<PAGE>   1


                  UNITED STATES SECURITIES 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 November 30, 1996
                                       OR
      [   ]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                  SECURITIES EXCHANGE ACT OF 1934
                   For the transition period from __________ to __________.

                        Commission File Number 000-21211
                             -----------------------
                                 ML DIRECT INC.
                 (Name of small business issuer in its charter)

          DELAWARE                                    13-3842020     
(State or other jurisdiction of                   (I.R.S. Employer
incorporation or organization)                    Identification No.)
         


              3001 EXECUTIVE DRIVE, SUITE 120, CLEARWATER, FLORIDA
                    (Address of principal executive offices)

                                      34622
                                   (Zip Code)

                                 (813) 572-8703
              (Registrant's telephone number, including area code)

        SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

         TITLE OF EACH CLASS           NAME OF EACH EXCHANGE ON WHICH REGISTERED
         -------------------           -----------------------------------------
Common Stock                                      NASDAQ - Small Cap
Common Stock Warrants                             NASDAQ - Small Cap

               ---------------------------------------------------
         Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
                                    YES [ X ]                 NO [  ]

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

         ML Direct Inc.'s net revenues for the year ended November 30, 1996 
were $692,256.

         The aggregate market value of the voting stock held by non-affiliates
on February 28, 1997 was $4,164,000. The number of shares outstanding of the
issuer's common stock, as of February 28, 1997 was 4,224,000.

<PAGE>   2
        
PART I

         This report may contain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
and Exchange Act of 1934. Actual results could differ materially from those
projected or suggested in the forward-looking statements as a result of the risk
factors set forth below and elsewhere in this report.

ITEM 1 - BUSINESS

GENERAL

         ML Direct Inc. (the "Company" or "ML Direct") was incorporated in the
State of Delaware on June 22, 1995. The Company sells through other channels of
distribution products that have already been sold successfully through direct
response television ("DRTV"), including infomercials and shopping networks. ML
Direct employs DRTV and consumer marketing industry executives and has pursued
and will continue to pursue affiliations with both product suppliers and
distributors.

         ML Direct purchases certain products that have been sold
through DRTV and resells them to other entities (including HSS, described
below) for sale to consumers. ML Direct resells products to supermarkets,
mass merchandisers, drug chains, and department stores (collectively, broad
retail distribution), and infomercials and shopping networks (collectively,
electronic retailing) and catalogs and print media (direct marketing). The
Company's initial focus is broad retail distribution.

         The Company owns 50.02% of KN2B, Inc., which does business under the
name Home Shopping Showcase(TM), Inc. ("HSS(TM)" or "Home Shopping
Showcase(TM)"). The remaining 49.98% of Home Shopping Showcase(TM) is owned by
HSN Direct Joint Venture ("HSN Direct" or "HSND"), which at the time of the
formation of HSS (TM) was a subsidiary of Home Shopping Network ("HSN"). HSND is
now a majority owned subsidiary of Flextech P.L.C. (a subsidiary of
Telecommunications Company, Inc. ("TCI")). Home Shopping Network, Inc.
continues to hold a minority equity position in HSND. 

         Home Shopping Showcase(TM) attempts to establish permanent in-store
programs that the Company believes will establish HSS as a distributor to 
retail outlets for DRTV products. The Company will use the Home Shopping
brand name to launch its programs, relying on the familiarity of the name with
consumers. Home Shopping Showcase(TM) has entered an agreement with HSN Direct,
which entitles the Company to the exclusive marketing rights to the products and
services of HSN Direct, as well as HSND's full support in obtaining rights to
products previously marketed on HSN.

         Home Shopping Showcase(TM) offers retailers two programs: (i) 
permanent store-within-a-store kiosk program, and (ii) promotional sales 
programs, consisting of temporary displays of individual products or "themed"
merchandise. Home Shopping Showcase(TM) is currently operating pilots of its
kiosk program in four Baker's stores and four Furr's stores. Each of these eight
pilots is offering a mix of DRTV products, leading collectible items, gift
merchandise lines, and celebrity-sponsored goods. The Baker's pilot will come to
an end on March 28, 1997.  Twenty new kiosks are being placed in two leading
supermarkets in North Florida and Pennsylvania during May 1997.  The retailer
has the right to discontinue the program if the program is not performing as
expected.  Based on several presentations to other supermarket chains, Home
Shopping Showcase(TM) and the Company believe that there are additional chains
which may be interested in implementing the kiosk program in their stores.

         Home Shopping Showcase's promotional sales program takes two forms: i)
continuity product supply sales programs where best selling TV products are sold
to retailers on a recurring basis and ii) promotional programs where best
selling TV products are sold to retailers on a one time basis.  HSS is currently
in negotiations with a supplier for over 3,000 supermarkets to implement a
continuity product supply program.  Although the negotiations are ongoing, there
can be no assurance a contract will be signed.  The Company's promotional
program has resulted in the distribution of individual products to several
chains totaling over 2,800 retail outlets in the current year.

         For the year ended November 30, 1996, the Company's gross revenue was
derived primarily from three customers, which were non-supermarket retailers:
Jack Eckerd Drug Co, Caldor Department Stores, and Play it Again Sports,
representing approximately 32%, 17% and 14% of the Company's total sales,
respectively.

BACKGROUND

         In 1984, the Federal Communication Commission removed certain
regulations which limited television commercial time, thereby permitting the
creation of long-form commercials (or "infomercials") as well as dedicated
television shopping channels, which were quickly recognized as new outlets of
distribution for both new and established consumer products. These new methods
of marketing have afforded undercapitalized manufacturers of lesser known
products an inexpensive testing ground for new product introductions. These
direct response channels of distribution have grown to over five (5) billion
dollars in annual consumer sales.




                                       2
<PAGE>   3

         New products which show promise in DRTV are often repackaged,
repositioned, and repromoted to retail as "As Seen On TV" merchandise. To date,
the retail distribution for such products has been largely through mass   
merchants, such as Kmart and WalMart. Not all products that were introduced
through DRTV have achieved retail success and there can be no guarantee that
the Company or HSS(TM) will be able to achieve success with any or all of their
retail product offerings.

SUPERMARKET DISTRIBUTION

         Distribution of DRTV products to supermarkets has been limited to
date.  Management believes the lack of success is due to the selling behavior
of DRTV product suppliers and the buying behavior of supermarket retailers. 
The Company believes it has several competitive strengths that will allow it to
penetrate the fragmented supermarket industry and become its preferred supplier
of DRTV merchandise: distribution rights (often exclusive) to best selling DRTV
products, marketing and sales management with an extensive understanding of,
and relationships with, the supermarket industry and a success model to follow
over the last year.

         The Company has secured rights to distribute to supermarkets (and
often other outlets) products from leading infomercial companies, TV shopping
networks, and licensed merchandise and collectible suppliers.  The Company's
management's understanding of and relationships in the supermarket industry
have allowed the Company to both develop and begin to implement permanent and
temporary display programs which are consistent with the needs of the
supermarket retailer.  Moreover, the Company's permanent display program is
modeled after other successful supermarket non-food products, such as videos,
greeting cards, film processing and fresh flowers.  Home Shopping 
Showcase(TM), organizes and manages a store's entire selection and display of
DRTV merchandise under the Home Shopping Showcase(TM) name.  Home Shopping
Showcase(TM) regularly supplies and rotates the product mix at each supermarket
location to assure new and popular DRTV products are available.  Home Shopping
Showcase(TM) will draws from a large selection of successful DRTV products to
be purchased from the Company and HSN Direct, among other suppliers.  Home
Shopping Showcase(TM) operates with a revolving purchase order from each
store, making all DRTV decisions for that store.

         A number of DRTV merchandise distribution organizations exist with the
experience and financial resources to develop sales and merchandising forces
capable of selling to and servicing supermarket accounts. These organizations
have done so but only to a limited extent, and with limited success yet there 
is no assurance that they will not do so in the future.

AGREEMENT WITH HSN DIRECT

         In June 1995, the Company entered into an agreement with HSN Direct
which provided for the creation of KN2B, Inc., which does business under the 
name Home Shopping Showcase(TM). The agreement provides that HSS will develop
programs to support the retail sales of products that have been introduced
through direct response television by establishing a "store within a store"
concept. The agreement provides that the Company owns 50.02% of HSS and HSN
Direct owns 49.98% of HSS. The Company secured financing of $4,000,000 for HSS
in September 1996 through the completion of a public offering of the Company's
stock. HSN Direct provided HSS with a license to the Home Shopping Showcase(TM)
trademarks, logos and service marks within the field of domestic retail
distribution so that HSS may exploit all manner of retail opportunities in the
United States using such trademarks, logos and service marks. This license
provides for use of the HSS logo and name until December 31, 2000, at retail
sites established on or before January 1, 1998 and until the earlier of (i)
December 31, 2003, or (ii) three (3) years after establishment of retail sites
established between January 1, 1998 and December 31, 2000. In addition, HSN
Direct contributed its rights and agreements for the domestic retail



                                       3
<PAGE>   4


distribution of its own and/or third-party products, services, programs and
promotions introduced through DRTV. The agreement also provides that HSS will be
managed by a board of directors consisting of two representatives from each of
HSN Direct and the Company. The Company has appointed Nancy Shalek, Chairman of
the Board of ML Direct, and Alan Kerzner, Executive Vice President of ML Direct,
to the Board of Directors of HSS(TM). The Chairman of the Board of KN2B, Inc.
will have the right to cast an additional vote to break a tie on all but certain
matters before the Board of Directors as specified in the Articles of
Incorporation of KN2B, Inc. The matters for which the chairman can not break a
tie include, among other things, amendment of the Certificate of Incorporation
or Bylaws, creation of any encumbrance not in the ordinary course of business in
excess of $50,000, acquisition of another business and the making of any
material change in the business. There are no provisions governing the
resolution of the votes in situations where the Chairman is not authorized to
cast the deciding vote.

EMPLOYEES

         As of February 28, 1997, ML Direct had seven full-time employees, and
HSS(TM) had eleven full-time and four part-time employees.

ITEM 2 - DESCRIPTION OF PROPERTY

         The Company's corporate office is in Clearwater, Florida in leased
office space. The lease is for three years and is approximately 2,400 square
feet. HSS's corporate office is located in leased space in New York City, New
York and is approximately 4,500 square feet.

         The Company believes that its existing facilities are adequate to meet
the Company's needs for the foreseeable future. Should the Company need
additional space, management believes the Company will be able to secure
additional space at reasonable rates.

ITEM 3 - LEGAL PROCEEDINGS

         None.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matters were submitted during the fourth quarter of the fiscal year
covered hereby to a vote of security holders of the Company.

PART II

ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         Since September 3, 1996, the date of the Company's initial public
offering, ML Direct's common stock, par value $.0001, has been traded on the
Nasdaq SmallCap market under the symbol "MLDR" and ML Direct's common stock
warrants have been traded on the Nasdaq SmallCap market under the symbol
"MLDRW." The high and low closing sale prices during the fourth quarter for ML
Direct's common stock and common stock warrants for fiscal year 1996 were as
follows:
<TABLE>
<CAPTION>

     COMMON STOCK                                          HIGH       LOW
      ------------                                          ----       ---
     <S>                                                   <C>        <C>
     September 4, 1996 through November 30, 1996           16 1/4     5 5/8

     COMMON STOCK WARRANTS
     ---------------------
     September 4, 1996 through November 30, 1996            7 3/4     4
</TABLE>

         On February 28, 1997, the closing sale prices of the Company's common
stock and common stock warrants were $1.00 per share and $0.59375 per warrant,
respectively. The approximate number of shareholders of record of the
Company's common stock and common stock warrants as of February 28, 1997 was
3,000 and 2,000,



                                       4
<PAGE>   5

respectively. ML Direct has not paid any cash dividends since its inception and
does not anticipate paying cash dividends in the foreseeable future.

ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATING

         The following discussion should be read in conjunction with the
consolidated financial statements of the Company and notes thereto included
elsewhere herein.

(A) RESULTS OF OPERATIONS

         YEAR ENDED NOVEMBER 30, 1996 COMPARED TO THE PERIOD FROM JUNE 22, 1995
(INCEPTION) TO NOVEMBER 30, 1995.

      Revenues for the year ended November 30, 1996 ("fiscal 1996") were
approximately $692,000 compared to approximately $760,000 for the period from
June 22, 1995 (Inception) through November 30, 1995 ("fiscal 1995") , a decrease
of 8.9%. Of the $692,000, approximately $618,000, or 89%, were net sales to 
three large chain stores, Jack Eckerd Drug Co., Caldor Department Store and Play
it Again Sports. The sales to Jack Eckerd Drug Co. and Caldor Department Store
were in keeping with the Company's promotional sales business. The remaining
sales represent the first results of the Company's core kiosk program. Overall,
the Company achieved a gross profit percentage of 28.4% in fiscal 1996 compared
to a 12.1% gross profit percentage in the previous period. The increase in gross
profit percentage in fiscal 1996 was due to the sale of a few products to one
customer in the prior period at a lower margin.

      Operating expenses for fiscal 1996 were approximately $3,290,000 compared
to approximately $188,000 in fiscal 1995. The increase in expenses reflects
growth in operational activity during fiscal 1996, as compared to mainly 
start-up activity during the approximately five month period ending November 30,
1995. The most significant expenses in 1996 were for: (a) reimbursement of
miscellaneous operating costs to related parties (as described below), (b)
compensation, (c) travel and entertainment, (d) consulting fees, (e)
compensation expense recorded through amortization of deferred compensation and
(f) a provision for loss recorded for a related party note receivable.

      The reimbursement was to a partnership in which both of the partners are
significant shareholders in the Company. The Company reimbursed this partnership
for expenses incurred on behalf of the Company for fiscal 1996 and fiscal 1995
as follows:
<TABLE>
<CAPTION>

                                     Fiscal 1996             Fiscal  1995
                                   -----------------       -----------------
                                                                            
<S>                                    <C>                      <C>     
Rent and Utilities ..................  $146,701                 $ 11,782
Travel and Entertainment ............    62,629                   47,786
Outside Services ....................    98,698                   60,989
Compensation and Benefits ...........       811                    7,795
                                       --------                 --------
  Total .............................  $308,839                 $128,352
                                       ========                 ========
</TABLE>

         The Company's net loss for fiscal 1996 was $3,053,661 compared to its 
net loss of $93,154 for fiscal 1995. The majority of the expenses which
comprised the net loss were for compensation and benefits (approximately
$1,038,000) as a result of the hiring of marketing, sales, and administrative
personnel, and for reimbursement of $308,839 of miscellaneous operating expenses
paid on behalf of the Company by a partnership in which both of the partners are
significant shareholders of the Company. In order to implement the supermarket
kiosk program within Home Shopping Showcase(TM)and to market the services of ML
Direct, additional expenses were incurred for travel and entertainment
(approximately $259,000) and consulting, which includes legal expenses
(approximately $368,000). In addition, the Company recorded additional
compensation expense (approximately $289,000) as a result of the amortization of
the deferred compensation cost which was recorded as a result of stock options
issued to employees and consultants with exercise prices below fair market 
value on the date of grant. The Company recorded a provision for loss on a 
related party note receivable ($500,000). See (B) LIQUIDITY & CAPITAL RESOURCES.


                                       5
<PAGE>   6

(B) LIQUIDITY AND CAPITAL RESOURCES

      The Company had working capital of $3,260,334 at November 30, 1996.
Cash used by operating activities was $3,075,847 for fiscal 1996.

      As of November 30, 1996, ML Direct had no material commitments for capital
expenditures. During fiscal year 1996 the Company used cash flows raised in the
public offering to purchase approximately $260,000 in displays and equipment.
Home Shopping Showcase plans to continue building kiosks in supermarkets through
fiscal year 1997 and the capital needs of this program are expected to be
approximately $200,000 for fiscal 1997.

      In November 1996, the Company made a loan in the aggregate principal
amount of $500,000 to Fresh Picks, Inc. ("Fresh Picks").  The Chairman of the
Board of the Company is also the Chairman of the Board of Fresh Picks. The loan
is evidenced by an Unsecured Non-Transferable Convertible Promissory Note (the 
"Note"), which bears interest at prime rate plus four percent per annum and is
due and payable on the earlier of (i) the completion of a private equity
offering by Fresh Picks in an amount greater than or equal to $6 million, or
(ii) November 14, 1998. The Company may, at its discretion, exercise its option
to convert a portion of the Note into a maximum of 100,000 shares of common
stock of Fresh Picks upon consummation of a private equity offering of Fresh
Picks, such conversion to be at the price of the lesser of $1.50 per share or
the price per share for common stock paid by investors in such offering. Upon
any such conversion of a portion of the Note into equity, Fresh Picks will
prepay all outstanding principal, and interest thereon, except to the extent so
converted. Due to the fact that there is no evidence that Fresh Picks will be
able to repay the loan and the Note is not collateralized, the Company has 
provided an allowance for loss for the entire $500,000 principal amount of the
Note as of November 30, 1996. The Company will recognize interest income on the
Note when received in cash.

        Fresh Picks, a development-stage company, is a proposed full-service
provider of music retail services to the grocery industry. The idea for Fresh
Picks arose from the similar objective to that of the Company of growing sales
in supermarkets. As such, the Chairman of the Board of both the Company and
Fresh Picks and the president of HSS and a former officer of Fresh Picks have
worked closely during original planning and formulation of business plans and
pilot markets for Fresh Picks. Initially pilots for HSS and Fresh Picks were
tested in the same Omaha stores served by the Company and the Company and Fresh
Picks have used the same outside operations personnel. Management of the
Company has been informed that Fresh Picks has secured a commitment with a
Boston-based supermarket chain to establish six planned pilot departments by
April 30, 1997, in those supermarkets, leading to an additional 20 departments
no later than year end. In addition, management of the Company has been
informed that Fresh Picks is currently in the process of seeking equity
financing from various potential investors. There can be no assurance that
Fresh Picks will be successful in obtaining such financing or that Fresh Picks
will achieve the necessary sales and profitability targets required to continue
its operations and enable Fresh Picks to repay the Note to the Company.

      The Company completed a registration statement for 480,000 units at $15.00
per unit which was declared effective on September 3, 1996. Each unit consisted
of 2 shares of common stock and 1 Class A Warrant. Each Class A Warrant entitles
its holder to purchase one share of common stock at $8.00. In September of 1996,
the Company received $6,656,856, which represented the net proceeds on the sale
of 552,000 units, including the original 480,000 units, as well as the full
72,000 units available in the underwriter's over allotment. Concurrently with
the receipt of the aforementioned proceeds, the Company paid $600,933 for the
redemption of 720,000 shares of Series A Preferred Stock and $4,000,000 for the
stock subscription of 1,500 shares of Class A Common Stock in KN2B, Inc.

      The accompanying consolidated financial statements have been prepared on
a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
consolidated financial statements, during the year ended November 30, 1996 and
the period ended November 30, 1995, the Company incurred net losses of
$3,053,847 and $93,154, respectively, and used cash for operating activities of
$3,075,847 and $61,211, respectively. These factors among others may indicate
that the Company will be unable to continue as a going concern for a reasonable
period of time.

      The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amount or
the amounts and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern. Management is continuing
its efforts to generate positive cash flows and profits by expanding its sales
through distribution channels such as supermarkets, mass merchandisers, drug
chains, and department stores as well as informercials and shopping networks
and catalogs and print media. The Company's continuation as a going concern is
dependent upon its ability and the ability of its subsidiary to generate
sufficient cash flow to meet their obligations on a timely basis and ultimately
on the Company's and its subsidiary's attaining successful operations.

(C)   OTHER SIGNIFICANT MATTERS

      On January 1, 1997, the Company entered into a Consulting Agreement with
The Columbus Circle ("TCC"), a New York partnership of which one of the two
general partners is owned and controlled by the Company's Chairman, pursuant to
which TCC agrees to provide certain general management and other services



                                       6
<PAGE>   7

to the Company. This agreement, which expires on December 31, 1999 provides
that the Company pay to TCC an initial fee of $120,000 and a monthly amount
equal to $15,000. KN2B, Inc. also entered into a Consulting Agreement with TCC
in January, 1997, pursuant to which TCC agrees to provide certain general
management and other services to KN2B. This agreement, which expires on
December 31, 1999 provides that the Company pay to TCC an initial fee of
$60,000 and a monthly amount equal to $7,500. The initial fees totaling
$180,000 will be capitalized and amortized over the three-year term.
The consulting agreements may be terminated by either party for non-performance.

         On January 1, 1997, pursuant to the above described Consulting
Agreement between the Company and TCC, the Company entered into a Stock Option
Agreement (the "ML Option Agreement") with TCC. Pursuant to the ML Option
Agreement, the Company granted TCC an option to purchase 54,545 Shares
exercisable from January 1, 1997 through December 31, 2001 at an exercise price
of $4.50 per share. In addition, the ML Option Agreement provides that the
Company issue to TCC the following options to purchase the Company's common
stock ("Shares") at an exercise price of $4.50 per share: (i) if the Consulting
Agreement shall be in effect at any time during the 120-day period ending on
January 1, 1999, an option to purchase an additional 54,545 Shares exercisable
from January 1, 1999 through December 31, 2003; (ii) if the Consulting Agreement
shall be in effect at any time during the 120-day period ending on January 1,
2000, an option to purchase an additional 54,545 Shares exercisable from January
1, 2000 through December 31, 2004; (iii) if the Company closes any transaction
whereby the Company receives an infusion or infusions of cash (either equity or
debt), or it acquires (directly or indirectly) another company, an option to
purchase the number of Shares obtained by dividing by 4.5, the total
consideration received by the Company in the case of a cash infusion, or the
total consideration given by the Company in the case of an acquisition, and (iv)
if Consulting Agreement shall be in effect at any time within the 120-day period
ending on the last day of the Company's 1997, 1998 and 1999 fiscal years, an
option to purchase the number of shares obtained by multiplying 54,545 by the
percentage increase in earnings per share from the Company's 1996 fiscal year
end earnings per share. To the extent not exercised, all options terminate on
the day immediately following the fifth anniversary of the date of grant. The
ML Option Agreement permits either party to terminate the agreement upon 90
days' notice without cause.

         On January 1, 1997, pursuant to above described Consulting Agreement
between KN2B, Inc. and TCC, the Company entered into a Stock Option Agreement
with TCC (the "KN2B Option Agreement"). Pursuant to the KN2B Option Agreement,
the Company granted TCC an option to purchase 27,273 Shares exercisable from
January 1, 1997 through December 31, 2001 at an exercise price of $4.50 per
share. In addition, the KN2B Option Agreement provides that the Company issue to
TCC the following options to purchase Shares at an exercise price of $4.50 per
share: (i) provided that the Consulting Agreement shall be in effect at any time
during the 120-day period ending on January 1, 1999, an option to purchase
27,273 Shares exercisable from January 1, 1999 through December 31, 2003; (ii)
provided that the Consulting Agreement shall be in effect at any time during the
120-day period ending on January 1, 2000, an option to purchase 27,273 Shares
exercisable from January 1, 2000 through December 31, 2004; (iii) in the event
that KN2B closes any transaction whereby the Company receives an infusion or
infusions of cash (either equity or debt), or KN2B acquires (directly or
indirectly) another company, and such transaction was initiated by TCC and
closed prior to the termination of the Consulting Agreement or within the
120-day period following the termination of the Consulting Agreement, an option
to purchase the number of Shares obtained by dividing by 4.5, the total
consideration received by the Company in the case of a cash infusion, or the
total consideration given by the Company in the case of an acquisition, and (iv)
provided that the Consulting Agreement shall be in effect at any time within the
120-day period ending on the last day of the Company's 1997, 1998 and 1999
fiscal years, an option to purchase the number of shares obtained by multiplying
27,273 by the percentage increase in KN2B's earnings per share from KN2B's 1996
fiscal year end earnings per share. To the extent not exercised, all options
terminate on the day immediately following the fifth anniversary of the date of
grant. The KN2B Option Agreement permits either party to terminate the
agreement upon 90 days' notice without cause.

ITEM 7 - FINANCIAL STATEMENTS

         The Company's Consolidated Financial Statements and notes thereto
appear beginning on page F-1 hereof.

ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES

         On December 24, 1996, the Company filed a Form 8-K reporting a change
in principal accountants from Moore Stephens, PC to Deloitte and Touche LLP.



                                       7

<PAGE>   8

PART III

ITEM 9 - DIRECTORS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A)
OF THE EXCHANGE ACT, EXECUTIVE OFFICERS

         The names and ages of the directors, executive officers and significant
employees, and promoters of the Company are set forth below.
<TABLE>
<CAPTION>

NAME                         AGE       POSITION HELD
----                         ---       -------------
<S>                          <C>       <C>                                  
Nancy Shalek                 42        Chairman of the Board of ML Direct

James M. Lawless             59        President, Chief Operating Officer and Principal Accounting
                                       Officer

Alan Kerzner                 39        Executive Vice President and Director

Benedict V. White, Jr        50        Executive Vice President
</TABLE>

BACKGROUND OF EXECUTIVE OFFICERS AND DIRECTORS

         Nancy Shalek is Chairman of the Boards of both the Company and of HSS.
She is President of Sherbrooke Consulting which is a partner in Columbus Circle.
She is currently an officer and also a director of several public and private
companies. Previously Mrs. Shalek was the President of The Shalek Agency, an
advertising agency that she formed in 1988. From 1987 to 1988, Mrs. Shalek 
served as Executive Vice President and West Coast Director of the W.B. Donor
advertising agency. W.B. Donor acquired Wexler & Shalek, an agency which she
co-founded in 1983. From 1983 through 1987, Mrs. Shalek served as President of
Wexler & Shalek. Prior to that time, she held marketing positions in the
Carnation Company and in the Voit division of AMF Corporation. Mrs. Shalek has
received national and western "Advertising Woman of the Year" awards and has
lectured at advertising industry conferences and business schools throughout the
country. Mrs. Shalek holds a B.A. from the University of Pennsylvania and an
M.B.A. from the University of Southern California.

         James M. Lawless has served as President, Chief Operating Officer and
Principal Accounting Officer of the Company since April 1996. From 1994 through
1996 he served as Chairman of the Board and President of Silver King
Communications Inc., a company which owns and operates television stations and
television production facilities. Prior to joining Silver King, Mr. Lawless was
an executive at the Home Shopping Club, a subsidiary of the Home Shopping
Network, Inc. He served as Home Shopping Club's Senior Vice President of Network
Operations from 1987 to 1989, and as its President from 1990 to 1993.
Mr. Lawless holds a B.A. from La Salle University in Philadelphia.

         Alan Kerzner is the Executive Vice President of the Company and
President and Chief Operating Officer of HSS(TM), as well as the Director of
both the Company and HSS(TM). From 1991 to 1995 he served as marketing director
of Johnson & Johnson's Consumer Products, Inc. Mr. Kerzner served as Vice
President of Marketing at The Rocking Horse Child Care Centers of America
from 1989 to 1991. Prior to that, Mr. Kerzner held marketing positions at
Richardson-Vicks, a division of Proctor & Gamble. He holds a B.A. from the
University of Rochester and an M.B.A. from the Wharton School of the University
of Pennsylvania.

         Benedict V. White, Jr. has served as Executive Vice President of the
Company since April 1996. Prior to joining the Company, Mr. White was the
President of Celebrity Marketing, a division of the Home Shopping Network, Inc.
At the Home Shopping Network, Mr. White was at various times President of HSN
Lifeway Health Products, a position he held for 5 years, and President of HSN
Cosmetics.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

         Under the securities laws of the United States, the Company's
directors, officers, and persons owning more than 10 percent of the Common Stock
are required to report their ownership of Common Stock and any changes



                                       8
<PAGE>   9

in that ownership, on a timely basis, to the Securities and Exchange
Commission. Based on material provided to the Company, the following reports
were not filed on a timely basis: (i) a report on Form 3 required to be filed
by each of James Lawless, the Company's President and Chief Operating Officer;
Benedict White, the Company's Executive Vice President; and (ii) a report on
Form 3 and a report on Form 4 required to be filed by Alan Kerzner, the
Company's Executive Vice President; (iii) a report on Form 3 and a report on
Form 4 required to be filed by Nancy Shalek, the Company's Chairman of the
Board of Directors; (iv) a report on Form 3 and a report on Form 4 required to
be filed by Sherbrooke Consulting, Ltd; (v) a report on Form 3 and a report on
Form 4 required to be filed by Carole Landau; and (vi) a report on Form 3 and a
report on Form 4 required to be filed by the Market Link Group, Ltd. All of the
aforementioned reports, or a Form 5 covering such reports, have subsequently
been filed.

ITEM 10 - EXECUTIVE COMPENSATION

         The following table provides summary information concerning cash and
certain other compensation paid or accrued during each of the last two fiscal
years by the Company to or on behalf of the Company's Chief Executive Officer
and each of the other most highly compensated executive officers of the Company
whose compensation exceeded $100,000 during the last fiscal year ( the "Named
Executive Officers").

<TABLE>
<CAPTION>

                                           SUMMARY COMPENSATION TABLE
                                           --------------------------

                                  ANNUAL COMPENSATION                 LONG TERM COMPENSATION
                                  ----------------------------------  ----------------------
                                                           OTHER     RESTRICTED
                                               ANNUAL      ANNUAL      STOCK       STOCK
    NAMES AND           FISCAL    SALARY        BONUS   COMPENSATION  AWARD(S)    OPTIONS
PRINCIPAL POSITION       YEAR       ($)          ($)        ($)         ($)          (#)
------------------      ------    ------       ------   ------------  --------    -------

<S>                      <C>      <C>            <C>       <C>           <C>      <C>    
Alan Kerzner (1)         1996     150,000        --         2,215        --        60,000
 Executive VP            1995      12,500        --          --          --          --
James Lawless(2)         1996      75,000        --          --          --       100,000
 President               1995        --          --          --          --          --
Benedict White(3)        1996     125,000        --        37,500        --       600,000
 Executive VP            1995        --          --          --          --          --

</TABLE>

(1)      Mr. Kerzner was hired in December 1995 and his annual salary is
         $150,000. The Company paid $2,215 on his behalf for a life insurance
         contract under the terms of his employment agreement.
(2)      Mr. Lawless was hired in April 1996 and his annual salary is $120,000.
(3)      Mr. White was hired in April 1996 and his annual salary is $200,000 and
         he receives a $5,000 per month expense allowance.

OPTION GRANTS

         Set forth below is information with respect to options to purchase the
Company's Common Stock granted to the Named Executive Officers during fiscal
year 1996. The grants to Messrs. Kerzner, Lawless, and White were made under the
ML Direct 1995 Stock Plan.


                      OPTION/SAR GRANTS IN LAST FISCAL YEAR
                               (INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
                                                                                             POTENTIAL REALIZABLE    
                                                                                                  VALUE AT           
                                                                                               ASSUMED ANNUAL        
                       NUMBER OF      PERCENT OF TOTAL                                         RATES OF STOCK        
                       SECURITIES      OPTIONS/SAR'S                                         PRICE APPRECIATION      
                       UNDERLYING       GRANTED TO                                           FOR OPTION TERM(1)      
                      OPTIONS/SAR'S     EMPLOYEES IN  EXERCISE OR BASE                      ---------------------    
 NAME                   GRANTED(#)      FISCAL YEAR     PRICE ($/SH)   EXPIRATION DATE        5%($)      10%($)
-------------          ----------       -----------     ------------   ---------------      ---------   ---------
<S>                     <C>                <C>          <C>            <C>                   <C>         <C>
Alan Kerzner             60,000             5.7%        $   2.50       June 30, 2000          32,326      69,615
James Lawless           100,000             9.5%        $   4.50       December 31, 2002     153,043     347,202
Benedict White          600,000            57.1%        $   4.50       December 31, 2002     918,258   2,083,215
</TABLE>

(1)  Gains are reported net of the option exercise price but before taxes
     associated with the exercise.  These amounts represent certain assumed
     rates of appreciation only.

     As of November 30, 1996 there were no options or SARS issued under the 1995
Incentive Stock Option and Stock Appreciation Rights Plan ("Incentive Option
Plan").


                                       9
<PAGE>   10
BOARD COMPENSATION

      Each director of the Company is entitled to receive reasonable expenses
not to exceed $150 incurred in attending meetings of the Board of Directors of
the Company. The Directors of the Company did not receive any compensation in 
fiscal for 1996 for Board related expenses.

OPTION EXERCISES

<TABLE>
<CAPTION>                                                                                    
                                                                                             Value of Unexercised,
                                                       Number of Unexercised                     In-the-Money
                        Shares                         Options Held at Fiscal                     Options at
                     Acquired on       Value                Year End (#)                     Fiscal Year-End ($)(2)
Name                 Exercise(#)    Realized ($)    Exercisable    Unexercisable(1)     Exercisable      Unexercisable
----                 -----------    ------------    -----------      -------------      -----------      -------------
<S>                     <C>             <C>           <C>               <C>                <C>              <C>
Alan Kerzner            -               -             60,000               -               195,000             -
James Lawless           -               -               -               100,000               -             125,000
Benedict White          -               -               -               600,000               -             750,000

</TABLE>

(1) Messrs. Lawless and White's options were not exercisable until January 1,
    1997 at which time they vested 100%, although the shares under the 1995 
    Stock Plan are not registered.
(2) Represents the difference between the $5.75 closing stock price on November
    29, 1996 and the exercise price of the options and does not include the 
    federal and state taxes due upon exercise.

EMPLOYMENT AGREEMENTS

      The Company has entered into a three year employment agreement, which
expires November 30, 1998, with Alan Kerzner pursuant to which Mr. Kerzner
serves as the Company's Executive Vice President effective December 1, 1995. The
agreement provides for Mr. Kerzner to receive a salary of $150,000 per annum as
well as a bonus at the sole discretion of the Board of Directors. The agreement
also provides that the Company purchase life insurance for Mr. Kerzner of not
less than $500,000 which shall be payable to his estate. Additionally, Mr.
Kerzner was granted an option to purchase 60,000 shares of ML Direct's Common
Stock for $2.50 per share at any time on or after July 1, 1996 and on or before
June 30, 2000.  The exercise price was determined by management.

      On April 15, 1996, the Company entered into a one year employment
agreement with James Lawless pursuant to which Mr. Lawless serves as the
Company's President. The agreement provides that Mr. Lawless will receive a
salary of $120,000 per annum and a bonus at the sole discretion of the Board of
Directors. The agreement also provides that Mr. Lawless be issued an option to
purchase up to 100,000 shares of Common Stock at any time between January 1,
1997 and December 31, 2002 at a price of $4.50 per share. The exercise price was
determined by management. The agreement also provides for the Company to 
purchase life insurance of not less than $500,000 which shall be payable to 
his estate.

      On April 15, 1996, the Company entered into a five year employment
agreement with Benedict White pursuant to which Mr. White serves as the
Company's Executive Vice President. The agreement provides that Mr. White will
receive a salary of $200,000 per annum and a bonus at the sole discretion of the
Board of Directors. Mr. White also receives a $5,000 per month expense
allowance. The agreement also provides that Mr. White be issued an option to
purchase up to 100,000 shares of Common Stock at any time between January 1,
1997 and December 31, 2002 at a price of $4.50 per share. The exercise price was
determined by management. The agreement also provides that Mr. White has the 
right to receive an additional 500,000 options at fair market value in 
increments of 100,000 options during the ensuing five years, if he is employed 
by the Company. The agreement also provides for the Company to purchase
life insurance of not less than $500,000, which shall be payable to his estate.

      On May 15, 1996, Home Shopping Showcase(TM) entered into a two year
employment agreement, effective June 3, 1996, with Win Taylor, pursuant to which
Mr. Taylor will serve as Home Shopping Showcase(TM)'s Executive Vice President
of Sales and Marketing. Mr. Taylor's agreement calls for annual compensation of
$140,000 and provides for a bonus at the discretion of the Board of Directors.
In connection with the employment agreement, Mr. Taylor was also granted an
option to purchase 100,000 shares of the Company's unregistered common stock for
$ 7.50 per share. The exercise price was determined by management. Mr. Taylor's
options vest, and are then immediately exercisable as follows: 33,333 options on
July 1, 1997; 33,333 options on July 1, 1998; and 33,334 options on July 1,
1999, should he have continued to be employed by the Company at each of the just
prior year ending dates (June 2nd of 1997, 1998, and 1999, respectively) of his
employment. The agreement also provides for the Company to purchase life
insurance of not less than $500,000 which shall be payable to his estate.

ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The following table sets forth information as of February 28, 1997 with 
respect to the beneficial ownership of the outstanding shares of the  Company's 
Common Stock by (i) any holder of more than five (5%) 


                                       10
<PAGE>   11

percent of the outstanding shares; (ii) the Company's directors; and the
directors and officers of the Company as a group.

<TABLE>
<CAPTION>

                                             SHARES OF           PERCENTAGE
                                               COMMON              (%) OF      
NAME AND ADDRESS OF                             STOCK              COMMON
BENEFICIAL OWNER *                              OWNED              STOCK
------------------                              -----              -----

<S>                                            <C>                 <C>  
Alan Kerzner(1) .............................   60,000             1.31%
Nancy Shalek(2) .............................  141,818             3.11%
James Lawless ...............................  100,000             2.19%
Benedict White ..............................  100,000             2.19%
M.D. Funding, Inc. ..........................  318,000             6.96%
     750 Lexington Avenue
     New York, NY 10022
All officers and directors as a group
  (four(4) persons) .........................  401,818             8.80%
</TABLE>

(1)   Includes 60,000 shares of Common Stock issuable upon exercise of 60,000
      options. Does not include shares of Common Stock issuable upon exercise of
      50,000 Class A Warrants.
(2)   Of the 141,818 shares, 60,000 shares of common stock are owned by James 
      Shalek, Mrs. Shalek's husband. The remaining shares are options granted
      and vested to The Columbus Circle, a partnership of which one of the two 
      general partners is owned and controlled by Mrs. Shalek.


ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         In June 1995, the Company entered into an agreement with HSN Direct
which provided for the creation of KN2B, Inc., which does business under the
name Home Shopping Showcase(TM). The agreement provides that HSS will develop
programs to support the retail sale of products that have been introduced
through direct response television by executing a "store within a store"
concept. The agreement provides that the Company owns 50.02% of HSS and HSN
Direct owns 49.98% of HSS. The Company agreed that it would secure financing
of $4,000,000 for HSS. HSN Direct provided HSS with a license to the Home
Shopping Showcase(TM) trademarks, logos and service marks within the field of
domestic retail distribution so that HSS may exploit all manner of retail
opportunities in the United States using such trademarks, logos and service
marks. This license provides use of the HSS logo and names until December 31,
2000, at retail sites established on or before January 1, 1998 and the earlier
of (i) December 31, 2003 or (ii) three (3) years after establishment of retail
sites established between January 1, 1998 and December 31, 2000. In addition,
HSN Direct contributed its rights and agreements for the domestic retail
distribution of its own and/or third party products, services, programs and
promotions introduced through DRTV. The agreement also provides that HSS will be
managed by a Board of Directors consisting of two representatives from each of
HSN Direct and the Company. A representative of the Company will be Chairman of
the Board and take primary responsibility for overseeing the day-to-day
management of HSS. The Chairman of the Board will have the right to cast an
additional vote to break a tie on all but certain matters before the Board of
Directors as specified in the Articles of Incorporation of KN2B, Inc. The
matters for which the Chairman can not break a tie include among other things
amendment of the Certificate of Incorporation or By-laws, creation of any
encumbrance not in the ordinary course of business in excess of $50,000,
acquisition of another business and the making of any material change in the
business. There are no provisions governing the resolution of the votes in
situations where the Chairman is not authorized to cast the deciding vote.

      In November 1996, the Company made a loan in the aggregate principal
amount of $500,000 to Fresh Picks, Inc. ("Fresh Picks"). The Chairman of the
Board of the Company is also the Chairman of the Board of Fresh Picks. The loan
is evidenced by an Unsecured Non-Transferable Convertible Promissory Note 
(the "Note"), which bears interest at prime rate plus four percent per annum 
and is due and payable on the earlier of (i) the completion of a private equity
offering by Fresh Picks in an amount greater than or equal to $6 million, or
(ii) November 14, 1998. The Company may, at its discretion, exercise its option
to convert a portion of the Note into a maximum of 100,000 shares of common
stock of Fresh Picks upon consummation of a private equity offering of Fresh
Picks, such conversion to be at the price of the



                                       11
<PAGE>   12

lesser of $1.50 per share or the price per share for common stock paid by
investors in such offering. Upon any such conversion of a portion of the Note
into equity, Fresh Picks will prepay all outstanding principal, and interest
thereon, except to the extent so converted. Due to the fact that there is no    
evidence that Fresh Picks will be able to repay the loan and the Note is not
collateralized, the Company has provided an allowance for loss for the entire 
$500,000 principal amount of the Note as of November 30, 1996. The Company will
recognize interest income on the Note when received in cash.

      Fresh Picks, a development-stage company, is a proposed full-service 
provider of music retail services to the grocery industry. The idea for Fresh
Picks arose from the similar objective to that of the Company of growing sales
in supermarkets. As such, the Chairman of the Board of both the Company and
Fresh Picks and the president of HSS and a former officer of Fresh Picks have
worked closely during original planning and formulation of business plans and
pilot markets for Fresh Picks. Initially pilots for HSS and Fresh Picks were
tested in the same Omaha stores served by the Company and the Company and Fresh
Picks have used the same outside operations personnel.  Management of the
Company has been informed that Fresh Picks has secured a commitment with a
Boston based supermarket chain to establish six planned pilot departments by
April 30, 1997, in those supermarkets, leading to an additional 20 departments 
no later than year end. In addition, management of the Company has been informed
that Fresh Picks is currently in the process of seeking equity financing from
various potential investors. There can be no assurance that Fresh Picks will be
successful in obtaining such financing or that Fresh Picks will achieve the
necessary sales and profitability targets required to continue its operations
and enable Fresh Picks to repay the note to the Company.

      The Company obtained financing during fiscal 1996 in the amount of
$582,000 from Marketlink, a partnership consisting of two partners, The
MarketLink Group, Ltd. ("MLG") and Sherbrooke Consulting, Inc., to provide short
term working capital to the Company prior to the public offering. MLG is a
stockholder of the Company and Sherbrooke Consulting, Inc. is a corporation
wholly owned by Nancy Shalek, an officer and Chairman of the Company's Board of
Directors. The $582,000 plus interest of $9,496 was repaid by the Company in
September 1996.

      The Company incurred approximately $12,300 per month, on a month-to-month
basis, for office space and office services provided to it by Marketlink. In 
addition, the partnership paid certain other expenses on behalf of the Company
during fiscal year 1996 and its first months of operation in 1995, such as 
travel and entertainment, outside services and compensation expense. For the
year ended November 30, 1996, and the period from June 22, 1995 (date of
inception) through November 30, 1995, the Company reimbursed this partnership
approximately $309,000 and $128,000, respectively. 

      On January 1, 1997, the Company entered into a Consulting Agreement with 
The Columbus Circle ("TCC"), a New York partnership of which one of the two
general partners is owned and controlled by the Company's Chairman, pursuant to
which TCC agrees to provide certain general management and other services to the
Company. This agreement, which expires on December 31, 1999 provides that the
Company pay to TCC an initial fee of $120,000 and a monthly amount equal to
$15,000. KN2B, Inc. also entered into a Consulting Agreement with TCC in
January, 1997, pursuant to which TCC agrees to provide certain general
management and other services to KN2B, Inc. This agreement, which expires on
December 31, 1999 provides that the Company pay to TCC an initial fee of $60,000
and a monthly amount equal to $7,500. The initial fees totaling $180,000 will be
capitalized and amortized over the three-year term. The consulting agreements
may be terminated by either party for non-performance.

      On January 1, 1997, pursuant to the above described Consulting Agreement
between the Company and TCC, the Company entered into a Stock Option Agreement
(the "ML Option Agreement") with TCC. Pursuant to the ML Option Agreement, the
Company granted TCC an option to purchase 54,545 Shares exercisable from January
1, 1997 through December 31, 2001 at an exercise price of $4.50 per share. In
addition, The ML Option Agreement provides that the Company issue to TCC the
following options to purchase the Company's common stock ("Shares") at an
exercise price of $4.50 per share: (i) if the Consulting Agreement shall be in
effect at any time during the 120-day period ending on January 1, 1999, an
option to purchase an additional 54,545 Shares exercisable from January 1, 1999
through December 31, 2003; (ii) if the Consulting Agreement shall be in effect
at any time during the 120-day period ending on January 1, 2000, an option to
purchase an additional 54,545 Shares exercisable from January 1, 2000 through
December 31, 2004; (iii) if the Company closes any transaction whereby the
Company receives an infusion or infusions of cash (either equity or debt), or it
acquires (directly or indirectly) another company, an option to purchase the
number of Shares obtained by dividing by 4.5, the total consideration received
by the Company in the case of a cash infusion, or the total consideration given
by the Company in the case of an acquisition, and (iv) if Consulting Agreement
shall be in effect at any time within the 120-day period ending on the last day
of the Company's 1997, 1998 and 1999 fiscal years, an option to purchase the
number of shares obtained by multiplying 54,545 by the percentage increase in
earnings per share from the




                                       12
<PAGE>   13

Company's 1996 fiscal year end earnings per share. To the extent not exercised,
all options terminate on the day immediately following the fifth anniversary of
the date of grant.

      On January 1, 1997, pursuant to above described Consulting Agreement
between KN2B, Inc. and TCC, the Company entered into a Stock Option Agreement
with TCC (the "KN2B Option Agreement"). Pursuant to the KN2B Option Agreement,
the Company granted TCC an option to purchase 27,273 Shares exercisable from
January 1, 1997 through December 31, 2001 at an exercise price of $4.50 per
share. In addition, the KN2B Option Agreement provides that the Company issue to
TCC the following options to purchase Shares at an exercise price of $4.50 per
share: (i) provided that the Consulting Agreement shall be in effect at any time
during the 120-day period ending on January 1, 1999, an option to purchase
27,273 Shares exercisable from January 1, 1999 through December 31, 2003; (ii)
provided that the Consulting Agreement shall be in effect at any time during the
120-day period ending on January 1, 2000, an option to purchase 27,273 Shares
exercisable from January 1, 2000 through December 31, 2004; (iii) in the event
that KN2B closes any transaction whereby the Company receives an infusion or
infusions of cash (either equity or debt), or KN2B acquires (directly or
indirectly) another company, and such transaction was initiated by TCC and
closed prior to the termination of the Consulting Agreement or within the
120-day period following the termination of the Consulting Agreement, an option
to purchase the number of Shares obtained by dividing by 4.5, the total
consideration received by the Company in the case of a cash infusion, or the
total consideration given by the Company in the case of an acquisition, and (iv)
provided that the Consulting Agreement shall be in effect at any time within the
120-day period ending on the last day of the Company's 1997, 1998 and 1999
fiscal years, an option to purchase the number of shares obtained by multiplying
27,273 by the percentage increase in KN2B's earnings per share from KN2B's 1996
fiscal year end earnings per share. To the extent not exercised, all options
terminate on the day immediately following the fifth anniversary of the date of
grant.

      Both contracts mentioned above allow termination of the agreement by
either party, without cause, upon not less than 90 days prior written notice to
the other.

        As part of the Company's agreement between the Company and HSND, each 
of the Company and HSND are to receive from HSS a royalty of 6% of all sales. In
addition to these royalties, the Company and/or HSS may, from time to time, be
required to pay royalties to suppliers other than HSND in order to acquire from
them the retail rights to their DRTV merchandise. As of November 30, 1996 the
Company accrued $108,517 in royalties payable to HSND.

       The Company had outstanding at November 30, 1995, 600,000 shares of 
Series A Preferred Stock, which were a part of preferred stock units (each
consisting of one share of Series A Preferred and one share of common) issued by
the Company to several related parties in August and September of 1995 in
exchange for $500,000. The 600,000 common shares so issued were included in the
March 1996 six-for-five stock split. The Series A Preferred Stock was
convertible, at the option of the holder, into a second share of common stock,
or was redeemable, by the Company, for approximately $.833 per share, which
approximates the original purchase price of the units. The Company redeemed the
600,000 shares of Series A Preferred Stock for approximately $500,000 with a
portion of the proceeds of the public offering described in Note (3) to the
Company's consolidated financial statements.

      The Company believes that the terms of all of the transactions discussed
in this section were no less favorable to the Company than those which could
have been obtained from non-affiliated parties. Transactions between the Company
and its officers, directors, employees and affiliates will be on terms no less
favorable to the Company than can be obtained from unaffiliated parties.


ITEM 13 - EXHIBITS AND REPORTS OR FORM 8-K

      (a)   List of Documents Filed as Part of this Report

            (1)   Consolidated Financial Statements - See Index to Consolidated
                  Financial Statements on page F-1 of this Form 10-KSB Annual
                  Report.

                  Independent Auditors' Report - Deloitte & Touche LLP
                  Independent Auditors' Report - Moore Stephens, PC

            (2)   Exhibits
                  27.01 - Financial Data Schedule (for SEC use only)

<TABLE>
<CAPTION>

EXHIBIT
  NO.                                              EXHIBIT           
-------                                            -------
<S>   <C>   <C>
3.01  -     Certificate of Incorporation of the Company filed as Exhibit 3.01 in the Company's Registration Statement on Form
            SB-2.

3.02  -     Certificate of Correction of the Company filed as Exhibit 3.02 in the Company's Registration Statement on Form SB-2.

3.03  -     Certificate of Designation Establishing a Series of Shares of Series A Redeemable Convertible Preferred Stock of the
            Company filed as Exhibit 3.03 in the Company's Registration Statement on Form SB-2.
</TABLE>


                                       13
<PAGE>   14
<TABLE>
<S>    <C>   <C>
 3.04  -     By-Laws of the Company filed as Exhibit 3.04 in the Company's Registration Statement on Form SB-2.

 4.01  -     Form of Warrant Agreement by and among the Company and American Stock Transfer & Trust Company filed as Exhibit 4.01
             in the Company's Registration Statement on Form SB-2.

 4.02  -     Form of Representative's Purchase Option Company filed as Exhibit 4.02 in the Company's Registration Statement on
             Form SB-2.

10.01  -     Form of Series A Preferred Stock Subscription Agreement filed as Exhibit 10.01 in the Company's Registration
             Statement on Form SB-2.

10.02  -     Letter of Agreement by and between the Company and HSN Direct Joint Venture dated June 12, 1995 and amendments
             thereto filed as Exhibit 10.02 in the Company's Registration Statement on Form SB-2.

10.03  -     Employment Agreement by and between Alan Kerzner and the Company dated as of December 1, 1995 filed as Exhibit 10.03
             in the Company's Registration Statement on Form SB-2.

10.04  -     Form of Financial Consulting Agreement by and between the Company and I.AA. Rabinowitz & Co. filed as Exhibit 10.04
             in the Company's Registration Statement on Form SB-2.

10.05  -     Employment Agreement by and between James Lawless and the Company dated April 15, 1996 filed as Exhibit 10.05 in the
             Company's Registration Statement on Form SB-2.

10.06  -     Agreement by and between EGW Enterprises, Ltd. and the Company dated April 8, 1996 filed as Exhibit 10.06 in the
             Company's Registration Statement on Form SB-2.

10.07  -     Employment Agreement by and between Benedict White and the Company dated April 15, 1996 filed as Exhibit 10.07 in the
             Company's Registration Statement on Form SB-2.

10.08  -     Consulting Agreement dated January 1, 1997 between the Company and Columbus Circle 

10.09  -     Consulting Agreement dated March 11, 1997 between Home Shopping Showcase and Columbus Circle

10.11  -     Stock Option Agreement dated January 1, 1997 between the Company and Columbus Circle

10.12  -     Stock Option Agreement dated January 1, 1997 between KN213, Inc. and Columbus Circle

10.13  -     Loan Agreement dated November, 1996 between the Company and Fresh Picks Inc.                                        

11.1   -     Loss Per Share Calculations

16     -     Letter from Moore Stephens, PC, the predecessor auditor, to the Securities and Exchange Commission filed with the 
             Company's Form 8-K on December 24, 1996 incorporated by reference herein.

21     -     Subsidiaries of the Company

23.01  -     Consent of Bernstein & Wasserman (including in Exhibit 5.01) filed as Exhibit 23.01 in the Company's Registration
             Statement on Form SB-2.

27.01  -     Financial Data Schedule (for SEC use only)
</TABLE>

(b)      Reports on Form 8-K

         On December 24, 1996, the Company filed a Form-8K reporting a change in
principal accountants from Moore Stephens, PC to Deloitte and Touche LLP.

                                       14

<PAGE>   15

                                   SIGNATURES


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


                                 ML DIRECT INC.



March 17, 1997             By: /s/  Nancy Shalek
                              -----------------------------------
                                    Nancy Shalek
                                    Chairman of the Board


         IN ACCORDANCE WITH THE EXCHANGE ACT, THIS REPORT HAS BEEN SIGNED BELOW
BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND
ON THE DATE INDICATED.



 /s/  NANCY SHALEK                                    March 17, 1997
-------------------------------
Nancy Shalek
Chairman of the Board




 /s/ JAMES M. LAWLESS                                 March 17, 1997
-------------------------------
James M. Lawless
President and
Principal Accounting Officer



 /s/ ALAN KERZNER                                     March 17, 1997
-------------------------------
Alan Kerzner
Director




                                       15
<PAGE>   16



                                 ML DIRECT INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>

                                                                                                     Page
                                                                                                     ----
<S>                                                                                                   <C>
Independent Auditors' Report..........................................................................F-2
Predecessor Auditors' Report..........................................................................F-3
Consolidated Balance Sheet as of November 30, 1996....................................................F-4
Consolidated Statements of Operations.................................................................F-5
Consolidated Statements of Stockholders' Equity ......................................................F-6
Consolidated Statements of Cash Flows.................................................................F-7
Notes to Consolidated  Financial Statements...........................................................F-8
</TABLE>





                                      F-1
<PAGE>   17

INDEPENDENT AUDITORS' REPORT



The Board of Directors and Stockholders of
ML Direct, Inc.
Clearwater, Florida

We have audited the accompanying consolidated balance sheet of ML Direct Inc.
(the "Company") and its subsidiary as of November 30, 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year ended November 30, 1996. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ML Direct Inc. and
its subsidiary as of November 30, 1996 and the results of their operations, and
their cash flows for the year ended November 30, 1996, in conformity with
generally accepted accounting principles.

The accompanying consolidated financial statements for the year ended November
30, 1996 have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 1, "Going Concern - 1996", to the consolidated 
financial statements, the Company's recurring losses and negative cash flows 
from operating activities raise substantial doubt about its ability to 
continue as a going concern. Management's plans concerning these matters are 
also described in Note 1. The consolidated financial statements do not 
include any adjustments that might result from the outcome of this uncertainty.




Deloitte & Touche LLP


Tampa, Florida
March 17, 1997




                                       F-2

<PAGE>   18



                          INDEPENDENT AUDITORS' REPORT



The Board of Directors and Stockholders of
ML Direct Inc.
New York, New York

      We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of ML Direct, Inc. and its subsidiary for
the period from June 22, 1995 (date of inception) to November 30, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.

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

      In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of operations
and cash flows of ML Direct Inc. and its subsidiary for the period June 22,1995
(date of inception) to November 30, 1995, in conformity with generally accepted
accounting principles.

      The accompanying 1995 consolidated financial statements have been prepared
assuming that ML Direct Inc. will continue as a going concern. As discussed in
Note 1, "Going Concern - 1995" to the consolidated financial statements, the 
Company's lack of operating history and insufficient cash to achieve its
operating objectives raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1 - Going Concern - 1995. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.





                  
                          MORTENSON & ASSOCIATES, P C 
                          Certified Public Accountants 



Cranford, New Jersey
December 20, 1995



                                       F-3


<PAGE>   19



                                 ML DIRECT, INC.
                           CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>

                               ASSETS                                              NOVEMBER 30, 1996
                                                                                   -----------------
<S>                                                                                  <C>             
CURRENT ASSETS
  Cash and Cash Equivalents............................................              $  2,562,227
  Inventory............................................................                 1,150,590
  Accounts Receivable, Net.............................................                   437,432
  Prepaid Expenses.....................................................                   588,455
                                                                                     ------------
              Total Current  Assets....................................                 4,738,704
                                                                                     ------------

FIXED ASSETS, NET......................................................                   290,234
                                                                                     ------------

OTHER ASSETS
  Organizational Cost, Net.............................................                    17,240
  Unsecured Non-Transferable Convertible Promissory Note Receivable - 
     Related Party, Net of Allowance for Loss of $500,000..............                        --
  Security Deposits....................................................                   130,400
  Other................................................................                   100,000
                                                                                     ------------
      Total Other Assets...............................................                   247,640
                                                                                     ------------

      TOTAL ASSETS.....................................................              $  5,276,578
                                                                                     ============

    LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
  Accounts Payable.....................................................              $  1,162,359
  Accrued Returns and Allowances.......................................                    73,654
  Accrued Expenses.....................................................                   133,840
  Accrued Royalty to Related Party ....................................                   108,517
                                                                                     ------------
      Total Current Liabilities .......................................                 1,478,370
                                                                                     ------------

COMMITMENTS............................................................                        --

STOCKHOLDERS' EQUITY
   Preferred Stock--$.0001 par value; 1,000,000
    shares of "Blank Check",  No Shares Issued and Outstanding.........                        --
  Common Stock--$.0001 par value; 15,000,000 Shares Authorized,
    4,224,000 Shares Issued and Outstanding............................                       422
  Additional Paid-In-Capital...........................................                 7,605,851
  Retained Earnings (Deficit)..........................................                (3,146,815)
  Deferred Compensation Expense........................................                  (661,250)
                                                                                     ------------ 
             Total Stockholders' Equity................................                 3,798,208
                                                                                      -----------

             TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................              $  5,276,578
                                                                                     ============
</TABLE>




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




                                       F-4

<PAGE>   20



                                 ML DIRECT, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION> 
                                                                                      FOR THE PERIOD 
                                                                                       JUNE 22, 1995
                                                                 YEAR ENDED      (DATE OF INCEPTION) THROUGH
                                                              NOVEMBER 30, 1996        NOVEMBER 30, 1995
                                                              -----------------        -----------------


<S>                                                             <C>                      <C>        
REVENUES, NET ......................................            $   692,256              $   759,622
COST OF SALES ......................................                495,272                  667,365
                                                                -----------              -----------

 Gross Profit ......................................                196,984                   92,257
                                                                -----------              -----------

OPERATING EXPENSES
  Selling Expense ..................................                919,965                   21,721
  General and Administrative Expenses ..............              1,542,734                   37,474
  Reimbursements to Related Party ..................                308,839                  128,352
  Provision for loss - Related Party Note Receivable                500,000                     --
  Depreciation and Amortization Expense ............                 18,306                     --
                                                                -----------              -----------
    Total Operating Expenses .......................              3,289,844                  187,547
                                                                -----------              -----------
  LOSS FROM OPERATIONS .............................             (3,092,860)                 (95,290)
                                                                -----------              -----------

OTHER INCOME (EXPENSE)
  Interest Income ..................................                 48,695                    2,136
  Interest Expense .................................                 (9,496)                    --
                                                                -----------              -----------
    Total Other Income (Expense) ...................                 39,199                    2,136
                                                                -----------              -----------

 NET LOSS ..........................................            $(3,053,661)             $   (93,154)
                                                                ===========              ===========

 Weighted Average Number of Shares .................              3,686,272                4,442,400
                                                                ===========              ===========

 NET LOSS PER SHARE ................................            $      (.83)             $      (.02)
                                                                ===========              ===========

</TABLE>

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





                                       F-5

<PAGE>   21



                                 ML DIRECT INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                             Preferred                 Common
                                                               Stock      Additional    Stock      Additional       Common        
                                                              $0.0001      Paid-in     $0.0001      Paid-in         Stock         
                                                             ParValue      Capital     ParValue     Capital       Subscribed      
                                                             -----------------------------------------------------------------
<S>                                                            <C>       <C>            <C>      <C>              <C>         
Stock Issued to Founders - June 22, 1995                       $ --      $      --      $240     $        --      $        -- 
Common and Preferred Stock Issued as part of Preferred
   Stock Units sold in August and September of 1995 issued
   for $500,000 cash                                             60        249,940        60         249,940               -- 
Common Stock Subscribed                                          --             --        --              --        4,000,000
Net Loss for the Period June 22, 1995 through
   November 30, 1995                                             --             --        --              --               -- 
                                                               ----      ---------      ----     -----------      ----------- 
Balance at November 30, 1995                                     60        249,940       300         249,940        4,000,000
Stock Options Issued                                             --             --        --         950,000               -- 
Compensation Expense                                             --             --        --              --               -- 
Issuance of Preferred Stock Units                                12         49,988        12          49,988               -- 
Issuance of Common Stock, Net of Offering Costs of $1.6M         --             --       110       6,656,856       (4,000,000)
Redemption of Preferred Stock at $.833 Stated Value             (72)      (299,928)       --        (300,933)              -- 
Net Loss for the Year Ended November 30,1996                     --             --        --              --               -- 
                                                               ----      ---------      ----     -----------      ----------- 
Balance at November 30, 1996                                   $ --      $      --      $422     $ 7,605,851      $        -- 
                                                               ====      =========      ====     ===========      =========== 
<CAPTION>

                                                                                Deferred         Stock              Total       
                                                                 Retained     Compensation    Subscription      Stockholders'  
                                                                 Earnings        Expense       Receivable          Equity      
                                                             -------------------------------------------------------------------
<S>                                                            <C>              <C>            <C>              <C>        
Stock Issued to Founders - June 22, 1995                       $        --      $      --      $        --      $       240
Common and Preferred Stock Issued as part of Preferred
   Stock Units sold in August and September of 1995 issued
   for $500,000 cash                                                    --             --               --          500,000
Common Stock Subscribed                                                 --             --       (4,000,000)              --
Net Loss for the Period June 22, 1995 through
   November 30, 1995                                               (93,154)            --               --          (93,154)
                                                               -----------      ---------      -----------      -----------
Balance at November 30, 1995                                       (93,154)            --       (4,000,000)         407,086
Stock Options Issued                                                    --       (950,000)              --               --
Compensation Expense                                                    --        288,750               --          288,750
Issuance of Preferred Stock Units                                       --             --               --          100,000
Issuance of Common Stock, Net of Offering Costs of $1.6M                --             --        4,000,000        6,656,966
Redemption of Preferred Stock at $.833 Stated Value                     --             --               --         (600,933)
Net Loss for the Year Ended November 30,1996                    (3,053,661)            --               --       (3,053,661)
                                                               -----------      ---------      -----------      -----------
Balance at November 30, 1996                                   $(3,146,815)     $(661,250)     $        --      $ 3,798,208
                                                               ===========      =========      ===========      ===========
</TABLE>




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






                                       F-6

<PAGE>   22


                                 ML DIRECT INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                            FOR THE PERIOD
                                                                    FOR THE                  JUNE 22, 1995
                                                                  YEAR ENDED                    THROUGH
                                                               NOVEMBER 30, 1996           NOVEMBER 30, 1995
                                                               -----------------           ------------------
<S>                                                            <C>                         <C>                
Cash Flows-Operating
Activities:
Net Loss                                                       $     (3,053,661)           $          (93,154)
Adjustments to Reconcile Net Loss to Net Cash Used by
  Operating Activities:
    Depreciation and Amortization                                        18,306                           880
    Deferred Compensation                                               288,750                            --
    Provision for Loss - Related Party Note Receivable                  500,000                            --
    Changes in Current Assets and Liabilities
     (Increase) in Accounts Receivable                                 (437,432)                           --
     (Increase) in Prepaid Expenses                                    (654,382)                      (34,073)
     (Increase) in Inventory                                         (1,150,590)                           --
     (Increase) Decrease in Related Party Receivable                     48,982                       (48,982)
      Increase in Accounts Payable and Payroll Taxes                  1,134,761                        27,526
      Increase in Accounts Payable - Related Party                      108,517                            --
      Increase in Accrued Expenses                                      119,663                        14,177
      Increase in Accrued Returns and Allowances                          1,239                        72,415
                                                               ----------------            ------------------

       Net Cash Used In Operating Activities                         (3,075,847)                      (61,211)
                                                               ----------------            ------------------

Cash Flows - Investing Activities:
  Purchases of Displays and Equipment                                  (259,963)                      (40,000)
  Organization Costs                                                    (14,370)                      (10,565)
  Investment in Unsecured Non-Transferable Convertible Promissory       
      Note receivable - Related Party                                  (500,000)                            --
  Principal Payment/Repayment of Note Receivable from
      Related Party                                                      50,000                       (50,000)
  Security Deposits                                                    (130,400)                           --
                                                               ----------------            ------------------
     Net Cash Used In Investing Activities                             (854,733)                     (100,565)
                                                               ----------------            ------------------

Cash Flows - Financing Activities:
  Proceeds from Related Party for Short Term Financing                  582,000                            --
  Repayment of Short Term Financing from Related Party                 (582,000)                           --
  Proceeds from Issuance of Preferred Stock Units                       100,000                       500,000
  Net Proceeds from Issuance of Common Stock                          6,656,856                            --
  Redemption of Preferred Stock                                        (600,933)                          240
  Offering Costs                                                             --                        (1,580)
                                                               ----------------            -------------------
     Net Cash Provided By Financing Activities                        6,155,923                       498,660
                                                               ----------------            ------------------

  Increase in Cash and Cash Equivalents                               2,225,343                       336,884

  Cash and Cash Equivalents -  Beginning of Periods                     336,884                            --
                                                               ----------------            ------------------

  Cash and Cash Equivalents - End of Periods                   $      2,562,227            $          336,884
                                                               ================            ==================

   Supplemental Disclosures:
      Interest Paid                                            $          9,496            $               --
                                                               ================            ==================
      Income Taxes Paid                                        $             --            $               --
                                                               ================            ==================
</TABLE>

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


                                       F-7


<PAGE>   23


                                 ML DIRECT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)  ORGANIZATION AND BUSINESS

     GENERAL

      ML Direct, Inc. (the 'Company'), a Delaware corporation, was incorporated
on June 22, 1995. In that same month, June of 1995, the Company entered into a
binding letter of intent with HSN Direct Joint Venture ('HSND') which provided
for the creation of a new entity, KN2B, Inc., which operates under the name
"Home Shopping Showcase(TM)" ('HSS'). HSS was organized to establish permanent
display programs in retail venues through which a variety of consumer products,
all of which had already been successfully marketed via direct response
television (DRTV) programming and/or advertising, could be offered for sale. At
the time of execution of the binding letter of intent, HSND was a subsidiary of
the Home Shopping Network, Inc. HSND is now a majority-owned subsidiary of
Flextech, P.L.C. (a UK Company, which itself is a subsidiary of
Telecommunications Company, Inc.). Home Shopping Network, Inc. continues to hold
a minority equity position in HSND. The binding letter of intent between the
Company and HSND has been twice amended, first in August of 1995 in connection
with the Company's initial funding of HSS, and then in February of 1996, in
connection with the change in majority ownership of HSND.

      The Company contributed $4,000,000 in cash to HSS, as well as its existing
and future retail rights to products and services, in exchange for the 1,500
shares of Class A Common Stock of HSS it was issued pursuant to the letter of
intent. The Company funded the $4,000,000 from the proceeds of the completed
public offering in September 1996. HSND, on the other hand, contributed the
right to use the name "Home Shopping Showcase(TM)" and certain related
trademarks, logos and service marks, as well as its existing and future retail
rights to products and services, in exchange for the 1,499 shares of Class B
Common Stock of HSS it was issued pursuant to the letter of intent. See
discussion in Note (5).

     GOING CONCERN -- 1996

      The accompanying consolidated financial statements have been prepared on
a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
consolidated financial statements, during the year ended November 30, 1996 and
the period ended November 30, 1995, the Company incurred net losses of
$3,053,847 and $93,154, respectively, and used cash for operating activities of
$3,075,847 and $61,211, respectively. These factors among others may indicate
that the Company will be unable to continue as a going concern for a reasonable
period of time.

      The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amount or
the amounts and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern. Management is continuing
its efforts to generate positive cash flows and profits by expanding its sales
through distribution channels such as supermarkets, mass merchandisers, drug
chains, and department stores as well as informercials and shopping networks
and catalogs and print media. The Company's continuation as a going concern is
dependent upon its ability and the ability of its subsidiary to generate
sufficient cash flow to meet their obligations on a timely basis and ultimately
on the Company's and its subsidiary's attaining successful operations.

     GOING CONCERN -- 1995

      As shown in the accompanying consolidated financial statements, the 
Company incurred a net loss of $93,154 for the period ended November 30, 1995,
utilized $61,211 in cash for operating activities, and did not have sufficient
cash to achieve its operating objectives. These factors created an uncertainty
about the Company's ability to continue as a going concern at November 30, 1995.

      The Company was in the process of filing a registration statement to
raise approximately $5,485,000 of net proceeds. The ability of the Company to
continue as a going concern was dependent on the success of the public
offering. The financial statements at November 30, 1995 did not include any
adjustments that might have been necessary if the Company was unable to continue
as a going concern.

(2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      (A) Principles of Consolidation -- The consolidated financial statements
include both the accounts of the Company and KN2B, Inc. The Company holds an
ownership interest in KN2B, Inc. which is greater than 50%, and has been given 
control over the day-to-day operations of KN2B through the terms of the binding
letter of intent. The consolidated financial statements have been prepared with
material intercompany transactions and balances eliminated in the consolidation.
In the consolidated financial statements, the Company has not recognized the
minority interest of KN2B, Inc. owned by HSND, which would be a payable to the
Company from HSND due to the fact that HSND has no cost basis in their
investment in KN2B, Inc.

      (B) Revenue Recognition -- The Company's policy is to record revenues when
title passes to the customer. Revenues from certain products sold with the right
of return, principally sales to supermarket chains, are recognized net of a
provision for estimated returns. The revenue for the year ended November 30,
1996 and the period ended November 30, 1995 is net of returns and allowances of
$53,926 and $37,216, respectively. There was an outstanding letter of credit at
November 30, 1995 of approximately $60,000 repaid upon shipment of merchandise.

      (C) Cash and Cash Equivalents -- For purposes of reporting cash flows, 
cash and cash equivalents include cash and short-term investments with original
maturities of less than 90 days. Total cash and cash equivalents is comprised of
$42,656 in cash on deposit and cash equivalents consist of $2,519,571 at
November 30, 1996 and are invested in interest bearing money market accounts.

      (D) Prepaid Expenses -- Prepaid Expenses include a deposit for the 
purchase of inventory of $463,828, packaging supplies of approximately
$125,000.

                                       F-8

<PAGE>   24


      (E) Inventory -- Inventory is comprised of consumer goods. The inventory
is stated at the lower of cost or market, with cost being determined on the
first-in, first-out ('FIFO') method.

      (F) Net Loss Per Share -- Net loss per share was calculated based on the
weighted average number of shares outstanding during the periods presented
including all common stock equivalents. All share data has been adjusted to
reflect the six-for-five stock split in March 1996. Although the Company
reported a net loss in both periods presented, the loss per share includes
certain common stock equivalents issued within a one year period prior to the
Company's initial public offering.

      (G) Accounts Receivable, Net -- Accounts Receivable is net of an allowance
for doubtful accounts at November 30, 1996 of approximately $23,942.

      (H) Reserve for Returns -- The Company has provided an allowance for
possible returns of approximately 6% of revenues in 1996 and 3.5% in 1995 from
non-supermarket sales, based on management's analysis of actual returns to date.
This allowance percentage will be reviewed periodically and adjusted as
necessary.

      (I) Note Receivable-Related Party -- The Company will recognize interest
income on the Note when received in cash. See discussion of the Note Receivable
in Note (4).

      (J) Business Concentration/Economics Dependency -- To date, the Company's
sales have been, and will continue to be, primarily to mass and specialty retail
outlets. The Company's business plan anticipates an ultimate emphasis on what it
believes to be the heretofore under-penetrated supermarket channel of
distribution. Still the Company expects, and has so far realized, greater early
success in sales to non-supermarket outlets.

      During its first five months of operation, the period ended November 30,
1995, all of the Company's net revenue was as a result of one order from one
customer, Service Merchandise, a non-supermarket retailer. Moreover, for the
year ended November 30,1996, the Company's gross revenue was primarily from
three customers, which were non-supermarket retailers: Jack Eckerd Drug Co., 
Caldor Department Stores, and Play it Again Sports representing approximately
32%, 17%, and 14% of the Company's total sales, respectively. The Company's
first foray into what it anticipates will be its area of specialization, the
Home Shopping Showcase(TM) kiosk program for supermarkets, was with grocery
chains, Baker's in Nebraska and Furrs in New Mexico. The Kiosk program accounted
for 10% of the Company's total sales for the year ended November 30, 1996.

      (K) Fixed Assets, net -- Fixed assets, net, includes display units placed
in service in fiscal 1996 and office equipment and computers purchased during
fiscal year 1996, net of depreciation expense to date. Display units are
depreciated on the straight-line method over a five year period, and office
equipment and computer equipment are depreciated over seven and three years,
respectively. Depreciation expense for the year ended November 30, 1996 was
$11,490. There were no fixed assets recorded at November 30, 1995.

      (L) Other Assets -- Organizational costs are amortized on the
straight-line method over a five year period and are net of accumulated
amortization of $6,816 as of November 30, 1996. Other assets includes a
$100,000 five year consulting agreement with Patterson Travis, Inc., the
underwriter of the public offering. See discussion of consulting agreement in
Note 3.


                                       F-9

<PAGE>   25


      (M) Security Deposit -- The Company purchased a certificate of deposit in
the amount of $125,400 as collateral for a letter of credit issued as a security
deposit for the Company's New York office lease. Interest income is recognized 
as earned on the certificate of deposit. The Company also has a security deposit
for the Clearwater office lease of $5,000.

      (N) Risk Concentrations -- Financial instruments, which potentially
subject the Company to concentrations of credit risk, consist primarily of cash.
As of November 30, 1996, the Company had a non-cash equivalent, the
above-mentioned Certificate of Deposit, on deposit with a financial institution.
The institution's excess liability to the Company on that Certificate of
Deposit, over the federally insured limit of $100,000, was $25,400.

      The Company's business, to date, has largely been the product of the
binding letter of intent it signed with HSND.  Further, the Home Shopping
Showcase(TM) name and marks, under which the Company and HSND intend to operate
this cooperative venture, lend brand recognition, and thus, a measure of
credibility, to the Company's retail offerings. The loss of use of such
intellectual property, through the termination of this agreement or the 
diminution in its value caused either by HSND's lack of success in the DRTV 
venue or by the infringement or misappropriation of the intellectual property 
by an outside third party, could have a material adverse effect on the Company.

      Moreover, the success of Home Shopping Showcase(TM) is dependent on the
success the Company, HSND, and HSS, itself, securing, from manufacturers and
distributors, the retail distribution rights to their successful DRTV
merchandise. There can be no assurance that the Company, HSND, or HSS will be
able to secure sufficient rights from such third parties, nor that such 
merchandise, when offered in the retail marketplace, will achieve a level of
success similar to that which it achieved through DRTV marketing. Finally,
there can be no assurance that the Company will be able to capitalize on its
relationships within the supermarket and other retail industries to establish
the number and quality of retail distribution outlets necessary to actualize
the Home Shopping Showcase(TM) program as it was envisioned.

      (O) Use of Estimates -- The preparation of the consolidated financial 
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual amounts may differ from those
estimates.

      (P) Stock Options and Similar Equity Instruments Issued to Employees - The
Company uses the intrinsic value method to recognize cost in accordance with
Accounting Principles Board Opinion No. 25 (Accounting for Stock Issued to 
Employees).

      (Q) Reclassifications -- Certain amounts have been reclassified in the
period from June 22, 1995 (inception date) to November 30, 1995 to be comparable
to the consolidation financial statement presentation for fiscal year 1996.

      (R) Fair Value of Financial Instruments -- The estimated fair value of 
amounts reported in the consolidated financial statements have been determined 
by using available market information and appropriate valuation methodologies. 
The carrying value of all current assets and current liabilities approximates 
fair value because of their short-term nature.  The fair value of long-term 
assets approximates the carrying value, based on market prices.

(3)      PUBLIC OFFERING

      The Company filed a registration statement for 480,000 units at $15.00 per
unit which was declared effective on September 3, 1996. Each unit consisted of 2
shares of common stock and 1 Class A Warrant. Each Class A Warrant entitles its
holder to purchase one share of common stock at $8.00 per share during the four
year period commencing one year from the effective date of the registration
statement . In September of 1996, the Company received $6,656,856, which
represented the net proceeds on the sale of 552,000 units, including the
original 480,000 units, as well as the full 72,000 units available in the
underwriter's over allotment. Concurrently with the receipt of the
aforementioned proceeds, the Company paid $600,933 for the redemption of 720,000
shares of Series A Preferred Stock and $4,000,000 for the stock subscription of
1,500 shares of Class A Common Stock in KN2B, Inc.



                                      F-10

<PAGE>   26


      The following table is a detail of the proceeds received by the Company
upon completion of the public offering on September 3, 1996:

<TABLE>
<CAPTION>


                                                  # OF UNITS  PRICE/UNITS     TOTAL
                                                  ----------  -----------     -----
<S>                                                 <C>         <C>        <C>       
PROCEEDS                                    
Initial Offering of 448,000 units                   480,000     $15.00     $7,200,000
Over-Allotment Option                                72,000      15.00      1,080,000
                                                    -------                ----------

TOTAL OFFERING PROCEEDS                             552,000                 8,280,000
                                                    =======                ----------
DEDUCTION FROM PROCEEDS
Underwriter's Discounts and Commissions                                       828,000
Underwriter's Non Accountable Expense Allowance                               248,400
Legal Fees                                                                    321,070
Accounting and Auditing Fees                                                  110,000
Printing and Other Fees                                                       115,674
                                                                           ----------
     TOTAL DEDUCTIONS                                                       1,623,144
                                                                           ----------

NET PROCEEDS FROM INITIAL PUBLIC OFFERING                                  $6,656,856
                                                                           ==========
</TABLE>

      In conjunction with the public offering, the Company entered into a five
year consulting agreement with Patterson Travis, Inc. in which the Company will
be provided with financial planning and business consulting services.

(4)  RELATED PARTY TRANSACTIONS

         Related Party Expenses and Accounts Payable -- The Company incurred
approximately $12,300 per month, on a month-to-month basis, for office space and
office services provided to it by a partnership in which both of the partners
are principal shareholders in the Company. In addition, the partnership paid
certain other expenses on behalf of the Company during its first months of
operation. For the year ended November 30, 1996, and the period from June 22,
1995 (date of inception) through November 30, 1995, the Company reimbursed this
partnership for payment of expenses on the Company's behalf as follows:
<TABLE>
<CAPTION>

                                For the Year    From June 22, 1995
                                   Ended       (Date of Inception) to
                              November 30, 1996   November 30, 1995
                              -----------------   -----------------
<S>                                <C>               <C>     
Rent and Utilities ..............  $146,701          $ 11,782
Travel and Entertainment ........    62,629            47,786
Outside Services ................    98,698            60,989
Compensation and Benefits .......       811             7,795
                                   --------          --------
  Total .........................  $308,839          $128,352
                                   ========          ========
</TABLE>

         The Company obtained short-term financing during fiscal 1996 in the
amount of $582,000 from Marketlink, a partnership consisting of two partners,
The MarketLink Group, Ltd. ("MLG") and Sherbrooke Consulting, Inc., to provide
short term working capital to the Company prior to the public offering. MLG is a
principal stockholder of the Company and Sherbrooke Consulting, Inc. is a
corporation wholly owned by an officer and Chairman of the Company's Board of
Directors. The $582,000 plus interest of $9,496 was repaid by the Company in
September 1996.




                                      F-11

<PAGE>   27

         In November 1996, the Company made an unsecured loan in the aggregate
principal amount of $500,000 to Fresh Picks, Inc. ("Fresh Picks"). The Chairman
of the Board of the Company, is also the Chairman of the Board of Fresh Picks.
The loan is evidenced by a Non-Transferable Convertible Promissory Note (the
"Note"), which bears interest at prime rate plus four percent per annum and is
due and payable on the earlier of (i) the completion of a private equity
offering by Fresh Picks in an amount greater than or equal to $6 million, or
(ii) November 14, 1998. The Company may, at its discretion, exercise its option
to convert a portion of the Note into a maximum of 100,000 shares of common
stock of Fresh Picks upon consummation of a private equity offering of Fresh
Picks, such conversion to be at the price of the lesser of $1.50 per share or
the price per share for common stock paid by investors in such offering. Upon
any such conversion of a portion of the Note into equity, Fresh Picks will
prepay all outstanding principal, and interest thereon, except to the extent so
converted. Due to the fact that there is no evidence Fresh Picks will be able to
repay the loan and the Note is not collateralized, the Company has provided an
allowance for loss for the entire $500,000 principal amount of the Note as of
November 30, 1996. The Company will recognize interest income on the Note when
received in cash.

         Fresh Picks, a development-stage company, is a proposed full-service
provider of music retail services to the grocery industry. The idea for Fresh
Picks arose from the similar objective to that of the Company of growing sales
in supermarkets. As such, the Chairman of the Board of both the Company and
Fresh Picks and the president of HSS and a former officer of Fresh Picks have
worked closely during original planning and formulation of business plans and
pilot markets for Fresh Picks. Initially pilots for HSS and Fresh Picks were
tested in the same Omaha stores served by the Company and the Company and Fresh
Picks have used the same outside operations personnel. Management of the 
Company has been informed the Fresh Picks has secured a commitment with a
Boston-based supermarket chain to establish six planned pilot departments by
April 30, 1997, in those supermarkets, leading to an additional 20 departments
no later than year end. In addition, management of the Company has been informed
that Fresh Picks is currently in the process of seeking equity financing from
various potential investors. There can be no assurance that Fresh Picks will be
successful in obtaining such financing or that Fresh Picks will achieve the
necessary sales and profitability targets required to continue its operations
and enable Fresh Picks to repay the Note to the Company.

      On January 1, 1997, the Company entered into a Consulting Agreement with
The Columbus Circle ("TCC"), a New York partnership of which one of the two
general partners is owned and controlled by the Company's Chairman, pursuant to
which TCC agrees to provide certain general management and other services to the
Company. This agreement, which expires on December 31, 1999, provides that the
Company pay to TCC an initial fee of $120,000 and a monthly amount equal to
$15,000. KN2B, Inc. also entered into a Consulting Agreement with TCC in 
January, 1997, pursuant to which TCC agrees to provide certain general
management and other services to KN2B, Inc.  This agreement, which expires on 
December 31, 1999 provides that KN2B, Inc. pay to TCC an initial fee of $60,000
and a monthly amount equal to $7,500. The initial fees totaling $180,000 will be
capitalized and amortized over the three-year term. The consulting agreements
may be terminated by either party for non-performance.

      On January 1, 1997, pursuant to the above described Consulting Agreement
between the Company and TCC, the Company entered into a Stock Option Agreement
(the "ML Option Agreement") with TCC. Pursuant to the ML Option Agreement, the
Company granted TCC an option to purchase 54,545 Shares exercisable from January
1, 1997 through January 1, 2002 at an exercise price of $4.50 per share. In
addition, the ML Option Agreement provides that the Company issue to TCC the
following options to purchase the Company's common stock ("Shares") at an
exercise price of $4.50 per share: (i) if the Consulting Agreement shall be in
effect at any time during the 120-day period ending on January 1, 1999, an
option to purchase an additional 54,545 Shares exercisable from January 1, 1999
through January 1, 2004; (ii) if the Consulting Agreement shall be in effect
at any time during the 120-day period ending on January 1, 2000, an option to
purchase an additional 54,545 Shares exercisable from January 1, 2000 through
January 1, 2005; (iii) if the Company closes any transaction whereby the
Company receives an infusion or infusions of cash (either equity or debt), or it
acquires (directly or indirectly) another company, an option to purchase the
number of Shares obtained by dividing by 4.5, the total consideration received
by the Company in the case of a cash infusion, or the total consideration given
by the Company in the case of an acquisition, and (iv) if Consulting Agreement
shall be in effect at any time within the 120-day period ending on the last day
of the Company's 1997, 1998 and 1999 fiscal years, an option to purchase the
number of shares obtained by multiplying 54,545 by the percentage increase in
earnings per share from the


                                     F-12
<PAGE>   28

Company's 1996 fiscal year end earnings per share. To the extent not exercised,
all options terminate on the day immediately following the fifth anniversary of
the date of grant. The ML Option Agreement permits either party to terminate
the agreement upon 90 days' notice without cause.

      On January 1, 1997, pursuant to above described Consulting Agreement
between KN2B, Inc. and TCC, the Company entered into a Stock Option Agreement
with TCC (the "KN2B Option Agreement"). Pursuant to the KN2B Option Agreement,
the Company granted TCC an option to purchase 27,273 Shares exercisable from
January 1, 1997 through January 1, 2002 at an exercise price of $4.50 per
share. In addition, the KN2B Option Agreement provides that the Company issue to
TCC the following options to purchase Shares at an exercise price of $4.50 per
share: (i) provided that the Consulting Agreement shall be in effect at any time
during the 120-day period ending on January 1, 1999, an option to purchase
27,273 Shares exercisable from January 1, 1999 through January 1, 2004; (ii)
provided that the Consulting Agreement shall be in effect at any time during the
120-day period ending on January 1, 2000, an option to purchase 27,273 Shares
exercisable from January 1, 2000 through January 1, 2005; (iii) in the event
that KN2B closes any transaction whereby the Company receives an infusion or
infusions of cash (either equity or debt), or KN2B acquires (directly or
indirectly) another company, and such transaction was initiated by TCC and
closed prior to the termination of the Consulting Agreement or within the
120-day period following the termination of the Consulting Agreement, an option
to purchase the number of Shares obtained by dividing by 4.5, the total
consideration received by the Company in the case of a cash infusion, or the
total consideration given by the Company in the case of an acquisition, and (iv)
provided that the Consulting Agreement shall be in effect at any time within the
120-day period ending on the last day of the Company's 1997, 1998 and 1999
fiscal years, an option to purchase the number of shares obtained by multiplying
27,273 by the percentage increase in KN2B's earnings per share from KN2B's 1996
fiscal year end earnings per share. To the extent not exercised, all options
terminate on the day immediately following the fifth anniversary of the date of
grant. The KN2B Option Agreement permits either party to terminate the 
agreement upon 90 days' notice without cause.

      See Note (5) for a description of the Company's license and royalty
agreement with the Company and HSND.

      See Note (7) for a description of the issuance of preferred stock to 
related parties and the redemption of this preferred stock.

      See Note (10) for a description of the Company's employment agreements 
with certain employees.

(5)  LICENSE AND ROYALTIES

      (A) In connection with the Company's agreement with HSND, HSND has
provided HSS with a license to the Home Shopping Showcase(TM) trademarks, logos
and service marks within the field of domestic retail distribution so that HSS
may exploit all manner of retail opportunities in the United States using such
trademarks, logos and service marks. The license provides for use of the Home
Shopping Showcase(TM) trademarks, logos, and service marks until December 31,
2000 at retail sites established on or before January 1, 1998, and until the
earlier of (i) December 31, 2003 or (ii) three years after establishment at
retail sites established between January 1, 1998 and December 31, 2000.

      As a result of negotiations between the Company and HSND, substantiated by
an independent 3rd party appraisal, the Company believes that the combination of
the Home Shopping Showcase(TM) trademarks, logos and service marks and all of
the existing and future retail rights to HSND's products and services, are
fairly valued at approximately $4,000,000. For financial statement purposes,
however, the Home Shopping Showcase(TM) trademarks, logos, and service marks, as
well as the existing and future retail rights, are presented at HSND's cost
basis, which is zero.

      (B) As part of the Company's agreement between the Company and HSND, 
each of the Company and HSND are to receive from HSS a royalty of 6% of all
sales. In addition to these royalties, the Company and/or HSS may, from time to
time, be required to pay royalties to suppliers other than HSND in order to
acquire from them the retail rights to their DRTV merchandise. As of November
30, 1996 the Company accrued $108,517 in royalties payable to HSND.

(6)  INCOME TAXES

      As of November 30, 1996 and 1995, the Company had net operating loss
carryforwards of approximately $800,000 and $93,000, respectively, which will
expire in the years 2004 and 2003, respectively. Accordingly, there were no 
provisions made for income taxes. However, based upon the Internal Revenue 
Service regulations



                                       F-13

<PAGE>   29
                                      
governing the utilization of net operating loss carryforwards where the
corporation has issued substantial additional stock, much of this loss carry
forward may not be available to the Company.

      Generally accepted accounting principles require the establishment of a
deferred tax asset for all deductible temporary differences and operating loss
carryforwards. The deferred tax asset was approximately $600,000 at November
30, 1996. Because of the uncertainties discussed above, any deferred tax
asset established for utilization of the Company's tax loss carry forwards would
correspondingly require a valuation allowance of the same amount ($600,000 at
November 30, 1996) pursuant to SFAS No. 109. Accordingly, no deferred tax asset
is reflected in these consolidated financial statements.

 (7)  CAPITAL STOCK

      (A) Preferred Stock -- The Company is authorized to issue 1,000,000 shares
of 'Blank Check' preferred stock with a par value of $.0001 per share. The
Company had outstanding at November 30, 1995, 600,000 shares of Series A
Preferred Stock, which were a part of preferred stock units (each consisting of
one share of Series A Preferred and one share of common) issued by the Company
to several related parties in August and September of 1995 in exchange for
$500,000. The 600,000 common shares so issued were included in the March 1996
six-for-five stock split. On March 29, 1996, the Company issued an additional
120,000 Series A Preferred Stock units in exchange for an additional $100,000.
The Series A Preferred Stock was convertible, at the option of the holder, into
a second share of common stock, or was redeemable, by the Company, for
approximately $.833 per share, which approximates the original purchase price of
the units. The Company redeemed the outstanding total of 720,000 shares of
Series A Preferred Stock for $600,933 with a portion of the proceeds of the
public offering described in Note (3).

      (B) Common Stock -- The Company is authorized to issue 15,000,000 shares
of common stock with par value of $.0001 per share. In March of 1996, the
Company declared a stock split whereby the shareholders received six shares of
common stock for every five shares held at the date of the split. All
share-data included in the consolidated financial statements has been
retroactively adjusted to reflect the six-for-five stock split. On June 22, 
1995, the Company issued 2,400,000 shares of common stock and 2,000,000 Class A
warrants, exercisable at $6.00 per share for four years commencing one year from
the close of the a public offering, to the founders of the Company for $240.

      (C) Class A Warrants --Each Class A Warrant ("Warrants") represents the
right to purchase one share of Common Stock at an exercise price of $8.00 per
share, for a period of four years, commencing one year after September 3, 1996,
the effective date of the initial public offering. Each Warrant is redeemable by
the Company for $.05 per Warrant at any time after September 3, 1997, upon 30
days' prior written notice, if the closing price of the Common Stock, as
reported by the Nasdaq Small Cap Market exceeds $12.00 per share for 20
consecutive trading days prior to the date of the notice of redemption.

      The Company has granted warrants and has granted options to purchase 
stock under the 1995 Stock Option Plan as follows:
<TABLE>
<CAPTION>

                                                              Warrants                         Stock Options
                                                              --------                         -------------
                                                     Number of          Exercise        Number of          Exercise
                                                      Shares              Price          Shares              Price
                                                      ------              -----          ------              -----
<S>                                                  <C>                <C>             <C>                <C>
Authorized June 22, 1995                                                                2,000,000          $     --

Outstanding Balance - November 1995                  2,000,000          $ 6.00               --                  --
Issued/Grants                                          552,000            8.00          1,051,000          2.50-7.50
Exercised                                                 --              --                 --                  --
Canceled                                                  --              --                 --                  --
Outstanding Balance - November 1996                  2,552,000                          1,051,000                    
                                                     =========                          =========

Exercisable at November 30, 1996                          --              --              391,000
                                                                                        =========                    
</TABLE>

      See Note 10 for a discussion of deferred compensation expense recorded as
a result of options granted to employees under the terms of employment
agreements. The remaining deferred compensation expense recorded is a result of
options issued to consultants at below market value prices.


      
                               F-14
<PAGE>   30

(9) PROSPECTIVE AUTHORITATIVE PRONOUNCEMENT

         The Financial Accounting Standards Board ("FASB") has issued Statement
of Financial Accounting Standards ("SFAS") No. 123 'Accounting for Stock-Based
Compensation,' in October 1995. SFAS No. 123 uses a fair value-based method of
recognition for stock options and similar equity instruments issued to employees
as contrasted to the intrinsic value based method of accounting prescribed by
APB Opinion No. 25, 'Accounting for Stock Issued to Employees.' The recognition
requirements of SFAS No. 123 are effective for transactions entered into in
fiscal years that begin after December 15, 1995. The Company will continue to
apply Opinion No. 25 in recognizing its stock-based employee arrangements. The
disclosure requirements of SFAS No. 123 are effective for financial statements
for fiscal years beginning after December 15, 1995. The Company will adopt the
disclosure requirements on December 1, 1996. SFAS 123 also applies to
transactions in which an entity issues its equity instruments to acquire goods
or services from non-employees. Those transactions must be accounted for based
on the fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more reliably measurable.

(10) EMPLOYMENT AGREEMENTS

         (A) As of December 1, 1995, the Company entered into a three-year
employment agreement with Alan Kerzner, pursuant to which Mr. Kerzner will serve
as the Company's Executive Vice President and a member of its Board of
Directors, and as the President and Chief Operating Officer of its Home Shopping
Showcase(TM) subsidiary. Mr. Kerzner's agreement calls for annual compensation
of $150,000 and provides for a bonus at the discretion of the Board of
Directors. In connection with the employment agreement, Mr. Kerzner was also
granted an option to purchase 60,000 shares of the Company's unregistered common
stock for $2.50 per share at any time on or after July 1, 1996, and on or 
before June 30, 2000. The exercise price was determined by management.

The Company recorded deferred compensation cost of $180,000 for the options
issued, which represented the difference between the value of the options at the
time of issuance and their exercise price of $2.50. The deferred compensation
expense will be amortized over the life of the employment agreement. For the
year ended November 30, 1996, $60,000 was expensed to operations. Mr. Kerzner's
agreement also provides for the Company to purchase life insurance of not less
than $500,000 on his behalf, the proceeds of which shall be payable to his
estate.

         (B) On April 15, 1996, the Company entered into a one-year employment
agreement with James Lawless, pursuant to which Mr. Lawless will serve as the
Company's President. Mr. Lawless's agreement calls for annual compensation of
$120,000 and provides for a bonus at the discretion of the Board of Directors.
In connection with the employment agreement, Mr. Lawless was also granted an
option to purchase 100,000 shares of the Company's unregistered common stock for
$4.50 per share. The exercise price was determined by management. The options 
are exercisable at any time on or after January 1, 1997 and on or before 
December 31, 2002.

         The Company recorded deferred compensation cost of $100,000 for the
options issued, which represented the difference between the value of the 
options at the time of issuance and their exercise price of $4.50. The deferred
compensation expense will be amortized over the life of the employment
agreement. For the year ended November 30, 1996, $62,500 was expensed to
operations. Mr. Lawless's agreement also provides for the Company to purchase
life insurance of not less than $500,000 on his behalf, the proceeds of which
shall be payable to his estate.

         (C) On April 15, 1996, the Company entered into a five-year employment
agreement with Ben White, pursuant to which Mr. White will serve as the
Company's Executive Vice President. Mr. White's agreement calls for annual
compensation of $200,000 and provides for a bonus at the discretion of the Board
of Directors. Mr. White also receives a $5,000 per month expense allowance. In
connection with the employment agreement, Mr. White was also granted an option
to purchase 600,000 shares of the Company's unregistered common stock for $4.50
per share on or after January 1, 1997 and on or before December 31, 2002. The 
exercise price was determined by management. The right to purchase one-sixth of
such shares (100,000) vested on the date of the agreement, with the remainder of
the shares vesting in 100,000 option increments on January 1st of each 1997,
1998, 1999, 2000 and 2001, so long as he continues to be employed by the
Company.



                                     F-15
<PAGE>   31

         The Company recorded deferred compensation cost of $600,000 for the
options issued, which represented the difference between the value of the 
options at the time of issuance and their exercise price of $4.50. The deferred
compensation expense will be amortized over the life of the employment
agreement. For the year ended November 30, 1996, $75,000 was expensed to
operations. Mr. White's agreement also provides for the Company to purchase
life insurance of not less than $500,000 on his behalf, the proceeds of which
shall be payable to his estate.

         (D) On May 15, 1996, Home Shopping Showcase(TM) entered into a two-year
employment agreement, effective June 3, 1996, with Win Taylor, pursuant to which
Mr. Taylor will serve as Home Shopping Showcase(TM)'s Executive Vice President
of Sales and Marketing. Mr. Taylor's agreement calls for annual compensation of
$140,000 and provides for a bonus at the discretion of the Board of Directors.
In connection with the employment agreement, Mr. Taylor was also granted an
option to purchase 100,000 shares of the Company's unregistered common stock for
$7.50 per share. The exercise price was determined by management. Mr. Taylor's
options vest, and are then immediately exercisable as follows: 33,333 options on
July 1, 1997; 33,333 options on July 1, 1998; and 33,334 options on July 1,
1999, should he have continued to be employed by the Company at each of the just
prior year ending dates (June 2nd of 1997, 1998, and 1999, respectively) of his
employment. Mr. Taylor's agreement also provides for the Company to purchase
life insurance of not less than $500,000 on his behalf, the proceeds of which
shall be payable to his estate.

(11)     COMMITMENTS AND CONTINGENCIES

         The Company leases office space in New York, New York and Clearwater,
Florida in connection with its operations under non-cancelable operating leases.
The lease in New York was entered into on August 29,1996. The lease in
Clearwater was entered into on December 1, 1996. Prior to this lease the office
space in Florida was leased on a month to month basis.

         The future payments under the operating leases are as follows:
<TABLE>
<CAPTION>

                           Year Ending
                           November 30                     Amount
                           -----------                     ------
                    <S>                                   <C>     
                               1997                       $216,504
                               1998                        220,657
                               1999                        221,810
                               2000                        183,600
                               2001                         61,200
                                                          --------
                    Total Minimum Lease Payments          $903,771
                                                          ========
</TABLE>

         Rent expense charged to operations from these operating leases for the
year ended November 30, 1996 was approximately $65,000. Rent expense for the
period ended November 30, 1995 is disclosed in the Related Party footnote 4.



                                     F-16