<PAGE>

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

                                   FORM 10-KSB

(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
    1934
        For the fiscal year ended 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, $.01 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, 1999 are
$1,175,206.

         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

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 the 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


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important, establishing strategic alliances with production and distribution
companies. The Company determined not to be responsible for the financing of
production costs of its programs unless such financing was restricted to future
distribution proceeds.
 
         In April 1999 The company issued received $750,00 in consideraion of
the sale of convertible notes. 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 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) is primarily engaged in the business of and 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 acquisition and distribution of entertainment library properties.



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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
Northg 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. 

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


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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
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         Television Production
         ---------------------

         The production of a program for first-run syndication begins with the
development of a creative concept. Depending on the type of programming, the
producer will develop a format and, in some instances, a pilot. The format and
the pilot, if any, will be presented by the program's syndicator to
representatives of various television stations around the world, in some
instances accompanied by sales promotion materials created by the producer or
syndicator. Frequently, in order to attract television stations to license
programming for exhibition for the upcoming fall television season, a producer
or syndicator will present its programming at the annual meeting of the National
Association of Television Programming Executives (primarily a domestic
programming exhibition) and at M.I.P. (primarily a foreign programming
exhibition), generally held in January and April, respectively, of each year.
Because the size of the viewing audience of a program for a station can be
affected by the popularity of the programming that precedes and follows it on
the station, syndicators generally attempt to sell their programs to the station
in a given market area with the highest ratings and to arrange for the program
to be broadcast in the most favorable time period and programming environment
possible. If a television station elects to license a program, it generally will
license one year's worth of such programming, subject to that programming being
produced.

         The development of programming for first-run syndication may require
significant expenditures before the programming is first broadcast. Depending on
the type of programming, the initial license fees paid by television stations
for the right to broadcast such programming may be less than the costs of
developing, producing, marketing and distributing such programming. The
Company's strategy is to attempt to use strategic partners to fund the costs of
the programming development significantly reduces the Company's financial risk
in program development. This strategy may also, however, limit the Company's
returns on successful programming. Additionally, the Company pre-sells the
foreign distribution rights to programming to further cover programming
development costs.

         The ultimate commercial success of a first-run program will depend on
the program's ratings (including the demographics of its audience), which are a
reflection of the program's popularity with viewers. As a program's ratings
improve, the value of the advertising time during that program and the amount
which can be charged to television stations for licensing that program generally
increase. A program's ratings may improve as a result of its being moved to a
more favorable time period or licensed by a greater number of, or more
successful, stations, i.e., stations with better overall ratings. Promotional
efforts by stations on which a program is broadcast can also help to improve a
program's ratings. The demographic composition of a program's audience and the
popularity of the program scheduled in the time period immediately preceding the
time period in which the program is broadcast are additional factors that can
affect a program's ratings. Finally, the distributor's direct consumer marketing
efforts for a program can substantially affect that program's ratings. The
Company seeks to maximize the strength of its programming by negotiating
desirable time slots, selecting optimal stations, and demanding effective
consumer marketing efforts in its syndication clearance efforts.




                                        5
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         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
         ----------------------------------------------------

         Revenues from the distribution of U.S. television programs 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 in the United States.





                                        6
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         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" series being produced by the Company.

         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.

         While the Company's present liquidity situation exists the Company will
concentrate on acquiring distribution rights. When acquiring existing
properties, the Company may pay a nominal fee for an option against a more
substantial purchase price. This option usually enables the Company to develop
the property on its own during the option period before committing to its
acquisition. Securing an option also enhances the Company's ability to obtain
financing or a production commitment before actually buying the property. Option
periods customarily run for a minimum of one year and contain provisions that
enable the Company to extend the option for additional periods. Terms of options
vary significantly and are dependent upon, among other factors, the credibility
and prior success of the writer/owner of the property, the level of revenues or
profits that the Company estimates can be received from the exploitation of the
property, and the estimated cost of further development and production of the
property. Agreements relating to these projects often provide for additional
payments to writers/owners upon their sale, production and/or distribution.
Certain agreements also provide for participation, at various percentage levels,
and or profits from these projects.

         In some cases, where the Company already has a working relationship
with outside creative personnel, the Company will agree to co-develop a
property. Generally, the Company will set up a corporation or similar entity
under which it will develop and possibly produce the property. Otherwise the
Company will enter into an agreement to co-develop the property with the owner
or creator. Like options, the terms of the Company's co-development agreements
can vary significantly.

         During the development phase of a project, commitments are sought from
external sources


                                        7
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such as the major entertainment studios, distributors, broadcast networks,
production companies and corporate sponsors. As indicated, it is not the
practice of the Company to expend substantial sums of its own in the development
process unless it has reason to believe that there is a strong likelihood of a
financing or production commitment for the project from such external sources.

         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.




                                        8
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         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.






                                       9
<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 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 which on the Company's operations cannot be predicted.

         One of the ways the Company can ensure that it maintains certain
ownership interests in its properties, both in the rights to sell ancillary
products and by participating in the direct profitability associated with the
broadcast of the program, is to enter into license fee arrangements with third
parties such as networks or distributors. Under this arrangement, the licensor,
in this case the Company, assumes a greater financial risk as the costs to
produce the program may exceed the negotiated license fee. This type of
arrangement generally gives the network or distributor the right to broadcast on
domestic television for a defined period of time. The licensor would retain the
rights to exploit ancillary markets, including foreign distribution of the
program. While the Company has not historically deficit financed productions and
generally would not agree to do so, for selected properties it may agree to such
a licensing arrangement to improve its ownership interest. In these cases, the
Company would assume greater financial risk on the production which could result
in


                                       10
<PAGE>

losses to the Company if the project failed or if the Company's production costs
exceeded the licensing fees and revenues generated from ancillary markets.

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) full-time persons,
of whom 4 were engaged in sales and marketing five (5) in management, finance
and administration. 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.


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. Management believes that the claim lacks merit. 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


                                       11
<PAGE>



Group, Inc. (United District Court for the District of California. This action
was commenced AAC Entertainment GMBH Co. ("ACC") for alleged breach of contract.
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. The court has derected that a settlement conference
be held.

         Paul Cioffari has 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.

         Jack Woolf has commenced an action in Supreme Court for the State of
California in Los Angeles entitled Jack Woolf vs. BNN Corporation. Mr. Woolf
alleges breach of an agreement with the Company's former subsidiary Celebrity
Shopping Network which Mr. Woolf claims the Company is liable. The damages are
not stated with particularity. Mr. Wolf action was dismissed but Mr. Woolf has
appealed.

         Mr. Barry Synter has commenced a claim 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.

         Tokyo Broadcasting Systems has taken a default judgment 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.



                                       12
<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. have 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. The Company believes it has valid and
meritorious defenses to the counterclaims, that the counterclaims are otherwise
invalid, and the Company has prepared an appropriate reply. The third defendant,
Andrew Varni, has not yet to date appeared in the action or answered the
complaint. The parties are engaged in discovery at this time.

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

         No matter was submitted.



                                       13
<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" and is traded on the Frankfurt Stock
Exchange and the Berlin Stock Exchange under the symbol "BNN".

         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.



                                       14
<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.




                                       15
<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 $1,137,075 in 1998 from $2,741,692 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 $2,063,508 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 lower amount 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


                                       16
<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 $188,698.
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 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 $561,985 to a loss of
$7,389,485 in 1998 from $1,172,500 in 1997. This decrease was a result of the
factors described above.

         The provision for income tax benefit was $1,731,470 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,


                                       17
<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 $5,658,015, or $0.19 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

         At December 31, 1998, NOLs of the Company amounted to approximately
$8,537,500s 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

         Net cash used in operating activities was $3,617,953 in 1998 compared
with $984,388 in 1997. The increase in cash used 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 $1,973 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 $150,332 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.

         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. This
decline in cash inflow caused the Company a severe liquidity problem which it


                                       18
<PAGE>



has partially addressed through equity financing, reduction in overhead.

         During the year ended December 31, 1998, the Company received no
material cash from its 50% participation in the Joint Venture that produced and
distributed of "Tarzan: The Epic Adventures." This resulted principally from the
obligations of the Joint Venture to its vendor.

         Management believes that as additional entertainment properties are
released to the market, cash flows from these properties will improve the
overall Company cash situation significantly. Although each new project going
into production will require additional financial resources, management expects
that financing from venture partners and funding from sponsorships and pre-
sales of programming will provide a significant portion of these needs

         At December 31, 1998, the Company had working capital deficity of
$(303,553) as compared to working capital of $801,603 at December 31, 1997.

         As a result of the operating and programming requirements, management
is continuing to explore initiatives to ensure adequate interim cash resources.
The Company is seeking to obtain necessary funding from (a) equity financing;
(b) arrangements for profit participation in individual projects and (c)
marketing or advertising tie-ins to programs and is exploring other joint
venture relationships that will share the burden of program investment. The
Company received $750,000 upon the sale of convertible notes in April 1999. The
investors subject to certain conditions which the Company believes are
attainable have agreed to purchase an additional $1,250,000 of convertible
debentures.


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 F-1 through F-28 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.




                                       19
<PAGE>



                                    PART III


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

         The directors and executive officers of the Company are as follows:

        Name             Age      Position
        ----             ---      --------
Henry Siegel             56       Chief Executive Officer, Chairman of the Board

Paul Siegel              56       President and Director

Ray Volpe                57       Director

Martin Miller            57       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.




                                       20
<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 has been a director of the Company since 1995. 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.

         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:



                                       21
<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, 1997.

                       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>


         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


                                       22
<PAGE>
<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 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. The Company has not paid
salary under then agreements since November 1999.

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.

 

                                       23
<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.



                                       24
<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                                  --                 --
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.





                                       25
<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 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
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. In settlement
on claims an agreement to pay indebted of the Company the 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.





                                       26
<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, par value $.01
            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.

  21.01     Subsidiaries of the Company

  23.1      Consent of Independent 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.

(b) Reports on Form 8-K

     None


                                       27
<PAGE>











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

                            FINANCIAL STATEMENTS WITH
                          INDEPENDENT AUDITOR'S REPORT

                 FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997


















<PAGE>
                         KALEIDOSCOPE MEDIA GROUP, INC.


                                  - I N D E X -
<TABLE>
<CAPTION>
                                                                                 Page
                                                                                Number

<S>                                                                              <C>
Independent Auditors' Report                                                      F-2


Financial Statements


      Consolidated Balance Sheets                                                F-3-4


      Consolidated Statements of Operations                                       F-5


      Consolidated Statements of Changes in Stockholders' Equity (Deficit)        F-6


      Consolidated Statements of Cash Flows                                      F-7-8


      Notes to Consolidated Financial Statements                                 F-9-26



</TABLE>


<PAGE>

                           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 statement of Kaleidoscope Media Group Inc. (formerly BNN Corporation)
at December 31, 1997 were audited by other auditors whose report dated April 14,
1998, expressed an unqualified opinion on those statements.

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

In our opinion, the consolidated financial statements referred to above
represent fairly, in all material respects, the financial position of
Kaleidoscope Medial 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 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 does not include any
adjustments that might result from the outcome of this uncertainty.




Garden City, New York
April 14, 1999




                                      F-2

<PAGE>


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

                           CONSOLIDATED BALANCE SHEETS



                                     ASSETS
<TABLE>
<CAPTION>
                                                                         December 31,
Current Assets:                                                    1998                1997
                                                               ----------          ----------
<S>                                                            <C>                 <C>       
        Cash                                                   $    4,865          $  252,260
        Accounts receivable, less allowance for
            doubtful accounts of $457,143 and
            $116,539 in 1998 and 1997, respectively               323,325             746,681
        Note receivable, less allowance for bad debt
            of $50,000 in 1997                                       --                  --
        Program cost inventory - current portion, net
            of accumulated amortization                           650,929           2,876,975
        Deferred income taxes                                     997,514             266,000
        Other current assets                                       55,006             129,153
                                                               ----------          ----------

             Total current assets                               2,031,639           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                                           1,410,386             356,600

Goodwill, net of accumulated amortization                            --               831,414

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

                                                               $5,281,533          $9,266,673
                                                               ==========          ==========
</TABLE>

                       See notes to financial statements.

                                       F-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 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 in 1998 and 1997                                  --
        Additional paid-in capital                                                       9,386,258             6,197,661
        Accumulated deficit                                                             (6,549,130)             (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                                                  2,875,789             5,332,573
                                                                                       -----------           -----------

             Total liabilities and stockholders' equity                                $ 5,281,533           $ 9,266,673
                                                                                       ===========           ===========
</TABLE>
                       See notes to financial statements.

                                       F-4

<PAGE>

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

                      CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                                                For the year 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                                                              (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 Income Taxes                                         (7,200,827)              854,779

Equity in Income of Joint Ventures                                          (188,658)              317,721
                                                                         -----------           -----------

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

Income Tax Expense (Benefit)                                              (1,731,470)            1,452,594
                                                                         -----------           -----------

Net Income (Loss)                                                        $(5,658,015)          $  (280,094)
                                                                         ===========           ===========

Basic Earnings (Loss) Per Share                                          $     (0.19)          $     (0.01)
                                                                         ===========           ===========

Diluted Earnings (Loss) Per Share                                        $     (0.19)          $     (0.01)
                                                                         ===========           ===========
</TABLE>

                       See notes to financial statements.

                                       F-5
<PAGE>

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

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                                   Additional                          
                                     Shares          Common          Paid-in       Accumulated       
                                     Issued           Stock          Capital          Deficit           Total
                                  -----------     -----------      -----------     -----------      -----------
<S>               <C>              <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 3)            --              --            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, 1998        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                                 --              --               --        (5,658,015)      (5,658,015)
                                  -----------     -----------      -----------     -----------      -----------

Balance - December 31, 1998        38,660,960     $    38,661      $ 9,386,258     $(6,549,130)     $ 2,875,789
                                  ===========     ===========      ===========     ===========      ===========
</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.

                                       F-6
<PAGE>

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

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                                For the year ended
                                                                                                     December 31,
                                                                                         --------------------------------
Cash Flows from Operating Activities:                                                        1998                  1997
                                                                                         -----------          -----------
<S>                                                                                      <C>                  <C>         
Net income (loss)                                                                        $(5,658,015)         $  (280,094)
Adjustment to reconcile net income (loss) to net cash
    used in operating activities:
        Amortization and depreciation                                                        893,711            1,098,749
        Equity in income of joint venture                                                    387,048             (317,721)
        Fee income from joint venture recorded as
          an increase in the investment                                                         --               (186,300)
        Deferred income tax expense (benefit)                                             (1,785,300)             736,400
        Deferred rent                                                                       (319,539)             (43,653)
        Gain from sale of assets                                                                --             (3,512,836)
        Change in assets and liabilities, net of effects, 
          in 1996, from purchase of KG:
             Accounts receivable                                                             423,356               60,664
             Expenditures billable to clients                                                   --                228,071
             Other current assets                                                             74,147               68,714
             Security deposits payable                                                        10,552                 --
             Options payable                                                                (143,750)                --
             Other assets                                                                     12,524               (3,000)
             Cash overdraft                                                                 (181,097)             194,148
             Accounts payable an accrued liabilities                                        (414,294)              12,368
             Write-down of program costs 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 shareholders                                         --                (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)
                             operating activities                                             (7,973)           1,232,964
                                                                                         -----------          -----------
</TABLE>

                       See notes to financial statements.

                                       F-7

<PAGE>

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

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

<TABLE>
<CAPTION>
                                                                                  For the year ended
                                                                                      December 31,
                                                                              1998                  1997
                                                                          -----------           -----------
<S>                                                                       <C>                   <C>
Cash Flows from Financing Activities:
        Deferred offering costs                                                  --                 (79,869)
        Repayments of loans payable - shareholders                             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.

                                       F-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 it 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
           share 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 for 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 share
           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 was amortized using the straight
           line method over a period of twenty years, and amounted to $2,608,256
           for the years ended December 31, 1997. 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.




                                       F-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. As more fully described in Notes 1 and 3, 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 accounting for on the
           equity method. Accordingly, KMG's share of the earnings 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.


                                      F-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.


                                      F-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 10. 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 4) 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 balance
           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.





                                      F-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):
-----------------------------------------------------------------

           Earnings (Loss) Per Common Share:
           ---------------------------------

           Basic earnings (loss) per common share is based upon the weighted
           average number of common shares outstanding during the year. Diluted
           earnings (loss) per common share includes 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 6) would have an anti-dilutive
           effect on earnings (loss) per share. As a result it was not used in
           the earnings per share calculation.

           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, the in 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.



                                      F-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 cancellations of a
           $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.



                                      F-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 $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.


                                      F-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 Shareholders':
-------------------------------------------------------------------- 

           These loans and advances to officers and shareholders 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. 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.




                                      F-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 other
           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 reasonable
           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 months, including interest at 7.2%, through
           January 1998. The final payment under this lease was made in December
           31, 1997.

Note 12 - Notes Payable:

                                                       December 31,
                                                       ------------
                                                  1998              1997
                                                  ----              ----

    Note payable - due to officer              $ 150,000         $       0

    Note payable to the former parent 
    of KG (see Note 16).                       (  40,000)        (  40,000)
                                               ---------         ---------

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






                                      F-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 a 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
                                                ----------
                                                $2,353,688
                                                ==========
           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.



                                       F-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
           not responsibility for the debts of the former affiliate.
           Furthermore, management believes that is 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 a recent decision, 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
           reasonable 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 his 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.


                                      F-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 reasonable 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 t assess the probable outcome of these claims, but
           it is at least reasonable possible that a material gain or loss could
           result. Year Ended December 31,

           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 not 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.

Note 16 - Income Taxes:

           The provision for income taxes for the year ended December 31, 1998
           consists of the following components:

                                     Year Ended December 31,
                                     -----------------------

                                  1998                      1997
                                  ----                      ----
Current
  Federal                   $(  339,038)                $         0
  State                      (  163,088)                    716,194
                             ----------                  ----------
                             (  502,126)                    716,194
                             ----------                  ----------
Deferred
  Federal                    (  830,059)                    931,800
  State                      (  399,285)                (   195,400)
                             ----------                  ----------
                             (1,229,344)                    736,400
                              ---------                  ----------

                            $(1,731,470)                $ 1,452,594
                              =========                   =========




                                      F-20


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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 1998




Note 16 - Income Taxes (Continued):

           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 are as
follows:
<TABLE>
<CAPTION>


                                                                                     Year Ended December 31,
                                                                                     -----------------------
                                                                                  1998                      1997
                                                                                  ----                      ----
           <S>                                                             <C>                        <C>    

           Federal corporate tax rate of 34% applied
             to pretax income                                               $( 1,108,393)               $   398,650

           State and local income taxes, net of federal benefit              (   949,735)                   343,724

           Effect of non-taxable gain on lease cancellation                  (    64,140)

           Effect of non-deductible goodwill amortization                        276,112                     26,180

           Effect of other non-deductible expenses                                60,856                     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                                                            53,830                (   146,684)

                                                                            $    194,790               $  1,452,594
                                                                            ============               ============
</TABLE>
<TABLE>
<CAPTION>



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

                                                                                        December 31,
                                                                                        ------------
                                                                                  1998             1997
                                                                                  ----             ----
<S>               <C>                                                       <C>               <C>    

                  Deferred tax assets                                        $ 2,488,464       $   818,600
                  Deferred tax liabilities                                    (   80,564)       (  154,900)
                  Valuation allowance                                                  0        (   41,100)
                                                                               ---------        ----------

                                                                             $ 2,407,900       $   622,600
                                                                               =========        ==========


</TABLE>

                                      F-21


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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 1998


                                                                               

           As of December 31, 1997, the Company had net operating loss ("NOL")
           carryforwards of approximately $58,658,500 available to offset future
           federal taxable income; the carryforwards are not available for state
           income tax purposes. These carryforwards begin to expire in 2011.

           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 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.


                                      F-22



<PAGE>


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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 1998

Note 17 - Capital Structure:

           In additional to the Millport warrants described in Note 14, all of
           which were still outstanding at December 31, 1997 and the outstanding
           stock options described in Note 19, 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 vest 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 during 1998 was as follows:

            Balance at December 31, 1997                    $ 828,333
              Granted                                               0
              Exercised                                             0
              Forfeited                                             0
              Expired                                               0
                                                            ---------

            Balance at December 31, 1997                    $ 828,333
                                                            =========







                                      F-23


<PAGE>


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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 1998


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
                                                            Year Ended
                                                            December 31,
                                                         -----------------
                                                    1998               1997
                                                    ----               ----

     Assets:
         Cash                                  $     4,865        $   252,260
         Notes receivable                                0                  0
         Loans and advances receivable -
             officers and shareholders               9,000             36,300

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





                                      F-24


<PAGE>


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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 1998




Note 19 - Fair Value of Financial Instruments (Continued):

           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
hold for trading purposes.

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        $         0
                               ===========        ===========

          Income taxes         $         0        $    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.






                                      F-25


<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 (Continued):

           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, and 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 additional debentures
           subject to attaining certain conditions. Note 15 discusses the
           Company's ability to continue a going concern.





                                      F-26


<PAGE>


                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on the 15th day of April, 1998.

                                            KALEIDOSCOPE MEDIA GROUP, INC.

                                            By: /s/ Henry Siegel
                                                -------------------------------
                                                Henry Siegel
                                                Chief Executive Officer

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

<TABLE>
<CAPTION>

    Signatures                                       Capacity                              Date
--------------------------          ----------------------------------------------     ---------------
<S>                                 <C>                                               <C> 
/s/ Henry Siegel                    Chief Executive Officer, Director                  April 15, 1999
----------------                    (Principal Executive Officer)
    Henry Siegel                 

/s/ Paul Siegel                     President, Director                                April 15, 1999
---------------
    Paul Siegel

/s/ Irving Greenman                 Chief Financial Officer (Principal Financial       April 15, 1999
-------------------                 Officer and Principal Accounting Officer)
    Irving Greenman                                   


/s/ Ray Volpe                       Director                                           April 15, 1999
-------------                       
    Ray Volpe

/s/ Martin Miller                   Director                                           April 15, 1999
-----------------                   
    Martin Miller

</TABLE>