<PAGE>   1
 
================================================================================
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                                  FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
   EXCHANGE ACT OF 1934
 
                    FOR THE FISCAL YEAR ENDED JUNE 30, 1997
 
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
   SECURITIES EXCHANGE ACT OF 1934
 
        FOR THE TRANSITION PERIOD FROM                TO
 
                         COMMISSION FILE NUMBER 1-11857
 
                           MULTICOM PUBLISHING, INC.
          (NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                                             <C>
                   WASHINGTON                                      91-1551337
(STATE OR OTHER JURISDICTION OF INCORPORATION OR       (I.R.S. EMPLOYER IDENTIFICATION NO.)
                  ORGANIZATION)
 
           1100 OLIVE WAY, 12TH FLOOR                                98101
              SEATTLE, WASHINGTON                                  (ZIP CODE)
    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
 
                   ISSUER'S TELEPHONE NUMBER: (206) 622-5530
      SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE EXCHANGE ACT:
 
<TABLE>
<S>                                             <C>
              TITLE OF EACH CLASS:                 NAME OF EACH EXCHANGE ON WHICH REGISTERED:
          COMMON STOCK, $.01 PAR VALUE                       BOSTON STOCK EXCHANGE
</TABLE>
 
      SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE ACT:
                          COMMON STOCK, $.01 PAR VALUE
 
     Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 in response 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 this Form
10-KSB, or any amendment to this Form 10-KSB.  [ ]
 
     Revenues for the fiscal year ended June 30, 1997: $5,488,044
 
     The aggregate market value of voting stock held by nonaffiliates of the
registrant as of September 30, 1997: $2,462,498
 
     The number of shares of Common Stock outstanding as of September 30, 1997:
6,780,925
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
(1) Portions of the definitive Proxy Statement to be filed for the 1997 Annual
    Meeting of Stockholders are incorporated by reference in Part III.
================================================================================
<PAGE>   2
 
                                     PART I
 
ITEM 1. DESCRIPTION OF BUSINESS.
 
     Multicom Publishing, Inc. ("Multicom" or the "Company") is a leading
interactive multimedia company concentrating on new media products and services
in the home/family/lifestyle category. New media delivers information and
entertainment to users in interactive digital form through media such as
CD-ROMs, DVD-Video, DVD-ROMs, the Internet, the World Wide Web, proprietary
online services, TV-based systems, interactive kiosks and laptop PC
presentations. The Company publishes software that typically incorporates
materials licensed from established companies with broad consumer acceptance and
substantial brand equity. The Company also develops custom publishing projects
for major consumer product and publishing companies, including the development
of DVD-ROM products. The Company seeks to capitalize on the consumer trend to
increasingly use new media as a source of information and on the business trend
to direct more marketing resources to the Internet, the World Wide Web and other
types of new media.
 
     The Company continually upgrades its technology to maintain its leadership
in the industry. Multicom is making a significant investment in the development
of its DVD capabilities. In early 1997, the Company pioneered the development of
a DVD product, Warren Miller's Ski World, which can be played on consumer
DVD-Video players and computer DVD-ROM drives. Multicom plans to continue to
develop multimedia products using its in-house assets and expertise and to
develop DVD products for others on a custom publishing basis.
 
     Using modular design and development techniques, the Company has created
high-quality, award-winning, innovative products. Since the release of its first
title in 1992, the Company has increased the total number of multimedia titles
it sells and markets over 60 individual titles under licenses from Meredith
Corporation, HarperCollins Publishers, Discovery Communications, American
Express Publishing and Simon and Schuster, among others. Many of the Company's
titles incorporate embedded online access to specified Web sites on the Internet
and proprietary online services for real-time information and direct advertiser
contact.
 
     Multicom provides additional new media opportunities to its customers
through custom publishing sources. The Company's custom publishing projects
include creation of new media marketing and publishing products, interactive
kiosks, DVD title development, comprehensive corporate training programs and
corporate Internet Web Sites.
 
     Multicom has gained important strategic advantages from its relationship
with Meredith Corporation ("Meredith"), the publisher of Better Homes and
Gardens products. Meredith has licensed branded material for many of the
Company's CD-ROM titles and has helped the Company to establish key
relationships with The Home Depot and several mass-market advertisers.
 
     The Company was incorporated in Washington on January 2, 1992. The
Company's principal corporate offices are located at 1100 Olive Way, 12th Floor,
Seattle, Washington 98101, and it has executive offices in San Francisco,
California. The telephone number at its principal corporate offices is (206)
622-5530. The Company's Web site can be located at http://www.multicom.com.
Information contained in such Web site is not a part of this Annual Report on
Form 10-KSB.
 
INDUSTRY
 
     In recent years, tremendous advances in computer hardware and software, as
well as online access, have significantly enhanced the ability of a broad base
of computer users in both home and business environments to take advantage of
new media products and services. Digital multimedia technology permits the
delivery of a wide range of media and information, including full-motion video,
animation, sound, photos and text. Such media and information are delivered via
a wide variety of methods, such as databases and hyperlinks, and platforms such
as CD-ROMs, DVD-Video, DVD-ROMs, the Internet, the World Wide Web, proprietary
online services, TV-based systems, interactive kiosks and laptop PC
presentations. These digital formats are interactive and allow a user random
access to any information contained in the multimedia product.
 
                                        1
<PAGE>   3
 
     The increasing availability of new and more sophisticated tools and
technologies and the emergence of alternate delivery platforms, including
CD-ROM, DVD-Video, DVD-ROMs, online and enhanced cable television services, have
heightened the demand for digital interactive media. The Company believes that
there will be an increasing convergence between CD-ROM, DVD-Video, DVD-ROMs and
online distribution of multimedia content, with CD-ROMs, DVD-Video, and DVD-ROMs
increasingly providing connectivity to online information sources to update and
supplement the CD-ROM experience.
 
     The increasing level of demand for high-quality interactive multimedia
provides a favorable environment for companies that are able to capitalize on
evolving trends. This demand is expected to increase as technical advancements
permit greater exploitation of existing multimedia capabilities in such emerging
media as the Internet and other online services. The Company believes that the
following trends are driving the new media arena:
 
     - Consumer Adoption of New Media. Consumers are adopting new technologies
       to help them obtain, quickly and efficiently, the home/family/lifestyle
       information they desire.
 
     - Migration of Content from Traditional Media to New Media. As the consumer
       demand for new media has expanded, leading providers of traditional
       media, such as magazines, books and video, have begun to seek digital
       formats for their brand franchise that will enable them to leverage their
       content, editorial resources and brand identification into the education,
       game and home/family/lifestyle categories.
 
     - Business Adoption of New Media Communication Strategies. The growing
       acceptance of new digital media by consumers, as well as the emergence of
       new media communication vehicles such as the World Wide Web, the
       Internet, proprietary online services, CD-ROMs, DVD-Video, DVD-ROMs,
       laptop PC presentations and interactive kiosks, is driving an increasing
       number of businesses to integrate new media into corporate communication
       strategies.
 
STRENGTHS AND STRATEGIES
 
     Multicom intends to leverage its strengths in order to efficiently provide
the highest quality interactive solutions to its customers. Multicom's core
strengths include the following:
 
     - Development and Distribution Relationships. Multicom's development and
       distribution relationships provide the Company with a number of
       significant competitive advantages, including a source of branded,
       evergreen content for product development, high-level access to other
       potential publishers, entry into new distribution channels, low-cost
       advertising space and access to large customer bases. Multicom's
       development and distribution relationships include Meredith Corporation
       (publisher of Better Homes and Gardens), Discovery Communications, Inc.,
       HarperCollins Publishers, Inc., The Home Depot, American Express, America
       Online and AT&T.
 
     - Development Expertise. Multicom has personnel who are skilled in leading
       edge development tools and software. Multicom's investment allows the
       Company to retain greater control over the creative process and maintain
       high product quality.
 
     - Modular Architecture. The Company designs its products to maximize the
       reuse of its software development technology in order to reduce product
       development costs, increase quality, decrease time-to-market and maintain
       flexibility as new digital platforms and delivery mediums emerge, such as
       DVD-Video and DVD-ROM. Multicom attempts to maximize the functional
       reusability of its software code through its modular product
       architecture.
 
     - Creative Excellence. Multicom places a priority on the development of
       high-quality productions that meet and exceed industry and consumer
       standards for creativity and functionality in interactive media.
 
                                        2
<PAGE>   4
 
     Multicom's objective is to exploit its core strengths to become the leading
producer of interactive digital multimedia products targeted at the
home/family/lifestyle market. To achieve this objective, Multicom publishes
branded material provided by third parties, producing interactive products
available in CD-ROM, the Internet, the World Wide Web or other online formats
and provides custom publishing services for clients. The Company seeks to
maximize its reusable assets and to leverage its relationship with publishers
and others. Multicom's strategy includes the following key elements:
 
     - Focus on Home/Family/Lifestyle. The Company's main focus is the delivery
       of all types of new media in the home/family/lifestyle category. This
       focus places the Company in an arena that is one of the largest markets
       for traditional media worldwide, as well as one of the largest categories
       of consumer products.
 
     - Leverage Brand Equities. A fundamental element of Multicom's strategy is
       to obtain high-quality branded materials which have already been
       successful in other media (e.g. Better Homes and Gardens cooking
       products, the Discovery Channel reference products, HarperCollins
       products such as Canon Photography Workshop and Emily Post's Complete
       Guide to Weddings, and The Home Depot home products). The Company
       believes that, as digital multimedia products increasingly become mass
       market items, consumers will seek new media products with the same brand
       names that they have learned to trust over many years of use of
       traditional media products.
 
     - Concentrate on Evergreen Products. Multicom strives to continue to
       maximize the value of the assets which it licenses by focusing on
       subjects such as cooking, gardening, home, hobbies and travel, where the
       majority of the underlying content remains current for an extended period
       of time. This "evergreen" product model is designed to have less risk
       over the long term than the shorter-term model for games and
       "edutainment" products.
 
     - Develop Portable Assets. Multicom strives to develop digital multimedia
       content which can be utilized across multiple digital platforms as they
       emerge. The Company's modular product architecture also helps to make its
       products and code more easily portable from one platform to another as
       well as enabling it to reduce the cost of producing products and the
       length of the development cycle, while maintaining the quality of new
       products. The modular architecture also enables Multicom to more easily
       update its products to new technologies such as DVD-Video and DVD-ROM as
       they emerge.
 
     - Expand Distribution Channels. Multicom's strategy is to continue to
       expand its distribution beyond traditional software channels and to seek
       to leverage its branded materials, its relationship with key publishers
       and its base of technology assets to develop its own brand recognition
       and maximize the shelf space its products receive.
 
PRODUCTS AND SERVICES
 
     Multicom's ongoing goal is to develop robust digital multimedia products
that provide consumers the information to enhance their lives and to provide
advertisers and publishers with ways of reaching these consumers. The Company
has targeted the home/family/lifestyle market, which includes food, home,
family, gardening, travel, crafts, personal improvement, nature and hobbies.
 
     Titles. Multicom currently distributes and markets multimedia titles on
CD-ROM. Some of these titles are listed below:
 
<TABLE>
    <S>                                         <C>
    Astrology Source                            Better Homes and Gardens
    Better Homes and Gardens                    Presents Great American Cooking
      Complete Guide to Gardening               Canon Photography Workshop
    Better Homes and Gardens                    Emily Post's Complete Guide to Weddings
      Decorating Your Home                      The Home Depot Home Improvement 1-2-3
    Better Homes and Gardens                    The American Sign Language Dictionary
      New Healthy Cooking                       Wines of the World Gold
                                                World Beer Hunter
</TABLE>
 
                                        3
<PAGE>   5
 
     Custom Publishing. Multicom's experience in CD-ROM and other digital
multimedia product development has enabled it to offer and provide custom
publishing services to publishers and other business users. The Company's custom
publishing activities include custom development projects that result in the
creation of Internet Websites and DVD and other products. Some of Multicom's
custom publishing projects are listed below:
 
<TABLE>
    <S>                                         <C>
    Multimedia sales presentation for           DVD-ROM product for Compaq Computer
      Better Homes and Gardens                  Corporation
      Real Estate Service                       Web Site for Pulte Home Corporation
    Web Site for Great Chefs Publishing
    Custom CD-ROM product for
      The Los Angeles Times
</TABLE>
 
DISTRIBUTION AND SALES
 
     Multicom distributes its titles primarily to traditional software
distribution channels through distributors such as Navarre, Ingram Micro and
Merisel. In addition to traditional software distributors, the Company also
directly markets its products to specialty markets such as wines stores,
national parks and ski product retailers. Multicom is exploring opportunities
for distribution of certain of the Company's titles for sale in mass market
consumer locations, such as grocery and drug stores.
 
MARKETING AND CUSTOMER SUPPORT
 
     As digital multimedia products are increasingly being targeted to a broader
base of consumers, effective product marketing to create consumer demand is
essential to the Company's success. In addition to joint marketing efforts with
its publisher, Multicom employs a wide range of consumer marketing techniques to
promote the sale of its products. The Company's marketing efforts include the
use of multiple packaging options for consumers including jewel cases, retail
boxes, three disc suites and books bundled with CD-ROMs. With its expanded
product line of over 60 individual titles, the Company's ability to create broad
product mixes which enhance the depth and display opportunities for its products
at the retail store level have improved. Examples of these product displays
include spinner racks and floor displays exhibiting a broad selection of Company
titles.
 
     Multicom has established a Web site which describes and promotes its
products and services. The Company's Web site can be located at
http://www.multicom.com. Multicom also includes an interactive advertisement for
its products on most of its titles.
 
     Multicom emphasizes customer satisfaction and, as part of this effort,
provides consumers with toll-free telephone assistance seven days a week at no
additional charge. Customer feedback is shared among other support
representatives and the development teams to assist in enhancing current and
future products.
 
COMPETITION
 
     The markets for the Company's products and services are intensely
competitive, and the Company expects competition to increase in the future. The
Company believes that the principal competitive factors affecting the markets
for its products include content, quality, brand recognition, price, marketing,
distribution, channel exposure, access to shelf space and critical reviews. In
the custom publishing markets, the Company believes that the principal
competitive factors also include the quality of services and the reputation of
the service provided among customers and potential customers.
 
     The consumer multimedia market is highly fragmented with products offered
by many vendors. The Company faces competition from large and established
software companies, such as Broderbund, and direct competition in the
home/family/lifestyle market from companies such as CUC Software, Expert
Software and The Learning Company. Such large and established competitors have
greater financial, technical, marketing, sales and customer support resources,
as well as greater name recognition and access to consumers, than the Company.
In the future, the Company may face competition from licensors and publishers,
who may seek to produce competing products using their own content or that of
other providers. Furthermore, the
 
                                        4
<PAGE>   6
 
Company anticipates the consolidation of the consumer multimedia market around a
smaller number of vendors who may be better positioned and have greater
resources to compete than the Company.
 
     In the custom publishing markets, the Company faces competition from a
number of companies focusing solely on custom publishing projects and from
interactive advertising agencies, as well as from the in-house multimedia
departments of potential customers. The Company will also face increased
competition as it seeks to deliver multimedia content through other new media,
such as the World Wide Web, the Internet and proprietary online services. There
can be no assurance that the Company will be able to compete effectively against
existing and potential competitors, many of whom have substantially greater
content, financial, technical, marketing, sales and customer support resources
and name recognition than the Company.
 
     The Company expects to encounter increasing price competition. Competitive
pressures could result not only in sustained price reductions, but also in a
decline in sales volume, which would have a material adverse effect on the
Company's business, operating results and financial condition.
 
     In addition, retailers of the Company's CD-ROM products typically have a
limited amount of shelf space and promotional resources. The Company expects
that, as the number of consumer multimedia and software products and computer
platforms increases, the intense competition among consumer multimedia and
software producers for adequate levels of shelf space and promotional support
from retailers will intensify. Due to increased competition for limited shelf
space, retailers and distributors are increasingly in a better position to
negotiate favorable terms of sale, including price discounts and product return
policies. Retailers often require software publishers to pay fees or provide
other accommodations in exchange for preferred shelf space. The Company's
products constitute a relatively small percentage of each retailer's sales
volume.
 
PROPRIETARY RIGHTS AND LICENSES
 
     The Company regards its products as proprietary and relies primarily on a
combination of trademarks, trade secrets, copyrights, contractual rights and
employee and third-party nondisclosure agreements to establish and protect its
proprietary rights. There can be no assurance that third parties will not assert
infringement claims against the Company, or against other parties (such as
distributors and publishers), which the Company has agreed to indemnify, with
respect to current or future products. As is common in the industry, the Company
has from time to time received notices from third parties claiming infringement
of intellectual property rights of such parties. The Company investigates these
claims and responds as it deems appropriate. There has been substantial
litigation regarding copyright, trademark, and other intellectual property
rights involving computer software companies. Although the Company is not
currently, and has not been, the defendant in any material intellectual property
rights claims, there can be no assurance that the Company will not face claims,
with or without merit, in the future. In the future, litigation may be necessary
to enforce the Company's proprietary rights, to protect copyrights, trademarks
and trade secrets and other intellectual property rights owned by the Company or
its licensors, to defend the Company or parties it has agreed to indemnify
against claimed infringements of the rights of others and to determine the scope
and validity of the proprietary rights of the Company and others. Any claims or
litigation, with or without merit, could be costly and could result in a
diversion of management's attention, which could have a material adverse effect
on the Company's business, operating results or financial condition. Any
settlement of such claims or adverse determinations in such litigation could
have a material adverse effect on the Company's business, operating results and
financial condition. Adverse determinations in such litigation could result in
the loss of the Company's proprietary rights, subject the Company to significant
liabilities or require the Company to seek licenses from third parties or
prevent the Company from selling its products, any of which could have a
material adverse effect on the Company's business, operating results and
financial condition.
 
     Policing unauthorized use of the Company's products is difficult, and,
while the Company is unable to determine the extent to which piracy of its
software products exists, software piracy can be expected to be a persistent
problem. The Company does not include in its products any mechanism to prevent
or inhibit unauthorized copying. In selling its products, the Company relies
primarily on its rights under applicable copyright and trademark laws. Further,
the Company distributes its products in countries where intellectual property
laws are not well developed or are poorly enforced. Legal protection of the
Company's rights may be
 
                                        5
<PAGE>   7
 
ineffective or difficult to enforce in such countries. Software piracy and
ineffective legal protection of the Company's software in foreign jurisdictions
may cause substantial losses of sales by the Company, which could have a
material adverse effect on the Company's business, operating results and
financial condition.
 
     Multicom is a trademark of the Company. "Better Homes and Gardens" and
"Meredith" are registered trademarks of Meredith Corporation. The Home Depot is
a registered trademark of Homer TLC, Inc. This Annual Report on Form 10-KSB also
contains brand names, trademarks and service marks of other companies, which are
the property of their respective holders.
 
RESEARCH AND DEVELOPMENT
 
     Multicom's in-house development teams have designed and produced a
significant number of consumer level titles and custom developed products which
have resulted in a comprehensive library of reusable technology components and
product-specific application frameworks that can be leveraged in the development
of new and derivative products and solutions. The Company utilizes advanced
industry-standard multimedia-aware technology to enhance the functionality of
its products. The development staff is experienced in the use of HTML, SGML,
Visual Basic, Director, and object-oriented languages such as C/C++, ActiveX,
JAVA and WebObjects.
 
     As the online and Internet markets continue to expand, the Company has
continued to provide and improve Internet access within its products. Additional
development in this area includes the implementation and hosting of several
large-scale Internet sites comprised of database search engines, electronic
commerce and catalogs, and object-oriented server-side application frameworks.
 
     The Company expects DVD technology to gain wide market acceptance by
consumers and corporations. The Company has pioneered the creation of
DVD-Multiplay, which combines the best aspects of DVD-Video and DVD-ROM on the
same disc. Multicom's focus in this area will be in the development of DVD-ROM
and DVD-Multiplay consumer products, and in providing DVD development services
to corporations and other third-party developers.
 
     In connection with the expansion of its in-house experience, asset and code
libraries and online expertise, Multicom has expended $2,325,453 and $2,212,117
in fiscal 1997 and 1996, respectively.
 
PRODUCTION
 
     For each published CD-ROM product, the Company prepares master software
discs, camera-ready user manuals and collateral materials. The Company's disc
duplication, packaging, printing of manuals, manufacture of related materials,
warehouse, assembly and shipping are performed by multiple outside vendors. To
date, the Company has not experienced any material difficulties or delays in the
manufacture and assembly of its products or significant returns due to product
defects. Books that are included in the CD-ROM/Book Bundles are purchased from
publishers or distributors.
 
EMPLOYEES
 
     As of June 30, 1997, Multicom employed 43 people on a full-time basis.
 
EXECUTIVE OFFICERS OF THE REGISTRANT
 
<TABLE>
<CAPTION>
             NAME               AGE          POSITION OR OFFICE AND PRINCIPAL OCCUPATION
------------------------------  ---     ------------------------------------------------------
<S>                             <C>     <C>
Tamara L. Attard..............  39      Chief Executive Officer and Chairman of the Board of
                                        the Company since its inception in 1991. Prior to that
                                        time, Ms. Attard was a founding partner of Bayseng
                                        Spice Company, a spice producer, where she was the
                                        Vice President of Operations from 1985 to June 1991.
                                        From 1981 to 1985, Ms. Attard was the Associate
                                        Director of Experiential Research, a film production
                                        company. From 1980-1981, she was the Associate Editor
                                        of Shooting Commercial Magazine and On Location
                                        Magazine, film industry trade publications.
</TABLE>
 
                                        6
<PAGE>   8
 
<TABLE>
<CAPTION>
             NAME               AGE          POSITION OR OFFICE AND PRINCIPAL OCCUPATION
------------------------------  ---     ------------------------------------------------------
<S>                             <C>     <C>
Paul G. Attard................  43      President of the Company since March 1996 and Chief
                                        Operating Officer and director of the Company since
                                        October 1992. Prior to that time, from 1989 to October
                                        1992, Mr. Attard was the Vice President of OWL
                                        International, Inc., a division of Matsushita which
                                        developed interactive multimedia and online tools and
                                        custom solution software. Mr. Attard was a Director of
                                        Reseller Channel Sales at Informix Software, a
                                        database software company. From 1984 to 1988, he
                                        served in various positions, including Vice President
                                        of Sales, at PacTel InfoSystems, a division of Pacific
                                        Telesis, a Regional Bell Operating Company.
Ellen R.M. Boyer..............  37      Vice President of Finance and Administration and Chief
                                        Financial Officer of the Company from March 1996
                                        through October 1997. She joined the Company in March
                                        1994 as Director of Finance and became the Vice
                                        President of Finance in April 1995. Prior to that
                                        time, Ms. Boyer was an Audit Senior Manager at Price
                                        Waterhouse LLP, where she held a variety of positions
                                        during her 12 years with the firm.
Patricia E. Hart..............  51      Vice President and General Counsel since joining the
                                        Company in August 1996. From November 1985 to August
                                        1996, Ms. Hart was Corporate Counsel for Tandem
                                        Computers Incorporated.
 
KEY EMPLOYEES
 
Lance T. Biggs................  34      Vice President of Development Operatons since July
                                        1996. Mr. Biggs joined the Company in July 1995 as
                                        Director of Quality Assurance. From March 1994 to June
                                        1995, he was the Director of Quality Assurance and
                                        Technical Support at Knowledge Adventure, a multimedia
                                        software developer. Mr. Biggs was the Director of
                                        Quality Assurance and Technical Support for Compton's
                                        New Media, a developer of interactive encyclopedia
                                        from January 1991 to March 1994.
Kurt E. Rolland...............  36      Vice President of Engineering and Chief Technical
                                        Officer since April 1995. Mr. Rolland joined the
                                        Company as Director of Development in June 1992. Prior
                                        to that time, he was a Senior System Engineer at OWL
                                        International, Inc., a division of Matsushita, an
                                        interactive multimedia tool and custom solutions
                                        developer, from 1990 to May 1992. From 1985 to 1990,
                                        Mr. Rolland was a Senior Systems Engineer at Ashton
                                        Tate, a database software company.
Dennis F. Tanner..............  44      Vice President of Product Management since April 1995.
                                        Mr. Tanner joined the Company in September 1993 as the
                                        Director of Product Management. Prior to that time,
                                        Mr. Tanner held several positions, including Director
                                        of Strategic Software Marketing, for Tandy Corporation
                                        from 1980 to September 1993.
</TABLE>
 
     Aside from Paul and Tamara Attard, who are married to each other, there are
no family relationships among the officers and directors of the Company. All
executive officers of the Company are full-time employees of the Company.
 
ITEM 2. DESCRIPTION OF PROPERTY.
 
     Multicom's research and development, customer support and administrative
offices are located in approximately 11,300 square feet of space in Seattle,
Washington. Multicom's sales, marketing and principal executive offices are
located in approximately 11,600 square feet of space in San Francisco,
California, of which the Company subleases approximately 50% of the space. Both
spaces are leased, with the Seattle lease expiring on June 30, 2000 and the San
Francisco lease expiring on October 31, 2000. The Company also leases, on a
month-to-month basis, approximately 10,000 square feet of warehouse space in
Seattle, Washington.
 
                                        7
<PAGE>   9
 
ITEM 3. LEGAL PROCEEDINGS.
 
     None.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
     None.
 
                                    PART II
 
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
 
     The Company's Common Stock is traded on the National Association of
Securities Dealers Automated Quotation System (NASDAQ) SmallCap Market under the
symbol "MNET" and on the Boston Stock Exchange under the symbol "MPB". Set forth
below is the range of reported closing quotations for the Company's Common Stock
as reported on the NASDAQ Small Cap Market.
 
<TABLE>
<CAPTION>
                                                                          PRICE PER
                                                                           SHARE OF
                                                                         COMMON STOCK
                                                                        --------------
                                                                               CLOSING
                                                                               -------
        <S>                                                             <C>    <C>
        Period July 1, 1996 to June 30, 1997..........................  High   $ 6.75
                                                                        Low    $ 0.75
</TABLE>
 
     Holders. As of September 30, 1997, the Company, to its knowledge, had
approximately 591 shareholders of record of its Common Stock.
 
     Dividends. The Company has never declared or paid any cash dividends on its
Common Stock. The Company currently intends to retain its future earnings, if
any, to fund the development and growth of its business and, therefore, does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future. The Company's bank line of credit agreement and its loan agreement with
Sirrom Capital Corporation prohibit the payment of cash dividends on Common
Stock. The Company is currently paying cash dividends on the Series A Preferred
Stock and is accruing dividends on the Series B Convertible Preferred Stock.
 
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
 
OVERVIEW
 
     Multicom was founded in 1991 to develop interactive multimedia products
from content that has broad consumer appeal, substantial brand loyalty, long
commercial life-cycles and a history of commercial success in other media. Since
its initial product release in 1992, the Company has expanded its business
through the release of consumer multimedia titles, acquisition of distribution
rights and the completion of custom publishing projects. The Company sells its
products primarily through distributors; however, it is developing other
channels of distribution for its products, such as sales of the Home Improvement
1-2-3 product through The Home Depot stores. During fiscal 1997, the Company
concentrated more of its efforts on sales and marketing activities and expects
this trend to continue in the future.
 
     The Company's net sales include revenues from title sales (less allowance
for estimated returns and promotional discounts), licensing revenues and custom
publishing provided to other entities. The Company's net sales also include
non-refundable royalty advances to the extent that the Company has completed all
significant performance obligations under the terms of the license agreement.
The allowance for estimated returns is established by taking into consideration
historical return rates, sell-through information, the competitive environment
and information concerning the mix of products in the distribution channel. The
Company enters into certain agreements whereby it provides custom publishing for
other entities. Revenues from such agreements are accounted for on a percentage
of completion method, based upon a ratio of costs incurred to total estimated
costs. Losses are recorded when they become known.
 
                                        8
<PAGE>   10
 
     The Company's cost of sales include all direct manufacturing costs (disc
duplication, packaging and assembly), warehousing and freight, as well as
royalties and amortization of capitalized software development costs. Direct
manufacturing costs and royalty expenses have accounted for a majority of the
cost of sales. Research and development expenses consist primarily of personnel,
equipment and content/asset (e.g. video, photos, sound) costs. The Company has
expensed a substantial portion of its software development activities,
capitalizing only those expenditures that are incurred after a product is
determined by the Company to be technologically feasible. Such capitalized
expenditures amounted to approximately 20% and 8% of research and development
expenses in the periods ended June 30, 1997 and 1996, respectively. While this
is determined on a product-by-product basis, in general, technological
feasibility has been considered to occur near the end of the product development
cycle. Other operating expenses consist of sales and marketing and general and
administrative expenses.
 
     The Company's operating results have fluctuated on a quarterly basis and
are highly seasonal. The first and fourth calendar quarters typically have the
highest gross revenues due to the holiday buying season. Operating results have
also been affected by the timing of product releases and the related development
effort, as well as the acquisition of distribution and licensing rights for
other products. The pace of product development activity can affect the
Company's operating results, as a substantial percentage of product development
costs associated with new titles have been incurred and recognized in periods
prior to the generation of revenues. In 1997, the Company initiated certain
restructuring actions to reduce operating expenditures. These included staff
reductions as well as expense curtailment in a variety of areas. These actions
have continued into fiscal 1998.
 
FISCAL 1997 COMPARED WITH FISCAL 1996
 
     Net sales. Net sales during fiscal 1997 decreased 22% over fiscal 1996.
Sales prices declined during fiscal 1997, yet there were sufficient increases in
volume to cause revenues from the sale of product to increase slightly. Revenues
from licensing, nonrefundable royalty advances and custom publishing declined
overall by 55%. The decline in royalty revenues had been expected and custom
revenues were lower due to the fact that the Company worked on lesser-scale
projects than in prior years.
 
     Allowances for product returns were 35.8% and 26.6% in the years ended June
30, 1997 and 1996, respectively. Throughout fiscal 1996, the Company focused on
promoting its new releases and attempting to have this product distributed
widely throughout the channel. With the significant expansion of the Company's
product line through new development and the acquisition of distribution rights
for other products, the opportunity to present a broader range of products to
the consumer arose. These additional product offerings were substituted for
certain of the new releases, resulting in additional product returns. A tighter
retail market with increased competition for shelf space also impacted product
returns.
 
     Cost of Sales. The Company's gross profit as a percentage of net sales
decreased to 29% in the year ended June 30, 1997 from 49% in the year ended June
30, 1996. While packaging and royalty expenses remained relatively consistent as
a percentage of gross sales between the two years (with cost reductions offset
by lower sales prices), the margin declined as a result of there being less
licensing revenues which typically have high margins and higher product returns.
 
     Research and Development. Research and development costs increased $113,000
in the year ended June 30, 1997. The Company released 11 internally-developed
titles in fiscal 1997, the same number released in fiscal 1996. Costs increased
in connection with this development effort and the development efforts
surrounding the Company's internet presence and DVD-ROM products. These were
offset by increased software development cost capitalization of $591,000 and
$182,000 in the years ended June 30, 1997 and 1996, respectively. The Company
anticipates that it will continue to make significant investment in this area
for future title and DVD-ROM development. For additional discussion on the risks
associated with these statements and other forward-looking statements, refer to
the Outlook and Risk Section below.
 
     Sales and Marketing. Sales and Marketing expenses decreased $810,000 for
the year ended June 30, 1997. These decreased expenditures were primarily due to
reduced advertising and direct promotion costs. As a percentage of net sales,
sales and marketing expenses were 45.0% and 46.5% for the years ended June 30,
 
                                        9
<PAGE>   11
 
1997 and 1996, respectively. The Company expects that sales and marketing
expenditures will increase; however, as a percentage of net sales, a decrease is
anticipated. For additional discussion on the risks associated with these
statements and other forward-looking statements, refer to the Outlook and Risk
section below.
 
     General and Administrative. In comparison to the prior year, general and
administrative expenses increased $403,000 and increased as a percentage of net
sales. The increase was primarily due to the growth of the Company and costs
related to being a publicly traded company.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Since its formation in 1991, the Company has financed its operations
primarily through its working capital, proceeds received from the issuances of
debt and the sale of stock. The Company's operating activities used cash of
$4,290,000 in fiscal 1997 and $6,217,000 in fiscal 1996.
 
     Accounts receivable have decreased $147,000 and inventories have increased
$713,000 from June 30, 1996 to June 30, 1997. Accounts receivable have decreased
primarily due to the decrease in net sales. Inventories have increased as a
result of the acquisition of the rights to distribute HarperCollins products and
the purchase of all of the related inventories (approximately $260,000), as well
as due to the increasing number of product offerings. As returns have continued
at higher than expected levels, inventories have also increased.
 
     The increase in trade payables from June 30, 1996 to June 30, 1997 of
$1,185,000 was due to there being higher production runs at the end of the year
compared to the prior year, as well as the fact that the Company was not making
payments on account as quickly as in prior years due to the shortage of cash.
 
     On February 7, 1997, the Company sold an aggregate of 696,620 shares of
Common Stock at $2.28 per share for an aggregate of $1,590,000, of which 109,649
shares were issued in exchange for a software accounting system valued at
$250,000 and the remainder for cash.
 
     On February 7, 1997, the Company converted $750,000 in long-term debt held
by Sirrom Investments, Inc. ("Sirrom"), to 150,000 shares of Series A Preferred
Stock and on February 11, 1997, the Company converted an additional $425,000 in
long-term debt held by Sirrom to 85,000 shares of Series A Preferred Stock. The
Series A Preferred Stock carries annual cash dividends of $.65 per share,
payable monthly, and is convertible to Common Stock at a price of $2.28 per
share, or one share of Series A Preferred Stock for 2.19 shares of Common Stock.
In connection with the February 11 transaction, the loan agreement on the
remaining debt was amended to include a financial covenant whereby if, at
quarter end, shareholders' equity is below $1,000,000 or certain minimum
standards are not met, then additional warrants to purchase 15% of the
outstanding Common Stock on a fully diluted basis at February 11, 1997, at an
exercise price of $.01, will be issued. At June 30, 1997 shareholders' equity
was below $1,000,000 and, accordingly, these warrants will be issued. In this
regard, a $950,000 extraordinary loss was recorded in the year ended June 30,
1997.
 
     On March 31, 1997, the Company issued 106,667 shares of Common Stock to
Sonic Solutions at $1.125 per share in connection with the acquisition of DVD
equipment.
 
     On March 31, 1997, pursuant to Convertible Preferred Stock Purchase
Agreements between the Company and GEM Management Limited and the Company and
Vitaloon Inc., the Company issued an aggregate of 400 shares of Series B
Convertible Preferred Stock at $1,000 per share for an aggregate of $400,000.
The Series B Preferred Stock is convertible to Common Stock at the lesser price
of the Common Stock as of the date of the closing, $1.125, or 75% of the last
ten days closing bid price prior to the conversion date. In connection with the
issuance of the Series B Preferred Shares, warrants to purchase up to 320,000
shares of Multicom Common Stock were issued to the placement agent and related
parties (the "Warrants"). The Warrants are exercisable over a two-year term and
have an exercise price of $1.125 per share. Subsequent to June 30, 1997, 100
shares of Series B Convertible Preferred Stock were converted to 239,808 of
Common Stock.
 
     The Company had a credit facility for $2,000,000 available under a
revolving line of credit, with advances available up to 75% of eligible accounts
receivable. The credit facility was secured by all the assets of the Company and
bore interest at prime plus 3%. At June 30, 1997, the Company had drawn
$1,629,000 against this line of credit. The credit facility expired on July 5,
1997 and, primarily due to the fact that the Company
 
                                       10
<PAGE>   12
 
had not been in compliance with various financial covenants, the bank chose not
to renew the facility. The Company is in the process of obtaining alternate
financing; however, until such financing is obtained the Company remains in
default on the credit facility, as well as other long-term debt owing to Sirrom
($1,825,000 at June 30, 1997) and to Meredith ($177,232 at June 30, 1997).
 
     The Company believes that additional working capital of approximately
$1,000,000 is needed to fund its ongoing operations. In this regard, it is
negotiating to obtain a $3,000,000 credit facility, and currently has an offer
for an additional $500,000 in long-term debt from Sirrom, which is contingent
upon obtaining a satisfactory credit facility. For additional discussion on the
risk associated with these statements and other forward-looking statements,
refer to the Outlook and Risks section below.
 
OUTLOOK AND RISKS
 
     The Company's future operating results and many of the forward-looking
statements contained in this document are dependent upon a number of factors,
including obtaining sufficient working capital for operations, expanding
successfully into new markets, successfully introducing its DVD products to the
consumer markets, augmenting its product line through new distribution and
licensing agreements, and managing resources effectively.
 
     Multicom has historically experienced negative cash flow from operations
and it is expected that Multicom will continue to experience negative operating
cash flow through the end of calendar 1997 and potentially thereafter. The
Company is currently in default of its line of credit facility as well as the
Meredith and Sirrom Loan agreements. All parties have currently delayed the
exercise of their rights and remedies under their agreements as it relates to
default; however, there can be no assurance that these parties will continue to
forbear. The Company is currently in negotiations to replace the line of credit
and it is anticipated that Sirrom and Meredith will waive the defaults upon
successful negotiations. There can be no assurance that the alternate financing
or waivers will be obtained. Additionally, continued delays in obtaining said
financing could prevent or delay the continued development and marketing of the
Company's products, require curtailment of the Company's operations and could
result in the bankruptcy or insolvency of the Company.
 
     Multicom has been expanding its markets into alternate channels (e.g. mass
merchandisers, specialty chains and grocery stores). The Company believes that
these alternate channels may provide a significant revenue stream in the future.
The management team has been reviewing Multicom's business opportunities and
strategic direction to address this industry trend, as well as the impact the
success of the Internet and the introduction of DVD-ROMs may have on the
business. The impact that the market trends and the Company's actions may have
on Multicom's operations cannot be fully measured at this time.
 
     Multicom believes that continued expansion of its product line is critical
to the success of the Company. In this regard, it has targeted the acquisition
of distribution rights for completed products as a key to continued growth,
primarily due to the lower costs to bring such products to market compared to
the internal development cost of titles. The Company's ability to identify
appropriate new products and acquire the related rights will have a significant
impact on growth of the product line.
 
     The Company's expense levels are based, in part, on its expectations
regarding future sales and, as a result, operating results would be
disproportionately adversely affected by a decrease in sales, a failure to meet
the Company's sales expectations or inability to fill orders. Additionally, as a
result of the timing of customer orders, the Company often ships its products,
representing a majority of its revenues for a quarter, in the last few weeks of
a quarter. This shipping pattern increases the risk of unanticipated
fluctuations in quarterly sales because, in the last few weeks of a quarter, the
Company has limited opportunities to take corrective action in the event orders
do not materialize. Moreover, to meet anticipated customer orders at the end of
a quarter, the Company is often required to begin production sooner than would
otherwise be the case. As a result, the Company may face increased inventory
levels if its projections of future sales at the end of a quarter do not
materialize. In addition, the Company has set its staffing levels and budgeted
expenditures based upon the expectation that certain custom publishing projects
will be obtained and completed. If these expectations are not realized, it may
be difficult for the Company to redirect its internal resources and revise its
expenditures to address the reduced revenues. The Company's custom publishing
businesses (including DVD development, on-line activities and interactive
marketing) often involve fee-for-service contracts. The Company assumes
 
                                       11
<PAGE>   13
 
greater financial risk on fixed-price contracts than on either
time-and-materials or cost-reimbursable contracts. Failure to anticipate
technical problems, estimate costs accurately or control costs during
performance of a fixed-price contract may reduce the Company's profit or cause a
loss.
 
     The Company is currently out of compliance with the continued listing
requirements of The Nasdaq SmallCap Market that it maintain a minimum of
$1,000,000 in equity and that its Common Stock maintain a closing inside bid
price greater than or equal to $1.00 for a period of 10 consecutive trading
days. There can be no assurance that the Company will be able to meet the
listing requirements in the future and thereby avoid the delisting of its
shares.
 
ITEM 7. FINANCIAL STATEMENTS.
 
     The following financial statements are furnished as part of this Annual
Report on Form 10-KSB:
 
<TABLE>
<CAPTION>
                            INDEX TO FINANCIAL STATEMENTS                               PAGE
--------------------------------------------------------------------------------------  -----
<S>                                                                                     <C>
Report of Independent Public Accountants..............................................     13
Balance Sheets as of June 30, 1996 and 1997...........................................     14
Statements of Operations for the Years Ended June 30, 1996 and 1997...................     15
Statement of Changes in Shareholders' Equity (Deficit) for the Years Ended June 30,
  1996 and 1997.......................................................................     16
Statements of Cash Flows for the Years Ended June 30, 1996 and 1997...................     18
Notes to Financial Statements.........................................................     19
</TABLE>
 
                                       12
<PAGE>   14
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Shareholders of
Multicom Publishing, Inc.
 
     In our opinion, the accompanying balance sheet and the related statements
of operations, of changes in shareholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of Multicom
Publishing, Inc. at June 30, 1997 and 1996 and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
 
     The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net working capital deficiency that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
 
                                          PRICE WATERHOUSE LLP
 
Seattle, Washington
October 10, 1997
 
                                       13
<PAGE>   15
 
                           MULTICOM PUBLISHING, INC.
 
                                 BALANCE SHEET
 
<TABLE>
<CAPTION>
                                                                    JUNE 30,         JUNE 30,
                                                                      1996             1997
                                                                  ------------     ------------
<S>                                                               <C>              <C>
ASSETS (NOTES 5, 6 AND 7)
Current assets
  Cash........................................................... $  3,476,879     $     12,368
  Accounts receivable, net of allowances (Note 1)................    2,303,591        2,156,235
  Inventories (Note 3)...........................................      940,595        1,653,827
  Other current assets (Note 7)..................................      198,221          251,102
                                                                  ------------     ------------
          Total current assets...................................    6,919,286        4,073,532
                                                                  ------------     ------------
  Property and equipment, net (Note 4)...........................      937,066        1,530,344
  Software development costs, net of accumulated amortization of
     $164,364 and $496,883, respectively.........................      258,686          516,938
  Capital lease, less accumulated amortization of $10,111........           --          171,889
  Other noncurrent assets........................................      168,928          134,876
                                                                  ------------     ------------
          Total assets........................................... $  8,283,966     $  6,427,579
                                                                  ============     ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
  Trade payables................................................. $    625,010     $  1,810,155
  Accrued liabilities............................................    1,211,689          981,830
  Accrued royalties (Note 12)....................................      321,882          176,920
  Deferred compensation..........................................      137,450           89,938
  Bank borrowings (Note 5).......................................    1,000,000        1,629,000
  Current portion of capital lease obligation (Note 12)..........                        73,394
  Current portion of shareholder debt (Note 7)...................      317,500          177,232
  Current portion of long-term debt, net of debt discount (Note
     6)..........................................................           --        1,413,310
                                                                  ------------     ------------
          Total current liabilities..............................    3,613,531        6,351,779
                                                                  ------------     ------------
  Long-term debt, net of debt discount and current portion (Note
     6)..........................................................    2,217,894               --
  Capital lease obligation, net of current portion (Note 12).....           --           91,812
  Shareholder debt, net of current portion (Note 7)..............       93,006               --
                                                                  ------------     ------------
          Total liabilities......................................    5,924,431        6,443,591
                                                                  ------------     ------------
Commitments (Note 12)
Shareholders' equity (deficit) (Notes 10 and 11)
  Preferred stock
     Series A....................................................           --        1,150,000
     Series B....................................................           --          448,000
  Common Stock...................................................   13,797,896       15,480,552
  Notes receivable...............................................      (81,538)              --
  Unearned royalties.............................................   (1,335,577)              --
  Accumulated deficit............................................  (10,021,246)     (17,094,564)
                                                                  ------------     ------------
          Total shareholders' equity (deficit)...................    2,359,535          (16,012)
                                                                  ------------     ------------
          Total liabilities and shareholders' equity (deficit)... $  8,283,966     $  6,427,579
                                                                  ============     ============
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                       14
<PAGE>   16
 
                           MULTICOM PUBLISHING, INC.
 
                            STATEMENT OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                      YEAR ENDED    YEAR ENDED
                                                                       JUNE 30,      JUNE 30,
                                                                         1996          1997
                                                                      -----------   -----------
<S>                                                                   <C>           <C>
Gross sales:
  Sales of products.................................................  $ 7,139,631   $ 7,194,018
  Sales of services and licensing...................................    1,945,489       886,738
                                                                      -----------   -----------
          Total gross sales.........................................    9,085,120     8,080,756
Product returns and promotional discounts...........................   (2,031,704)   (2,592,712)
                                                                      -----------   -----------
Net sales...........................................................    7,053,416     5,488,044
Cost of sales.......................................................    3,588,450     3,898,563
                                                                      -----------   -----------
     Gross profit...................................................    3,464,966     1,589,481
                                                                      -----------   -----------
Operating expenses
  Research and development..........................................    2,212,117     2,325,453
  Sales and marketing...............................................    3,280,592     2,471,027
  General and administrative........................................    1,496,538     1,900,103
                                                                      -----------   -----------
          Total operating expenses..................................    6,989,247     6,696,583
                                                                      -----------   -----------
Loss from operations................................................   (3,524,281)   (5,107,102)
Interest expense....................................................     (567,766)     (627,412)
Other income........................................................        1,194        97,133
                                                                      -----------   -----------
Net loss before extraordinary items.................................   (4,090,853)   (5,637,381)
Extraordinary items (Note 2)........................................           --    (1,302,473)
                                                                      -----------   -----------
Net loss............................................................   (4,090,853)   (6,939,854)
Dividends on Preferred Stock (Note 10)..............................           --      (133,464)
                                                                      -----------   -----------
Net loss available for common shareholders..........................  $(4,090,853)  $(7,073,318)
                                                                      ===========   ===========
Loss per common share
     Loss before extraordinary items................................  $      (.83)  $      (.97)
     Extraordinary items............................................           --          (.22)
                                                                      -----------   -----------
     Net loss.......................................................  $      (.83)  $     (1.19)
                                                                      ===========   ===========
Weighted average number of common shares and common share
  equivalents outstanding...........................................    4,917,485     5,960,243
                                                                      ===========   ===========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                       15
<PAGE>   17
 
                           MULTICOM PUBLISHING, INC.
 
             STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
                   FOR THE YEARS ENDED JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
                                                COMMON STOCK -- VOTING                    COMMON STOCK -- SERIES A VOTING
                                             40,000,000 SHARES AUTHORIZED                   50,000,000 SHARES AUTHORIZED
                                  ---------------------------------------------------   ------------------------------------
                                    SHARES                                                SHARES
                                  ISSUED AND      COMMON        NOTES      UNEARNED     ISSUED AND                   NOTES
                                  OUTSTANDING      STOCK      RECEIVABLE   ROYALTIES    OUTSTANDING    SERIES A    RECEIVABLE
                                  -----------   -----------   ---------   -----------   -----------   ----------   ---------
<S>                               <C>           <C>           <C>         <C>           <C>           <C>          <C>
BALANCE AT JUNE 30, 1995........          --             --          --            --     2,531,191   $  219,727   $ (81,290)
Earned royalties................          --             --          --            --            --           --          --
Interest paid in Common Stock
  (Note 7)                                --             --          --            --            --           --          --
Exercise of options.............          --             --          --            --        80,189       20,189        (248)
Warrants issued to note holder
  (Note 6)......................          --             --          --            --            --      805,015          --
Warrants issued for services
  (Note 6)......................          --             --          --            --            --       49,485          --
Conversion of mandatorily
  redeemable stock..............          --             --          --            --       825,000      825,000          --
Conversion of debt to equity....          --             --          --            --            --           --          --
Issuance of Common Stock for
  cash, net of $1,476,684 of
  Expense (Note 10).............          --             --          --            --     1,028,600    5,209,216          --
Stock reclassification (Note
  10)...........................   5,612,169    $13,797,896   $ (81,538)  $(1,335,577)   (4,464,980)  (7,128,632)     81,538
Net loss for the year...........          --             --          --            --            --           --          --
                                   ---------    -----------   ---------   -----------   -----------   -----------    -------
BALANCE AT JUNE 30, 1996........   5,612,169     13,797,896     (81,538)   (1,335,577)           --           --          --
Earned royalties................          --             --          --       277,475            --           --          --
Interest paid in Common Stock
  (Note 7)......................       5,815         35,297          --            --            --           --          --
Exercise of options and
  warrants......................     118,981         46,456          --            --            --           --          --
Issuance of Common Stock for
  computer software.............     109,649        250,000          --            --            --           --          --
Issuance of Common Stock for
  computer hardware.............     106,667        119,000          --            --            --           --          --
Warrants issued to note holder
  (Note 2)......................          --        950,000          --            --            --           --          --
Repayment of Notes Receivable...          --             --      81,538            --            --           --          --
Issuance of Common Stock for
  Note Receivable...............      10,965         25,000                        --            --           --          --
Conversion of debt to equity,
  net of $25,000 of expense
  (Note 6)......................          --             --          --            --            --           --          --
Issuance of Common Stock for
  cash (Note 10)................     576,006      1,315,005          --            --            --           --          --
Issuance of Convertible
  Preferred Stock for cash, net
  of $25,000 of expense (Note
  10)...........................          --             --          --            --            --           --          --
Unearned royalties
  reclassification (Note 10)....          --     (1,058,102)         --     1,058,102            --           --          --
Payment of dividends............
Dividend on Preferred Stock.....          --             --          --            --            --           --          --
Net loss for the year...........          --             --          --            --            --           --          --
                                   ---------    -----------   ---------   -----------   -----------   -----------    -------
BALANCE AT JUNE 30, 1997........   6,540,252    $15,480,552   $      --   $        --            --   $       --   $      --
                                   =========    ===========   =========   ===========   ===========   ===========    =======
 
<CAPTION>
                                             COMMON STOCK -- SERIES B VOTING
                                               25,000,000 SHARES AUTHORIZED
                                  ------------------------------------------------------
                                    SHARES
                                  ISSUED AND                   UNEARNED       CARRIED
                                  OUTSTANDING    SERIES B      ROYALTIES      FORWARD
                                  -----------   -----------   -----------   ------------
<S>                               <C>           <C>           <C>           <C>
BALANCE AT JUNE 30, 1995........     839,144    $ 4,916,747   $(1,672,728)  $  3,382,456
Earned royalties................          --             --       337,151        337,151
Interest paid in Common Stock
  (Note 7)                            40,767        247,398            --        247,398
Exercise of options.............      20,059          5,119            --         25,060
Warrants issued to note holder
  (Note 6)......................          --             --            --        805,015
Warrants issued for services
  (Note 6)......................          --             --            --         49,485
Conversion of mandatorily
  redeemable stock..............          --             --            --        825,000
Conversion of debt to equity....     247,219      1,500,000            --      1,500,000
Issuance of Common Stock for
  cash, net of $1,476,684 of
  Expense (Note 10).............          --             --            --      5,209,216
Stock reclassification (Note
  10)...........................  (1,147,189)    (6,669,264)    1,335,577             --
Net loss for the year...........          --             --            --             --
                                     -------    -----------   -----------    -----------
BALANCE AT JUNE 30, 1996........          --             --            --     12,380,781
Earned royalties................          --             --            --        277,475
Interest paid in Common Stock
  (Note 7)......................          --             --            --         35,297
Exercise of options and
  warrants......................          --             --            --         46,456
Issuance of Common Stock for
  computer software.............          --             --            --        250,000
Issuance of Common Stock for
  computer hardware.............          --             --            --        119,000
Warrants issued to note holder
  (Note 2)......................          --             --            --        950,000
Repayment of Notes Receivable...          --             --            --         81,538
Issuance of Common Stock for
  Note Receivable...............          --             --            --         25,000
Conversion of debt to equity,
  net of $25,000 of expense
  (Note 6)......................          --             --            --             --
Issuance of Common Stock for
  cash (Note 10)................          --             --            --      1,315,005
Issuance of Convertible
  Preferred Stock for cash, net
  of $25,000 of expense (Note
  10)...........................          --             --            --             --
Unearned royalties
  reclassification (Note 10)....          --             --            --             --
Payment of dividends............
Dividend on Preferred Stock.....          --             --            --             --
Net loss for the year...........          --             --            --
                                     -------    -----------   -----------    -----------
BALANCE AT JUNE 30, 1997........          --    $        --   $        --   $ 15,480,552
                                     =======    ===========   ===========    ===========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                       16
<PAGE>   18
 
                           MULTICOM PUBLISHING, INC.
 
       STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
                   FOR THE YEARS ENDED JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
                                                                                                        CONVERTIBLE
                                                                                                 PREFERRED STOCK -- SERIES
                                                                PREFERRED STOCK -- SERIES A                  B
                                                                  NONVOTING 300,000 SHARES        NONVOTING 300,000 SHARES
                                                                         AUTHORIZED                      AUTHORIZED
                                                                ----------------------------     --------------------------
                                                                SHARES ISSUED                    SHARES ISSUED
                                                  BROUGHT            AND                              AND
                                                  FORWARD        OUTSTANDING       SERIES A       OUTSTANDING      SERIES B
                                                ------------    -------------     ----------     -------------     --------
<S>                                             <C>             <C>               <C>            <C>               <C>
BALANCE AT JUNE 30, 1995.......................   $3,382,456            --                --           --                --
Earned royalties...............................      337,151            --                --           --                --
Interest paid in Common Stock (Note 7).........      247,398            --                --           --                --
Exercise of options............................       25,060            --                --           --                --
Warrants issued to note holder (Note 6)........      805,015            --                --           --                --
Warrants issued for services (Note 6)..........       49,485            --                --           --                --
Conversion of mandatorily redeemable stock.....      825,000            --                --           --                --
Conversion of debt to equity...................    1,500,000            --                --           --                --
Issuance of Common Stock for cash, net of
  $1,476,684 of expense (Note 10)..............    5,209,216            --                --           --                --
Stock reclassification (Note 10)...............
Net loss for the year..........................           --            --                --           --                --
                                                 -----------       -------        ----------          ---          --------
BALANCE AT JUNE 30, 1996.......................   12,380,781            --                --           --                --
Earned royalties...............................      277,475            --                --           --                --
Interest paid in Common Stock (Note 7).........       35,297            --                --           --                --
Exercise of options and warrants...............       46,456            --                --           --                --
Issuance of Common Stock for computer
  software.....................................      250,000            --                --           --                --
Issuance of Common Stock for computer
  hardware.....................................      119,000            --                --           --                --
Warrants issued to note holder (Note 2)........      950,000            --                --           --                --
Repayment of Notes Receivable..................       81,538            --                --           --                --
Issuance of Common Stock for Note Receivable...       25,000            --                --           --                --
Conversion of debt to equity, net of $25,000 of
  expense (Note 6).............................           --       235,000        $1,150,000           --                --
Issuance of Common Stock for cash, (Note 10)...    1,315,005            --                --           --                --
Issuance of Convertible Preferred Stock for
  cash, net of $25,000 of expense (Note 10)....           --            --                --          400           375,000
Unearned royalties reclassification (Note
  10)..........................................           --            --                --           --                --
Payment of Dividends...........................           --            --                --           --                --
Dividend on Preferred Stock....................           --            --                --           --            73,000
Net loss for the year..........................           --            --                --           --                --
                                                 -----------       -------        ----------          ---          --------
BALANCE AT JUNE 30, 1997.......................  $15,480,552       235,000        $1,150,000          400          $448,000
                                                 ===========       =======        ==========          ===          ========
 
<CAPTION>
 
                                                                       TOTAL
                                                 ACCUMULATED       SHAREHOLDERS'
                                                   DEFICIT        EQUITY (DEFICIT)
                                                 ------------     ----------------
<S>                                             <C><C>            <C>
BALANCE AT JUNE 30, 1995.......................  $ (5,930,393)      $ (2,547,937)
Earned royalties...............................            --            337,151
Interest paid in Common Stock (Note 7).........            --            247,398
Exercise of options............................            --             25,060
Warrants issued to note holder (Note 6)........            --            805,015
Warrants issued for services (Note 6)..........            --             49,485
Conversion of mandatorily redeemable stock.....            --            825,000
Conversion of debt to equity...................            --          1,500,000
Issuance of Common Stock for cash, net of
  $1,476,684 of expense (Note 10)..............            --          5,209,216
Stock reclassification (Note 10)...............            --                 --
Net loss for the year..........................    (4,090,853)        (4,090,853)
                                                 ------------         ----------
BALANCE AT JUNE 30, 1996.......................   (10,021,246)         2,359,535
Earned royalties...............................            --            277,475
Interest paid in Common Stock (Note 7).........            --             35,297
Exercise of options and warrants...............            --             46,456
Issuance of Common Stock for computer
  software.....................................            --            250,000
Issuance of Common Stock for computer
  hardware.....................................            --            119,000
Warrants issued to note holder (Note 2)........            --            950,000
Repayment of Notes Receivable..................            --             81,538
Issuance of Common Stock for Note Receivable...            --             25,000
Conversion of debt to equity, net of $25,000 of
  expense (Note 6).............................            --          1,150,000
Issuance of Common Stock for cash, (Note 10)...            --          1,315,005
Issuance of Convertible Preferred Stock for
  cash, net of $25,000 of expense (Note 10)....            --            375,000
Unearned royalties reclassification (Note
  10)..........................................            --                 --
Payment of Dividends...........................       (60,464)           (60,464)
Dividend on Preferred Stock....................       (73,000)                --
Net loss for the year..........................    (6,939,854)        (6,939,854)
                                                 ------------         ----------
BALANCE AT JUNE 30, 1997.......................  $(17,094,564)      $    (16,012)
                                                 ============         ==========
</TABLE>
 
  The par value of the Common, Series A and Series B common stock is $.01 per
share.
 
  The Board of Directors have authorized 300,000 shares of Preferred stock with
a par value of $.01 per share. At June 30, 1997 there were 235,000 shares of
Series A and 400 shares of Series B Preferred Stock issued and outstanding.
 
   The accompanying notes are an integral part of these financial statements.
 
                                       17
<PAGE>   19
 
                           MULTICOM PUBLISHING, INC.
 
                            STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                    YEAR ENDED      YEAR ENDED
                                                                     JUNE 30,        JUNE 30,
                                                                       1996            1997
                                                                    -----------     -----------
<S>                                                                 <C>             <C>
Cash flows from operating activities
  Net loss........................................................  $(4,090,853)    $(6,939,854)
  Adjustments to reconcile net loss to net cash used in operating
     activities...................................................
     Extraordinary items..........................................           --       1,302,473
     Depreciation and amortization................................      249,493         506,474
     Amortization of software development costs...................       75,373         332,519
     Amortization of debt discount................................       22,909         116,168
     Issuance of common stock for interest payable to
      shareholder.................................................      247,398          35,297
     Earned royalties.............................................      337,151         277,475
     (Increase) decrease in accounts receivable, net..............   (1,738,709)        147,356
     Increase in inventories, net.................................     (619,030)       (713,232)
     Increase in other assets.....................................      (75,364)       (117,054)
     Increase (decrease) in trade payables........................   (1,469,004)      1,185,145
     Increase (decrease) in accrued liabilities...................      728,085        (229,859)
     Increase (decrease) in accrued royalties.....................      121,502        (144,962)
     Decrease in deferred compensation............................       (6,400)        (47,512)
                                                                    -----------     -----------
  Net cash used in operating activities...........................   (6,217,449)     (4,289,566)
                                                                    -----------     -----------
Cash flows from investing activities
     Additions to property and equipment..........................     (565,339)       (720,641)
     Additions to software development costs......................     (182,472)       (590,771)
                                                                    -----------     -----------
  Net cash used in investing activities...........................     (747,811)     (1,311,412)
                                                                    -----------     -----------
Cash flows from financing activities
     Sale of stock for cash, net..................................    5,209,216       1,690,005
     Proceeds from bank borrowings................................    1,930,000         629,000
     Proceeds from issuance of long-term debt and warrants........    3,000,000              --
     Cash paid for debt issue costs...............................     (150,018)             --
     Proceeds from notes payable to shareholder...................    2,484,516              --
     Collection of notes receivable from shareholder..............           --          81,538
     Repayment of notes payable to shareholder....................     (724,517)       (233,274)
     Repayment of bank borrowings.................................   (1,930,000)             --
     Repayment of long-term debt..................................       (6,250)             --
     Payment of dividends.........................................           --         (60,464)
     Repayment of capital lease obligation........................           --         (16,794)
     Exercise of stock options, net of expenses...................       25,060          46,456
                                                                    -----------     -----------
  Net cash provided by financing activities.......................    9,838,007       2,136,467
                                                                    -----------     -----------
Net increase (decrease) in cash...................................    2,872,747      (3,464,511)
Cash, beginning of year...........................................      604,132       3,476,879
                                                                    -----------     -----------
Cash, end of year.................................................  $ 3,476,879     $    12,368
                                                                    ===========     ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest............................  $   323,465     $   547,758
                                                                    ===========     ===========
</TABLE>
 
See Note 14 for supplemental information of noncash investing and financing
activities.
 
   The accompanying notes are an integral part of these financial statements.
 
                                       18
<PAGE>   20
 
                           MULTICOM PUBLISHING, INC.
 
                         NOTES TO FINANCIAL STATEMENTS
 
 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
 
  BUSINESS
 
     Multicom Publishing, Inc. ("Multicom" or the "Company") was incorporated on
January 2, 1992 under the laws of the state of Washington and is a vertically
integrated multimedia company engaged primarily in acquiring the content for
developing and publishing multimedia products. These products are primarily
distributed throughout the United States.
 
     Multicom consummated its initial public offering ("IPO") on June 24, 1996
through the sale of 1,028,600 shares of its Common Stock (Note 10).
 
     The Company has incurred recurring net losses since inception and is in
violation of the covenants of its principal borrowing arrangements (Notes 5 and
6). The ability of the Company to continue its operations is dependent upon its
ability to obtain additional financing and/or its ability to generate sufficient
funds from operations. The Company is currently in default of its line of credit
facility (Note 5) as well as the Sirrom and Meredith loan agreements (Notes 6
and 7). All parties have currently delayed the exercise of their rights and
remedies under their agreements as it relates to default; however, there can be
no assurance that these parties will continue to forbear. The Company is seeking
additional funding through new or restructured borrowing arrangements, private
equity financing, mergers or strategic marketing partnerships. However, there
can be no assurance that these methods will generate sufficient proceeds to
enable the Company to improve its liquidity or achieve positive cash flow from
operations. The accompanying financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
 
  REVENUE RECOGNITION
 
     Titles
 
     Revenue from the sale of products is recognized when the product has been
shipped, the Company has the right to invoice the customer, collection of the
receivable is probable and there are no significant obligations remaining.
 
     While the Company has no other obligations to perform future services
subsequent to shipment, the Company provides telephone customer support as an
accommodation to purchasers of its products for a limited time and as a means of
fostering customer loyalty. Costs associated with this effort are insignificant
and, accordingly, are expensed as incurred.
 
     Advertising is charged to expense as incurred and includes product related
advertising and marketing. Advertising expense for the years June 30, 1996 and
1997 totaled $864,505 and $990,543, respectively.
 
     Allowance for product returns and price protection
 
     The Company maintains a return policy that allows distributors and
retailers to return CD-ROM products according to negotiated terms relating to
overstocking or defective products. Additionally, the Company may grant price
protection credits to distributors and retailers. The Company records an
allowance for returns and price protection as a reduction of gross sales at the
time of product shipment. The allowance, which is included in accounts
receivable, is estimated based primarily upon historic experience, analysis of
distributor and retailer inventories of the Company's products and analysis of
market conditions. Allowances for product returns and price protection totaled
$1,087,438 and $903,269 at June 30, 1996 and 1997, respectively.
 
                                       19
<PAGE>   21
 
                           MULTICOM PUBLISHING, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
     Software licenses
 
     Software license revenue and royalty advances are recognized as revenue at
the time the Company has completed all significant performance obligations under
the terms of the license agreement and when any amounts advanced or received are
non-refundable.
 
     Custom publishing
 
     The Company enters into certain agreements whereby it provides development
services for other entities. Revenue for such agreements is accounted for on a
percentage of completion method, based upon costs incurred to total estimated
costs. Losses are recorded when they become known.
 
     Allowance for doubtful accounts receivable
 
     The Company performs ongoing credit evaluations of its customers and
records an allowance for doubtful receivables to the extent that credit losses
are expected. At June 30, 1996 and 1997, the allowance for doubtful accounts
receivable was $215,001 and $123,272, respectively.
 
  INVENTORIES
 
     Inventories, which consist of packaging materials, books and finished
goods, are stated at the lower of cost or market, cost being determined based
upon the average cost of individual product titles.
 
  PROPERTY AND EQUIPMENT
 
     Property and equipment acquired is recorded at cost. Depreciation and
amortization are recognized using the straight-line method over the estimated
useful lives of such assets ranging from one to five years. Development assets
consist of purchased and internally developed video, images and sounds which can
be utilized in multiple products.
 
  SOFTWARE DEVELOPMENT COSTS
 
     Software development costs are capitalized once technological feasibility
has been established. All other research and development costs are expensed as
incurred. These costs are amortized using the greater of the straight-line
method over the estimated useful lives of the titles (12 to 60 months) or the
ratio of current sales to total current and projected sales. Amortization for
the years ended June 30, 1996 and 1997 totaled $75,373 and $332,519.
 
  INCOME TAXES
 
     Deferred tax assets and liabilities arise primarily as a result of
differences in the method of accounting for allowances for product returns and
doubtful accounts receivable, software development costs, depreciation and stock
compensation plans between income tax and financial statement reporting and net
operating loss carry-forwards.
 
  NET INCOME/LOSS PER SHARE
 
     Net income/loss per share is computed using the weighted average number of
common and dilutive common stock equivalent shares outstanding during the
period, after applying the treasury stock method. For periods in which the
Company reports a net loss, common stock equivalents do not include stock
options and warrants as their effect would be anti-dilutive. For the period
prior to the effective date of the Company's initial public offering of Common
Stock (Note 10), common stock equivalents include the impact of the
 
                                       20
<PAGE>   22
 
                           MULTICOM PUBLISHING, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
issuance of options and warrants granted within one year of the initial public
offering, at exercise prices less than the initial public offering price,
whether or not the effect is anti-dilutive.
 
  FAIR VALUE OF FINANCIAL INSTRUMENTS
 
     Statement of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financial Instruments, requires disclosure of the fair value of certain
financial instruments. Cash, accounts receivable and payable, accrued
liabilities and trade notes payable are reflected in the financial statements at
their estimated fair value because of the short-term nature of these
instruments.
 
     The fair value of the Company's long-term debt, shareholder debt and
capital lease obligations is estimated using discounted cash flow analysis,
based on the Company's current incremental borrowing rate, and approximates the
carrying value.
 
  MANAGEMENT'S ESTIMATES
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Estimates
significant to these financial statements include allowances for product
returns, price protection, doubtful receivables, useful lives of capitalized
software costs, the valuation allowance for deferred tax assets and provisions
for inventory obsolescence.
 
  STOCK-BASED COMPENSATION
 
     In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, Accounting for Stock-Based Compensation, which was effective for the
Company beginning in fiscal 1997. Under the provisions of this statement,
employee stock-based compensation expense is measured using either the
intrinsic-value method as prescribed by Accounting Principles Board No. 25 or
the fair value method described in Statement No. 123. Companies choosing the
intrinsic-value method are required to disclose the proforma impact of the fair
value method on net income and earnings per share. The Company implemented the
Statement in fiscal 1997 using the intrinsic-value method for its employee
stock-based compensation plan. The Company is required to implement Statement
No. 123 for stock-based awards to other than employees. Accordingly, the Company
has recorded an expense of $-0- and $49,485 for the fiscal years ended June 30,
1997 and 1996, respectively, related to warrants and options issued to other
than employees
 
  NEW ACCOUNTING PRONOUNCEMENTS
 
     In February 1997, Financial Accounting Standards No. 128, Earnings per
Share (FAS 128), was issued by the Financial Accounting Standards Board. This
pronouncement modifies the computation, presentation and disclosure requirements
for earnings per share (EPS) for entities with publicly held common stock or
potential common stock. This pronouncement is effective for the Company
beginning December 31, 1997. The adoption of FAS 128 is not expected to have a
material impact on the Company's EPS.
 
  RECLASSIFICATIONS
 
     Certain balances previously reported have been reclassified to conform with
the presentation of the June 30, 1997 financial statements.
 
                                       21
<PAGE>   23
 
                           MULTICOM PUBLISHING, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
2. EXTRAORDINARY ITEMS
 
     In connection with the conversion of long-term debt to Series A Preferred
Stock discussed in Note 10, the Company recorded an extraordinary loss on the
extinguishment of debt. This extraordinary loss was determined based upon the
difference between the estimated fair market value of the Preferred Stock and
the carrying value of the converted debt at the time of the conversion.
 
     In connection with the extinguishment of debt, warrants to purchase 844,354
shares were to be issued should the Company default on certain financial
covenants described in Note 10. At June 30, 1997, the Company was in default as
a result of shareholders' equity being less than $1,000,000. As a result, the
warrants were valued and an extraordinary loss was recorded in the amount of
$950,000.
 
 3. INVENTORIES
 
          Inventories consist of the following:
 
<TABLE>
<CAPTION>
                                                               JUNE 30,      JUNE 30,
                                                                 1996          1997
                                                               --------     ----------
        <S>                                                    <C>          <C>
        Finished goods.......................................  $464,790     $  965,864
        Books................................................   300,128        325,954
        Raw materials........................................   175,677        362,009
                                                               --------     ----------
                                                               $940,595     $1,653,827
                                                               ========     ==========
</TABLE>
 
 4. PROPERTY AND EQUIPMENT
 
     Property and equipment consists of the following:
 
<TABLE>
<CAPTION>
                                                              JUNE 30,       JUNE 30,
                                                                1996           1997
                                                             ----------     -----------
        <S>                                                  <C>            <C>
        Computer hardware..................................  $  839,396     $ 1,088,852
        Development assets.................................     416,841         775,149
        Furniture and fixtures.............................     140,131         271,676
        Purchased computer software........................     102,217         387,384
        Leasehold improvements.............................          --          65,165
                                                             ----------     -----------
                                                              1,498,585       2,588,226
        Less: Accumulated depreciation.....................    (561,519)     (1,057,882)
                                                             ----------     -----------
                                                             $  937,066     $ 1,530,344
                                                             ==========     ===========
</TABLE>
 
 5. BANK BORROWINGS
 
     The Company had a $2,000,000 line of credit agreement with a bank which
bore interest at prime plus 3.0% and expired on July 5, 1997. At June 30, 1997
the Company's borrowing rate was approximately 11%. The outstanding balance on
this line of credit at June 30, 1997 was $1,629,000. The line of credit was
secured by all assets of the Company, except property and equipment owned prior
to June 28, 1995. In connection with this agreement, the Company was required to
comply with certain covenants, including maintaining certain financial ratios
and a restriction on the payment of dividends, each of which are measured at the
end of each calendar quarter. As of December 31, 1996, March 31, 1997 and June
30, 1997, the Company was not in compliance with certain covenants primarily due
to operating losses incurred in those quarters. During April 1997, the Bank
informed the Company that it would not advance funds in excess of the then
outstanding amount of $1,629,000 and that it would not renew the line of credit
upon its expiration. The Company is currently seeking an alternative line of
credit; however, the ultimate resolution of this matter cannot be determined at
this time.
 
                                       22
<PAGE>   24
 
                           MULTICOM PUBLISHING, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
     Default under the line of credit results in cross defaults under the
convertible note payable to Meredith Corporation described in Note 7 and the
long-term debt described in Note 6 that had balances of $177,232 and $1,825,000,
respectively as of June 30, 1997.
 
 6. LONG-TERM DEBT
 
     Long-term debt consists of the following:
 
<TABLE>
<CAPTION>
                                                               JUNE 30,       JUNE 30,
                                                                 1996           1997
                                                              ----------     ----------
        <S>                                                   <C>            <C>
        Note payable, net of $782,106 and $411,690 discount,
          respectively, bearing cash interest at 13% payable
          monthly. Due in full on March 29, 2001............  $2,217,894     $1,413,310
                                                              ==========     ==========
</TABLE>
 
     The note is secured by a third position in all assets of the Company. In
connection with the issuance of this promissory note, the Company granted
warrants to purchase 268,338 shares of Series A common stock at an exercise
price of approximately $.01 per share through March 29, 2001. Upon the closing
of the Company's IPO (Note 10), the number of warrants was reduced to 163,791. A
debt discount of $805,015 was recorded related to the warrants based upon the
fair market value at the close of the debt transaction. The discount is
amortized using the effective interest method over the life of the debt.
Additional warrants to purchase 16,481 shares of Series A common stock at an
exercise price of $.01 per share were also issued as a finder's fee to the
broker of this transaction. These warrants were valued at $49,485 and have been
included in other assets as a deferred loan cost and are amortized over the life
of the debt using the effective interest method. As discussed in Note 10, all
Series A common shares were reclassified to Common Stock upon the closing of the
IPO. Additionally, as discussed in Note 10, $1,175,000 of the note was converted
to Series A Preferred Stock in February 1997. As discussed in Note 5, due to
cross defaults with the bank borrowings at June 30, 1997, the Company is in
default on this note and it is therefore classified as a current liability.
 
 7. RELATED PARTY TRANSACTIONS
 
     Shareholder debt consists of the following:
 
<TABLE>
<CAPTION>
                                                               JUNE 30,      JUNE 30,
                                                                 1996          1997
                                                               ---------     ---------
        <S>                                                    <C>           <C>
        Note payable to Meredith, bearing interest at 10%.
          Principal and interest payable in monthly
          instalments of $6,453. Due in full on August 15,
          1997 and secured by property and equipment owned as
          of June 28, 1995...................................  $  90,506     $  37,232
        Convertible note payable to Meredith, bearing
          interest at 15%, payable quarterly in Common Stock
          (Note 10). Principal repayments are due quarterly
          and due in full on July 31, 1998...................    320,000       140,000
                                                               ---------     ---------
                                                                 410,506       177,232
        Less: Current portion................................   (317,500)     (177,232)
                                                               ---------     ---------
                                                               $  93,006     $      --
                                                               =========     =========
</TABLE>
 
     On July 31, 1995, the Company issued a promissory note to Meredith in the
amount of $2,000,000. The promissory note was convertible at the holder's option
into Series B common stock at $6.07 per share via a partial exercise of
Meredith's option (Note 10) at any time prior to the payment in full of the
promissory note or the expiration of Meredith's option. On June 24, 1996,
Meredith exercised its option and converted $1,500,000 of the outstanding debt
to Series B common stock at $6.07 per share. The balance of the option expired
upon the consummation of the IPO. Principal payments, calculated based upon 8%
of certain sales for a quarter, as defined in the Meredith license agreements,
with a minimum amount of $60,000, are due
 
                                       23
<PAGE>   25
 
                           MULTICOM PUBLISHING, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
quarterly and the balance is due in full on July 31, 1998. The note bears
interest at 15% and is payable quarterly in Common Stock at a price of $6.07 per
share. The note is secured by a second security interest in all assets of the
Company.
 
     In February, 1996 the Company issued an unsecured trade note to Meredith
Corporation in the amount of $484,516, bearing interest at an annual rate of
8.25% with monthly payments of interest and principal of $21,969. The note was
due in full on February 28, 1998. On June 28, 1996 the Company paid the note
totaling $465,878 with proceeds from the Company's IPO (Note 10).
 
     The notes payable to Meredith are subordinate to the bank borrowings. As
discussed in Note 5, the Company was in default of certain covenants in
connection with these borrowings. The Company is in the process of obtaining a
new line of credit and upon completion of this financing transaction it is
anticipated that Meredith will waive such defaults.
 
     Transactions with Meredith were as follows:
 
<TABLE>
<CAPTION>
                                                                YEAR ENDED     YEAR ENDED
                                                                 JUNE 30,       JUNE 30,
                                                                   1996           1997
                                                                ----------     ----------
        <S>                                                     <C>            <C>
        Purchases of raw materials............................   $752,000       $298,000
        Sale of product.......................................     85,000          3,000
        Sale of services......................................    468,000         48,000
</TABLE>
 
     See discussion of licensing agreements with Meredith at Note 10.
 
     Notes receivable from the majority shareholders were as follows:
 
<TABLE>
<CAPTION>
                                                                  JUNE
                                                                   30,       JUNE 30,
                                                                  1996         1997
                                                                 -------     ---------
        <S>                                                      <C>         <C>
        Note receivable, bearing interest at 4%, principal and
          interest due on December 31, 1996....................  $65,000
        Note receivable, bearing interest at 6%, principal and
          interest due on December 31, 1996....................   16,538
        Note receivable, bearing interest at 8%, principal and
          interest due on December 31, 1997, subsequently
          repaid in August 1997................................              $  25,000
        Note receivable, bearing interest at prime + 1.25%,
          principal and interest due on December 31, 1997
          subsequently repaid in August 1997...................                 70,000
                                                                 --------    ---------
                                                                  81,538        95,000
        Amount offsetting shareholders' equity.................  (81,538)           --
                                                                 --------    ---------
          Total notes due from majority shareholder included in
             other current assets..............................  $    --     $  95,000
                                                                 ========    =========
</TABLE>
 
                                       24
<PAGE>   26
 
                           MULTICOM PUBLISHING, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
 8. MAJOR CUSTOMERS
 
     The Company's major customers are primarily distributors of the Company's
product. Sales to these customers are approximately as follows:
 
<TABLE>
<CAPTION>
                                                              YEAR ENDED        YEAR ENDED
                                                             JUNE 30,1996      JUNE 30, 1997
                                                             -------------     -------------
        <S>                                                  <C>               <C>
        Customer A.........................................   $ 3,121,000       $ 1,958,000
        Customer B.........................................   $   973,000       $ 2,049,000
        Customer C.........................................   $   655,000                --
</TABLE>
 
     The major customers for the years ended June 30, 1996 and 1997 also account
for 66% and 60% of the gross outstanding accounts receivable at June 30, 1996
and 1997, respectively.
 
 9. INCOME TAXES
 
     At June 30, 1997, Multicom had net operating loss (NOL) carry-forwards of
approximately $14,000,000 which expire from 2008 to 2013. Should there be
significant changes in ownership, this NOL may be subject to annual limitations.
 
     Deferred taxes are as follows:
 
<TABLE>
<CAPTION>
                                                            JUNE 30, 1996     JUNE 30, 1997
                                                            -------------     -------------
        <S>                                                 <C>               <C>
        Deferred tax assets
          Net operating losses............................   $  2,741,000      $  4,766,000
          Stock appreciation plan.........................         44,000            16,000
          Allowance on returns............................        363,000           300,000
          Allowance for doubtful receivables..............         73,000            42,000
          Allowance for inventory obsolescence............             --            59,000
          Accrued promotions..............................         20,000                --
          Other...........................................         33,000           108,000
                                                              -----------       -----------
                                                                3,274,000         5,291,000
        Deferred tax liabilities
          Amortization of software development costs......        (98,000)         (183,000)
          Depreciation....................................        (33,000)          (62,000)
          Other...........................................        (11,000)          (10,000)
                                                              -----------       -----------
                                                                3,132,000         5,036,000
        Less: Valuation allowance.........................     (3,132,000)       (5,036,000)
                                                              -----------       -----------
                                                             $         --      $         --
                                                              ===========       ===========
</TABLE>
 
     A 100% valuation allowance has been recorded due to the limited operating
history and significant losses incurred to date by the Company, and therefore
lack of certainty about future taxable income. For the years ended June 30, 1996
and 1997, the valuation allowance increased by $1,373,000 and $1,904,000,
respectively.
 
10. SHAREHOLDERS' EQUITY (DEFICIT)
 
     Common stock
 
     On June 24, 1996, the Company consummated its initial public offering (IPO)
of its Common stock and sold 1,028,600 of its Common shares raising gross
proceeds of $6,685,900. In connection with this offering, warrants to purchase
97,717 Common shares were issued to the underwriter at an exercise price of
$.01.
 
                                       25
<PAGE>   27
 
                           MULTICOM PUBLISHING, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
     Prior to June 24, 1996, the Company had two classes of common stock, Series
A and Series B, authorized, issued and outstanding. The Board of Directors
authorized 40,000,000 of Common Stock and upon the effective date of the IPO,
the Series A and Series B common shares were reclassified to Common Stock.
Holders of Common Stock are entitled to one vote per share. The Common Stock has
no preemptive, redemption, conversion or other subscription rights.
 
     Series A common stock was entitled to one vote per share. In connection
with the transaction below, the Series B nonvoting stock was eliminated and a
revised Series B common stock was established which is entitled to one vote per
share and has certain rights and preferences including the following: 1)
proportional representation on the Board of Directors, 2) approval of and
participation in certain financing and equity transactions and 3) conversion
option to Series A common stock on a share-for-share basis.
 
     On June 4, 1994, the Company issued common stock under a Stock Purchase
Agreement, representing 20% of the then outstanding common stock to Meredith in
exchange for $2,000,000 in cash, a $900,000 note receivable and $2,100,000 in
unearned royalties. Meredith also received the right to purchase an additional
823,532 shares of Series B common stock, representing 13 1/3% of the then
outstanding common stock of the Company, at a purchase price of $6.07 per share
which expired upon the earlier of June 30, 1999 or the date of an initial public
offering. On June 24, 1996, Meredith exercised its right, in part, in
conjunction with the conversion of $1,500,000 of its convertible debt to Series
B common stock. The remaining right expired upon the closing of the IPO.
 
     In connection with this transaction, Meredith received certain
anti-dilution privileges, so that it would have the right to purchase Series B
common stock sufficient to maintain an agreed upon ownership percentage. Upon
the closing of the IPO, Meredith no longer receives anti-dilution privileges on
equity transactions.
 
     On February 7, 1997, the Company issued 696,620 shares of Common Stock in
exchange for cash of approximately $1,315,000 and fixed assets of $250,000. The
shares were issued pursuant to a Common Stock Purchase Agreement. The selling
price of these shares was $2.28 per share, based upon the average closing price
on the 20 consecutive trading days immediately preceding the Closing. In
conjunction with this transaction, options to purchase 102,500 shares were
exercised for prices ranging from $.25 to $1.00.
 
     On March 31, 1997, the Company issued 106,667 shares of Common Stock in
connection with the acquisition of certain equipment. These shares were issued
at a value of $119,000, based upon the closing price of the stock on the date of
issuance.
 
     Preferred stock
 
     Upon consummation of the Company's IPO, 300,000 shares of preferred stock
with a par value of $.01 were authorized by the Board of Directors. This
preferred stock allows for certain rights and preferences to be established by
the Board of Directors.
 
     On February 7, 1997, $750,000 in long-term debt was converted to Series A
Preferred Stock. The Series A Preferred Stock is nonvoting, except in instances
where changes and/or issuances of Preferred Stock are being considered as well
as the sale of the Company or other actions which might impact the rights of the
Series A Preferred Shareholders. In such instances, a minimum 51% of the Series
A Preferred Stock must vote in favor of the proposals. The Series A Preferred
Stock carries annual cash dividends of $.65 per share, payable monthly. The
Series A Preferred Stock is convertible to Common Stock at a price of $2.28 per
share, or one share of Series A Preferred Stock for 2.19 shares of Common Stock.
 
     On February 11, 1997, the Company completed an additional conversion of
$425,000 in long-term debt in a similar transaction to that outlined in the
preceding paragraph. As part of this transaction, the loan agreement on the
remaining debt was amended to include a financial covenant whereby if, at
quarter end,
 
                                       26
<PAGE>   28
 
                           MULTICOM PUBLISHING, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
shareholders' equity is below $1,000,000, or certain minimum standards are not
met, then additional warrants to purchase 15% of the outstanding Common Stock on
a fully diluted basis at February 11, 1997 (844,354 shares), at an exercise
price of $.01 per share, will be issued. As discussed in Note 2, at June 30,
1997 shareholders' equity was below $1,000,000. As a result, these warrants will
be issued and an additional extraordinary loss of $950,000 related to conversion
of debt was recorded based upon the valuation of these warrants as of June 30,
1997.
 
     On March 31, 1997, the Company issued 400 shares of Series B Convertible
Preferred Stock for $400,000. The Series B Convertible Preferred Stock is
nonvoting, except in instances where changes and/or issuances of preferred stock
are being considered as well as the sale of the Company or other actions which
might impact the rights of the Series B Convertible Preferred Shareholders. The
Series B Convertible Preferred Stock is convertible to Common Stock at the
lesser of the price of the Common Stock as of the date of the closing, $1.125,
or 75% of the last ten days closing bid price prior to the conversion date. This
discount conversion feature is accounted for as a dividend to preferred
shareholders in the amount of $73,000. In connection with this transaction, the
Company issued warrants to purchase 320,000 shares of Common Stock at an
exercise price of $1.125 per share.
 
     Unearned royalties
 
     The Company entered into certain licensing agreements for the licensing of
content provided by Meredith. Under these licensing agreements, the Company
incurs royalty expenses based upon a percentage of net sales. As stipulated in
the Stock Purchase Agreement, royalties owing under these licensing agreements
are applied against the $2,100,000 unearned royalty amount discussed above.
Royalties incurred through March 31, 1997 will be so applied to the unearned
royalty amount; thereafter royalties incurred shall be paid in cash as outlined
in the licensing agreements. Any remaining unearned royalty amount at March 31,
1997 shall be forgiven and the number of common shares shall not be adjusted.
For the year ended June 30, 1996 and nine months ended March 31, 1997, royalties
of approximately, $337,000 and $277,000, respectively, have been incurred under
Meredith license agreements. At March 31, 1997, royalties of $1,042,000 had been
earned under these licensing agreements. The remaining $1,058,000 in unearned
royalties was offset with Common Stock. As a result, the adjusted per share
purchase price of the stock sold to Meredith Corporation in June 1994 was
approximately $4.80.
 
11. STOCK OPTIONS AND WARRANTS
 
     The Company has a Stock Option Plan (the "Plan") which provides for the
granting of incentive stock options to employees, non-qualified stock option
plans which provide for the granting of stock options to certain employees and
consultants and an Outside Directors' Stock Option Plan (the "Directors' Plan")
which provides for the annual granting of 2,500 stock options to each director.
At June 30, 1997, the Company has reserved 1,249,400 shares of Common Stock for
issuance under the Plan. Incentive and non-qualified stock options have ten year
terms, and vest over periods determined by the Board of Directors, generally
four years. A total of 100,000 shares of Common Stock have been reserved for
issuance under the Directors' Plan. Directors' Plan stock options vest and are
exercisable in four equal annual installments and must be exercised within ten
years after the date of grant.
 
     Prior to the June 1994 agreement with Meredith, options were generally
granted at the fair market value of Multicom's stock on the date of grant and
became exercisable under the terms of the agreements. Meredith however, placed
certain limitations on the exercise price of options granted. Options granted
from June 1994 to the date of the IPO were granted at the higher of the exercise
price set by Meredith or the fair market value of Multicom stock on the date of
grant. Subsequent to the IPO, Plan options will not be granted with an option
exercise price of less than 85% of the fair market value of the Common Stock on
the date of grant. The exercise price of all options granted under the Directors
Plan will be equal to the fair market value of a share
 
                                       27
<PAGE>   29
 
                           MULTICOM PUBLISHING, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
of Common Stock on the date of grant. In the event an option holder's employment
is terminated, unexercised options will expire and any shares outstanding from
the exercise of such options must be offered for repurchase by Multicom at their
then fair market value, as defined by the agreements.
 
     A summary of stock option activity for Common Stock under the Plan,
individual option agreements and the Directors' Plan, is as follows:
 
<TABLE>
<CAPTION>
                                                          TOTAL         TOTAL SERIES A
                                                         COMMON          COMMON STOCK        WEIGHTED-
                                                      STOCK OPTIONS        OPTIONS            AVERAGE
                                                       OUTSTANDING       OUTSTANDING       EXERCISE PRICE
                                                      -------------     --------------     --------------
<S>                                                   <C>               <C>                <C>
Outstanding at June 30, 1995........................           --            931,392           $ 2.43
  Grants............................................        7,500            338,200           $ 5.40
  Forfeitures.......................................           --           (163,800)          $ 4.96
  Exercises.........................................           --            (80,248)          $  .25
  Reclassification of Series A common stock options
     to Common Stock options........................    1,025,544         (1,025,544)
                                                        ---------         ----------            -----
Outstanding at June 30, 1996........................    1,033,044                 --           $ 3.19
  Grants............................................      486,313                 --           $ 2.21
  Forfeitures.......................................     (313,371)                --           $ 3.39
  Exercises.........................................     (102,500)                --           $  .45
                                                        ---------         ----------            -----
Outstanding at June 30, 1997........................    1,103,486                 --           $ 2.95
                                                        =========         ==========            =====
Weighted-average fair value of options granted, net
  of forfeitures, during the year ended June 30,
  1997..............................................                                           $ 1.39
                                                                                                =====
</TABLE>
 
     A summary of stock options outstanding and exercisable at June 30, 1997 is
as follows:
 
<TABLE>
<CAPTION>
                              OPTIONS OUTSTANDING
                   ------------------------------------------          OPTIONS EXERCISABLE
                     NUMBER          WEIGHTED-                    ------------------------------
                   OUTSTANDING        AVERAGE        WEIGHTED-      NUMBER
   RANGE OF            AT            REMAINING       AVERAGE      EXERCISABLE       WEIGHTED-
   EXERCISE         JUNE 30,        CONTRACTUAL      EXERCISE     AT JUNE 30,        AVERAGE
    PRICES            1997         LIFE (YEARS)       PRICE          1997         EXERCISE PRICE
--------------     -----------     -------------     --------     -----------     --------------
<S>                <C>             <C>               <C>          <C>             <C>
     $.25              120,000          5.16          $  .25        120,000           $  .25
$.875 - $1.125         351,511          7.87          $  .96        184,722           $ 1.00
$1.50 - $1.875         184,475          9.65          $ 1.86             --               --
 $2.30 - $3.00          24,000          6.72          $ 3.00         20,571           $ 3.00
 $4.50 - $5.00          71,200          9.00          $ 4.66          5,800           $ 5.00
 $6.07 - $6.50         352,300           7.9          $ 6.09        115,575           $ 6.08
                   -----------                                    -----------
                     1,103,486                                      446,668
                      ========                                     ========
</TABLE>
 
     Common Stock options vest as follows:
 
<TABLE>
<CAPTION>
                                                                            EXERCISE
                                                               OPTIONS        PRICE
                                                              ---------   -------------
        <S>                                                   <C>         <C>
        Vesting on or before June 30,
          1998..............................................    895,611    $.25 - $6.07
          1999..............................................    109,750   $1.00 - $6.50
          2000..............................................     74,750   $1.00 - $6.50
          2001..............................................     23,375   $1.00 - $6.50
                                                               --------
                                                              1,103,486
                                                               ========
</TABLE>
 
     As of June 30, 1997, approximately 493,166 and 85,000 shares were available
for grant under the Plan and Directors' Plan, respectively.
 
                                       28
<PAGE>   30
 
                           MULTICOM PUBLISHING, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
     Subsequent to June 30, 1997, stock options to purchase 57,854 shares of
Common Stock were issued to employees under the terms of the Plan and stock
options to purchase 206,245 shares of Common Stock were forfeited. These issued
stock options carry an exercise price equal to the closing price of Multicom's
Common Stock on the grant date.
 
     The Company applies Accounting Principles Board Opinion 25, Accounting for
Stock Issued to Employees, and related interpretations to account for its plan.
Had compensation cost for the Plan been determined based upon the fair value at
the grant date for awards under the Plan consistent with the methodology
prescribed under Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation, the Company's net loss would have been increased
to the pro forma amounts indicated below.
 
<TABLE>
<CAPTION>
                                                             YEAR ENDED        YEAR ENDED
                                                            JUNE 30, 1996     JUNE 30, 1997
                                                            -------------     -------------
        <S>                                                 <C>               <C>
        PRO FORMA STATEMENT OF OPERATIONS:
          Net loss before extraordinary items.............   $ (4,218,000)     $ (5,839,000)
          Extraordinary items.............................             --        (1,302,473)
                                                              -----------       -----------
          Net loss........................................   $ (4,218,000)     $ (7,141,473)
          Dividends on preferred stock....................             --          (133,464)
                                                              -----------       -----------
          Net loss available for common shareholders......   $ (4,218,000)     $ (7,274,937)
                                                              ===========       ===========
        PRO FORMA LOSS PER COMMON SHARE:
          Loss before extraordinary items.................   $       (.86)     $      (1.00)
          Extraordinary items.............................             --              (.22)
                                                              -----------       -----------
          Net loss........................................   $       (.86)     $      (1.22)
                                                              ===========       ===========
</TABLE>
 
     The fair value of the options granted during fiscal 1997 and 1996 is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions:
 
<TABLE>
<CAPTION>
                                                             YEAR ENDED        YEAR ENDED
                                                            JUNE 30, 1996     JUNE 30, 1997
                                                            -------------     -------------
        <S>                                                 <C>               <C>
        Expected life of options..........................    3.5 years         3.5 years
        Expected volatility of stock......................       70%               70%
        Dividend Yield....................................       0%                0%
        Risk-Free interest rate...........................      7.45%             7.12%
        Assumed Forfeiture Rate...........................       27%               27%
</TABLE>
 
                                       29
<PAGE>   31
 
                           MULTICOM PUBLISHING, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
     The following table summarizes activity with respect to warrants for the
two years ended June 30, 1997.
 
<TABLE>
<CAPTION>
                                                           WARRANTS      EXERCISE PRICE
                                                           ---------     ---------------
        <S>                                                <C>           <C>
        Outstanding at June 30, 1995.....................    904,012      $1.00 - $ 6.07
          Grants.........................................    286,229      $ .01 - $ 6.07
          Forfeitures....................................         --
          Expirations....................................   (576,415)             $ 6.07
          Exercises......................................   (247,117)             $ 6.07
                                                           ---------      --------------
        Outstanding at June 30, 1996.....................    366,709      $ .01 - $ 6.07
          Grants.........................................  1,164,354     $ .01 - $ 1.125
          Forfeitures....................................         --
          Exercises......................................    (16,481)             $  .01
                                                           ---------      --------------
        Outstanding at June 30, 1997.....................  1,514,582      $ .01 - $ 6.07
                                                           =========      ==============
        Weighted-average fair value of warrants issued
          during the year ended June 30, 1997............                          $1.69
                                                                          ==============
</TABLE>
 
12. COMMITMENTS
 
     Leases
 
     In April 1997, the Company entered into a capital lease agreement in
connection with certain computer hardware. Under the terms of this lease,
monthly payments of $9,466 will be made through April 1998; monthly payments of
$7,557 will be made through April 1999; and monthly payments of $3,565 will be
made through April 2000.
 
     Multicom leases office space and certain computer hardware and furniture
and fixtures. Future minimum rentals under these operating lease agreements are
approximately as follows:
 
<TABLE>
                <S>                                                <C>
                Year ending June 30,
                  1998...........................................  $  489,000
                  1999...........................................     523,000
                  2000...........................................     540,000
                  2001...........................................     329,000
                  2002...........................................       5,000
                                                                   ----------
                                                                   $1,886,000
                                                                   ==========
</TABLE>
 
     Rent expense for the years ended June 30, 1996 and 1997 was $203,000 and
$430,000, respectively.
 
     Royalties
 
     Multicom has numerous exclusive and nonexclusive licensing agreements in
connection with certain content included in its products. These agreements
extend over various periods of time and generally bear royalties of .5% to 15%
of net sales as defined by the agreements. For the years ended June 30, 1996 and
1997, royalties of $633,000 and $568,000, respectively, have been expensed.
 
     401(k) Plan
 
     The Board of Directors approved the establishment of a 401(k) plan for all
eligible employees. The plan was implemented in the year ended June 30, 1997.
 
                                       30
<PAGE>   32
 
                           MULTICOM PUBLISHING, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
13. ACQUISITION OF LICENSE TO PUBLISH
 
     On October 11, 1996, the Company acquired an exclusive license to publish,
distribute and manufacture 11 existing titles and three CD-ROM titles currently
in development from HarperCollins Publishers Inc. (HarperCollins) in exchange
for $30,000 and the assumption of certain liabilities in amounts not to exceed
$240,000. Additionally, the Company acquired the inventories of the existing
titles at cost, which was approximately $350,000. If certain inventories are not
used on or before March 31, 1998, then the amount may be reduced to $250,000.
Royalties will be paid to HarperCollins based upon net sales and Multicom will
pay certain nonrefundable advances against these royalties, in an amount not to
exceed $200,000. Such advances are payable in installments based upon delivery
of the unpublished titles and other items.
 
14. SUPPLEMENTAL CASH FLOW INFORMATION
 
     The following items are supplemental information of noncash investing and
financing activities:
 
          In fiscal 1996, Multicom issued 40,767 shares of Series B common stock
     in exchange for interest payable of $247,398.
 
          In fiscal 1996, warrants to purchase 16,481 shares of Series B common
     stock were issued in exchange for services rendered with a fair value of
     $49,485.
 
          In fiscal 1996, Multicom issued warrants to purchase 268,338 shares of
     Series A common stock in conjunction with debt issued to a lender (Note 6),
     with a fair value of $805,015.
 
          In fiscal 1996, Multicom issued 247,219 shares of Series B common
     stock in conjunction with the conversion of $1,500,000 of shareholder debt
     to equity (Note 7).
 
          In fiscal 1997, Multicom issued 109,649 shares of Common Stock in
     conjunction with the acquisition of $250,000 of computer software.
 
          In fiscal 1997, Multicom issued 106,667 shares of Common Stock in
     conjunction with the acquisition of $119,000 of computer hardware.
 
          In fiscal 1997, Multicom entered into a capital lease for equipment
     valued at $182,000.
 
          In fiscal 1997, long-term debt in the amount of $1,175,000 was
     converted to Series A Preferred Stock. In conjunction with this conversion,
     extraordinary losses of $352,473 and $950,000 were recorded (see Notes 2
     and 10).
 
          In fiscal 1997, Multicom issued 5,815 shares of Common Stock in
     exchange for interest payable of $35,297.
 
15. SUBSEQUENT EVENTS
 
     In September 1997, the Company acquired an exclusive license to publish,
distribute and manufacture 14 existing titles from Discovery Communications,
Inc. (Discovery) in exchange for warrants to purchase 200,000 shares of Common
Stock. Additionally, the Company acquired the inventories of the existing titles
at cost, which was approximately $500,000. Royalties will be paid to Discovery
based upon net sales and Multicom will pay certain nonrefundable advances
against these royalties, in an amount not to exceed $500,000. Such advances are
payable in four equal instalments at the end of each of the four years
subsequent to the consummation of the acquisition agreement.
 
     On August 14, 1997, the holder of 300 shares of Series B Convertible
Preferred Stock issued the Company notice of its intent to convert 100 of the
Preferred Shares to Common Stock. This conversion was completed on September 19,
1997 and 239,808 shares of Common Stock were issued.
 
                                       31
<PAGE>   33
 
                           MULTICOM PUBLISHING, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
     In anticipation of the sale of Common Stock, the Company received $134,000.
 
     On August 15, 1997, the Company received $60,000 through the amendment of
the loan agreement described in Note 6. There were no significant changes to the
terms and conditions of that note. On October 3, 1997, the Company received
$160,000 through the amendment of the loan agreement described in Note 6. There
were no significant changes to the terms and conditions of that note.
 
     Effective August 3, 1997, the Board of Directors of the Company approved
the terms of the agreement for consulting services with Viking Capital
Corporation (Viking), the principals of which have beneficial ownership of
approximately 9% of the outstanding Common Stock. In exchange for consulting
services through December 31, 1997, certain principals of Viking will receive
warrants to purchase 320,000 shares of the Company's Common Stock at an exercise
price of $.375 per share.
 
                                       32
<PAGE>   34
 
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
 
     None.
 
                                    PART III
 
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(A) OF THE EXCHANGE ACT.
 
     Directors. Set forth below are the names and ages of the present directors,
their principal occupations at present and for the past five years, certain
directorships held by each and the year in which each became a director of the
Company.
 
<TABLE>
<CAPTION>
                 NAME AND PRINCIPAL OCCUPATION AT PRESENT AND                    DIRECTOR
                    FOR THE PAST FIVE YEARS; DIRECTORSHIPS                        SINCE     AGE
-------------------------------------------------------------------------------  --------   ---
<S>                                                                              <C>        <C>
Tamara L. Attard...............................................................    1991     39
  Chief Executive Officer and Chairman of the Board of the Company since 1991;
  Vice President of Operations of Bayseng Spice Company, a spice producer, from
  1985 to 1991; Associate Director of Experiential Research, a film production
  company, from 1981 to 1985; and Associate Editor of Shooting Commercial
  Magazine and On Location Magazine, film industry trade publications, from
  1980 to 1981.
Paul G. Attard.................................................................    1992     43
  President of the Company since March 1996 and Chief Operating Officer of the
  Company from 1992; Vice President of Sales for OWL International, Inc., a
  division of Matsushita, which developed interactive multimedia and on-line
  tools and custom solution software, from 1989 to 1992; Director of Reseller
  Channel Sales at Informix Software, a database software company, from 1988 to
  1989; held various positions, including Vice President of Sales, at PacTel
  InfoSystems, a division of Pacific Telesis, a Regional Bell Operating
  Company, from 1984 to 1988.
Larry D. Hartsook..............................................................  1995..     54
  Vice President of Finance, Meredith Corporation, a home and family media
  company, since 1991, and has held various other finance related positions
  with Meredith Corporation since 1969.
Henrik N. Vanderlip............................................................    1993     45
  Chairman of Viking Capital Partners, Inc., a private investment firm, since
  1993; Senior Vice President and Partner of Wesray Capital Corporation, a
  private investment firm, from 1985 to 1995; Chairman of Action Sports Group
  LLC, a sports apparel manufacturing company and The Moorings LLC, a sailing
  yacht charter company; Director of Avis, Inc., an automobile rental company,
  and Rocky Mountain Radio LLC, a broadcasting company.
</TABLE>
 
     Executive Officers. Reference is made to the information appearing under
the captions "Executive Officers of the Registrant" and "Key Employees" in Part
I, Item 1 of this Form 10-KSB, which information is incorporated herein by
reference.
 
     Section 16(a) Beneficial Ownership Reporting Compliance. Section 16(a) of
the Securities Exchange Act of 1934 (the "Exchange Act") and the rules of the
Securities and Exchange Commission (the "Commission") thereunder require the
Company's directors and executive officers to file reports of their ownership
and changes in ownership of Common Stock with the Commission. Personnel of the
Company generally prepare these reports on the basis of information obtained
from each director and officer. Based on such information, the Company believes
that all reports required by Section 16(a) of the Exchange Act to be filed by
its directors and executive officers during the last fiscal year were filed on
time except for Mr. Vanderlip's Statement of Beneficial Ownership of Securities
on Form 4 to be filed by March 10, 1997, which was filed four days late.
 
                                       33
<PAGE>   35
 
ITEM 10. EXECUTIVE COMPENSATION.
 
                COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
 
                        1997 SUMMARY COMPENSATION TABLE
 
     The following table sets forth information concerning the compensation of
the Chief Executive Officer of the Company and the one other most highly
compensated executive officer of the Company ("Named Executive Officers") as of
June 30, 1997, June 30, 1996, and June 30, 1995, whose total salary, bonus and
other compensation for the fiscal years ended June 30, 1997, June 30, 1996, and
June 30, 1995, exceeded $100,000 for services in all capacities to the Company.
 
                           SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                                                             LONG TERM
                                                                                            COMPENSATION
                                                         ANNUAL COMPENSATION                   AWARDS
                                               ----------------------------------------     ------------
                                                                             OTHER           SECURITIES
             NAME AND               FISCAL                                  ANNUAL           UNDERLYING
        PRINCIPAL POSITION           YEAR       SALARY       BONUS      COMPENSATION(1)       OPTIONS
----------------------------------  ------     --------     -------     ---------------     ------------
<S>                                 <C>        <C>          <C>         <C>                 <C>
Tamara L. Attard..................   1997      $153,252     $ 1,927        $3,500(1)            35,345
  Chairman and                       1996      $118,625     $15,368        $3,171(1)           140,000
  Chief Executive Officer            1995      $126,250     $11,809        $3,171(1)
Paul G. Attard....................   1997      $153,251     $ 1,284        $3,500(1)            35,345
  President and                      1996      $118,625     $ 4,587        $2,484(1)
  Chief Operating Officer            1995      $120,642     $ 8,575        $2,484(1)           140,000
</TABLE>
 
---------------
 
(1) Represents the incremental insurance premiums paid by the Company
    representing coverage in excess of term insurance for the benefit of the
    Company.
 
     Option Grants in Fiscal 1997. The following table provides details
regarding stock options granted to the named executive officers in fiscal 1997.
 
                          OPTION GRANTS IN FISCAL 1997
 
<TABLE>
<CAPTION>
                                                                                               POTENTIAL
                                                                                          REALIZABLE VALUE AT
                                               PERCENT                                      ASSUMED ANNUAL
                               NUMBER OF       OF TOTAL                                     RATES OF STOCK
                              SECURITIES       OPTIONS                                    PRICE APPRECIATION
                              UNDERLYING      GRANTED TO      EXERCISE                      FOR OPTION TERM
                                OPTIONS      EMPLOYEES IN      PRICE       EXPIRATION     -------------------
           NAME              GRANTED(1)(2)   FISCAL 1997    PER SHARE(3)      DATE          5%          10%
---------------------------  -------------   ------------   ------------   ----------     -------     -------
<S>                          <C>             <C>            <C>            <C>            <C>         <C>
Tamara L. Attard...........      15,345          3.2%          $0.875        5/1/02       $21,943     $34,833
                             20,000....          4.1%          $1.875        1/5/02       $61,000     $97,200
Paul G. Attard.............  15,345....          3.2%          $0.875        5/1/02       $21,943     $34,833
                                 20,000          4.1%          $1.875        1/5/02       $61,000     $97,200
</TABLE>
 
---------------
 
(1) All of the above options were granted under the Option Plan. The Board of
    Directors has discretion, subject to plan limits, to modify the terms of
    outstanding options and to reprice the options.
 
(2) The options vest in full one year from date of grant. Vesting may accelerate
    upon a transfer of control.
 
(3) The exercise price per share of options granted represents the closing price
    of the Common Stock of the Company as reported by The Nasdaq SmallCap Market
    on the date of the grant.
 
(4) Potential gains are net of exercise price but before taxes associated with
    exercise. These amounts represent certain assumed rates of appreciation
    only, based on the Securities and Exchange Commission rules. Actual gains,
    if any, on stock option exercises are dependent on the future performance of
    the Common Stock, overall market conditions and the option holders'
    continued employment through the vesting period. The amounts reflected in
    this table may not necessarily be achieved. One share of the stock purchased
    in 1997 at $0.875 would yield profits of $1.43 per share at 5% appreciation
    over ten years, or $2.27 per share at 10% appreciation over the same period.
    One share of the stock purchased in 1997 at
 
                                       34
<PAGE>   36
 
    $1.875 would yield profits of $3.05 per share at 5% appreciation over ten
    years, or $4.86 per share at 10% appreciation over the same period.
 
                   AGGREGATED OPTION EXERCISES IN FISCAL 1997
                                      AND
                       FISCAL 1997 YEAR-END OPTION VALUES
 
<TABLE>
<CAPTION>
                       SHARES                     NUMBER OF UNEXERCISED OPTIONS       VALUE OF UNEXERCISED IN-THE-
                      ACQUIRED                              AT 6/30/97                 MONEY OPTIONS AT 6/30/97(2)
                        UPON         VALUE       --------------------------------     -----------------------------
        NAME          EXERCISE      REALIZED     EXERCISABLE(1)     UNEXERCISABLE     EXERCISABLE     UNEXERCISABLE
--------------------  ---------     --------     --------------     -------------     -----------     -------------
<S>                   <C>           <C>          <C>                <C>               <C>             <C>
Tamara L. Attard....     --            --            35,000            140,345            $ 0              $ 0
Paul G. Attard......     --            --            70,000            105,345            $ 0              $ 0
</TABLE>
 
---------------
 
(1) The amounts in this column represent the number of vested unexercised
    options at June 30, 1997.
 
(2) The amounts in this column represent the difference between the exercise
    price and the closing market price of $1.125 on June 4, 1997, for the Common
    Stock. The actual value of unexercised options fluctuates with market
    activity.
 
COMPENSATION OF DIRECTORS
 
     Nonemployee directors receive $500 for each regularly scheduled board
meeting attended. In addition, each nonemployee director who is first elected to
the Board after June 24, 1996 (the "Effective Date") receives a stock option to
purchase 8,000 shares of Common Stock pursuant to the 1996 Outside Directors
Stock Option Plan, unless he or she (i) owns, or performs services for an entity
which beneficially owns 0.5% of the total combined voting power of the Company,
or (ii) was already serving on the Board at the time that he or she became a
nonemployee director. In addition, each nonemployee director receives an annual
stock option to purchase 2,500 shares of Common Stock. The "annual option" is
granted on each anniversary of the Effective Date, if he or she was serving as a
nonemployee director as of such date, or the anniversary of the date on which he
or she first became a nonemployee director.
 
                                       35
<PAGE>   37
 
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
 
                                STOCK OWNERSHIP
 
     The following table sets forth information as of September 30, 1997, as to
shares of Common Stock beneficially owned by each director and nominee for
director named under "Election of Directors", each executive officer named in
the table under "Compensation of Executive Officers and Directors", each
stockholder known to the Company to own more than 5% of the Company's
outstanding stock and the directors and executive officers of the Company as a
group. Except as otherwise indicated, each person has sole investment and voting
power with respect to the shares shown. Ownership information is based upon
information furnished by the respective individuals.
 
                              BENEFICIAL OWNERSHIP
 
<TABLE>
<CAPTION>
                                                                        SHARES BENEFICIALLY
                                                                             OWNED(1)
                                                                       ---------------------
                                  NAME                                   NUMBER      PERCENT
    -----------------------------------------------------------------  ----------    -------
    <S>                                                                <C>           <C>
    Meredith Corporation(2)..........................................   1,466,956     16.5%
      1716 Locust Street
      Des Moines, Iowa 50309-3023
    Sirrom Investments, Inc..........................................   1,008,145     11.3%
      500 Church Street
      Nashville, Tennessee 37219
    Tamara L. Attard(4)..............................................   3,930,012     44.1%
    Paul G. Attard(4)................................................   3,930,012     44.1%
    Larry D. Hartsook(5).............................................   1,467,581     16.5%
    Henrik N. Vanderlip(6)...........................................     723,618      8.1%
    All directors and executive officers as a group (4 persons)(7)...   4,281,289     48.0%
</TABLE>
 
---------------
 
(1) Except pursuant to applicable community property laws or as indicated in the
    footnotes to this table, to the Company's knowledge, each shareholder
    identified in the table possesses sole voting and investment power with
    respect to all shares of Common Stock shown as beneficially owned by such
    shareholder.
 
(2) Includes certain anti-dilution rights of Meredith with respect to exercises
    of options by Multicom employees; such anti-dilution rights entitle Meredith
    to obtain up to 138,397 shares.
 
(3) Includes 1,008,145 shares issuable to Sirrom upon exercise of warrants
    exercisable within 60 days after September 30, 1997.
 
(4) Includes 1,785,090 shares beneficially held by the Attards, and 70,000
    shares issuable to Ms. Attard, and 105,000 shares issuable to Mr. Attard
    upon exercise of stock options exercisable within 60 days after September
    30, 1997. Also includes 1,153,120 shares beneficially owned by Meredith,
    138,397 shares Meredith has the right to obtain in accordance with the
    anti-dilution rights described in footnote (2) above, and 549,029 shares
    beneficially owned by Mr. Vanderlip; Ms. Attard has entered into Voting
    Agreements with each of these parties and has sole power to vote such shares
    on certain matters, but has no power to dispose of such shares. Includes
    130,000 shares held by Ms. Attard as custodian for the minor children of the
    Attards.
 
(5) Reflects shares beneficially held by Meredith Corporation, as to which Mr.
    Hartsook disclaims beneficial ownership, and 625 shares issuable to Mr.
    Hartsook upon exercise of stock options exercisable within 60 days after
    September 30, 1997.
 
(6) Includes 614,493 shares held by Mr. Vanderlip, 108,500 shares held by the
    Vanderlip Children's 1988 trust, and 625 shares issuable to Mr. Vanderlip
    upon exercise of stock options exercisable within 60 days after September
    30, 1997. Mr. Vanderlip disclaims beneficial ownership in shares owned by
    the Trust.
 
(7) Includes 356,025 shares issuable upon exercise of stock options and warrants
    held by executive officers and directors exercisable within 60 days after
    September 30, 1997; includes 130,000 shares held by
 
                                       36
<PAGE>   38
 
    Ms. Attard as custodian for the minor children of the Attards; includes the
    1,328,559 shares beneficially owned by Meredith, 138,397 shares Meredith has
    the right to obtain in accordance with its anti-dilution rights described in
    footnote (2) above, and the 108,500 shares held by Mr. Vanderlip as
    Co-Trustee.
 
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
CERTAIN TRANSACTIONS
 
  Equity Investments
 
     On June 4, 1994, the Company issued Meredith an aggregate of 824,000 shares
of its Series B Common Stock (the "Meredith Shares") in a private venture
funding at a purchase price of $6.07 per share. The purchase price was paid in a
combination of $2,900,000 in cash and $2,100,000 in unearned royalties owing on
products created by Multicom under license from Meredith. Under licensing
agreements with Meredith, the Company incurs royalty expenses based upon a
percentage of net sales. Royalties owing and incurred through March 31,1997
under these licensing agreements were applied against the $2,100,000 unearned
royalty amount. The remaining unearned royalty amount at March 31, 1997,
$1,058,000, was forgiven, and the number of shares of Common Stock were not
adjusted. Based upon the cash paid and earned royalties through March 31, 1997,
the adjusted purchase price at March 31, 1997, was $4.80 per share. For the year
ended June 30, 1996, and nine months ended March 31, 1997, royalties of
approximately, $337,000 and $277,000, respectively, have been incurred under
Meredith license agreements.
 
     On July 29, 1994, Mr. Vanderlip and Ms. Attard entered into a Voting
Agreement pursuant to which Mr. Vanderlip agreed that, so long as Ms. Attard
named him to her nominated slate of directors, he would vote at any election of
directors as directed by Ms. Attard. The Agreement provides that it may be
terminated by Ms. Attard upon the occurrence of certain events, including the
naming of another director to the Board in connection with the issuance of
securities of the Company for consideration of at least $2,000,000.
 
     Effective May 5, 1994, the Company entered into a Voting Trust Agreement
with Ms. Attard, as the voting trustee, and certain shareholders. Pursuant to
the Voting Trust Agreement, the Non-voting Shareholders agreed to transfer their
right to vote their shares to Ms. Attard and to sell no more than 20% of the
stock they owned as of May 5, 1994 unless such additional shares are subject to
the voting trust. The Voting Trust Agreement terminated effective February 4,
1997.
 
     On June 4, 1996, Ms. Attard, Meredith Corporation and the Company entered
into a Voting Agreement (the "1996 Voting Agreement") pursuant to which Ms.
Attard and Meredith agreed that Ms. Attard would vote her shares for a single
Meredith designee to serve on the Board of Directors of the Company. The 1996
Voting Agreement does not bind either Meredith's or Ms. Attard's shares when
held by an unrelated transferee. If despite the parties' compliance with their
nomination and voting obligations under the 1996 Voting Agreement, no designee
of Meredith sits on the Board of Directors of the Company for a period of 60
days, then at its election, Meredith may cancel its obligations under Sections
2.3(b) and 2.3(c) of the Stock Purchase Agreement. The 1996 Voting Agreement
expires upon such termination or June 30, 1999.
 
     On February 7, 1997, the Company entered into a Common Stock Purchase
Agreement ("Purchase Agreement") with various officers and directors of the
Company, and shareholders of the Company including the Attards, Meredith
Corporation, and Mr. Vanderlip. An aggregate of 696,620 shares of Common Stock
were sold under the Purchase Agreement at a price of $2.28 per share. The
Attards, Meredith Corporation and Mr. Vanderlip purchased 324,262, 175,438, and
66,089 shares, respectively. The shares of Common Stock sold pursuant to the
Purchase Agreement have not been registered with the Securities and Exchange
Commission.
 
  Contractual Arrangements
 
     On August 11,1992, the Company entered into a license agreement with
Meredith Corporation to use Meredith's copyright, for a term of eight years, in
connection with the following works: Better Homes and Gardens New Dieter's
Cookbook, Better Homes and Gardens Complete Guide to Food and Cooking, Better
Homes and Gardens Food Facts Calorie Counts and More For 488 Common Foods (the
"1992 Meredith
 
                                       37
<PAGE>   39
 
License Agreement"). Under the terms of the 1992 Meredith License Agreement, the
Company was also granted an eight-year nonexclusive license to use Meredith's
trademark, "Better Homes and Gardens", in North America and all other countries
where Meredith enjoys unchallenged ownership in its trademark, for a percentage
royalty, based upon retail sell-through. In June 1996 the parties amended the
1992 Meredith License Agreement to add the books Better Homes and Gardens Quick
Healthy & Delicious Cooking and Better Homes and Gardens Healthy Family
Cookbook.
 
     On August 30, 1993, the Company entered into a second license agreement
with Meredith ("the 1993 Meredith License Agreement"). Under the terms of the
1993 Meredith License Agreement, the Company was granted an eight-year exclusive
copyright license to use the Max the Dragon Series and Max the Dragon song to
prepare its own electronic media products. The Company was granted an eight-year
worldwide nonexclusive right to use Meredith's trademark, "Max the Dragon," in
all countries where Meredith enjoys unchallenged ownership in its trademark, and
pays Meredith a percentage royalty, based upon retail sell-through. The 1993
Meredith License Agreement was later amended to allow Multicom's use of the book
"Incredibly Awesome Crafts for Kids."
 
     On March 31, 1994, the Company entered into a third license agreement with
Meredith (the "1994 Meredith License Agreement"). Pursuant to the 1994 Meredith
License Agreement, the Company was granted an eight-year exclusive copyright
license to make, distribute, use and sell worldwide its titles relating to:
Better Homes and Gardens Complete Guide to Gardening and Better Homes and
Gardens Gardening Naturally. The Company was also granted a nonexclusive
copyright license to use certain transparencies of photographs and the
videotapes Better Homes and Gardens Foolproof Flowerbeds and Better Homes and
Gardens Solving Landscape Problems. The Company was also granted a nonexclusive
license to use Meredith's trademark "Better Homes and Gardens" throughout the
world where Meredith owns full rights in the trademark. Pursuant to the terms of
the license, the Company pays Meredith a percentage royalty fee, based upon
retail sell-through.
 
     In August 1994, the Company issued a $200,000 note payable to Meredith
Corporation, the proceeds of which were used to purchase capital equipment. This
note bears interest at 10% per annum and principal and interest is due monthly
in installments of $6,453. During fiscal year 1997, the largest principal amount
outstanding under the note was $90,506. The balance was due in full on August
15, 1997, but has not yet been paid.
 
     On January 31, 1995, the Company entered into a fourth license agreement
with Meredith (the "1995 Meredith License Agreement"). Under the 1995 Meredith
License Agreement, the Company was granted an eight-year exclusive copyright
license to make, distribute, use and sell worldwide its titles relating to:
Better Homes and Gardens Presents: America's Best Loved Community Recipes,
Better Homes and Gardens Complete Guide to Food and Cooking and Better Homes and
Gardens Food Facts Calorie Counts and More For 488 Common Foods (the "1995
License Works"). The Company was also granted a non-exclusive license to use
Meredith's trademark "Better Homes and Gardens" throughout the world where
Meredith enjoys unchallenged ownership in the trademark. The 1995 Meredith
License agreement obligates the Company to pay a percentage royalty, based upon
retail sell-through.
 
     On July 31, 1995, the Company issued a $2,000,000 note payable to Meredith
Corporation, the proceeds of which were used to fund operations. This note bears
interest at 15% which is payable quarterly in Common Stock at a price of $6.07
per share. Quarterly principal payments are calculated based upon 8% of certain
sales for the quarter, as defined, with a minimum amount of $60,000 due. The
note is convertible at the holder's option into Common Stock via a partial
exercise of the Option Shares. Meredith converted $1,500,000 of the remaining
balance of the note on June 24, 1996. This note is secured by all the Company's
assets pursuant to a Security Agreement dated as of January 31, 1996. The
largest principal amount due under the note during fiscal year 1997 was
$320,000, of which $140,000 remains due and owing. The balance is due in full on
July 31, 1998.
 
     On November 1, 1995, the Company entered into a fifth license agreement
with Meredith (the "First November 1995 Meredith License Agreement"). Under the
First November 1995 Meredith License Agreement, the Company was granted an
eight-year exclusive copyright license to make, distribute, use and
 
                                       38
<PAGE>   40
 
sell worldwide its title relating to Better Homes and Gardens Do-It-Yourself
Tips. The Company was also granted a non-exclusive license to use Meredith's
Trademark, "Better Homes and Gardens," in those territories throughout the world
where Meredith owns unchallenged ownership in the Trademark solely in connection
with the production, advertising, promotion and sale of the title. Pursuant to
the terms of the license, the Company pays Meredith royalties on wholesale
prices of its title, based upon retail sell-through.
 
     On November 1, 1995, the Company entered into a sixth license agreement
with Meredith (the "Second November 1995 Meredith License Agreement"). Under the
Second November 1995 Meredith License Agreement, the Company was granted an
eight-year exclusive copyright license to make, distribute, use and sell
worldwide its title relating to Better Homes and Gardens Planning Your Home. The
Company was also granted a non-exclusive license to use Meredith's Trademark,
"Better Homes and Gardens," in those territories throughout the world where
Meredith owns unchallenged ownership in the Trademark solely in connection with
the production, advertising, promotion and sale of the title. The license
further provides that the Company pay Meredith royalties on wholesale prices of
its title, based upon retail sell-through.
 
     On November 1, 1995, the Company entered into a seventh license agreement
with Meredith (the "Third November 1995 Meredith License Agreement"). Under the
Third November 1995 Meredith License Agreement, the Company was granted an
eight-year exclusive copyright license to make, distribute, use and sell
worldwide its title relating to Better Homes and Gardens Cooking For Today. In
addition, the Company was granted a non-exclusive license to use Meredith's
Trademark, "Better Homes and Gardens," in those territories throughout the world
where Meredith owns unchallenged ownership in the Trademark solely in connection
with the production, advertising, promotion and sale of the title. The license
also obligates the Company to pay Meredith royalties on wholesale prices of its
title, based upon retail sell-through.
 
     Effective June 4, 1996, the Company entered into an eighth license
agreement with Meredith (the "June 1996 Meredith License Agreement"). Under the
June 1996 Meredith License Agreement, the Company was granted an eight-year
exclusive copyright license to make, distribute, use and sell worldwide its
title relating to Better Homes and Gardens Remodeling Your Home. The Company was
also granted a non-exclusive license to use Meredith's Trademark, "Better Homes
and Gardens," in those territories throughout the world where Meredith owns
unchallenged ownership in the Trademark solely in connection with the
production, advertising, promotion and sale of the title. The license also
obligates the Company to pay Meredith royalties on wholesale prices of its
title, based upon retail sell-through.
 
     In March 1996, the Company entered into an agreement with The Moorings LLC,
a sailing yacht charter company in which Henrik N. Vanderlip has a controlling
ownership interest, to license a title engine for the development of a marketing
CD-ROM and Web site for $100,000.
 
     On October 1, 1996, the Company entered into three separate Exclusive
License Agreements with Meredith (the "October 1996 Meredith License
Agreements"). Under the October 1996 Meredith License Agreements, the Company
was granted an eight-year exclusive copyright license to make, distribute, use
and sell worldwide its title relating to Better Homes and Gardens Cooking For
Today and relating to other descriptive text and materials relating to home
decorating and crafts. In addition, under each of the October 1996 Meredith
License Agreements, the Company was granted a non-exclusive license to use
Meredith's Trademark, "Better Homes and Gardens," in those territories
throughout the world where Meredith owns unchallenged ownership in the Trademark
solely in connection with the production, advertising, promotion and sale of the
title. The licenses also obligate the Company to pay Meredith royalties on
wholesale prices of its title, based upon retail sell-through.
 
     The Company has two notes receivable from Tamara and Paul Attard dated in
February and March 1997, in the amounts of $25,000 and $70,000, respectively.
The largest principal amounts due under each note during fiscal year 1997 were
$25,000 and $70,000. The February note bears interest at 8%, and principal and
interest are due in full on December 31, 1997. The March note bears interest at
prime plus 1.25%, and principal and interest are due in full on December 31,
1997. These notes were repaid in full in August 1997.
 
     During fiscal year 1997, the Company engaged the services of Viking Capital
Partners, Inc. ("Viking Capital"), a private investment firm, to advise and
assist the Company in connection with certain financing
 
                                       39
<PAGE>   41
 
and strategic matters. Mr. Vanderlip is the Chairman of Viking Capital. Under
the terms of the February 6, 1997 engagement, the Company paid Viking Capital a
retainer of $35,000, refundable at the option of the Company in the event none
of the contemplated financing transactions occurred for which Viking Capital
would receive a fee.
 
EMPLOYMENT AGREEMENTS
 
     The Company has entered into employment agreements with each of its Named
Executive Officers.
 
     The employment agreement with Ms. Attard dated October 1995 provides for
her to serve as the Chairman and Chief Executive Officer of the Company for a
term expiring October. Under the terms of this employment agreement, the amount
of Ms. Attard's annual salary and bonus is based upon the Software Publishers
Association Annual Salary Survey for the similar position in Northern California
and is adjusted quarterly. This employment agreement entitles Ms. Attard to
severance benefits equal to 12 months salary and benefits in the event of a
termination of her employment by the Company without cause or resignation by her
for good reason.
 
     The employment agreement with Mr. Attard dated October 1995 provides for
him to serve as the President of the Company for a term expiring October 1998.
Under the terms of this employment agreement, the amount of Mr. Attard's annual
salary and bonus is based upon the Software Publishers Association Annual Salary
Survey for the similar position in Northern California and is adjusted
quarterly. This employment agreement entitles Mr. Attard to severance benefits
equal to 12 months salary and benefits in the event of a termination of his
employment by the Company without cause or resignation by him for good reason.
 
     Each of the above-described employment agreements contains restriction on
the employee engaging in competition with the Company for the term thereof, and
for up to one year thereafter, and provisions protecting the Company's
proprietary rights and information.
 
CHANGE IN CONTROL
 
     Upon a change in control, options held by certain directors and executive
officers will become immediately exercisable and vested in full.
 
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
 
     (a) Exhibits required by Item 601 of Regulation S-B. Reference is made to
         the information appearing in the "Index to Exhibits" on pages 41
         through 44 of this Form 10-KSB which information is incorporated herein
         by reference.
 
     (b) Reports on Form 8-K during the fourth quarter: None.
 
                                       40
<PAGE>   42
 
                                   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.
 
                                          MULTICOM PUBLISHING, INC.
 
October 13, 1997
 
                                          By:     /s/ ELLEN R.M. BOYER
 
                                            ------------------------------------
                                                      Ellen R.M. Boyer
                                               Vice President of Finance and
                                                        Administration
                                                and Chief Financial Officer
 
     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 dates indicated.
 
<TABLE>
<CAPTION>
                   SIGNATURE                                TITLE                   DATE
----------------------------------------------- ----------------------------- -----------------
<S>                                             <C>                           <C>
 
           By: /s/ TAMARA L. ATTARD              Chief Executive Officer and   October 13, 1997
-----------------------------------------------     Chairman of the Board
               Tamara L. Attard                 (Principal Executive Officer)
 
            By: /s/ PAUL G. ATTARD                 President and Director      October 13, 1997
-----------------------------------------------
                Paul G. Attard
 
           By: /s/ ELLEN R.M. BOYER               Vice President of Finance    October 13, 1997
-----------------------------------------------      and Administration
               Ellen R.M. Boyer                  and Chief Financial Officer
                                                  (Principal Financial and
                                                Principal Accounting Officer)
 
           By: /s/ LARRY D. HARTSOOK                      Director             October 13, 1997
-----------------------------------------------
               Larry D. Hartsook
 
          By: /s/ HENRIK N. VANDERLIP                     Director             October 13, 1997
-----------------------------------------------
              Henrik N. Vanderlip
</TABLE>
 
                                       41
<PAGE>   43
 
                               INDEX TO EXHIBITS
 
<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                                      EXHIBIT                                   PAGE
    -------    -------------------------------------------------------------------------  ----
    <C>        <S>                                                                        <C>
      3.1*     Amended and Restated Articles of Incorporation of Multicom Publishing,
               Inc., a Washington corporation, filed as Exhibit 3.1 to the Company's
               Annual Report on Form 10-KSB for the period ended June 30, 1996.
      3.2*     Restated Bylaws of Multicom Publishing, Inc., a Washington corporation,
               filed as Exhibit 3.2 to the Company's Registration Statement on Form
               SB-2. (File No. 33-4704-LA) (the "Registration Statement on Form SB-2").
      3.3*     Amendment to Amended and Restated Articles of Incorporation of Multicom
               Publishing, Inc., a Washington corporation, dated February 7, 1997, filed
               as Exhibit 3.3 to the Company's Quarterly Report on Form 10-QSB for the
               period ended March 31, 1997.
      3.4*     Amendment to Amended and Restated Articles of Incorporation of Multicom
               Publishing, Inc., a Washington corporation, dated February 11, 1997,
               filed as Exhibit 3.4 to the Company's Quarterly Report on Form 10-QSB for
               the period ended March 31, 1997.
      3.5*     Amendment to Amended and Restated Articles of Incorporation of Multicom
               Publishing, Inc., a Washington corporation, dated March 31, 1997, filed
               as Exhibit 3.5 to the Company's Quarterly Report on Form 10-QSB for the
               period ended March 31, 1997.
      4.1*     Form of Certificate for Common Stock, filed as Exhibit 4.1 to the
               Company's Registration Statement on Form SB-2.
      4.2*     Registration Rights Agreement dated as of March 31, 1997 between Multicom
               Publishing, Inc. and Vitaloon, Inc., filed as Exhibit 4.2 to the
               Company's Quarterly Report on Form 10-QSB for the period ended March 31,
               1997.
      4.3*     Registration Rights Agreement dated as of March 31, 1997 between Multicom
               Publishing, Inc. and GEM Management Ltd., filed as Exhibit 4.3 to the
               Company's Quarterly Report on Form 10-QSB for the period ended March 31,
               1997.
      4.4*     Letter Agreement dated March 31, 1997, between Multicom Publishing, Inc.
               and Sonic Solutions, filed as Exhibit 4.4 to the Company's Quarterly
               Report on Form 10-QSB for the period ended March 31, 1997.
      4.5*     Common Stock Purchase Agreement dated February 7, 1997, among Multicom
               Publishing, Inc., Tamara L. and Paul G. Attard; Friar, Harper & Arndt
               LLP; Peter Hairston, Jr.; Meredith Corporation; and Henrik N. Vanderlip,
               filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-QSB
               for the period ended March 31, 1997.
      4.6*     First Amendment to Loan Agreement and Loan Documents dated February 7,
               1997, between Multicom Publishing, Inc. and Sirrom Investments, Inc.,
               with Amended and Restated Secured Promissory Note payable to Sirrom
               Investments, Inc., filed as Exhibit 10.2 to the Company's Quarterly
               Report on Form 10-QSB for the period ended March 31, 1997.
      4.7*     Series A Preferred Stock Securities Purchase Agreement dated February 7,
               1997, between Multicom Publishing, Inc., and Sirrom Investments, Inc.,
               filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-QSB
               for the period ended March 31, 1997.
      4.8*     Second Amendment to Loan Agreement and Loan Documents dated February 11,
               1997, between Multicom Publishing, Inc., and Sirrom Investments, Inc.,
               with Amended and Restated Secured Promissory Note payable to Sirrom
               Investments, Inc., filed as Exhibit 10.4 to the Company's Quarterly
               Report on Form 10-QSB for the period ended March 31, 1997.
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      4.9*     Series A Preferred Stock Securities Purchase Agreement (II) dated
               February 11, 1997, between Multicom Publishing, Inc., and Sirrom
               Investments, Inc., filed as Exhibit 10.5 to the Company's Quarterly
               Report on Form 10-QSB for the period ended March 31, 1997.
      4.10*    Convertible Preferred Stock Purchase Agreement dated as of March 31,
               1997, between Multicom Publishing, Inc. And Vitaloon, Inc., filed as
               Exhibit 10.6 to the Company's Quarterly Report on Form 10-QSB for the
               period ended March 31, 1997.
      4.11*    Preferred Stock Purchase Agreement dated as of March 31, 1997, between
               Multicom Publishing, Inc., and GEM Management Ltd., filed as Exhibit 10.7
               to the Company's Quarterly Report on Form 10-QSB for the period ended
               March 31, 1997.
     10.1*     Form of Indemnity Agreement for officers and directors, filed as Exhibit
               10.1 to the Company's Registration Statement on Form SB-2.
     10.2*#    The Registrant's 1994 Stock Option Plan, as amended, Nonqualified Stock
               Option Agreement and Incentive Stock Option Agreement, filed as Exhibit
               10.2 to the Company's Registration Statement on Form SB-2.
     10.3*#    1996 Outside Directors Stock Option Plan, filed as Exhibit 10.3 to the
               Company's Registration Statement on Form SB-2.
     10.4*     Standard Form of Multicom Publishing, Inc. Nonstatutory Stock Option
               Agreement for Outside Directors (Initial Option) and Multicom Publishing,
               Inc. Nonstatutory Stock Option Agreement for Outside Directors (Annual
               Option), filed as Exhibit 10.4 to the Company's Registration Statement on
               Form SB-2.
     10.5*     Lease, dated July 28, 1992, between Multicom Publishing, Inc., and
               Benaroya Capital Company, LLC, as amended, filed as Exhibit 10.5 to the
               Company's Registration Statement on Form SB-2. (Seattle)
     10.6*     Lease, dated November 10, 1995, between Multicom Publishing, Inc. and
               Bayside Plaza Associates, filed as Exhibit 10.6 to the Company's
               Registration Statement on Form SB-2. (San Francisco)
     10.7*     Stock Purchase Agreement dated as of June 4, 1994 among Multicom
               Publishing, Inc., Meredith Corporation and Tamara L. Attard, as amended,
               filed as Exhibit 10.7 to the Company's Registration Statement on Form
               SB-2.
     10.8*     Employment and Non-Competition Agreement, dated October 15, 1995, by and
               between Multicom Publishing, Inc., and Tamara L. Attard, filed as Exhibit
               10.8 to the Company's Registration Statement on Form SB-2.
     10.9*     Employment and Non-Competition Agreement, dated October 15, 1995, by and
               between Multicom Publishing, Inc. and Paul G. Attard, filed as Exhibit
               10.9 to the Company's Registration Statement on Form SB-2.
    10.10*+    License Agreement, dated August 11, 1992, by and between Multicom
               Publishing, Inc., and Meredith Corporation, as amended, filed as Exhibit
               10.10 to the Company's Registration Statement on Form SB-2.
    10.11*+    License Agreement, dated August 30, 1993, by and between Multicom
               Publishing, Inc. and Meredith Corporation, as amended, filed as Exhibit
               10.11 to the Company's Registration Statement on Form SB-2.
    10.12*+    License Agreement, dated March 31, 1994, by and between Multicom
               Publishing, Inc. and Meredith Corporation, as amended, filed as Exhibit
               10.12 to the Company's Registration Statement on Form SB-2.
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    10.13*+    License Agreement, dated January 31, 1995, by and between Multicom
               Publishing, Inc. and Meredith Corporation, filed as Exhibit 10.13 to the
               Company's Registration Statement on Form SB-2.
     10.14*    Voting Agreement dated as of July 29, 1994 between Tamara L. Attard and
               Henrik N. Vanderlip, filed as Exhibit 10.17 to the Company's Registration
               Statement on Form SB-2.
     10.15*    Loan Agreement between Sirrom Capital Corporation and Multicom
               Publishing, Inc. dated as of March 29, 1996, with Stock Purchase Warrant
               to Sirrom Capital Corporation, Security Agreement, Patent and Trademark
               Security Agreement, and Copyright and Royalty Security Agreement, filed
               as Exhibit 10.18 to the Company's Registration Statement on Form SB-2.
     10.16*    Letter Agreement Regarding Resignation between Multicom Publishing, Inc.,
               William H. Luden III and Paul and Tamara L. Attard with Notice of
               Exercise, Warrant Agreement, Note payable to Multicom Publishing, Inc.
               and Stock Pledge Agreement, filed as Exhibit 10.20 to the Company's
               Registration Statement on Form SB-2.
     10.17*    Voting Agreement between Tamara L. Attard, Meredith Corporation and
               Multicom Publishing, Inc., dated as of June 8, 1994, filed as Exhibit
               10.22 to the Company's Registration Statement on Form SB-2.
     10.18*    Loan and Security Agreement, dated June 28, 1995, by and between
               Cupertino National Bank & Trust and Multicom Publishing, Inc., Collateral
               Assignment, Patent Mortgage and Security Agreement, Registration Rights
               Agreement, Amendment to Loan and Security Agreement, Amendment to Loan
               and Security Agreement, Warrants to Purchase Stock and Antidilution
               Agreements, filed as Exhibit 10.23 to the Company's Registration
               Statement on Form SB-2.
     10.19*    Form of Voting Trust Agreement, filed as Exhibit 10.24 to the Company's
               Registration Statement on Form SB-2.
    10.20*+    Distribution Agreement, dated July 25, 1995, by and between Ingram Micro
               Inc. and Multicom Publishing, Inc., filed as Exhibit 10.25 to the
               Company's Registration Statement on Form SB-2.
     10.21*    Promissory Note payable to Meredith Corporation in the principal amount
               of $2,000,000.00 dated July 31, 1995, Allonge and Security Agreement,
               filed as Exhibit 10.26 to the Company's Registration Statement on Form
               SB-2.
     10.22*    Promissory Note payable to Meredith Corporation in the principal amount
               of $200,000.00 dated August 1994, Allonge, Security Agreement and
               Amendment to Security Agreement, filed as Exhibit 10.27 to the Company's
               Registration Statement on Form SB-2.
     10.23*    Promissory Note payable to Meredith Corporation in the principal amount
               of $484,516.07 dated February 4, 1996 and Allonge, filed as Exhibit 10.28
               to the Company's Registration Statement on Form SB-2.
    10.24*+    Exclusive License Agreement between Meredith Corporation and Multicom
               Publishing, Inc. dated November 1, 1995, as amended, filed as Exhibit
               10.29 to the Company's Registration Statement on Form SB-2.
    10.25*+    Exclusive License Agreement between Meredith Corporation and Multicom
               Publishing, Inc. dated November 1, 1995, as amended, filed as Exhibit
               10.30 to the Company's Registration Statement on Form SB-2.
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    10.26*+    Exclusive License Agreement between Meredith Corporation and Multicom
               Publishing, Inc., dated November 1, 1995, as amended, filed as Exhibit
               10.31 to the Company's Registration Statement on Form SB-2.
     10.27*    Employment Agreement dated March 1, 1994 and Stock Option Agreement
               between Multicom Publishing, Inc. and Ellen R.M. Boyer, filed as Exhibit
               10.32 to the Company's Registration Statement on Form SB-2.
     10.28*    Employment agreement dated as of August 26, 1996 between Multicom
               Publishing, Inc. and Patricia E. Hart, filed as Exhibit 10.34 to the
               Company's Annual Report on Form 10-KSB for the period ended June 30,
               1997.
     11.1      Calculation of Earnings Per Share.
     23.1      Consent of Price Waterhouse LLP.
     27        Financial Data Schedule (available in Edgar format only).
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     All other schedules are omitted because they are not required, are not
applicable or the information is included in the Financial Statements or notes
thereto.
---------------
 
* Incorporated by reference.
 
# Director or officer compensatory plan.
 
+ The Company has been granted confidential treatment with respect to these
  exhibits.