - Property and Equipment:

           Property and equipment consisted of the following:
<TABLE>
<CAPTION>

                                                                             Estimated Useful
                                                          December 31,         Life in Years
                                                                             ----------------
                                                     1998           1997
                                                  --------        --------
<S>                                             <C>             <C>                 <C>
           Automobile                             $ 51,543        $ 51,543          5
           Furniture and fixtures                   14,855          58,299          7
           Computers and office equipment           46,426          78,339          5
                                                  --------        --------
                                                   112,824         188,181
           Less: accumulated depreciation          (84,366)       (105,399)
                                                  --------         -------

                                                  $ 28,458        $ 82,782
                                                  ========        ========
</TABLE>

           Depreciation expense was $62,297 and $48,488 for the years ended
           December 31, 1998 and 1997, respectively.

Note 10 - Investment in Joint Ventures:


           The Company has a 50% ownership interest in Keller-Siegel
           Entertainment LLC ("KSE"). KSE produces Tarzan: The Epic Adventures,
           an hour long action adventure television series that first aired in
           September, 1996. Revenue is derived from both domestic and foreign
           sources. Summarized financial information of KSE as of December 31,
           and the years then ended are as follows:
<TABLE>
<CAPTION>
                                                                      December 31,
                                                                1998                1997
                                                             ---------          -----------
<S>                                                          <C>                <C>
                  Assets                                     $ 281,671          $ 5,770,000
                  Liabilities                                  281,671           (3,017,000)
                  Members capital                            $       -          $ 2,753,000
                  Revenue                                    $  36,865          $ 5,570,000

                  Net income                                 $(317,316)         $   136,000

                  Company's equity in net (loss) income      $(188,658)         $    68,000

</TABLE>
           The Company is the domestic distributor of Tarzan: The Epic
           Adventures. Both the Company and the other 50% owner of KSE provide
           production, marketing and administrative services to KSE, the cost of
           which exceeds the reimbursements received from KSE. Certain of these
           production and marketing costs related to Tarzan: The Epic Adventures
           have been capitalized by the Company as program cost inventory. The
           amortization of this program cost inventory, as well as the KSE share
           of administrative and noncapitalizable marketing costs are recognized
           as expenses in the statement of operations.


                                       16
<PAGE>

                         KALEIDOSCOPE MEDIA GROUP, INC.
                           (Formerly BNN Corporation)
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 1998



Note 10 - Investment in Joint Ventures (Continued):


           The production costs for the two part premiere episode along with
           certain pre-release marketing costs were funded by STI Entertainment
           ("STI") under an agreement by which STI was to fund the production
           costs for the entire season's episodes in exchange for significant
           gross profit participation. STI refused to supply the funding for the
           remaining episodes. As a result, KSE incurred significant costs in
           arranging for alternate financing. During 1997, STI asserted a claim
           for an accounting, contending that they were due monies for the
           premiere episode. Management vigorously contests this claim,
           contending that STI materially breached its contract with KSE, which
           material breach excused any further performance of KSE thereunder,
           and also contending that KSE has been damaged in an amount exceeding
           $2,800,000. A complaint has been filed by KSE against STI and others
           seeking damages for breach of contract and to declare that KSE is
           excused from all future performance under the contract. Management
           and STI are now engaged in settlement discussions. Despite
           management's belief that it has a strong case for the damages claim
           against STI and against STI's claim for profit participation, due to
           the uncertainties inherent in litigation, it is at least reasonably
           possible that a material liability could result, although the amount
           cannot be estimated.


           Kaleidoscope Sports & Entertainment LLC:

           From the April 1, 1997 effective date of the sale to IPG (consummated
           in May of 1997) through the sale of the remaining interest in August
           of 1997, the Company held a 49% interest in KS&E.

Note 11 - Capitalized Lease Obligation:

           The Company was obligated under a capitalized lease requiring
           payments of $2,919 per month, including interest at 7.2%, through
           January 1998. The final payment under this lease was made in December
           31, 1997.

Note 12 - Notes Payable:



<TABLE>
<CAPTION>
                                                                             December 31,
                                                                        1998             1997
                                                                      --------         --------
<S>                                                                    <C>            <C>
           Note payable - due to officer                              $150,000         $      0

           Note payable to the former parent of KG (see Note 15).       40,000           40,000
                                                                      --------         --------

                                                                      $190,000         $ 40,000
                                                                      ========         ========

</TABLE>

                                       17


<PAGE>
                         KALEIDOSCOPE MEDIA GROUP, INC.
                           (Formerly BNN Corporation)
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 1998


Note 13 -  Millport Transactions:


           During 1996 and the first quarter of 1997, the Company issued notes
           (with face amounts of $600,000 and $412,217, respectively) payable on
           demand, bearing interest at 8% per annum, to foreign clients of
           Millport Ltd. (the "Millport Clients"), a Bahamian domiciled
           investment advisor. As additional consideration for granting the
           loans to the Company, the Millport Clients were given two year
           warrants to purchase an aggregate of 4,048,866 shares of Common Stock
           at $.25 per share. Pursuant to generally accepted accounting
           principles, the proceeds received from the Millport Clients, which
           equaled the principal amounts on the notes, were allocated between
           the warrants and the notes based on their relative estimated fair
           values.


           Of the $600,000 received in 1996, $248,000 was deemed to be the
           proceeds of issuing the warrants and $352,000 the proceeds of the
           notes. Of the $412,217 received in the first quarter of 1997,
           $284,451 was deemed to be the proceeds of the warrants and $127,766
           the proceeds of the notes. The implied discount on the notes payable
           was amortized as a cost over the period from the receipt of the
           proceeds to the repayment of the notes. Substantially all of the
           notes were repaid at face value by May, 1997.


           Millport Clients also have purchased a total of 4,732,220 shares of
           Common Stock from the Company. In addition, some of the Millport
           Clients have purchased shares of Common Stock in the open market.
           Martin Miller, a director of the Company is the director of
           corporate finance of Millport Ltd. Mr. Miller represents that the
           Millport Clients are not affiliates of Mr. Miller or Millport Ltd.


Note 14 -  Commitments:

           The Company leased the space for its principal office in New York, NY
           under an agreement expiring in June 2002. The Company was also
           obligated under operating lease agreements for certain office
           equipment. The Company is also the lessee of office space, located in
           Los Angeles, California, under a lease also expiring in June 2002 and
           is the lessee of office space, located in Miami, Florida, under a
           lease expiring December 1999. The office leases provide for future
           escalation based on certain cost increases.

           As of December 31, 1998, the total commitments for future rentals
           were as follows:


                           1999                 $   668,228
                           2000                     605,203
                           2001                     613,378
                           2002                     466,845
                                                 ----------
                                                 $2,353,654
                                                 ==========


           Rent expense was $246,811 and $551,042 for the years ended December
           31, 1998 and 1997 respectively.  This was partially offset by
           sublease income of $194,053 and $434,844, respectively.


                                       18
<PAGE>
                         KALEIDOSCOPE MEDIA GROUP, INC.
                           (Formerly BNN Corporation)
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 1998



Note 14 -  Commitments (Continued):

           The Company entered into employment agreements as of January 1, 1997
           with Henry Siegel, Chief Executive Officer of the Company, and Paul
           Siegel, President of the Company. Each agreement has a three-year
           term which renews for an additional year on each anniversary of the
           agreement, and provides for an annual base compensation of $350,000,
           with annual increases subsequent to the three year term in an amount
           to be determined by the Board of Directors. In addition, Henry Siegel
           and Paul Siegel are each entitled to such bonuses as may be awarded
           by the Board of Directors in its discretion. Each agreement also
           provides for the payment of benefits, including an automobile
           allowance. In the event of the death or total disability of either
           executive, the Company has agreed to pay his estate or the executive
           the unpaid portion of his annual base compensation, but in no event
           less than six months base compensation. The agreement also contains a
           non-competition provision covering the term of the agreement plus two
           years following termination or expiration of the agreement.

Note 15 -  Contingencies:


           On June 21, 1996, a suit was filed against two of the Company's
           subsidiaries and other unrelated parties in the amount of $21,000,000
           alleging that they are successors to the alleged liability for a
           default judgment entered against a former affiliate of the
           subsidiaries in April, 1995 for an alleged action taking place in
           1988. The subsidiaries have vigorously defended themselves in this
           litigation. Management believes that the claim against the former
           affiliate lacks merit and that, in any case, its subsidiaries have
           no responsibility for the debts of the former affiliate.
           Furthermore, management believes that if any judgment were to be
           entered against the subsidiaries, it would be able to obtain
           indemnification from the prior owner of the former affiliate's
           business, a major advertising agency. In March, 1998, the court
           dismissed plaintiff's claim against the subsidiaries and at the same
           time found that the advertising agency may be liable to the plaintiff
           pursuant to aforesaid indemnity agreement. The plaintiff and the
           advertising agency have submitted arguments to reargue and the
           Company believes they intend to appeal in any event. While management
           believes, based on the foregoing, that the litigation will not have a
           material effect on the Company's financial position, it is as least
           reasonably possible that a material liability could result, although
           the amount cannot be estimated.


           At the time of the May, 1996 acquisition of KG (see Note 1), KG had a
           note payable (jointly and severally with a former affiliate that is
           now insolvent) to a former parent company in the amount of $225,000.
           KG was contesting its liability under this note because of various
           claims against the former parent. In accounting for the acquisition,
           the Company valued the liability at $40,000 based on a signed
           settlement agreement with the former parent's bankruptcy trustee.
           Subsequent to the issuance of the 1996 financial statement, the
           settlement was rejected by the creditors of the former parent. No
           efforts have been made by the former parent's bankruptcy estate to
           collect this debt, the Company still intends to assert its
           counterclaims if the matter is litigated. No adjustment has been made
           to the original $40,000 valuation assigned to the debt. It is,
           however, at least reasonably possible that the Company would be
           required to pay the full $225,000, resulting in a loss of $185,000.


                                       19


<PAGE>
                         KALEIDOSCOPE MEDIA GROUP, INC.
                           (Formerly BNN Corporation)
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 1998


Note 15 -  Contingencies (Continued):


           In December 1997, the Company filed an action seeking damages for
           breach of contract and fraudulent inducement of contract, among other
           claims, arising out of a venture that the Company entered into, with
           the defendants in the action to promote a Latin American boxing
           tournament. The Company seeks damages of at least $500,000 plus
           punitive damages in the action. Two of the defendants have answered
           the complaint, asserting various affirmative defenses and two
           counterclaims seeking damages of not less than $250,000. A third
           defendant has not yet responded to the complaint. It is not possible
           to make an assessment of the probable outcome of this litigation but
           it is at least reasonably possible that a material gain or loss
           could result.


           Certain former independent contractors, related to each other, who
           performed services for the Company, have expressed a belief that they
           have valid claims against the Company amounting to up to $500,000. It
           is not known whether these former independent contractors will press
           their claims. If they do, management intends to contest each case
           vigorously and to file substantial counterclaims.


           During 1998, various claims were filed against the Company alleging
           breach of contract, failure to pay in accordance with a contract of
           services, alleged failure to permit the transfer of stock
           certificates and unpaid salary to a former subsidiary's employee.
           These claims are in excess of $2,750,000. The Company denies all
           liability and in certain instances has counter-claimed for damages.
           It is not possible to assess the probable outcome of these claims,
           but it is at least reasonably possible that a material gain or loss
           could result.

           Other contingencies include an action for an alleged unpaid bonus of
           $25,000 and claims for approximately $89,000 arising from a sporting
           event managed by KG in early 1996. Management believes that the
           claims are not valid and no liabilities have been recorded for these
           amounts as management believes that no loss is probable. It is,
           however, reasonably possible that the Company will have to pay these
           claims.

           Going Concern:

           As shown in the accompanying financial statements, the Company
           incurred a net loss of $8,065,915 during the year ended December 31,
           1998, and as of that date, the Company's current liabilities exceeded
           its current assets by $1,360,067. Those factors, create an
           uncertainty about the Company's ability to continue as a going
           concern. However, the Company has recently completed a transaction
           whereby they issued convertible debentures for the sum of $750,000.
           The investors, subject to certain conditions, which the Company
           believes are attainable, have agreed to purchase an additional
           $1,250,000 of convertible debentures. The ability of the Company to
           continue as a going concern is dependent upon the completion of this
           financing. The financial statements do not include any adjustments
           that might be necessary if the Company is unable to continue as a
           going concern.



                                       20
<PAGE>

                         KALEIDOSCOPE MEDIA GROUP, INC.
                           (Formerly BNN Corporation)
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 1998

Note 16 - Income Taxes:


           The tax benefit for the year ended December 31, 1998 and the
           provision for income taxes for the year ended December 31, 1997
           consist of the following components:

                                                   Years Ended December 31,
                                                    1998              1997
                                                -----------       -----------
                  Current
                    Federal                     $         0        $        0
                    State                            53,830           716,194
                                                -----------        ----------
                                                     53,830           716,194
                                                -----------        ----------
                  Deferred
                    Federal                         334,336           931,800
                    State                           228,264          (195,400)
                                                -----------       -----------
                                                $   622,600           736,400
                                                -----------       -----------

                                                $   676,430       $ 1,452,594
                                                ===========       ===========

           The income tax expense for the year exclusive of the benefit from the
           change in tax status, does not bear the expected relationship between
           pretax income and the federal corporate income tax rate of 34%
           because of the effect of state and local income taxes and the fact
           that the company's amortization of goodwill and certain other
           expenses are not deductible for income tax purposes.

           The reconciliation between the actual and expected federal tax is as
           follows:

<TABLE>
<CAPTION>
                                                                                      Years Ended December 31,
                                                                                 1998                      1997
                                                                             -----------               ------------
<S>                                                                          <C>                       <C>
           Federal corporate tax rate of 34%
             applied to pretax income (loss)                                 $   164,923               $    398,650

           State and local income taxes, net of federal
             Income Tax benefit                                                  142,197                    343,724

           Effect of non-taxable gain on lease cancellation                      (65,665)                         0

           Effect of non-deductible goodwill amortization                        282,681                     26,180

           Effect of other non-deductible expenses                                86,888                     19,389

           Effect of excess of carrying amount of goodwill
             sold over the tax basis                                                   0                    811,335

           Effect of change in previous year's income tax
             estimates                                                            65,406                   (146,684)
                                                                             -----------                -----------

                                                                             $   676,430                $ 1,452,594
                                                                             ===========                ===========

</TABLE>

                                       21

<PAGE>


                         KALEIDOSCOPE MEDIA GROUP, INC.
                           (Formerly BNN Corporation)
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 1998


Note 16 - Income Taxes (Continued):


           Deferred income taxes as reported on the balance sheet consists of:

                                                          December 31,
                                                     1998             1997
                                                 -----------      ------------
                  Deferred tax assets            $ 4,730,257      $    818,600
                  Deferred tax liabilities                 0          (154,900)
                  Valuation allowance             (4,730,257)          (41,100)
                                                 -----------      ------------
                                                 $         0      $    622,600
                                                 ===========      ============

           Deferred tax asset balances consist principally of the following:
<TABLE>
<CAPTION>
                                                                                         December 31,
                                                                                     1998            1997
                                                                                ------------    ------------
<S>               <C>                                                           <C>             <C>
                  Net operating loss carryforwards                              $          -    $    491,100
                  Start-up costs capitalized for income tax
                      purposes but not on the financial statements                         -         116,300
                  Deferred rent                                                            -          99,200
                  Liability assumed in KG acquisition, not yet
                      recognized as an expense for tax purposes                            -               -
                  Expenses accrued by subsidiary that is taxed on
                      cash basis                                                           -          65,000
                                                                                ------------    ------------
                  Other                                                                    -           5,900
                                                                                ------------    ------------
                                                                                $          -    $    777,500
                                                                                ============    ============
</TABLE>

           Deferred tax liability balances arise principally because of the
following:
<TABLE>
<CAPTION>
<S>              <C>                                                            <C>                    <C>
                  Revenue earned but not received by the
                      subsidiary taxed on the cash basis                        $          -    $    104,900
                  KG liabilities assumed in the acquisition, recorded at
                      fair values lower than their tax basis                               -          50,000
                                                                                ------------    ------------
                                                                                $          -    $    154,900
                                                                                ------------    ------------
                                                                                $          -    $    622,600
                                                                                ============    ============
</TABLE>
           As of December 31, 1998, the Company had net operating loss ("NOL")
           carryforwards of $8,537,514 available to offset future federal
           taxable income; the carryforwards are not available for state
           income tax purposes. These carryforwards begin to expire in 2011.
           The Company has provided a full 100% valuation allowance on the
           deferred tax assets as at December 31, 1998 to reduce such deferred
           income tax assets to zero as it is managements belief that
           realization of such amounts do not meet the criteria required by
           generally accepted accounting principles. Management will review the
           valuation allowance requirement periodically and make adjustments as
           warranted.



                                       22
<PAGE>

                         KALEIDOSCOPE MEDIA GROUP, INC.
                           (Formerly BNN Corporation)
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 1998



Note 16 -  Income Taxes (Continued):


           In addition, one of the Company's subsidiaries has approximately
           $175,000 of NOL carryforwards that can only be used to offset the
           future taxable income (for federal and certain state purposes) of the
           specific subsidiaries to which they pertain. These carryforwards are
           further limited by the operation of Section 382 of the Internal
           Revenue Code. The subsidiary is only allowed to use a maximum of
           approximately $28,000 of these carryforwards each year. Additional
           portions of the carryforwards can, however, be used to offset certain
           gains on the disposition of assets. Certain of the Company's
           subsidiaries also have substantial NOL carryforwards available to
           offset state and local taxable income.


Note 17 -  Capital Structure:


           During 1998, the Company issued 12,633,878 shares of common stock to
           various non-related parties. The Company received $3,201,231 in
           capital for 11,943,868 shares; the remaining 690,010 shares were for
           services rendered.

           In addition to the Millport warrants described in Note 13, all of
           which were still outstanding at December 31, 1997 and the outstanding
           stock options described in Note 18 (below), the Company issued
           1,500,000 warrants to one of the Company's directors on March 6,
           1997. Each warrant gave the holder the right to buy one share of
           common stock at $0.60 at any date through March 5, 1998. These
           warrants, were issued in conjunction with 500,000 shares of common
           stock sold to the director. The total price paid for the stock and
           warrants was $125,000. The warrants were still outstanding at
           December 31, 1997 but expired on March 5, 1998.


Note 18 -  Stock Options:


           In December 1997, the shareholders authorized the implementation of
           an Incentive Stock Option plan which granted employees 835,000
           options. The options vested one-third each on January 2, 1997, 1998
           and 1999. The 1997 options, although vesting retroactively to January
           1997, were not effective until the shareholder approval. Each option
           entitles the holder to purchase one share of Common Stock at $.62.
           Each option can be exercised at any time over a five year period.

           Stock option activity was as follows:

                                                              December 31,
                                                          1998           1997
                                                        -------        -------
                  Balance at January 1,                 828,333              -
                    Granted                                   -        835,000
                    Exercised                                 -              -
                    Forfeited                                 -              -
                    Expired                                   -         (6,667)
                                                        -------        -------
                  Balance at December 31,               828,333        828,333
                                                        =======        =======




                                       23


<PAGE>

                         KALEIDOSCOPE MEDIA GROUP, INC.
                           (Formerly BNN Corporation)
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 1998



Note 18 - Stock Options (Continued):


           As described in Note 2, the Company accounted for the granting of
           stock options under the intrinsic value method and, accordingly, no
           compensation cost has been recognized for stock options in the
           financial statements. Had the Company determined compensation cost
           based on the fair value at the grant date for its stock options, the
           company's net loss would have been increased to the pro forma amounts
           indicated below:

                  Net loss:
                      As reported                  $(8,065,915)
                      Pro forma                    $(8,162,476)

                  Net loss per share:
                      As reported                  $     (0.27)
                      Pro forma                    $     (0.27)

Note 19 - Fair Value of Financial Instruments:

           Statement of Financial Accounting Standards No. 107, Disclosures
           about Fair Value of Financial Instruments ("SFAS 107") requires
           entities to disclose the fair values of financial instruments except
           when it is not practicable to do so. Under SFAS 107, it is not
           practicable to make this disclosure when the costs of formulating the
           estimated values exceed the benefit when considering how meaningful
           the information would be to financial statement users.

           The Company's financial instruments, and the related amounts recorded
           on the balance sheet, to which SFAS 107 would be applied include the
           following:


                                                           Carrying Amount
                                                       ----------------------
                                                             Years Ended
                                                              December 31,
                                                          1998         1997
                                                       ---------    ---------
                  Assets:
                      Cash                             $   4,865    $ 252,260
                      Notes receivable                         -            -
                      Loans and advances receivable
                          officers and stockholders        9,000       36,300

                  Liabilities:
                      Cash overdraft                      13,051      194,148
                      Notes payable                      190,000       40,000


           As a result of the difficulties presented in the valuation of the
           loans receivable and payable from the officers and shareholders
           because of their related party nature, estimating the fair value of
           these financial instruments is not considered practicable. The fair
           value of the cash, notes receivable, cash overdraft and notes payable
           do not differ materially from their carrying amounts.


           None of the above are derivative financial instruments and none are
           held for trading purposes.



                                       24
<PAGE>

                         KALEIDOSCOPE MEDIA GROUP, INC.
                           (Formerly BNN Corporation)
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 1998



Note 20 - Supplemental Statement of Cash Flows Disclosure:

           Interest and Income Taxes Paid

           Cash payments for the following were:

                                                       December 31,
                                                   1998             1997
                                               -----------      -----------
                  Interest                     $    36,568      $         -
                                               ===========      ===========

                  Income taxes                 $         -      $    43,618
                                               ===========      ===========

           Non-Cash Financing Transactions

           The following assets were contributed to and liabilities assumed by
           KS&E in connection with its formation and partial sale in May, 1997:

                  Assets contributed to KS&E
                      Accounts receivable                         $   169,000
                      Other current assets                             89,648

                  Liabilities assumed by KS&E
                      Accounts payable and accrued liabilities        169,000
                      Deferred income and client advances              89,648

           In addition to the assets and liabilities actually contributed to
           KS&E, goodwill amounting to $2,409,416 was allocated to the Company's
           investment in KS&E. Of this amount $23,301 was amortized as part of
           the Company's equity in the income of KS&E and the remaining
           $2,386,115 represented the cost basis of the assets sold.


           As described in Note 7, $112,500 of advances to Ray Volpe were
           applied to program cost inventory in 1997. Also pursuant to the
           agreement, an additional $187,500 of capitalized program costs were
           incurred by recording the future amounts due under the By-The-Way
           agreement.


Note 21 - Subsequent Events:

           As discussed in Note 15, the Company issued $750,000 of convertible
           debentures and anticipates issuing $1,250,000 of additional
           debentures subject to attaining certain conditions. Note 15 discusses
           the Company's ability to continue as a going concern.





                                       25


<PAGE>

                         KALEIDOSCOPE MEDIA GROUP, INC.
                           (Formerly BNN Corporation)
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 1998


Note 22 - Segment Information:

             As described in Note 1, the Company's operations have been
             classified into two segments, the Entertainment Division and the
             Sports Division. Summarized information by business segment for
             1998 is as follows:
<TABLE>
<CAPTION>
                                                                    Direct
                                  Entertainment      Sports       Marketing         Other            Total
                                  -------------   -----------    -----------    -----------      ------------
<S>                                <C>            <C>            <C>            <C>              <C>
Revenue                            $   748,249    $        --    $        --    $   389,426      $  1,137,675

Operating (loss)                   $(5,611,304)   $(7,221,773)   $(1,040,231)   $   (19,652)     $ (7,393,960)

Gain on lease cancellation                  --             --             --        193,133           193,133

Equity in loss on joint ventures      (188,658)            --             --             --          (188,658)

Pretax income (loss)               $(5,799,962)   $  (722,773)   $(1,040,231)   $   173,481      $ (7,389,485)

Total identifiable assets          $ 1,884,181    $        --    $        --    $        --      $  1,884,181

Depreciation and amortization      $   893,711    $        --    $        --    $        --      $    893,711

Capital expenditures               $        --    $        --    $        --    $        --      $         --

</TABLE>

             As described in Note 1, the Company's operations have been
             classified into two segments, the Entertainment Division and the
             Sports Division. Summarized information by business segment for
             1997 is as follows:
<TABLE>
<CAPTION>
                                                                      Direct
                                    Entertainment      Sports        Marketing        Other         Total
                                    -------------   -----------    -----------    -----------    -----------
<S>                                  <C>            <C>            <C>            <C>            <C>
Revenue                              $   633,916    $ 1,784,946    $   311,274    $    11,256    $ 2,741,392

Operating (loss)                     $(1,474,012)   $  (619,684)   $  (379,736)   $  (184,625)   $(2,658,057)

Gain on lease cancellation                    --      3,512,836             --             --      3,512,836

Equity in income on joint ventures        68,100        249,621             --             --        317,721

Pretax income (loss)                 $(1,405,912)   $ 3,142,773    $  (379,736)   $  (184,625)   $ 1,172,500

Total identifiable assets            $ 3,549,415    $ 2,403,919    $ 1,142,320    $   171,919    $ 7,267,573

Depreciation and amortization        $   339,955    $   438,523    $   296,798    $    23,473    $ 1,098,749

Capital expenditures                 $ 2,759,610    $ 1,203,381    $ 1,263,190    $     6,144    $ 5,232,325
</TABLE>


                                       26