<PAGE>

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

                                    FORM 10-K
(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, 1996

/ /  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
     OF 1934
     For the transition period from __________ to __________

                         Commission File Number 0-28676

                               GRAPHIX ZONE, INC.
                (Name of Registrant as specified in its charter)

                      Delaware                                33-0697932      
     (State or other jurisdiction of                      (I.R.S. Employer 
       incorporation or organization)                      Identification No.)

     42 Corporate Park, Suite 200
          Irvine, California                                     92614   
     (Address of principal executive offices)                  (Zip Code)

Issuer's telephone number (including area code):   (714) 833-3838

Securities registered under Section 12(b) of the Exchange Act:

                                        None

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

                          Common Stock, $.01 par value
                                (Title of Class)

     Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that 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-K 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-K
or any amendment to this Form 10-K. /X/

     The issuer's revenues for its most recent fiscal year were $7,182,046.

     Based on the last sale price, the aggregate market value of the voting
stock held by non-affiliates of the registrant on October 4, 1996 was
$41,162,939.

     The number of shares outstanding of the registrant's only class of Common
Stock, no par value, was 10,622,553 on October 4, 1996.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for the 1996 Annual Meeting of
Shareholders to be held on December 12, 1996 are incorporated herein by
reference into Part III.
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                                     PART I

ITEM 1.        DESCRIPTION OF BUSINESS

GENERAL

  The Company was formed in January 1996 for the purpose of acquiring Graphix 
Zone, Inc., a California corporation (GZ-CA), and StarPress, Inc. (StarPress) 
in reverse triangular mergers pursuant to a "Reorganization Agreement" 
entered into by both GZ-CA and StarPress on January 3, 1996 (the 
"Reorganization"). On June 28, 1996, the Reorganization was consummated, and 
GZ-CA and StarPress became wholly-owned subsidiaries of the Company. Both 
GZ-CA and StarPress had been publishers of entertainment-oriented interactive 
multimedia software. The Company will carry on the business of both these 
companies as it pursues a long-term strategy of becoming a leading provider 
of interactive entertainment and multimedia products and services.  To this 
end, the Company is also pursuing a focused Internet strategy.  Through its 
WILMA live music venue site and its CD-ROM LEGENDS sites, the Company is now 
a provider and packager of music content on the Internet.

  The Company develops, publishes and distributes personal computer-based
interactive entertainment and multimedia products (or "New Media") for consumer
markets. The Company's products have been characterized by highly entertaining
and informative experiences in which computer users may interact with a variety
of compelling media from popular sources. The Company is perhaps best known for
its interactive music CD-ROM titles, but has also developed, published and
distributed other entertainment and "edutainment" oriented titles, as well as
reference and personal productivity titles including health, travel and other
genres.  The Company views CD-ROM as simply one of the current and future
technologies that can be exploited for delivery of interactive entertainment
products.  The Company intends to pursue new optical disc formats as they become
commercially viable, such as Digital Video Disc (DVD), which is capable of
containing in excess of two hours of compressed video content along with other
digital information. 

  The Company is currently in the process of establishing a network of Internet
music web sites designed to bring "break-out" musicians, established groups and
solo artists, venues, music fans, retailers, talent agencies and other music
insiders together in an interactive format. The Company believes that the
Internet and other online delivery systems have the potential to become a
primary vehicle for the delivery of music and other interactive entertainment
products to consumers.

  The Company entered the interactive music market in June 1994 with the
introduction of p INTERACTIVE, featuring the recording artist formerly known as
Prince. This was followed in February 1995 with HIGHWAY 61 INTERACTIVE,
featuring Bob Dylan.  In 1995, the Company entered into a contract with Herbie
Hancock to develop a series of interactive jazz titles. The first of these
titles, LIVING JAZZ, was released in September 1996.  A CD-ROM based on the work
of country music artist Willie Nelson was also released in September 1996, as
was UNDER THE COVERS which explores the 1960's rock music scene through the lens
of legendary rock photographer Henry Diltz.  Furthermore, the Company is in
negotiations with numerous other musical artists.

  The Company has also developed the interactive content for enhanced CDs. 
Enhanced CDs and CD-Extra discs contain the audio tracks of a typical compact
disc, but also contain interactive software content that can be accessed via the
CD-ROM drive of a multimedia PC. The Company's first enhanced CD featured the
work of acclaimed composer John Williams.  It contained the only released
version of Williams' Academy Award nominated sound track for the film NIXON and
was the first film soundtrack released exclusively with interactive content. 
The Company recently developed another enhanced CD, ALMIGHTY SOUL: BOB MARLEY,
the formative years, featuring rare and previously unpublished tracks from the
late reggae artist.   The Company is developing an enhanced CD with a track by
the group Hole taken from THE CROW: CITY OF ANGELS sound track and new
interactive content based on the film and comic book series.

  The Company also develops and publishes entertainment and "edutainment" CD-
ROM titles, including its first title, The GUIDED TOUR OF MULTIMEDIA, which was
released in its second edition in October 1995. The Company is developing and
publishing a series of entertainment titles based on the America's Funniest Home
Videos television show, The first title in this series, LIGHTS! CAMERA!
INTERACTION! was released in October 1995. TRAVIS JETT'S REEL EXTREME CD-ROoM,
the second title in the America's Funniest Home Video series, featuring teen
heart-throb Jonathon Jackson, was released in June 1996.  The Company
collaborated with multiple Academy Award winning director Oliver Stone to
produce an interactive CD-ROM based on the film NIXON.  NIXON: THE CD-ROM was
also released in June 1996.  The Company also publishes and distributes 

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THE HALDEMAN DIARIES and PORTRAITS OF AMERICAN PRESIDENTS.  Additionally, the 
Company is distributing and selling WHEEL OF FORTUNE and JEOPARDY, based on 
the popular television shows, and CNN: FACES OF CONFLICT, an interactive 
CD-ROM featuring first-hand personal accounts from countries torn apart by 
war, hostility and discord, and CNN: TIME CAPSULE 1995,  featuring the top 
news stories of 1995.  Other new releases published and distributed by the 
Company in 1996 are Popular Sciences' OCEAN VOYAGER and Highlights 
PUZZLEMANIA.  The Company also developed and published two new releases in 
1996 in the travel genre: EXPERIENCE HAWAII and THE ULTIMATE GUIDE TO 
ADVENTURE TRAVEL.  The Company currently offers 44 multimedia CD-ROM and 
software titles.

  The Company looks for opportunities outside the music and entertainment
arenas which have strategic significance. For example, in the third quarter of
fiscal 1996 the Company released, in partner with EarthLink Network, Inc., an
all-in-one Internet access product.  This project allowed the Company to begin
building relationships with Netscape and EarthLink. It also tied in to the
Company's Internet strategy, which was in its early formative stages at that
point.

  Prior to the Reorganization, StarPress had developed health and personal
productivity software titles, and GZ-CA had operated marketing services and
multimedia productions departments. The Company has discontinued these
activities (although it will continue to publish and distribute the already-
developed health and personal productivity titles), and has disposed of the
Bulgarian subsidiary that performed some of StarPress' software development
work.

ENTERTAINMENT CD-ROM INDUSTRY

  The desktop multimedia industry has been rapidly expanding in recent years
due to technological improvements in hardware and software combined with price
decreases in hardware. Because desktop multimedia is now relatively inexpensive
on both the Windows and Macintosh platforms, it is readily available to
virtually every business or home consumer in the market for a computer. Computer
sales to the home consumer markets now exceed computer sales to the corporate
markets, reflecting widespread non-business computer use. The Company believes
this significant shift has created growing demand for CD-ROM titles at retail
through existing hardware and software channels. The Company also believes that
its interactive music titles have helped to open the retail music channel, a
non-traditional channel for CD-ROMs.

  Most computers sold today are already "multimedia enabled," with a CD-ROM
drive, sound board, speakers and modem included. During 1994 and 1995, many new
CD-ROM titles were published and introduced into the software market, creating a
strong demand for CD-ROM drives as hardware additions to computers. Over 52
million CD-ROM titles were estimated to have been purchased in 1995. The
installed base of CD-ROM drives was estimated to have reached 41 million by the
end of 1995.

INTERNET MUSIC INDUSTRY

  The Internet is a global collection of computer networks, linking millions of
public and private computers around the world. Historically, the Internet was
used by academic institutions and government agencies to exchange information
and send and receive electronic mail. A number of factors, including the
proliferation of communication-enabled personal computers, the availability of
intuitive, graphical software and wide accessibility to an increasingly robust
network infrastructure, have allowed widespread access to the Internet at a
rapidly declining cost and have facilitated the emergence of the worldwide web,
a client/server system of hyper-linked, multimedia databases. The worldwide web
enables non-technical users to easily access information on the Internet and
enables individuals or organizations to offer textual, graphical and other
information directly to end-users.  Further, it enables delivery of graphic
images, animation, motion video and sound.  Commerce and various types of
collaborative communication are also enabled via the Internet and the World Wide
Web.  Internet usage has been rapidly increasing in recent years. The number of
Internet users worldwide was estimated to be approximately 56 million at the end
of 1995, with that number expected to increase to 200 million by the year 2000. 
An October 1995 CommerceNet/Nielsen Internet Demographics survey indicated that
approximately 18 million people in the U.S. and Canada had used the web during
the three month period prior to the survey.

BUSINESS STRATEGY

  The Company believes that the combination of GZ and StarPress makes the
Company stronger than either company could have been on its own, and better able
to exploit opportunities in the multimedia industry (including the Internet).
Its specific strategies are the following:

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  BECOME AN INDUSTRY LEADER IN THE INTERACTIVE ENTERTAINMENT MARKET. The
Company is seeking to become an industry leader in interactive entertainment by
developing interactive entertainment software titles with content obtained from
highly visible and popular sources. The Company believes interactive
entertainment will continue to grow in popularity because of the appeal of
combining video, CD-quality sound, animation, text, graphics and other material
in interactive contexts such as gaming, educational explorations, information
gathering and entertainment experiences. By producing quality interactive
software with popular, high-profile content for its initial products, the
Company intends to capitalize on this potentially large market, create name
recognition and attract other top names in the entertainment industry. The
Company's first entertainment releases, p INTERACTIVE and HIGHWAY 61
INTERACTIVE, have received significant critical acclaim.

  LEVERAGE REPUTATION DEVELOPED BY MUSIC TITLES. The Company's music CD-ROM
titles have brought the Company considerable recognition as a result of the high
quality and many innovative features of those products. The Company believes
this notoriety will open doors in the entertainment industry, allowing the
Company access to the high-profile content that should help sell CD-ROM titles.
Although the Company's reputation was built with music titles, it intends to
exploit this reputation in order to obtain popular content from all facets of
the entertainment industry.  The Company has successfully pursued contractual
relationships with companies such as ABC Productions, Cinergi Productions,
Warner Brothers Music, Sony Music, and Willie Nelson Productions as well as
negotiations in progress with numerous other artists.  The Company recently
entered into a relationship with ICM to further enhance its access to key
entertainment properties.

  ESTABLISH AND EXPLOIT INTERNET WEB SITES. The Company intends to leverage its
reputation as a leader in interactive music by establishing a network of music-
related Internet web sites. The Company believes it can generate revenue through
(1) advertising,  (2) sales of Internet access software, web space and music
related software to musicians and bands seeking discovery, promotion and
exposure, (3) sales of the Company's music and other CD-ROMs, (4) sales of
concert tickets, and (5) sales of music-related merchandise.  

  The Company's Internet strategy calls for the development of a high volume
site in which music fans are attracted by legendary artists as well as the
opportunity to discover emerging talent.  Bands, musicians and other music sites
already represent thousands of independent web sites on the Internet.  The
Company intends to attract visitors of these sites into its Internet music
network thus making it easier for talent to be discovered and entertainment to
be found.  Fresh content and live events will encourage repeat visits by
consumers.  As consumers return again and again to the sites, their "profile" is
developed in such a way that the network of web sites can suggest new web sites
and provide quick links to favorite sites based on past preferences and
responses.  Music industry insiders are expected to be drawn to the site because
of the commercial opportunities for discovery of new talent, up-to-date
information, and observation of trends.  By keeping an eye on the need for
synergy between fans, artists and music industry insiders, and the need for
momentum and widespread awareness of the site, the Company plans to obtain the
critical mass necessary to its network of music sites the first entertainment
megasite on the Internet.

  DEVELOP CONTENT FOR CD-EXTRA DISC FORMAT. The Company has developed the
interactive content for enhanced CDs from Bob Marley, the NIXON sound track and
THE CROW sound track. Other projects under negotiation are expected to be
developed for a similar technology called CD-Extra.  The purpose of both of
these optical disc formats is to allow for interactive content playable by
computers while at the same time including audio tracks to be played either by a
computer or a home stereo system.  These are not only good revenue generating
opportunities for the Company (it receives per unit royalties on enhanced CD and
CD-Extra sales), they help the Company build relationships with artists, record
labels and entertainment industry giants. These relationships are very
significant for the Company's CD-ROM and Internet strategies.  Furthermore, the
ability to play the discs in home stereo systems provides an easier entry for
the Company's products into traditional music distribution channels.

  CONTINUE TO DISTRIBUTE NON-ENTERTAINMENT TITLES. The Company has a library of
approximately forty health, personal productivity and travel titles that it will
continue to distribute. The Company recently entered in a distribution agreement
with GT Interactive Software Corp. ("GT"), one of the largest software
distributors. GT has what the Company believes is the best distribution in the
mass merchant channels (e.g., Target, WalMart, K-Mart), and should enable the
Company's products to be far more widely distributed than they had been
previously.

  SELECTIVELY PURSUE OTHER OPPORTUNITIES. The Company will pursue opportunities
outside the music and entertainment arenas when they have strategic
significance. For example, the Company's all-in-one Internet access product,
released in the 

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third quarter of Fiscal 1996, allowed the Company to begin building 
relationships with Netscape and EarthLink, two key companies in the Internet 
industry.

  USE BUNDLING TO ENHANCE MARKETING AND DISTRIBUTION. Through its long-standing
relationships with major multimedia hardware companies, the Company expects to
create large bundling opportunities for its CD-ROM and CD-Extra titles.
Furthermore, it is believed that DVD format discs will present future bundling
opportunities.  By exploiting these relationships and aggressively pursuing
bundling opportunities, GZ believes it can attain additional distribution of its
titles and market penetration for the PC and Macintosh platforms. GZ currently
has bundling arrangements with Compaq, Sirius, Camintonn/ZRAM, Syncronys
Softcorp and IDG Books.

MUSIC CD-ROM PRODUCTS

  GZ-CA entered the entertainment CD-ROM market with the introduction of p
INTERACTIVE in June 1994 with the cooperation of Warner Brothers Music. The
critical acclaim accorded this product attracted the attention of Sony Music
Entertainment and Bob Dylan, who provided the content for HIGHWAY 61
INTERACTIVE, which was introduced in February 1995. The Company believes these
CD-ROMs have set the standard for a new form of entertainment, interactive
music, built around the growing installed base of multimedia computers. 
Together these titles have received dozens of awards.

  The Company intends to continue to develop CD-ROMs with an innovative
interface that abandons the traditional, linear look of many CD-ROM products.
For example, the look and feel of many of the Company's early releases included
an unbounded, experiential navigation system that had no main menu or home
screen, with the objective of making the user forget that a computer was being
used. Symbols that accurately represented the entertainer were used as
interactive icons and transitions. The Company's goal is to remain in the
artistic lead and set multimedia entertainment trends that deliver content in
fresh, entertaining and compelling ways.  CD-ROMs may contain songs, music
videos, playable audio files, celebrity interviews, insights into the artist's
personal life, biographical articles, video puzzles, 3D imagery, discovery
challenges and the ability to create interactive music. All CD-ROMs will contain
links to the Company's Internet music web sites. The Company entered into an
agreement to develop a series of jazz CD-ROMs with Grammy and Academy Award
winner Herbie Hancock.  The first jazz CD-ROM called LIVING JAZZ was released in
September 1996.  The Company also released in September 1996 UNDER THE COVERS, a
CD-ROM on the Los Angeles music scene featuring the photography of legendary
rock photographer Henry Diltz and the music of such bands as Crosby, Stills and
Nash and The Doors.  Further, the Company released WILLIE in September 1996
based on the life and music of legendary singer, songwriter and composer Willie
Nelson.  

ENHANCED CD PRODUCTS

  As a result of the recognition it has gained through its music CD-ROM titles,
the Company has had opportunities to develop enhanced CDs (and intends to
develop for a similar format in the future called CD-Extra), which are audio CDs
that also contain multimedia computer content. Enhanced CDs play like any other
audio compact disc when placed in an audio CD player, and play like a CD-ROM
when placed in the CD-ROM drive of a multimedia PC. Graphix Zone has developed
an enhanced CD of the NIXON sound track, The Crow sound track and a Bob Marley
title in this format titled ALMIGHTY SOUL: BOB MARLEY -- the formative years.
This Bob Marley enhanced CD contains unreleased songs, including the rarest Bob
Marley recording of all, SELASSIE IS THE CHAPEL.  The Company believes that many
artists and record labels will be eager to utilize unused space on music CDs by
adding interactive content that helps create interest and provide an
entertainment and cultural context for the music.  These discs open up
distribution opportunities through traditional music channels and avail the
company the opportunity for per disc royalties.  The Company intends to provide
online links to its network of Internet music web sites through these discs as
well.

ENTERTAINMENT CD-ROM PRODUCTS

  In addition to music CD-ROMs, the Company intends to develop and distribute
entertainment titles of many other types. Pursuant to an agreement with ABC
Productions, GZ-CA developed a title based on the hit television show, America's
Funniest Home Videos, which was released in October 1995. A second CD-ROM based
on America's Funniest Home Videos entitled TRAVIS JETT'S REEL EXTREME VIDEO CD-
RoOM was released in June 1996 and features teen heart-throb Jonathon Jackson. 
Pursuant to an agreement with Cinergi Pictures Entertainment, Inc., the Company
developed and release in June 1996 a CD-ROM based on the Oliver Stone film,
NIXON.  In August 1996 the Company released an entertainment CD-ROM based on the
cult film, THE CROW.  The Company publishes and distributes titles featuring
such household names

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as Wheel of Fortune, Jeopardy, MTV's Beavis and Butthead, CNN, ABC News, 
Highlights, Popular Science, the Improv, Caroline's, Playboy, Sports 
Illustrated, Willy Wabbit, Charles Kuralt, Bobcat Goldthwaite, World Book 
Encyclopedia and ESPN.  The Company has also entered into an agreement to 
develop an entertainment CD-ROM based on the cult film, THE CROW.  The 
Company will continue to seek content with high name recognition for a 
variety of entertainment titles.

OTHER SOFTWARE PRODUCTS

  GZ-CA has published and distributed THE GUIDED TOUR OF MULTIMEDIA since May
1993. This title was developed as a joint project between GZ and Multimedia
World/PC World magazines and is currently in its 2nd edition.  THE GUIDED TOUR
OF MULTIMEDIA is an interactive multimedia tutorial and reference for beginners
and experts which includes text, sound, graphics, video and animation, with over
15 hours of content providing an overview and understanding of multimedia
basics, technical fundamentals, hardware and software and guidelines for
creating a multimedia production. 

  StarPress brought to the Reorganization a library of 21 titles of the health,
personal productivity and travel genres. Although the Company does not intend to
develop any additional titles of these types, it will continue to publish and
distribute the titles in its library so long as there is demand for them.

  The Company intends to take advantage of software publishing opportunities in
areas of strategic significance outside the entertainment genre when those
opportunities seem to present opportunities for significant revenue, enhanced
strategic relationships or increased brand recognition.  The Company's all-in-
one Internet access product, which is a collection of Internet software
including Netscape Navigator 2.0, Internet Phone and other third-party modules
was released in 1996 by the Company.  The Company produced tutorial,
installation and presentation aspects of the software bundle and published the
title in conjunction with EarthLink, Inc. The Company believes the product
release meets each of the strategic and tactical criteria mentioned above and is
currently in negotiation to produce a similar title with another Internet access
provider.

SOFTWARE MARKETING AND DISTRIBUTION

  The Company's CD-ROM products are distributed through established CD-ROM
distribution channels throughout the world, i.e., computer and software retail
outlets, and multimedia bundling, where the Company has strong industry
contacts, as well as in music, mass merchandise and other retail stores. The
Company believes that its music and other entertainment CD-ROM titles offer an
opportunity to greatly expand CD-ROM sales into nontraditional retail channels
of distribution such as "superstores," mass merchants and record stores. The
Company has established its own internal sales and distribution force enabling
increased distribution of its CD-ROM products.

  The Company believes that in-house sales and distribution has facilitated
strong relationships with buyers and distributors. The Company is known for its
strong marketing abilities, with strong backgrounds in computer products
marketing. The marketing group has been carefully assembled to include experts
in consumer electronics marketing, retailing, software marketing, and high
technology public relations. It is entering into electronic direct marketing via
the online virtual store, e-mail newsletters, and innovative targeted
advertising.  The Company combines high quality production, "brand name"
entertainment content and aggressive sales and marketing in an effort to ensure
the greatest possible success for its titles.

  On March 13, 1996, the Company entered into a Distribution Agreement with GT. 
The Company believes that GT's distribution capabilities in mass merchandise
retail stores such as Target and WalMart are the strongest in the industry, and
that this alliance will broaden distribution of the Company's CD-ROM products.
In connection with the execution of this Distribution Agreement, the Company
issued to GT a warrant to purchase up to 800,000 shares of Common Stock for a
per share exercise price of $5.125.  GT has exercised the warrant with respect
to 80,000 of the shares.  The Company is registering for resale the remainder of
Common Stock underlying GT's warrant.

  The Company expects commercial success of its products due in part to the
demonstrated popularity of the content and entertainment properties it chooses
for its titles. The Company believes, going forward, that the popularity of the
artists, films, television shows, and other media properties, combined with
quality production should generate sales levels at least sufficient to recover
costs and generate positive gross margin. However, the entertainment marketplace
is unpredictable, and 

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the Company cannot predict the popularity of any particular title, even if 
the content is "brand name" and the title receives considerable critical 
acclaim.

CD-ROM DEVELOPMENT AND PRODUCTION

  The development of an interactive software product requires the integration
and management of a complex combination of talent ranging from the highly
creative to the very technical. The Company has assembled a core group of
experienced people and state-of-the-art computer hardware and software tools to
facilitate this process.

  An interactive multimedia entertainment product begins with a team of
creative writers and artists who prepare written treatments, flowcharts,
outlines, design documents, scripts and storyboards as required to internally
communicate the concept, flow, content, media and interaction. Production is
managed by a producer who coordinates with the technical programmers to assure
acceptable image quality within the defined performance limits of the targeted
playback systems.  This is followed by the task of organizing, gathering,
preparing and editing the media such as the video clips, sound recordings and
voice-overs, photographs, drawings and printed matter. This work is done by
researchers, writers, editors, graphic artists, videographers, audio
specialists, animators and production assistants. The producer coordinates
concurrent activity by artists who create artwork for the various screens and
interfaces that comprise the interactive experience and over which the media is
displayed.  For entertainment products, musical artists, record companies, film
studios and other copyright owners are expected to supply a considerable amount
of broadcast quality digital video and audio.

  All of the media elements are organized by the Company's programmers with
authoring software tools used to insert the media, assemble the modules and
define the interactivity. Through a series of trials, tests and troubleshooting
procedures, the program code is refined so that it functions as specified in the
design document. When the software development is complete, the entire digital
file is packaged onto a large hard drive. If the product is to be distributed as
a CD-ROM, this data file is processed through Company owned CD-ROM formatting
equipment which generates a single "one-off" CD-ROM. Several of these discs are
produced for purposes of further testing. After all the final editing is
completed, a "golden master" CD-ROM is made to be used for manufacturing in high
volumes at third party facilities.

INTERNET MUSIC SITE

  The Company is developing a modularized group of related Internet web sites
which the Company believes will bring together emerging musicians and bands,
music fans, music venues, record labels, talent agencies and other "industry
insiders."  Within the Company's site there will be modules in which visitors
can view or download music, graphics and, in some cases, videos from music
"legends" as well as new artists seeking recognition, obtain concert information
and, eventually, purchase tickets, upload their own music, and purchase CD's and
cassette tapes, the Company's interactive music titles and other CD-ROMs and
other music-related merchandise.

  The Company has established certain components of its music site.  WILMA is
the concert information site.  Visitors to the WILMA site can access a broad
range of information about thousands of clubs and other secondary concert
venues.  Available information includes concert and performance schedules, venue
information, reviews, directions to venues and ticket prices. Additionally, the
Company has entered into an agreement with Lycos to use its search engine to
provide search capabilities for information on music and entertainment elsewhere
on the Internet.

CD-ROM MANUFACTURING

  The Company does not have any facilities for manufacturing or duplicating CD-
ROMs in high volumes and uses outside suppliers for its production quantities.
There are a number of duplication facilities that are capable of satisfying the
Company's needs, and the Company will generally select duplication facilities
based on price and service. 

COMPETITION

  The interactive software publishing business is extremely competitive, with
the number of publishers and titles expanding dramatically each year. 
Competition comes from four sources: (1) large established publishers (and often
distributors) such as Electronic Arts, Davidson Broderbund, The Learning
Company, Compton's NewMedia and Interplay Productions; (2) smaller publishers
such as Sanctuary Woods and 7th Level; (3) very small independent developers who

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develop product but rarely distribute; and (4) large entertainment companies who
are entering the field such as Time Warner, Turner, Sony and Disney.  The
Company is presently in the second category, with the goal of moving up to the
first category (the top tier of publishers).  While the Company does not
dominate market share of CD-ROMs title sales as a whole, the Company believes it
is the leader in CD-ROMs based on popular entertainment content, be it from
music, film, video, television or publishing genres.  Although some of the large
entertainment companies may be establishing their own production groups now or
in the future, the vast majority of entertainment content is controlled by or
dependent upon individuals or entities outside the grasp of those large
companies.  Of the large entertainment companies that are forming interactive
production groups, some, such as Sony, have already begun disbanding the effort,
while others, such as Disney, have discovered that interactive software
publishing is not a trivial task and have hired outside development companies. 
The Company believes that the principal competitive factors in its market are
brand recognition, ease of use, comprehensiveness and over-all quality. 
Although the Company believes that its products compete favorably with respect
to the factors outlined above, there can be no assurance that the Company will
be able to compete successfully against current and future sources of
competition or that the competitive pressures faced by the Company will not have
a material adverse effect on the Company's business, results of operations and
financial condition.

  The market for Internet products and services is highly competitive, and this
competition is expected to continue to increase significantly.  There are no
substantial barriers to entry, and the Company expects that competition will
continue to intensify.  The Company competes with other providers of Internet
music services, including IUMA and NIIK.  In the future, the Company may
encounter competition from providers of Internet entertainment products and
services that incorporate music content into their offerings.  Many of the
Company's existing competitors, as well as a number of potential new
competitors, have significantly greater financial, technical and marketing
resources than the Company.

INTELLECTUAL PROPERTY

  The Company relies on copyright and trademark protection and non-disclosure
agreements to protect its intellectual property. The Company has no patents,
pending or otherwise, relating to any of its products. The Company's logo and
the name Graphix Zone-Registered Trademark- have been registered as service
marks with the United States Patent and Trademark Office.  The Company claims
copyright protection for all of its multimedia and CD-ROM materials. The Company
intends to pursue registration of its copyrights and other trademarks and
service marks as advised by counsel.

  The Company will not own the copyrights to all of the video, audio and
related content it obtains from copyright owners in order to create its CD-ROMs
and certain other entertainment titles and which it intends to include in its
Internet music sites.  The Company will claim copyright on and seek to protect
the material it creates in developing these titles and the Internet sites,
subject to the terms of the Company's agreements with the copyright owners. It
must obtain, and will continue to seek, rights to use video, audio and related
content from the copyright owners.

EMPLOYEES

  As of September 27, 1996, the Company had 67 full-time employees of whom 17
were employed in administration and finance, 20 in sales and marketing and 30 in
multimedia development and related computer services. Many of the Company's
employees are highly skilled, and the Company's continued success depends in
part upon the ability to attract and retain such employees. In an effort to
attract and retain such employees, the Company offers employee benefit programs
which it believes are competitive and sufficient to attract qualified employees.
In critical areas, the Company has utilized consultants and contract personnel
to fill temporary needs or to fill open positions until permanent employees
could be recruited. The Company has never experienced a work stoppage, none of
its employees is represented by a labor organization, and the Company considers
its employee relations to be good.

ITEM 2.        DESCRIPTION OF PROPERTY

  The Company leases approximately 17,000 square feet of office, multimedia
production, showroom and theater space in two separate buildings located in
Irvine, California and approximately 2,700 square feet of office and production
space in a building located in Venice, California.  The Company plans to lease
additional space in the Irvine, California area, as necessary. The Company also
subleases approximately 12,000 square feet of office space in San Francisco,
California, which was the old StarPress headquarters. Because the Company has
consolidated the combined operations of StarPress and GZ-CA in Irvine, the
Company is attempting to sublease the San Francisco space.

                                       8
<PAGE>


ITEM 3.        LEGAL PROCEEDINGS

     The Company is not a party to any material litigation and is not aware 
of any material pending or threatened litigation.

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

     The registrant Graphix Zone, Inc., a Delaware corporation, did not 
submit any matters to a vote of security holders.  However, the registrant is 
the successor to Graphix Zone, Inc., a California corporation, and StarPress, 
Inc., a Colorado corporation.  The following is the information required 
under Item 4 of Form 10-K for Graphix Zone, Inc., a California corporation, 
and StarPress, Inc., a Colorado corporation : 

Graphix Zone, Inc., a California corporation:

     (a)     Special Meeting of Shareholders of Graphix Zone, Inc., a 
             California corporation, was held on June 27, 1996.

     (b)     Omitted pursuant to Instruction 3 to Item 4 of Form 10-K.

     (c)     PROPOSAL ONE:     Approval of the combination of Graphix Zone, 
             Inc., a Californian corporation, and StarPress, Inc., a Colorado 
             corporation, pursuant to an Agreement and Plan of Reorganization 
             dated January 3, 1996:

                 For                Against                  Abstain
             ------------        ---------------       -------------------
               3,910,813             4,350                    3,560

     (d)     Not applicable

StarPress, Inc., a Colorado corporation:

     (a)     Special Meeting of Shareholders of StarPress, Inc., a Colorado 
             corporation, was held on June 27, 1996.

     (b)     Omitted pursuant to Instruction 3 to Item 4 of Form 10-K.
  
     (c)     PROPOSAL ONE:     Approval of the combination of StarPress, Inc.,
             a Colorado corporation, and Graphix Zone, Inc., a California
             corporation, pursuant to an Agreement and Plan of Reorganization
             dated January 3, 1996:

                 For                Against                  Abstain
             ------------        ---------------       -------------------
               20,835,744            2,500                   372,739
  
     (d)     Not applicable

                                      9
<PAGE>

                                   PART II

ITEM 5.        MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

     Graphix Zone, Inc.'s common stock began trading on July 1, 1996 on the 
Nasdaq - SmallCap Market under the symbol GZON.  Prior to July 1, 1996 the 
Company's wholly owned subsidiary GZ-CA traded on the Nasdaq - SmallCap 
Market under the symbol GZON.  Prior to July 1, 1996 the Company's wholly 
owned subsidiary StarPress traded on National Association of Securities 
Dealers Electronic Bulletin Board under the symbol GTBR.  The following 
tables set forth the range of high and low closing prices for the common 
stock of GZ-CA and StarPress, the Company's wholly owned subsidiaries, for 
the fiscal quarters indicated.

     GZ-CA Year ended June 30, 1996                    High           Low  
--------------------------------------------------------------------------------
     First fiscal quarter                         $   11.125     $   5.000
     Second fiscal quarter                             8.875         4.500
     Third fiscal quarter                              6.875         4.750
     Fourth fiscal quarter                             8.000         4.875

     GZ-CA Year ended June 30, 1995                    High           Low  
--------------------------------------------------------------------------------
     First fiscal quarter                         $    5.500     $   3.375
     Second fiscal quarter                             4.875         3.375
     Third fiscal quarter                              5.625         3.500
     Fourth fiscal quarter                             5.375         2.375

     StarPress Year ended June 30, 1996                High           Low  
--------------------------------------------------------------------------------
     First fiscal quarter                         $    9.375     $   3.409
     Second fiscal quarter                             7.671         3.146
     Third fiscal quarter                              6.392         3.835
     Fourth fiscal quarter                             5.966         4.262

     StarPress Year ended June 30, 1995                High           Low  
--------------------------------------------------------------------------------
     First fiscal quarter                         $   13.637     $   3.409
     Second fiscal quarter                             8.523         0.426
     Third fiscal quarter                              7.458         0.426
     Fourth fiscal quarter                             7.245         2.131

HOLDERS OF RECORD

     At June 30, 1996 the Company had approximately 262 stockholders of 
record of the Company's common stock.

DIVIDENDS

     The Company has never paid any cash dividends on its common stock and 
does not intend to pay any cash dividends in the foreseeable future.  In 
addition, the terms of the Company's senior credit facility restrict the 
ability of the Company to pay cash dividends. 

                                      10
<PAGE>


ITEM 6.        SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal year ended June 30,                        1996           1995           1994           1993           1992
(In thousands, except per share data)             --------------------------------------------------------------------
<S>                                               <C>            <C>            <C>            <C>            <C>
Statement of Operations Data:
Net revenues                                      $  7,182       $  2,171       $   244        $   -          $   -
Gross profit                                         3,986            333            77            -              -
Net loss                                          $ 23,519       $ 10,916       $ 2,773        $  839         $   94
----------------------------------------------------------------------------------------------------------------------
Per Share Data (1):
Net loss                                          $   5.05       $   7.76       $  3.15        $ 3.04         $ 0.39
Weighted average shares outstanding                  4,661          1,407           881           276            244
----------------------------------------------------------------------------------------------------------------------
Balance sheet Data :
Working capital (deficit)                         $    (20)      $   (277)      $   296        $ (696)           (98)
Total assets                                         8,529          3,771         3,852           126              4
Shareholders' equity (deficit)                    $  2,049       $    939       $ 3,039        $ (591)           (94)
----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Share and per share data have been adjusted to reflect a .14666 : 1 stock
    exchange in connection with the Reorganization.

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following table sets forth certain quarterly and pro-forma quarterly
consolidated financial information for the Company's last four quarters.  The
pro-forma quarterly consolidated financial information is based upon the results
of operations of the Company's wholly owned subsidiaries, GZ-CA and StarPress,
combined and adjusted as if the Reorganization occurred at the beginning of
fiscal 1996.  The operating results for any quarter are not necessarily
indicative of results for any future period.

<TABLE>
<CAPTION>
Year ended June 30, 1996                          1st Quarter    2nd Quarter    3rd Quarter    4th Quarter     Total Year
(In thousands, except per share data)             -------------------------------------------------------------------------
<S>                                               <C>            <C>            <C>            <C>             <C>
Net revenues                                      $     911      $   1,065      $    1,952     $   3,254       $    7,182
Gross margin                                            423             42           1,281         2,240            3,986
Net loss                                             (1,438)        (4,597)           (960)      (16,524)         (23,519)
Loss per share                                    $   (0.33)     $   (1.00)     $    (0.21)    $   (3.27)      $    (5.05)
---------------------------------------------------------------------------------------------------------------------------
Year ended June 30, 1996 (Pro-forma)

Net revenues                                      $   1,634      $   1,388      $    2,529     $   3,650       $    9,201
Gross margin                                            710           (554)          1,695         2,423            4,274
Net income (loss)                                    (1,876)        (7,195)         (2,377)          354          (11,094)
Income (loss) per share                                (.18)          (.71)           (.23)          .03            (1.09)
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                      11
<PAGE>


ITEM 7.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND

               FINANCIAL CONDITION

     THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES.  THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.

GENERAL

     The Company's business focus and strategy is to become an industry leader
in interactive entertainment.  The Company develops and distributes interactive
CD-ROM multimedia products for the growing interactive multimedia segment of the
desktop computer industry.  In addition, the Company is developing a network of
Internet music web sites which may create additional revenue streams.

     In June 1996, the Company acquired all of the outstanding capital stock of
GZ-CA, a developer and publisher of interactive software titles, in exchange for
5,526,543 shares of the Company's common stock.  The total purchase price for
GZ-CA was $23,930,957 (which was determined by the fair market value of GZ-CA
common stock) including acquisition costs of $823,932.  The acquisition was
accounted for by the purchase method of accounting.

RESULTS OF OPERATIONS

     The following table sets forth items from the Company's Consolidated
Statements of  Operations as a percentage of net revenues.

<TABLE>
<CAPTION>
                                                  1996           1995           1994
                                                --------       --------       --------
    <S>                                         <C>            <C>            <C>
    Net revenues                                 100.0%         100.0%         100.0%
    Cost of revenues                              44.5%          84.7%          68.4%
                                                --------       --------       --------
    Gross margin                                  55.5%          15.3%          31.6%
    Research and development expense              28.0%          93.6%         272.2%
    Sales and marketing expense                   41.4%         115.0%         344.0%
    General and administrative expense            36.3%         144.6%         540.0%
    Restructuring charge                          26.4%           -              -
    Acquired in-process technology               249.7%         129.4%           -
                                                --------       --------       --------
    Operating loss                              (326.3)%       (467.3)%     (1,124.6)%
    Interest expense, net                          1.1%          35.4%          12.4%
                                                --------       --------       --------
    Net loss                                    (327.4)%       (502.7)%     (1,137.0)%
                                                --------       --------       --------
                                                --------       --------       --------
</TABLE>

NET REVENUES

     Net revenues for fiscal 1996 increased by $5,010,712 to $7,182,046 from 
$2,171,334 in fiscal 1995.  The increase in net revenues of  230.8% from 
fiscal 1995 to fiscal 1996 is primarily due to the acquisition of StarPress 
Multimedia, Inc. in June 1995 and the acquisition of certain products from 
Sony Interactive Entertainment, Inc. in November 1995.  Both acquisitions 
increased the Company's catalog of products and corresponding revenues.  Net 
revenues for fiscal 1995 increased $1,927,436 to $2,171,334 from $243,898 in 
fiscal 1994.  The increase in net revenues of 790.3% from fiscal 1994 to 
fiscal 1995 is primarily a result of the Company having first introduced its 
products and begun developing its distributor network mid way through fiscal 
1994.  The Company expects revenues to increase during fiscal 1997 as 
revenues from both GZ-CA's and StarPress's catalog of products will be 
reflected in the results of operations for the entire year.  Additonally, the 
Company expects to release several new titles during fiscal 1997.

                                      12
<PAGE>


     Approximately 66% of the Company's net revenues for fiscal 1996 were 
derived from three customers.  GT Interactive, Tech Data Corporation and 
Navarre Corporation individually accounted for 27%, 24% and 15% of net 
revenues, respectively.  Approximately 58% of the Company's net revenues for 
fiscal 1995 were derived from three customers.  Tech Data Corporation, Ingram 
Micro and Kenyon Capital Ltd. Individually accounted for 36%, 12% and 10% of 
net revenues, respectively.

     The Company's revenues may fluctuate periodically as a result of the 
timing of new CD-ROM releases as well as external factors such as seasonal 
buying patterns for CD-ROM titles.  The Company grants certain distributors 
and retailers limited rights to exchange product and price protection on 
unsold merchandise. The Company establishes a reserve for price adjustments 
and estimated returns at the time the related revenue is recognized.  As of 
June 30, 1996, the Company has accrued approximately $1,039,000 in reserves 
for product returns.

GROSS MARGIN

     Gross margin as a percentage of net revenues during fiscal 1996 
increased to 55.5% from 15.3% in fiscal 1995.  The increase in gross margin 
percentage from fiscal 1995 to 1996 is primarily a result of fiscal 1995 cost 
of revenues including approximately $608,000 of amortization and write-offs 
of product development costs.  These charges represented a significantly 
larger proportional share of net revenues in fiscal 1995 than similar charges 
included in fiscal 1996 cost of revenues.  Additionally, during fiscal 1995 
the Company was able to decrease per unit product costs as it gained 
experience in the procurement of product components.  Gross margin as 
percentage of net revenues during fiscal 1995 decreased to 15.3% from 31.6% 
in fiscal 1994.  The decrease in gross margin percentage from fiscal 1994 to 
1995 was due to the amortization and write-offs of product development costs 
included in fiscal 1995 cost of revenues, as discussed above.

RESEARCH AND DEVELOPMENT EXPENSES

     Research and development expenses increased by $23,445 to $2,008,614 in 
fiscal 1996 from $2,032,059 in fiscal 1995 and represented 28.0% and 93.6% of 
net revenues, respectively.  The relatively stable expense related to 
research and development and decrease as a percentage of net revenues were 
primarily a result of the Company not directly incurring research and 
development costs and instead shifting all research and development 
activities to GZ-CA in the third quarter of fiscal 1996 in anticipation of 
the Reorganization.  For financial statement reporting purposes the expenses 
incurred by GZ-CA are not reflected in the Company's results of operations.  
In the near term the Company expects research and development costs, as 
compared to fiscal 1996, to increase in both amount and as a percentage of 
net revenues.  

SELLING AND MARKETING EXPENSES

     Selling and marketing expenses during fiscal 1996 increased to 
$2,973,569 from $2,498,488 and $839,111 during fiscal 1995 and 1994, 
respectively.  The increase in sales and marketing expenses is primarily 
related to increases in personnel as well as increased participation in 
cooperative advertising and marketing programs to further penetrate and 
promote products in traditional and alternative channels.  The Company 
expects selling and marketing expenses to continue to increase in dollar 
amount in the future.  As a percentage of net revenues, selling and marketing 
expenses during fiscal 1996 decreased to 41.4% from 115.0% and 344.0% in 
fiscal 1995 and 1994, respectively.  The decrease as a percentage of net 
revenues is primarily due to significant increases in revenues and only 
moderate increases in selling and marketing expenses.  As revenues increase, 
the Company expects selling and marketing expenses to decrease as a 
percentage of net revenues.

GENERAL AND ADMINISTRATIVE EXPENSES

     General and administrative expenses during fiscal 1996 decreased to 
$2,606,670 from $3,139,507 during fiscal 1995.  The decrease is primarily as 
result of the curtailment of certain administrative functions and decrease in 
personnel in anticipation of the Reorganization.  Additionally, certain 
recurring administrative costs including facility rents for the second half 
of fiscal 1996 were reserved for and included in restructuring charge 
discussed below.  General and administrative expenses during fiscal 1995 
increased to $3,139,507 from 1,317,070 during fiscal 1994.  The increase was 
a result of several factors including financial consulting fees of $554,000, 
amortization of debenture financing costs of $176,000 and write-off of the 
unrealizable balance of goodwill resulting from the acquisition of a 
subsidiary of $91,000.  General and administrative expenses during fiscal 
1996 decreased as a percentage of net revenues to 36.3% from 144.6% and 
540.0% during fiscal 1995 and 1994, respectively.  The decrease is primarily 
as result of a significant increase in revenues and only moderate increases 

                                      13
<PAGE>

in general and administrative expenses. The Company expects general and 
administrative expenses to increase in amount in the near term as the Company 
continues to develop the infrastructure to facilitate continued growth.

RESTRUCTURING CHARGE

     During the second quarter of fiscal 1996, in anticipation of the 
Reorganization, the Company adopted a restructuring plan to enhance overall 
competitiveness, productivity and efficiency through the reduction of 
overhead costs.  The total estimated cost of the restructuring charged to 
operations during fiscal 1996 was $1,900,000.  The charge principally 
reflects severance costs resulting from a reduction of a significant portion 
of the Company's workforce, write-down of excess furniture and equipment and 
office facilities and write-offs of assembled workforce and goodwill arising 
from the Company's acquisition of StarPress Multimedia, Inc. in June 1995.

ACQUIRED IN-PROCESS TECHNOLOGY

     As a result of the Company acquiring GZ-CA in June 1996 and StarPress 
Multimedia, Inc. in June 1995 the Company wrote-off $17,935,000 and 
$2,810,000 of acquired research and development costs in fiscal 1996 and 
1995, respectively.  These costs are considered non-recurring expenses.
The Company is not able to determine if any such costs will be incurred in
the future.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's principal source of liquidity is cash.  At June 30, 1996, 
cash and cash equivalents was $1,288,196, net working capital deficiency was 
$19,631 and net shareholders' equity was $2,048,729.  At June 30, 1995, cash 
and cash equivalents were $1,919,102, net working capital deficiency was 
$277,374 and net shareholders' equity was $939,408.  The decrease in cash and 
cash equivalents from the prior fiscal year was primarily due to the funding 
of fiscal year operating losses offset by cash and cash equivalents acquired 
in the acquisition of GZ-CA.  Cash used in operating activities during fiscal 
1996 and 1995 were $7,082,940 and $4,979,232, respectively.

     Due to historical losses and substantial up-front costs associated with 
the development of CD-ROM titles and Internet web sites, the Company has 
continually needed to locate outside sources of liquidity.  In September 
1996, the Company raised $939,950, net of offering expenses, through a 
private equity offering of 1,000 shares of convertible preferred stock and a 
warrant to purchase 69,717 shares of common stock to one accredited investor. 
Additionally, on October 31, 1996, the Company raised $1,072,910, net of 
offering expenses, through a private equity offering of 1,525 shares of 
convertible preferred stock and warrants to purchase 498,368 shares of common 
stock to five accredited investors. The Company intends to use the proceeds 
from the October 31, 1996 private equity offering to satisfy its bank note 
payable of $750,000 upon its maturity on November 7, 1996. Pursuant to the 
Reorganization, during the second half of fiscal 1996 prior to the closing of 
the Reorganization, GZ-CA had provided the Company with approximately 
$5,869,000 of cash and working capital which was primarily raised through its 
own private equity offerings in fiscal 1996.  The proceeds from the Company's 
private equity and debt offerings and funds provided by GZ-CA have been and 
will be used as working capital to fund the development of future CD-ROM 
products, royalty payments on existing titles, expected advance royalty 
payments to entertainment content owners for future titles, investment in the 
Company's Internet strategy and other costs associated with the continued 
growth and expansion of the Company.

     As the Company continues to focus its resources on the development and 
publishing of interactive multimedia products (CD-ROM publishing and Internet 
web sites), the costs, including capital expenditures, associated with such 
development have been and will continue to be considerable and will be 
incurred before any significant related revenue is realized.  The Company has 
an equipment purchase line of credit with a leasing company to finance 
computer equipment aggregating up to $250,000.  As of June 30, 1996, $198,850 
remained available for future equipment acquisitions.  This credit line gives 
the Company added flexibility to either purchase or lease necessary equipment.

     The Company's long-term liquidity is principally contingent on its 
ability to raise funds through private and public debt and equity offerings. 
Having completed the Reorganization, the Company believes it will generate 
greater revenues and significant cost savings thus improving overall 
liquidity. The Company's anticipated liquidity needs are based upon a number 
of factors, including the size of the business and related working capital 
needs, the extent of CD-ROM and Internet development costs and funding 
requirements, and the level of corporate operating costs.  The Company 
believes that its present funding sources, including the proceeds from the 
aforementioned private equity offerings, are sufficient to sustain these 
needs through fiscal 1997, including the satisfaction of the $750,000 bank 
note payable maturing on November 7, 1996.

                                      14
<PAGE>


NEW ACCOUNTING STANDARDS

     STOCK COMPENSATION.  Statement of Financial Accounting Standards No. 
123, "Accounting for Stock-Based Compensation" (Statement No.123), issued in 
October 1995 and effective for fiscal years beginning after December 15, 
1995, encourages, but does not require, a fair value based method of 
accounting for employee stock options or similar equity instruments.  
Statement No. 123 allows an entity to elect to continue to measure 
compensation cost under Accounting Principles Board Opinion No. 25 
"Accounting for Stock Issued to Employees" (APBO No. 25), but requires pro 
forma disclosures to net earnings and earning per share as if the fair-value 
based method of accounting had been applied.  The Company expects to adopt 
Statement No. 123 in fiscal 1997, though the Company currently expects to 
elect to continue to measure compensation cost under APBO No. 25 and comply 
with the pro forma disclosure requirements of statement No. 123.  If the 
Company makes this election, Statement No. 123 will have no impact on the 
Company's financial position or results of operations.

ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The Company's consolidated financial statements and schedule appear in a 
separate section of this Annual Report on Form 10-K beginning on page F-1 and 
S-1, respectively.

ITEM 9.        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND ACCOUNTING AND
FINANCIAL DISCLOSURES

     None.

ITEM 10.       DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this item for the Company's directors and 
executive officers will be contained in the Company's Proxy Statement for its 
1996 Annual Meeting of Shareholders to be held on December 12, 1996 (the 
"Proxy Statement") and is incorporated herein by reference.

ITEM 11.       EXECUTIVE COMPENSATION
  
     The information required by this item will be contained in the Proxy 
Statement and is incorporated herein by reference.

ITEM 12.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this item will be contained in the Proxy 
Statement and is incorporated herein by reference.

ITEM 13.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this item will be contained in the Proxy
Statement and is incorporated herein by reference.

ITEM 14.       EXHIBITS AND REPORTS ON FORM 8-K

     (a)  Exhibits

        Exhibit Number                Description of Exhibit
        --------------                ----------------------
             3.1          Certificate of Incorporation of the Registrant. (1)

             3.2          Bylaws of the Registrant (1)

             10.1         Agreement and Plan of Reorganization, dated 
                          January 3, 1996, between Graphix Zone, Inc., a 
                          California corporation ("GZ-CA"), 

                                       15
<PAGE>


                          and StarPress Inc., a Colorado corporation 
                          (formerly Great Bear Technologies Incorporated) 
                          ("StarPress"). (1)

             10.2         Exchange Agreement, dated as of June 9, 1995, by and 
                          among, StarPress Multimedia, Inc. and the StarPress 
                          stockholders. (1) 

             10.3         1996 Stock Option Plan of Registrant (the "1996 
                          Plan"). (1)

             10.4         Form of Non-Qualified Stock Option Agreement 
                          pertaining to the 1996 Plan. (1)

             10.5         Form of Incentive Stock Option Agreement pertaining 
                          to the 1996 Plan. (1)

             10.6         Distribution Agreement dated March 13, 1996, by and 
                          among GZ-CA, StarPress and GT Interactive Software 
                          Corp., a Delaware corporation ("GTIS"). (1)

             10.7         Keep-Well Agreement dated March 13, 1996 by and 
                          among GZ-CA, GTIS and the Registrant. (1)

             10.8         Common Stock Purchase Warrant for 800,000 shares of 
                          GZ-CA Common Stock dated March 13, 1996 by GZ-CA in 
                          favor of GTIS. (1)
     
             10.9         Registration Rights Agreement dated March 13, 1996, 
                          by and between GZ-CA and GTIS. (1)
     
             10.10        Form of Registration Rights Agreement dated February,
                          2, 1996, entered into by and among GZ-CA and each 
                          of the accredited investors that purchased Units, 
                          consisting of one share of GZ-CA Common Stock and a 
                          warrant to purchase one additional share of GZ-CA 
                          Common Stock for every three shares of GZ-CA Common 
                          Stock purchased, in GZ-CA's 1996 private placement 
                          offering, pursuant to which an aggregate of 1,449,
                          378 shares of GZ-CA Common Stock and warrants to 
                          purchase an additional 483,135 shares of GZ-CA 
                          Common Stock (the "1996 Private Placement Warrants") 
                          were issued and sold. (1) 

             10.11        Form of Warrant Agreement dated February 2, 1996, 
                          entered into by and among GZ-CA and each of the 
                          holders of the 1996 Private Placement Warrants. (1)
     
             10.12        Office Building Lease dated October 10, 1990, 
                          between GZ-CA and Masaaki & Fumiko Nakaoka, as 
                          amended. (1)
     
             10.13        Office Building Lease dated September 13, 1994, 
                          between GZ-CA and Pan Pacific Investments, as 
                          amended by First, Second and Third Amendments. (1)
     
             10.14        Warrant Agreements dated January 31, 1994 and 
                          February 28, 1994 between GZ-CA and Frank Cutler. (1)
     
             10.15        Registration Rights Agreements dated January 31, 
                          1994 and 

                                      16
<PAGE>


                          February 28, 1994, among GZ-CA, Frank 
                          Cutler, James Cutler, Jr. and Gregory A. Brown. (1)

             10.16        Non-Qualified Stock Option dated July 1, 1994 
                          granted by GZ-CA to Frank Cutler. (1)
     
             10.17        Non-Qualified Stock Option dated January 26, 1995, 
                          granted by GZ-CA to John and Anne Aber. (1)
     
             10.18        Non-Qualified Stock Option dated January 26, 1995, 
                          granted by  GZ-CA to John Aber. (1)
     
             10.19        Non-Qualified Stock Option dated January 26, 1995, 
                          granted by GZ-CA to Anne Aber. (1)
     
             10.20        Non-Qualified Stock Option dated January 26, 1995, 
                          granted by GZ-CA to Thomas and Honor Vandeveer. (1)
     
             10.21        Form of StarPress 9% Convertible Subordinated 
                          Debentures with Warrant Agreements. (1)
     
             10.22        Sublease Agreement, dated August 13, 1995 by and 
                          between StarPress and International Business 
                          Machines Corporation. (1) 

             10.23        Joint Venture Agreement, dated March 31, 1995, by 
                          and between Olivetti Systems and Networks Holdings 
                          N.V. and StarPress Multimedia, Inc. (1) 

             10.24        Employment Agreement between StarPress and Ronald S. 
                          Posner dated June 23, 1995. (1)
     
             10.25        Employment Agreement dated as of April 18, 1996 
                          between Registrant and Charles R. Cortright, Jr. (1)
     
             10.26        Employment Agreement dated as of April 18, 1996 
                          between Registrant and Angela Aber Cortright. (1)
     
             10.27        Asset Purchase Agreement, dated November 1, 1995 by 
                          and between Sony Interactive Entertainment Inc. and 
                          StarPress. (1) 

             10.28        Business Loan Agreement, dated June 26, 1996 by and 
                          between Silicon Valley Bank and GZ-CA. 

              21          Subsidiaries of the Registrant.

              23          Consent of Ernst & Young LLP with respect to
                          StarPress' financial statements.

  Reports on Form 8-K
  
                 None.
---------------------------
     (1)  Filed as an exhibit to Registrant's Registration Statement on Form S-4
          dated March 25, 1996 (Registration No. 333-2642) and incorporated
          herein by reference.

                                      17
<PAGE>


                                   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.

                                        GRAPHIX ZONE, INC.


Dated:  October 09, 1996                By: /S/CHARLES R. CORTRIGHT, JR.
                                            ----------------------------------
                                            Charles R. Cortright, Jr., Chief
                                            Executive Officer

     In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.

<TABLE>
<CAPTION>
                Name                                               Title                                     Date
------------------------------------------          ---------------------------------------             ----------------
<S>                                                 <C>                                                 <C>
      /S/Ronald S. Posner                           Chairman of the Board and Director                  October 9, 1996
------------------------------------------
                Ronald S. Posner

      /S/Charles R. Cortright, Jr.                  Chief Executive Officer and Director                October 9, 1996
------------------------------------------
                Charles R. Cortright, Jr.              (Principal Executive Officer)

      /S/Angela C. Cortright                        Executive Vice President and Director               October 9, 1996
------------------------------------------
                Angela C. Cortright

      /S/Norman H. Block                            Chief Operating Officer                             October 9, 1996
------------------------------------------
                Norman H. Block

      /S/Frank E. Murnane                           Chief Financial Officer                             October 9, 1996
------------------------------------------
                Frank E. Murnane                       (Principal Financial and Accounting
                                                         Officer)

      /S/C. Richard Kramlich                        Director                                            October 9, 1996
------------------------------------------
                C. Richard Kramlich

      /S/Thomas C.K. Yuen                           Director                                            October 9, 1996
------------------------------------------
                Thomas C.K. Yuen

      /S/Doug Glen                                  Director                                            October 9, 1996
------------------------------------------
                Doug Glen
</TABLE>

                                      18
<PAGE>


                       INDEX TO FINANCIAL STATEMENTS AND
                         FINANCIAL STATEMENT SCHEDULE
                              GRAPHIX ZONE, INC.

     ITEM                                                              PAGE
     ----                                                              ----
Independent Auditors' Reports .......................................   F-2

Consolidated Balance Sheets .........................................   F-4

Consolidated Statements of Operations ...............................   F-5

Consolidated Statements of Shareholders' Equity (Deficiency) ........   F-6

Consolidated Statements of Cash Flows ...............................   F-7

Notes to Consolidated Financial Statements ..........................   F-9

Schedule II - Valuation and Qualifying Accounts......................   S-1

                                      F-1
<PAGE>


                          INDEPENDENT AUDITORS' REPORT

The Board of Directors 
Graphix Zone, Inc.:


We have audited the accompanying consolidated balance sheet of Graphix Zone, 
Inc. and subsidiaries as of June 30, 1996 and the related consolidated 
statements of operations, shareholders' equity and cash flows for the year 
then ended.  In connection with our audit of the consolidated financial 
statements, we have also audited the financial statement schedule for the 
year ended June 30, 1996 as listed in the accompanying index.  These 
consolidated financial statements and financial schedule are the 
responsibility of the Company's management. Our responsibility is to express 
an opinion on these consolidated financial statements and financial statement 
schedule based on our audit.

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

In our opinion, the consolidated financial statements referred to above 
present fairly, in all material respects, the financial position of Graphix 
Zone, Inc. and subsidiaries as of June 30, 1996, and the results of its 
operations and its cash flows for the year then ended in conformity with 
generally accepted accounting principles.  Also, in our opinion, the related 
financial statement schedule for the year ended June 30, 1996, when 
considered in relation to the basic consolidated financial statements taken 
as a whole, presents fairly, in all material respects, the information set 
forth therein.

                                   KPMG Peat Marwick LLP

Orange County, California
August 22, 1996, except as to
     note 19 which is as of
     October 15, 1996

                                      F-2
<PAGE>


                           INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
StarPress, Inc.:

We have audited the accompanying consolidated balance sheets of StarPress, 
Inc. (formerly Great Bear Technology Incorporated) as of June 30, 1995 and 
1994, and the related consolidated statements of operations, shareholders' 
equity and cash flows for the years then ended.  Our audits also included the 
financial statement schedule listed in the Index at Item 8.  These financial 
statements and schedule are the responsibility of the Company's management. 
Our responsibility is to express an opinion on these financial statements and 
schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in 
all material respects, the consolidated financial position of StarPress, Inc. 
at June 30, 1995 and 1994, and the consolidated results of its operations and 
its cash flows for the years then ended, in conformity with generally 
accepted accounting principles.  Also, in our opinion, the related financial 
statement schedule, when considered in relation to the basic financial 
statements taken as a whole, presents fairly in all material respects the 
information set forth therein.

The accompanying consolidated financial statements have been prepared 
assuming StarPress Inc. will continue as a going concern.  The Company has 
incurred operating losses since inception.  This condition raises substantial 
doubt about its ability to continue as a going concern.  In addition, the 
Company has recorded capitalized product development costs and intangible 
assets in its consolidated balance sheet at June 30, 1995.  The Company must 
generate substantial revenue and net income in future periods to realize the 
carrying value of these assets.  The consolidated financial statements do not 
include any adjustments to reflect the possible future effects on the 
recoverability and classification of assets or the amounts and classification 
of liabilities that may result from the outcome of these uncertainties.

                                   Ernst and Young LLP

Walnut Creek, California
August 18, 1995

                                      F-3
<PAGE>


                              GRAPHIX ZONE, INC.

                         CONSOLIDATED BALANCE SHEETS

                         AS OF JUNE 30, 1996 AND 1995

<TABLE>
<CAPTION>
                                                                       1996            1995
                                                                   ------------    ------------
<S>                                                                <C>             <C>
                                ASSETS
Cash and cash equivalents                                          $  1,288,196    $  1,919,102
Accounts Receivable, net of allowance for doubtful                                
  accounts of $640,194 in 1996 and $177,183 in 1995                   3,867,268         295,323
Inventories                                                             833,700         208,789
Prepaid expenses and other current assets                               281,883         131,341
                                                                   ------------    ------------
      Total current assets                                            6,271,047       2,554,555
                                                                                  
Property and equipment, net                                             653,833         706,830
Intangibles                                                             850,186         271,686
Other assets, net                                                       753,619         238,266
                                                                   ------------    ------------
                                                                   $  8,528,685    $  3,771,337
                                                                   ------------    ------------
                                                                   ------------    ------------
                LIABILITES AND SHAREHOLDERS' EQUITY                               
                                                                                  
Notes payable                                                      $    750,000    $     -   
Convertible debentures                                                   -              185,585
Current installments of obligations under capital leases                100,409          -   
Accounts payable                                                      2,617,806         996,131
Accrued royalties                                                       977,764         140,769
Accrued liabilities                                                     984,537       1,432,174
Accrued restructuring charge                                            573,461          -   
Deferred revenue                                                        286,701          77,270
                                                                   ------------    ------------
      Total current liabilities                                       6,290,678       2,831,929

Other liabilities                                                       189,278          -   
                                                                   ------------    ------------
      Total liabilities                                               6,479,956       2,831,929

Shareholders' equity
  Preferred stock, $.01 par value, 25,000,000 shares
    authorized, no shares issued or outstanding                         -               -   
  Common stock, $.01 par value, 100,000,000 shares
    authorized, 10,608,748 and 4,321,780 issued and
    outstanding in 1996 and 1995, respectively                       40,189,771      15,561,790
  Accumulated deficit                                               (38,141,042)    (14,622,382)
                                                                   ------------    ------------
      Net shareholders' equity                                        2,048,729         939,408
                                                                   ------------    ------------

Commitments and contingencies
Subsequent event
                                                                   $  8,528,685    $  3,771,337
                                                                   ------------    ------------
                                                                   ------------    ------------
</TABLE>

            See accompanying notes to consolidated financial statements

                                      F-4
<PAGE>


                              GRAPHIX ZONE, INC.

                    CONSOLIDATED STATEMENTS OF OPERATIONS

                   YEARS ENDED JUNE 30, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
                                                   1996           1995          1994
                                               ------------   ------------   -----------
<S>                                            <C>            <C>            <C>
Net revenues                                   $  7,182,046   $  2,171,334   $   243,898 

Cost of revenues                                  3,195,934      1,838,699       166,861 
                                               ------------   ------------   -----------
Gross margin                                      3,986,112        332,635        77,037 

Operating expenses:
          Research and development                2,008,614      2,032,059       663,983 
          Sales and marketing                     2,973,569      2,498,488       839,111 
          General and administrative              2,606,670      3,139,507     1,317,070 
          Restructuring charge                    1,900,000          -              -   
          Acquired in-process technology         17,934,863      2,810,000          -   
                                               ------------   ------------   -----------
               Total operating expenses          27,423,716     10,480,054     2,820,164
                                               ------------   ------------   -----------
Operating loss                                  (23,437,604)   (10,147,419)   (2,743,127)

Interest expense, net                               (81,056)      (783,507)      (53,367)
Other income (expense), net                          -              14,529        23,343 
                                               ------------   ------------   -----------
Net loss                                       $(23,518,660)  $(10,916,397)  $(2,773,151)
                                               ------------   ------------   -----------
                                               ------------   ------------   -----------

Loss per share of common stock                 $      (5.05)  $      (7.76) $     (3.15)
                                               ------------   ------------   -----------
                                               ------------   ------------   -----------

Weighted average common shares                    4,661,401      1,406,688      880,716 
                                               ------------   ------------   -----------
                                               ------------   ------------   -----------
</TABLE>

            See accompanying notes to consolidated financial statements

                                      F-5
<PAGE>


                              GRAPHIX ZONE, INC. 

           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY) 

                   YEARS ENDED JUNE 30, 1996, 1995 AND 1994 

<TABLE>
<CAPTION>
                                                                                                          Net
                                                                Common Stock                          Shareholders'
                                                                ------------           Accumulated       Equity
                                                           Shares         Amount          Deficit     (Deficiency)
                                                         ----------     -----------    ------------   ------------
<S>                                                      <C>            <C>            <C>            <C>
Balance, June 30, 1993                                      510,100     $   341,551    $   (932,834)  $   (591,283)
                                                                           
Common stock issued for acquisition of Logatronix, Inc.     153,260         (12,412)           -           (12,412)
Common stock issued in private placement, net               503,729       4,205,714            -         4,205,714
Common stock issued upon conversion of notes payable         75,774         775,000            -           775,000
Stock option and warrant compensation                         -             181,180            -           181,180
Common stock issued for acquisition of MicroBase, Inc.       98,079       1,253,906            -         1,253,906
Net loss                                                      -               -          (2,773,151)    (2,773,151)
                                                         ----------     -----------    ------------   ------------
Balance, June 30, 1994                                    1,340,942       6,744,939      (3,705,985)     3,038,954

Common stock issued for acquisition of StarPress
  Multimedia, Inc.                                        1,935,539       1,649,682            -         1,649,682
Common stock issued in private placement, net               381,316       3,081,451            -         3,081,451
Detachable warrants issued in connection with 
  convertible debentures and notes payable                     -          1,059,796            -         1,059,796
Common stock issued upon conversion of debentures           319,132       2,200,278            -         2,200,278
Common stock issued upon exercise of warrants               301,753          20,575            -            20,575
Common stock issued for services                             43,118         158,500            -           158,500
Stock option compensation                                      -            720,351            -           720,351
Notes receivable for purchase of common stock                  -            (73,782)           -           (73,782)
Net loss                                                       -               -        (10,916,397)   (10,916,397)
                                                         ----------     -----------    ------------   ------------
Balance, June 30, 1995                                    4,321,800      15,561,790     (14,622,382)       939,408

Common stock issued upon conversion of debentures            24,932         195,180            -           195,180
Common stock issued upon exercise of warrants                52,995           3,613            -             3,613
Common stock issued upon exercise of options                300,260         134,879            -           134,879
Common stock issued for acquisition of assets               172,059         292,852            -           292,852
Stock option compensation                                      -            195,682            -           195,682
Common stock issued in satisfaction of obligations           85,159          80,000            -            80,000
Common stock issued for services                            125,000         618,750            -           618,750
Common stock issued for acquisition of GZ-CA              5,526,543      23,107,025            -        23,107,025
Net loss                                                       -               -        (23,518,660)   (23,518,660)
                                                         ----------     -----------    ------------   ------------
Balance, June 30, 1996                                   10,608,748     $40,189,771    $(38,141,042)  $  2,048,729
                                                         ----------     -----------    ------------   ------------
                                                         ----------     -----------    ------------   ------------
</TABLE>

            See accompanying notes to consolidated financial statements 

                                      F-6
<PAGE>


                              GRAPHIX ZONE, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                   YEARS ENDED JUNE 30, 1996, 1995 AND 1994





<TABLE>
<CAPTION>
                                                                                      1996           1995          1994
                                                                                  -------------  -------------  ------------
<S>                                                                               <C>            <C>            <C> 
Cash flows form operating activities:
  Net loss                                                                        $(23,518,660)  $(10,916,397)  $(2,773,151)
  Adjustments to reconcile net loss to net cash used in operating activities:
    Depreciation and amortization                                                      349,769         95,067        95,223 
    Amortiztion and write-down of intangible assets                                       -         1,680,046          -   
    Aquired in-process technology                                                   17,934,863      2,810,000          -   
    Provision for sales returns and doubtful accounts                                  221,000        398,000          -   
    Provision for inventory reserve                                                     90,000           -             -   
    Amortization of discount on convertible debentures                                    -           579,122          -   
    Stock option and warrant compensation expense                                      195,682        853,851       181,180 
    Restructuring charge                                                             1,900,000           -             -   
    Changes in operating assets and liabilities:
      Decrease (increase) in accounts receivable                                    (3,926,851)      (619,476)        7,132 
      Decrease (increase) in inventories                                               251,246         (4,447)      (39,220)
      Decrease (increase) in prepaid expenses and other current assets                 424,507         71,981       (48,764)
      Decrease (increase) in other assets                                              (59,679)        54,691       (26,695)
      Increase (decrease) in accounts payable                                         (162,490)      (593,782)       52,400 
      Increase in accrued royalties                                                    360,857           -             -   
      Increase (decrease) in accrued liabilities                                      (612,483)       594,842       136,701 
      Increase in accrued restructuring                                               (484,031)          -             -   
      Increase (decrease) in deferred revenue                                          (46,670)        17,270        60,000
                                                                                  ------------   ------------   -----------
         Net cash used in operating activities                                      (7,082,940)    (4,979,232)   (2,355,194)

Cash flows from investing activities:
  Purchase of property and equipment                                                   (42,000)      (226,727)     (270,772)
  Proceeds from sale of property and equipment                                          97,360           -             -   
  Software development costs                                                              -              -         (427,723)
  Acquisition of StarPress Multimedia, Inc.                                               -          (337,000)         -   
  Acquisistion of DMT assets                                                           (20,890)          -             -   
  Net cash acquired from purchase of GZ-CA                                           6,854,357           -             -   
                                                                                  ------------   ------------   -----------
         Net cash provided by (used in) investing activites                          6,888,827       (563,727)     (698,495)

Cash flows from financing activities:
  Release of restricted cash from escrow                                                  -           592,700          -   
  Proceeds from convertible of notes payable                                              -         2,766,537       975,000
  Proceeds from notes payable to related parties                                          -           300,000       147,000
  Payments on notes payable to related parties                                            -          (222,000)     (602,500)
  Proceeds from notes payable                                                             -           265,000          -   
  Payments on notes payable                                                           (575,285)      (243,000)         -   
  Payments on convertible notes payable                                                   -              -         (200,000)
  Proceeds from exercise of stock options                                              134,879           -             -   
  Proceeds from exercise of warrants                                                     3,613         20,575          -   
  Proceeds from common stock issuances, net                                               -         3,081,451     3,613,014
                                                                                  ------------   ------------   -----------
         Net cash (used in) provided by financing activities                          (436,793)     6,561,263     3,932,514
</TABLE>

                                      F-7
<PAGE>


<TABLE>
<S>                                                                               <C>            <C>            <C> 
Net increase in cash                                                                  (630,906)     1,018,304       878,825
Cash and cash equivalents at beginning of year                                       1,919,102        900,798        21,973
                                                                                  ------------   ------------   -----------
Cash and cash equivalents at end of year                                          $  1,288,196   $  1,919,102   $   900,798
                                                                                  ------------   ------------   -----------
                                                                                  ------------   ------------   -----------
Supplemental disclosure of cash flow information:

Cash paid during the year for interest                                            $     86,635  $     140,251   $    64,073
                                                                                  ------------   ------------   -----------
                                                                                  ------------   ------------   -----------
Supplemental disclosure of noncash investing and financing activities:
  Common stock issued in connection with acquisitions and services                $ 24,018,627   $  1,674,682   $ 1,253,906
                                                                                  ------------   ------------   -----------
                                                                                  ------------   ------------   -----------
  Conversion of convertible debentures and notes payable to common stock          $    195,180   $  2,200,278   $   775,000
                                                                                  ------------   ------------   -----------
                                                                                  ------------   ------------   -----------
  Common stock issued in satisfaction of obligations                              $     80,000   $       -      $      -   
                                                                                  ------------   ------------   -----------
                                                                                  ------------   ------------   -----------
  Proceeds from issuance of common stock held in escrow as restricted cash        $       -      $       -      $   592,700
                                                                                  ------------   ------------   -----------
                                                                                  ------------   ------------   -----------
</TABLE>

            See accompanying notes to consolidated financial statements

                                      F-8
<PAGE>


                              GRAPHIX ZONE, INC.

                         Notes to Financial Statements

                         June 30, 1996, 1995 and 1994

(1)  GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     GENERAL
     
     Graphix Zone, Inc. (the "Company") is a Delaware corporation and was
     incorporated in January 1996 for the purpose of acquiring Graphix Zone,
     Inc., a California corporation (GZ-CA), and StarPress, Inc., a Colorado
     corporation (StarPress).  The Company is engaged in the development,
     production and marketing of CD-ROM and on-line products for the personal
     computer industry.
     
     On January 3, 1996 the Company's wholly owned subsidiaries GZ-CA and
     StarPress, entered into an Agreement and Plan of Reorganization pursuant to
     which both companies would become wholly owned subsidiaries of Graphix
     Zone, Inc., a Delaware corporation.  All conditions to the merger were met
     and on June 28, 1996 the shareholders of both GZ-CA and StarPress approved
     the merger (the "Reorganization") which was consummated on that date (see
     note 8).
     
     Based upon the capitalization of both GZ-CA and StarPress, at the
     consummation of the merger, the former shareholder interests of StarPress
     comprised a larger percentage of the outstanding shares of the Company than
     the former shareholder interests of GZ-CA, and accordingly StarPress was
     deemed the acquiring entity for financial accounting purposes.  
     Accordingly, the historical financial statements presented herein, prior to
     the effective date of the Reorganization are the financial statements of
     StarPress.  All shares have been adjusted to reflect a .14666 : 1 stock
     exchange in connection with the Reorganization.
     
     All references to the "Company" prior to June 28, 1996 relate to StarPress
     and Graphix Zone, Inc., a Delaware Corporation.
     
     PRINCIPLES OF CONSOLIDATION

     The accompanying consolidated financial statements include the accounts of
     Graphix Zone, Inc., a Delaware corporation, and its wholly owned
     subsidiaries GZ-CA and StarPress.  All material inter-company balances and
     transactions have been eliminated in consolidation. 

     REVENUE RECOGNITION

     Revenue is recognized from CD-ROM sales upon shipment. The Company grants
     certain distributors limited rights to exchange product and price
     protection on unsold merchandise. The Company establishes a reserve for
     price adjustments and estimated returns at the time the related revenue is
     recognized.

     CASH AND CASH EQUIVALENTS
     
     Cash equivalents are highly liquid investments purchased with an original
     maturity of three months or less. Cash equivalents include bank demand
     deposits and money market funds.
     
     INVENTORIES

     Inventories are comprised primarily of CD-ROM products and packaging
     materials and are stated at the lower of cost (first-in, first-out) or
     market (net realizable value).

     PROPERTY AND EQUIPMENT

     Property and equipment are stated at cost. Depreciation of property and
     equipment is computed on a straight-line basis over estimated useful lives
     of two to seven years. Equipment held under capital leases and leasehold

                                      F-9
<PAGE>

                              GRAPHIX ZONE, INC.

                         Notes to Financial Statements

                         June 30, 1996, 1995 and 1994

     improvements are amortized on a straight-line basis over the shorter of the
     lease term or the estimated useful life of the related asset.

     SOFTWARE DEVELOPMENT COSTS

     The Company capitalizes costs related to the development of certain
     software products.  In accordance with Statement of Financial Accounting
     Standards No. 86, capitalization of costs began when technological
     feasibility was established and ended when the product was available for
     general release to customers.  Capitalized software development costs as of
     June 30, 1996 and 1995 include amounts capitalized pursuant to the
     acquisitions described in note 8.

     Amortization is computed on an individual product basis and is recognized
     over the greater of the remaining economic lives of each product or the
     ratio that current gross revenues for a product bear to the total of
     current and anticipated revenues for that product, commencing when the
     products became available for general release to customers.  Software
     development costs are generally being amortized over a three-year period. 
     The Company continually assesses the recoverability of software development
     costs by comparing the carrying value of individual products to their net
     realizable value.
     
     The Company incurred amortization expense for software development costs of
     $214,731, $720,340 and $68,097 in 1996, 1995 and 1994, respectively.
     
     INTANGIBLE ASSETS
     
     The Company accounts for goodwill and other intangible assets at the lower
     of amortized cost or fair value.  Goodwill represents the excess of
     purchase price over fair value of net assets acquired.  Goodwill and other
     intangibles are amortized on a straight-line basis over the expected
     periods to be benefited (generally two to five years).  The Company
     assesses the recoverability of intangible assets by determining whether the
     amortization of the intangible asset balance over its remaining life can be
     recovered through projected un-discounted cash flows.  The amount of
     goodwill impairment, if any, is measured based on projected discounted cash
     flows using a discount rate reflecting the Company's average cost of funds.
     
     
     ROYALTY EXPENSE
     
     Royalty expense is recognized based upon actual net product sales in
     accordance with the terms of the related royalty agreement.  Royalty
     advances are capitalized and expensed when earned.  The Company
     periodically reviews the realizability of capitalized royalty advances and
     expenses such advances which it determines may not be realized from future
     sales.  Royalty expenses are included in cost of revenues in the
     accompanying consolidated statements of operations.
     
     FAIR VALUE OF FINANCIAL INSTRUMENTS
     
     In December 1991, the FASB issued Statement of Financial Accounting
     Standards No. 107 "Disclosure about Fair Value of Financial Instruments"
     (SFAS 107).  SFAS 107 requires all entities to disclose the fair value of
     financial instruments, both assets and liabilities recognized and not
     recognized on the balance sheet, for which it is practicable to estimate
     fair value.  SFAS 107 defines fair value of a financial instrument as the
     amount at which the instrument could be exchanged in a current transaction
     between willing parties.  As June 30, 1996 the carrying value of all
     financial instruments approximates fair value.
     
     LONG-LIVED ASSETS
     
     During fiscal 1996, the Company adopted Statement of Financial Accounting
     Standards No. 121, "Accounting for 

                                      F-10
<PAGE>


                              GRAPHIX ZONE, INC.

                         Notes to Financial Statements

                         June 30, 1996, 1995 and 1994

     Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed 
     of" (Statement 121) which establishes accounting standards for the
     recognition and measurement of impairment of long-lived assets, certain 
     identifiable intangibles and goodwill either to be held or disposed of.  
     The adoption of Statement 121 did not have a material impact on the 
     Company's financial position or results of operations.
     
     BASIS OF FINANCIAL STATEMENT PRESENTATION
     
     The financial statements have been prepared in conformity with generally
     accepted accounted principles.  In preparing the financial statements,
     management is required to make estimates and assumptions that affect the
     reported amounts of assets and liabilities as of the dates of the balance
     sheets and revenues and expenses for the periods.  Actual results could
     differ significantly from those estimates.
     
     INCOME TAXES

     The Company accounts for income taxes under the provisions of Statement of
     Financial Accounting Standards No. 109, "Accounting for Income Taxes"
     ("Statement 109"). Statement 109 generally provides that deferred tax
     assets and liabilities be recognized for temporary differences between the
     financial reporting basis and the tax basis of the Company's assets and
     liabilities and expected benefits of utilizing net operating loss carry-
     forwards. A valuation allowance is required to reduce the potential
     deferred tax asset when it is more likely than not that all or some portion
     of the potential deferred tax asset will not be realized due to the lack of
     expected future taxable income. The impact on deferred taxes of changes in
     tax rates and laws, if any, are applied to the years during which temporary
     differences are expected to be settled, and are reflected in the financial
     statements in the period of enactment.
    
     LOSS PER SHARE OF COMMON STOCK
    
     Loss per share of common stock is based on the weighted average number of
     outstanding shares of common stock during the period.  Common stock
     equivalents are not included in the computation because their effect would
     be anti-dilutive.  Primary loss per share approximates fully diluted loss
     per share for all periods presented.  All shares used in the calculation of
     loss per share of Common Stock have been adjusted to reflect a .14666 : 1
     stock exchange in connection with the Reorganization.

     RECLASSIFICATION 
     
     Certain prior year amounts have been reclassified to conform to the 1996
     presentation.
     
     
(2)  INVENTORIES

     Inventories consisted of the following:
                                                                 June 30,
                                                                 --------
                                                            1996        1995
                                                         ----------  ----------
          
          Finished goods                                   $479,747    $180,519
          Components                                        353,953      28,270
                                                         ----------  ----------
                                                           $833,700    $208,789
                                                         ----------  ----------
                                                         ----------  ----------

                                      F-11
<PAGE>


                              GRAPHIX ZONE, INC.

                         Notes to Financial Statements

                         June 30, 1996, 1995 and 1994

(3)  PROPERTY AND EQUIPMENT
    
     Property and equipment consisted of the following:

<TABLE>
<CAPTION>
                                                                 June 30,
                                                                 --------
                                                            1996         1995
                                                         ----------   ----------
          <S>                                            <C>          <C>
          Computer and office equipment                  $  824,474   $  805,285
          Furniture and fixtures                            174,760       65,843
          Computer software                                 101,287       38,910
          Equipment held under capital lease obligations    100,575        -
                                                         ----------   ----------

          Accumulated depreciation and amortization        (547,263)    (203,208)
                                                         ----------   ----------
                                                         $  653,833   $  706,830
                                                         ----------   ----------
                                                         ----------   ----------
</TABLE>

(4)  INTANGIBLE ASSETS

     Intangible assets consist of the following:
                                                                June 30,
                                                                --------
                                                           1996         1995
                                                        ----------   ----------

          Assembled workforce                           $  185,000   $  240,000
          Goodwill                                         560,186      122,872
          Other                                            105,000        -
                                                        ----------   ----------
          
          Accumulated amortization                           -          (91,186)
                                                        ----------   ----------
                                                        $  850,186   $  271,686
                                                        ----------   ----------
                                                        ----------   ----------

(5)  OTHER ASSETS

     Other assets consist of the following:
                                                                June 30,
                                                                --------
                                                           1996         1995
                                                        ----------   ----------
          
          Capitalized software development costs        $  238,342   $  662,024
          Capitalized warrant valuation (see note 13)      312,000        -
          Other                                            221,477        -
                                                        ----------   ----------
          
          Accumulated amortization                         (18,200)    (423,758)
                                                        ----------   ----------
                                                        $  753,619   $  238,266
                                                        ----------   ----------
                                                        ----------   ----------

(6)  NOTES PAYABLE

     On October 27, 1995 the Company borrowed $750,000 under a loan agreement
     with Silicon Valley Bank.  The note bore interest at the bank's prime rate
     plus 150 basis points.  The note was secured by all of the Company's assets
     excluding the Sony assets (see note 8) and matured on February 24, 1996. 
     In connection with the loan agreement, the Company also issued a warrant to
     Silicon Valley Bank to purchase 6,160 shares of the Company's common stock
     at an exercise price of $8.52 per share.  The warrant expires on October
     27, 2000.  On June 28, 1996 GZ-CA paid down the Company's existing loan
     with Silicon Valley bank and simultaneously entered into a new loan
     agreement with Silicon Valley Bank for a $750,000 loan bearing interest at
     the bank's prime rate plus 300 basis points.  The loan is due on 
     November 7, 1996 (as amended, see note 19) and is secured by all of the 
     Company's assets.  GZ-CA issued a

                                      F-12
<PAGE>


                              GRAPHIX ZONE, INC.

                         Notes to Financial Statements

                         June 30, 1996, 1995 and 1994

     warrant to Silicon Valley Bank to purchase 20,000 shares of GZ-CA's Common
     Stock at an exercise price of $5.625 per share.  The warrant expires on
     June 26, 2001.
     
     In July, September, October and November 1993, the Company sold an
     aggregate of 19  1/2 units (the "Bridge Units"), each consisting of: (1) a
     one-year promissory note having an aggregate original principal amount of
     $50,000 bearing interest at a rate of 12% per annum ("Bridge Note") and (2)
     a four-year warrant which entitles the holder to purchase 3,667 shares of
     the Company's common stock, at a purchase price of $7.84 per share ("Bridge
     Warrant").  The Bridge Units were offered at a purchase price of $50,000
     per Unit.  The Bridge Notes were payable upon maturity one year from the
     date of issuance and bore interest at a rate of 12% per annum.  Certain
     holders of the Bridge Notes converted the principal amount of the Bridge
     Notes into subscriptions for securities in the Company's 1993/1994 private
     placement offering (see note 10).  Bridge Notes amounting to $775,000 were
     converted to stock in the private placement of common stock during the year
     ended June 30, 1994.

(7)  BORROWINGS UNDER LINE OF CREDIT
     
     The Company had a line of credit with a bank which allowed borrowings of up
     to $200,000 with interest at the bank's prime rate plus 1.50% (12% at June
     30, 1995).  Borrowings under the line of credit were secured by
     certificates of deposit in the same amount.  As of June 30, 1995, the
     Company had borrowed $200,000 under the line of credit.  On July 1, 1995,
     this amount was repaid using the certificates of deposit at which time the
     line of credit expired.  
     
     The Company has an equipment line of credit with a leasing company to
     finance computer equipment aggregating up to $250,000.  As of June 30,
     1996, $198,850 remained available for future equipment acquisitions.

(8)  ACQUISITIONS AND TRANSACTIONS
     
     In June 1996, the Company acquired all of the outstanding capital stock of
     GZ-CA, a developer and publisher of interactive software titles, in
     exchange for 5,526,543 shares of the Company's common stock.  In connection
     with the acquisition, the Company also issued 125,000 shares of common
     stock to its investment banker.  In addition, the Company assumed all
     outstanding options and warrants of GZ-CA to purchase shares of the
     Company's common stock.  The acquisition was accounted for by the purchase
     method of accounting.
     
     The total purchase price for GZ-CA was $23,930,957 (which was determined by
     the fair market value of GZ-CA common stock) including acquisition costs of
     $823,932.  An allocation of the purchase price is as follows:
     
<TABLE>
<CAPTION>
                                                         Allocation of       Amortization
                         Description                     Purchase Price      (Useful Life)
                         -----------                     --------------      -------------
          <S>                                            <C>                 <C>
          In-process technology charged to operations      $  17,934,863           N/A
          Product development costs                               89,390         3 years
          Assembled workforce                                    185,000         3 years
          Goodwill                                               459,310         3 years
          Net assets assumed                                   5,262,394           N/A
                                                           -------------
               Purchase price                              $  23,930,957
                                                           -------------
                                                           -------------
</TABLE>
     
     On April 22, 1996, the Company entered into an Asset Purchase Agreement
     with Digital Media Theory, Inc. ("DMT").  The Company purchased from DMT
     certain assets which consisted of an Internet computer database; equipment
     contracts and supplies; and rights, title and interest to intellectual
     property.  The purchase price for these assets consisted of 36,000 shares
     of the Company's common stock valued at $176,887 and a promissory note for

                                      F-13
<PAGE>


                              GRAPHIX ZONE, INC.

                         Notes to Financial Statements

                         June 30, 1996, 1995 and 1994

     $23,099.  Acquisition costs were $20,890.  The acquisition was accounted
     for by the purchase method of accounting.
     
     The total purchase price of $220,876 was allocated as follows:
     
<TABLE>
<CAPTION>
                                                     Allocation of       Amortization
                         Description                 Purchase Price      (Useful Life)
                         -----------                 --------------      -------------
          <S>                                        <C>                 <C>
          Goodwill                                     $  100,876           5-years
          Computer database                                75,000           5 years
          Trademarks and covenant not to compete           30,000          2-5 years
          Furniture and equipment                          15,000          3-5 years
                                                     --------------
               Purchase price                          $  220,876
                                                     --------------
                                                     --------------
</TABLE>
     
     On November 1, 1995, the Company purchased from Sony Interactive
     Entertainment, Inc. ("Sony") certain products and other assets which
     consisted of 14 products currently in distribution or production and
     related finished goods inventory, prepaid royalties, certain accounts
     receivable and furniture and equipment.  The purchase price for these
     assets consisted of 136,059 shares of the Company's common stock (which
     were valued using the per share price determined by independent appraisal)
     valued at $115,965 and a promissory note of $561,781 which bore interest at
     the prime rate as quoted by Chemical Bank, and was secured by the assets
     acquired.  The promissory note was paid in full on February 2, 1996.  The
     acquisition was accounted for by the purchase method of accounting.
     
     The total purchase price of $677,746 was allocated as follows:
     
<TABLE>
<CAPTION>
                                                     Allocation of       Amortization
                         Description                 Purchase Price      (Useful Life)
                         -----------                 --------------      -------------
          <S>                                        <C>                 <C>
          Prepaid royalties                            $  311,000             N/A
          Finished goods inventory                        132,457           3 years
          Product development costs                       125,417           3 years
          Furniture and equipment                         100,000           3 years
          Accounts receivable                               8,872             N/A
                                                     --------------
               Purchase price                          $  677,746
                                                     --------------
                                                     --------------
</TABLE>
     
     In June 1995, the Company acquired all of the outstanding capital stock of
     StarPress Multimedia, Inc., a developer and publisher of interactive
     software titles, in exchange for 1,935,539 shares of the Company's common
     stock (which were valued using the per share price determined by an
     independent appraisal).  StarPress Multimedia, Inc. had acquired iTravel
     International Ltd. ("iTravel"), a developer located in Seattle, Washington,
     on March 31, 1995 for 180,000 shares of common stock of StarPress
     Multimedia, Inc.  StarPress assumed StarPress Multimedia, Inc.'s
     obligations to issue additional shares of common stock to former iTravel
     shareholders.  In April and May 1996, 71,258 additional shares of the
     Company's common stock were issued to meet this commitment.  In addition,
     the Company issued options to purchase 34,318 shares of common stock at a
     price of $8.52 per share (vested immediately and exercisable for three
     years) for outside financing expenses directly related to the acquisition
     and assumed all outstanding options and warrants of StarPress Multimedia,
     Inc. to purchase shares of the Company's common stock  The acquisition was
     accounted for by the purchase method of accounting.
     
     The total purchase price for StarPress Multimedia, Inc. was $2,011,682,
     based upon an independent appraisal (including acquisition costs of
     $362,000).  An allocation of the purchase price is as follows:
     

                                      F-14
<PAGE>


                              GRAPHIX ZONE, INC.

                         Notes to Financial Statements

                         June 30, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                                          Allocation of       Amortization
                         Description                      Purchase Price      (Useful Life)
                         -----------                      --------------      -------------
          <S>                                             <C>                 <C>
          In-process technology charged to operations       $  2,810,000            N/A
          Product development costs                              110,000          3 years
          Assembled workforce                                    240,000          3 years
          Goodwill                                                31,686          3 years
          Net liabilities assumed                             (1,180,004)
                                                          --------------
               Purchase price                               $  2,011,682
                                                          --------------
                                                          --------------
</TABLE>

     The following unaudited summary presents the pro forma consolidated results
     of operations of the Company as if the acquisitions of GZ-CA and StarPress
     Multimedia, Inc. had occurred at the beginning of each respective period
     presented, exclusive of the write-offs of $17,934,863 and $2,810,000 of in-
     process technology related to the GZ-CA and Starpress Multimedia, Inc.
     acquisitions in fiscal 1996 and 1995, respectively.  These pro forma
     results have been prepared for comparative purposes only an do not purport
     to be indicative of what would have occurred had the acquisition been made
     as of the first day of the fiscal years presented or the results which may
     occur in the future.
     
                                              For the year ended June 30, 
                  Pro Forma (unaudited)          1996            1995
                  ---------------------          ----            ----
          
          Net revenues                       $  9,201,414    $  6,743,161
          Net loss                             11,093,818      19,901,976
          Net loss per share                 $       1.09    $       2.87

(9)  RESTRUCTURING CHARGE
     
     During the second quarter of fiscal year 1996, the Company adopted a
     restructuring plan to enhance overall competitiveness, productivity and
     efficiency through the reduction of overhead costs.  The plan included the
     elimination of the Company's in-house software research and development
     activities.  Total estimated restructuring costs of $1,950,000 were
     recorded in the second quarter of fiscal 1996, $50,000 of which was
     reversed in the fourth quarter due to changes in the underlying estimates. 
     The charge principally reflects severance costs resulting from a reduction
     of a significant portion of the Company's workforce of $777,492, write-down
     and disposal of excess furniture and equipment and office facilities of
     $946,103, and write-offs of assembled workforce and goodwill of $226,405
     arising from the Company's acquisition of StarPress Multimedia, Inc. in
     June 1995.  At June 30, 1996 $573,461 of accrued restructuring cost
     remained outstanding.  The amount remaining principally represents unpaid
     severance costs and outstanding lease payments on unused office facilities
     through fiscal 1999.
     
     Pursuant to the above restructuring plan, on April 2, 1996, the Company
     entered an agreement pursuant to which PolarCap, LLC, owned and operated by
     Douglas D. Cole a former director and chief executive officer of the
     Company, acquired 100% equity ownership of  Logatronix, Ltd. (Great Bear -
     Bulgaria), formally a wholly owned subsidiary of the Company based in
     Sofia, Bulgaria, and certain other assets of the Company.  The purchase
     price consisted of a $40,000 promissory note, a contingent payment in the
     event of the sale or other transfer of any of the Great Bear - Bulgaria
     stock by PolarCap, LLC, a contingent payment in the event of the collection
     of certain receivables transferred to PolarCap, LLC in the acquisition, and
     the assumption by PolarCap, LLC of certain Great Bear - Bulgaria
     liabilities.

                                      F-15
<PAGE>


                              GRAPHIX ZONE, INC.

                        Notes to Financial Statements

                        June 30, 1996, 1995 and 1994

(10) SHAREHOLDERS' EQUITY

     COMMON STOCK

     Between December 29, 1993 and February 15, 1994 ("fiscal 1994 private
     placement"), the Company sold 39.51 units at a purchase price of $150,000
     per unit in a private placement.  Each unit consisted of 14,666 shares of
     common stock and 4,400 warrants to purchase common stock at an exercise
     price of $17.05 per share.  None of the proceeds were allocated to these
     warrants as their value was not considered significant.  Of the proceeds of
     $5,927,000, $775,000 related to the conversion of Bridge Notes (see note
     6), $946,286 was used to pay expenses of the offering, $592,700 was held in
     escrow pending registration of the stock, which was released from escrow in
     fiscal 1995, and $3,613,014 was received by the Company in cash.
     Immediately following the closing of the private placement, $200,000 was
     used to pay down the remaining Bridge Note holders.

     As compensation to the Company's investment banker in connection with the
     fiscal 1994 private placement, the Company issued a five-year option to
     purchase 3.95 units at $150,000 per unit.  Each unit consists of options to
     purchase 14,666 shares of common stock and warrants to purchase 4,400
     shares of common stock (total of 57,950 shares under options and 17,385
     shares under warrants).  The units are identical to the units sold in the
     private placement, except that these warrants are not redeemable by the
     Company.

     CONVERTIBLE SUBORDINATED DEBENTURES AND BRIDGE LOANS

     During March 1995, the Company raised net proceeds of $2,766,537 (net of
     offering costs of $165,963) through the issuance of convertible
     subordinated debentures with detachable common stock warrants (the
     "Debentures").  The net proceeds of the offering were allocated between the
     Debentures and the warrants ($1,806,741 and $959,796), respectively) based
     on their relative fair values.  The Debentures bore interest at a rate of
     9% per annum and were convertible at a price of $8.52 per share under
     certain circumstances.  As of June 30, 1995, Debentures with a carrying
     balance of $2,200,278 had been converted into 319,132 shares of common
     stock.  On July 31, 1995, the remaining $185,585 of Debentures were
     converted into 24,932 shares of common stock.

     During fiscal year 1995, the Company borrowed $300,000 from certain
     officers and shareholders of the Company and $265,000 from outside
     investors.  In consideration for such loans, the Company paid interest at a
     rate of 9% per annum and issued warrants to purchase 25,134 shares of
     common stock with the same terms and conditions as the warrants issued in
     the debenture offering.  All of the above loans were repaid with proceeds
     from the Debentures offering.

     STOCK WARRANTS

     Pursuant to the merger of GZ-CA and SP (see note 1) the Company assumed all
     outstanding warrants of GZ-CA.  The following summarizes the outstanding
     warrants and underlying shares of common stock, exercise price per share of
     common stock and the expiration date:

          Common stock shares    Exercise Price     Expiration Date
          -------------------    --------------     ---------------
                116,667             $  2.50             5/31/99
                120,000             $  3.90             6/30/99
                 15,000             $  3.63             6/05/00
                483,135             $ 4.125             2/02/99
                720,000             $ 5.125             2/28/01
                 20,000             $ 5.625             6/26/01

     In October 1995, the Company issued a warrant to purchase up to 6,160
     shares of Common Stock to a lender ("Lender's Warrant") in connection
     with a business loan.  The exercise price of the Lender's Warrant is
     $8.52 per share

                                     F-16
<PAGE>


                              GRAPHIX ZONE, INC.

                        Notes to Financial Statements

                        June 30, 1996, 1995 and 1994

     and the Lender's Warrant may be exercised at any time prior to
     October 27, 2000.

     In connection with the issuance of the Debentures, discussed above, each
     Debenture holder was issued a warrant to purchase shares of the Company's
     common stock at a purchase price of $.48 per share.  Warrants to purchase a
     total of 329,614 shares were issued in connection with the Debentures.

     In September 1994, the Company issued warrants to purchase up to 82,130
     shares of Common Stock to two financial consultants ("Financial
     Consultants' Warrants") in connection with services provided to the
     Company. The exercise price of the Financial Consultants' Warrants is
     $10.23 per share and they may be exercised until thirty (30) days after
     the registration of the shares underlying the Financial Consultants'
     Warrants.

     In June 1994, the Company issued a warrant ("Consultant's Warrant") to
     purchase up to 72,481 shares of Common Stock to a consultant in connection
     with services provided to the Company.  The exercise price of the
     Consultant's Warrant is $6.32 per share and they may be exercised at any
     time prior to June 30, 1997.

     In connection with the fiscal 1994 private placement a total of 191,236
     warrants (including the agent's unit purchase option of 17,385) were
     issued.  Each warrant entitles the holder thereof to purchase one share of
     common stock at an exercise price of $17.05 per share and expires on
     December 29, 1999.  The number of shares and exercise price are subject to
     adjustment upon the occurrence of specified events.  These warrants are
     redeemable by the Company, at any time upon 30 days written notice, at a
     price of $22.16 per warrant, provided that the average closing price or
     average closing bid price of the common stock as reported by the principal
     exchange on which the common stock is traded for 30 consecutive trading
     days ending 10 days prior to the date on which the notice of redemption is
     given exceeds $22.16 and provided further that the stock underlying the
     warrants may be publicly sold without restriction under the Securities and
     Exchange Acts at the time notice of redemption is given.

     In connection with the Bridge Notes issued in fiscal 1994 (see note 6), the
     Company issued warrants to purchase 71,497 shares of the Company's common
     stock at an exercise price of $7.84 per share which expire on July 20,
     1997.  These warrants do not entitle holders to any rights of a shareholder
     of the Company, and are redeemable by the Company at $.68 per warrant under
     certain circumstances.

     In addition, the Company has warrants outstanding with a shareholder (see
     note 15) to purchase 7,333 shares of common stock.  These warrants have the
     same terms as the bridge warrants discussed above.

     STOCK OPTION PLANS

     The Company's 1996 Stock Option Plan (the "Plan") is administered by a
     committee of the Board of Directors ("Committee") which determines the
     recipients and terms of the options granted.  All stock option plans of the
     Company's wholly owned subsidiaries, GZ-CA and SP have been assumed by the
     Plan.  The Plan provides for the grant of incentive stock options ("ISOs")
     and non-qualified stock options ("NQOs") for up to 2,500,000 shares of
     common stock.  Terms of the Plan require that ISOs granted must have an
     exercise price of not less than 100% of the fair market value of the
     Company's common stock on the date of grant and must be exercised within
     ten years from grant date.  NQOs granted under the Plan must have an
     exercise price of not less than 85% of the fair market value of the
     Company's common stock on the date of grant and the option period may not
     exceed five years.  The Plan also includes automatic annual grants of NQOs
     to purchase 25,000 shares of common stock to each member of the Committee
     at an exercise price equal to 100% of the fair market value on the date of
     grant.  The Committee NQOs vest and are exercisable at the rate of 50%
     following six months from date of grant and 50% following twelve months
     following date of grant.

     A summary of the stock option activity under the Plan is as follows:

                                     F-17
<PAGE>


                              GRAPHIX ZONE, INC.

                        Notes to Financial Statements

                        June 30, 1996, 1995 and 1994

                                                   Number of    Price per Share
                                                    Shares
                                                  -----------  -----------------
        Outstanding at June 30, 1993                   -        $      -
        Options granted                              67,904        .34 - 12.78
        Options exercised                              -               -
        Options canceled                             (1,467)       .50
                                                  -----------  -----------------

        Outstanding at June 30, 1994                 66,437        .34 - 12.78
        Options granted                              46,613        .007 - 4.77
        Options exercised                            (1,467)        1.70
        Options canceled                            (16,238)        1.70 - 12.78
        Assumed from StarPress Multimedia, Inc.     279,414        .25 - .78
                                                  -----------  -----------------

        Outstanding at June 30, 1995                374,759        .007 - 12.78
        Options granted                             517,710        .01 - 1.02
        Options exercised                          (300,260)       .01 - .72
        Options canceled                           (396,647)       .04 - 1.875
        Assumed from GZ-CA                          314,050        .01 - 7.50
                                                  -----------  -----------------

        Outstanding at June 30, 1996                509,612
                                                  -----------
                                                  -----------

     As of June 30, 1996, approximately 486,403 stock options under the Plan
     were exercisable at prices of $.01 to $12.78 per share.

     During 1996, the Company accelerated the vesting period of certain stock
     options granted to an officer of the Company resulting in a new measurement
     date of such options.  The exercise price of the options was below the fair
     market value on the date of acceleration.  Accordingly, earned compensation
     of $195,682 has been recorded for the difference between the option
     exercise price and fair market value on the date of acceleration.

     NON-QUALIFIED STOCK OPTIONS

     In July 1994, the Company entered into an agreement for certain
     professional services in exchange for certain monetary consideration. In
     addition, the Company granted non-qualified options to purchase 250,000
     shares of the Company's common stock at an exercise price of $3.43 per
     share (the fair market value of the Company's common stock on the date of
     grant). The options vest in various increments over a ten-year period
     subject to certain accelerating events. Pursuant to the agreement, the
     option holder shall be granted additional options ("New Options") to
     purchase shares of the Company's common stock in amounts so that the shares
     of common stock issuable under all options granted to the holder equals 5%
     of the Company's then issued and outstanding common stock. The New Options
     will have terms similar to the original options, except that the exercise
     price will approximate fair market value on the date of grant of the New
     Options.

     During fiscal 1995, the Company granted various non-qualified stock options
     to purchase an aggregate of 106,679 shares of the Company's common stock at
     exercise prices ranging from $3.43 to $4.25 per share (the fair market
     value of the Company's common stock on the respective date of grant).
     Options for 56,679 shares were granted to certain related parties. The
     remainder were granted to consultants and other individuals providing
     assistance to the Company. The options vest at various times through their
     expiration in ten years from the date of grant subject to certain
     accelerating events.

     Certain directors, officers and consultants of the Company were granted
     non-qualified stock options to purchase 121,581 and 88,374 shares of the
     Company's Common Stock during the years ended June 30, 1995 and 1994,
     respectively.  These options vested immediately upon grant at exercise
     prices ranging from $.007 to $8.52 per share.  Compensation expense of
     $720,351 and $181,180 related to the issuance of these stock options was
     recorded for the years ended June 30, 1995 and 1994, respectively.

     A summary of the stock option activity for all non-qualified options is as
     follows:

                                     F-18
<PAGE>


                              GRAPHIX ZONE, INC.

                        Notes to Financial Statements

                        June 30, 1996, 1995 and 1994

                                                Number of     Price per Share
                                                 Shares
                                                ---------    -----------------
        Outstanding at June 30, 1993              36,665      $  10.23
        Options granted                          146,323         .34 - 8.52
                                                ---------    -----------------

        Outstanding at June 30, 1994             182,988         .34 - 10.23
        Options granted                          121,581         .007 - 8.52
                                                ---------    -----------------

        Outstanding at June 30, 1995             304,569         .007 -10.23
        Assumed from GZ-CA                       119,179         3.43
                                                ---------    -----------------

        Outstanding at June 30, 1996             423,748         .007 - 10.23
                                                ---------    -----------------
                                                ---------    -----------------

     As of June 30, 1996, approximately 86,679 stock options pursuant to non-
     qualified stock option grants were exercisable at prices of $3.43 to $3.50
     per share.

(11) INCOME TAXES

     Deferred income taxes reflect the net effects of temporary differences
     between the carrying amounts of assets and liabilities for financial
     reporting purposes an the amounts used for income tax purposes.
     Significant components of the Company's deferred tax assets and liabilities
     are as follows:

          June 30,                                     1996          1995
                                                       ----          ----
          Deferred tax assets:
               Net operating loss carryforwards    $  6,867,000  $  5,800,000
               Reserves not currently deductible        698,000       150,000
               Less valuation allowance              (7,565,000)   (5,760,000)
                                                   ------------  ------------
                         Total deferred tax assets        -           190,000
                                                   ------------  ------------
                                                   ------------  ------------

          Deferred tax liability:
               Identified intangible assets               -          (190,000)
                                                   ------------  ------------
                                                   ------------  ------------

     The valuation allowance for deferred tax assets as of June 30, 1996 was
     $7,565,000. The net change in the total valuation allowance for the year
     ended June 30, 1996 was an increase of $1,805,000.

     Reconciliation of the Federal statutory rate to the Company's effective tax
     rate is as follows:

<TABLE>
<CAPTION>
                                                                       1996          1995
                                                                       ----          ----
     <S>                                                              <C>           <C>
     Federal statutory rate                                           (34.0)%       (34.0)%
     State income taxes, net                                           (6.1)         (6.1)
     Write-off of acquired in-process technology for which no tax
         benefit is recognized                                         30.6          10.3
     Net operating loss carryforward with no tax benefit recognized     9.5          29.8
                                                                      ------        ------
                                                                         -             -
                                                                      ------        ------
                                                                      ------        ------
</TABLE>

     As of June 30, 1996, the Company had a net operating loss carryforward for
     Federal and state income tax purposes

                                     F-19
<PAGE>


                              GRAPHIX ZONE, INC.

                        Notes to Financial Statements

                        June 30, 1996, 1995 and 1994

     of approximately $18,275,000 and $10,644,000, respectively, which is
     available to offset future Federal taxable income. The net operating loss
     carryforwards, if not utilized, will expire in 2005 through 2011.  Pursuant
     to the merger of GZ-CA and StarPress, the utilization of the net operating
     loss carryforwards may be limited due to restrictions imposed under the
     Federal and state laws due to change in ownership rules and regulations.

(12) COMMITMENTS AND CONTINGENCIES

     LEASES
     The Company leases its office, production facilities and certain equipment
     under non-cancelable operating and capital lease agreements which provide
     for total future minimum annual lease payments as follows:

                      Year ending                      Operating     Capital
                       June 30,                         Leases       Leases
                       --------                         ------       ------
                        1997                          $  478,972   $  105,041
                        1998                             177,525         -
                        1999                             149,949         -
                                                      ----------   ----------
                                                      ----------   ----------

            Total minimum lease payments                 806,446      105,041

            Less amount representing interest               -           4,632
                                                      ----------   ----------

            Present value of minimum lease payments   $  806,446   $  100,409
                                                      ----------   ----------
                                                      ----------   ----------

     Total rental expense, including month-to-month rentals, approximated
     $248,000, $230,000 and $87,000 in 1996, 1995 and 1994, respectively.

     ROYALTIES
     The Company has entered into agreements with major music production and
     entertainment companies to produce interactive music, educational and
     entertainment CD-ROM titles. These agreements obligate the Company to pay
     royalties, as specified in the agreements, based on the sales of the CD-
     ROMs and certain guarantees.

     LEGAL MATTERS
     The Company is involved with certain legal proceedings and other claims
     arising in the normal course of business.  In the opinion of the Company's
     management, the liability, if any, resulting from such litigation would not
     have a material adverse affect on the Company's consolidated financial
     position or results of operations.

(13) DISTRIBUTION AGREEMENT

     On March 13, 1996 the Company entered into a distribution agreement ("the
     Agreement") with GT Interactive Software Corp. (GT).  In connection with
     the execution of the Agreement, the Company issued to GT a warrant to
     purchase up to 800,000 shares of common stock for a per share exercise
     price of $5.125.  As of June 30, 1996 GT exercised 80,000 shares with
     respect to the warrant.  The Company has agreed to register of the common
     stock underlying the warrant at the request of GT.  The warrant was valued
     at $312,000, management's estimate of fair value at the date of its
     issuance.  The warrant is being amortized over the five year life of the
     distribution agreement.

(14) SIGNIFICANT CUSTOMERS AND EXPORT SALES

     The Company had sales to three major customers which represented
     approximately 27%, 24% and 15% of 1996 revenues and 36%, 12% and 10% of
     1995 revenues. At June 30, 1996 and 1995, accounts receivable included

                                     F-20
<PAGE>


                              GRAPHIX ZONE, INC.

                        Notes to Financial Statements

                        June 30, 1996, 1995 and 1994

     approximately $3,134,000 and $236,000 due from these major customers.

(15) RELATED PARTY TRANSACTIONS

     On March 21, 1996 GZ-CA advanced an aggregate of $110,162 to two executive
     officers and one senior staff member of the Company in order to exercise
     certain vested stock options under the Company's stock option plan.  These
     advances are secured by promissory notes, bear interest at the rate of 6%
     per annum and due on or before termination of employment with the Company.
     As of June 30, 1996, $94,062 remained outstanding under these notes.

     Certain officers and major shareholders of the Company are affiliated with
     companies which provide various shipping, warehousing , consulting , legal
     and accounting services to the Company.  The cost of these services were
     $47,975 and $376,090 for the years ended June 30, 1995 and 1994,
     respectively.

     In March 1994, the Company entered into a financial advisory agreement with
     Maroon Bells Capital Partners, Inc. ("MBC"), whereby MBC agreed to provide
     certain financial advisory services to the Company for a period of six
     months, for up to $10,000 per month, plus commissions in the event that MBC
     introduced transactions or acquisitions to the Company.  A former director
     and shareholder of the Company is a partner in MBC.  The Company recorded
     expenses to MBC of $60,000 for the year ended June 30, 1994.

     In July 1993, the Company borrowed $50,000 from a shareholder of the
     Company in the form of a promissory note providing for 12% interest.  In
     September 1993, the Company borrowed $92,000 from an officer of the Company
     in the form of a promissory note providing for 12% interest, and the
     Company granted warrants relating to the promissory note to purchase 7,333
     shares at $7.84 per share.  Both of these notes and the related accrued
     interests were paid in full in January 1994.

(16) PROFIT SHARING PLAN

     The Company and its wholly owned subsidiaries maintain three pretax savings
     and profit sharing plans under Section 401(k) of the Internal Revenue Code.
     Under all plans, eligible employees are able to contribute from 1% to 15%
     of their compensation.  Under the plan maintained by GZ-CA, the Company
     makes a matching contribution of certain amounts contributed by the
     employee and may, at its discretion, make additional contributions to the
     plan, up to a maximum of 15% of the employee's compensation.  Under the two
     plans maintained by StarPress, one of which was assumed pursuant to the
     acquisition of StarPress Multimedia, Inc. (see note 8), the Company does
     not make any matching contributions.  The Company is currently in the
     process of consolidating the three plans into one plan.

(17) JOINT VENTURE

     In connection with a joint venture agreement with Olivetti Telemedia,
     the Company is obligated to invest an additional $450,000 in cash and
     contribute intellectual property which the joint venture has valued at
     $1,000,000.  The cash is to be contributed based upon needs of the joint
     venture as requested by the joint venture's governing board.  On February
     26, 1996, the Company received a letter from Olivetti Telemedia requesting
     that the Company become current on its cash contribution obligations to 
     the joint venture.  The parties are currently in negotiations regarding 
     this request.  The maximum amount of cash that the Company could owe to 
     the joint venture entity is $450,000.  As of June 30, 1996 the Company
     had accrued and expensed $100,000 of this total maximum amount.  The 
     Company does not expect it will be required to contribute material 
     amounts to the joint venture beyond the $100,000 accrued as of June 30, 
     1996.

(18) LIQUIDITY

     As of June 30, 1996, the Company had a net working capital deficiency of
     $19,631.  In addition, the Company has incurred significant losses from
     operations during 1996 and 1995. However, subsequent to June 30, 1996, the
     Company raised $939,950, net of offering expenses, from a private

                                     F-21
<PAGE>


                              GRAPHIX ZONE, INC.

                        Notes to Financial Statements

                        June 30, 1996, 1995 and 1994


     equity offerings (see note 19).  Management believes that cash from 
     operations, supplemented by the proceeds of these private equity offerings,
     will be adequate to support the Company's working capital needs through 
     the year ending June 30, 1997, as well to satisfy the bank note payable 
     (see note 6) upon its maturity.

(19) SUBSEQUENT EVENTS

     On September 25, 1996, the Company sold 1,000 shares of Series A 
     convertible preferred stock at $1,000 per share to one accredited 
     investor in a private equity offering.  In addition the Company granted 
     the investor a warrant to purchase 69,717 shares of common stock.  The 
     preferred stock is convertible into the Company's common stock, at the 
     option of the holder, commencing 60 days from the date of issuance based 
     upon, among other things, the closing price of the Company's common 
     stock at or near the conversion date. The holder of the Preferred Stock 
     is entitled to receive $80.00 per annum which shall be fully cumulative 
     from the date of issuance. The cash proceeds, net of offering expenses, 
     were $939,950.

     On October 31, 1996, the Company sold 1,525 shares of Series A 
     convertible preferred stock at $1,000 per share to five accredited 
     investors in a private equity offering.  In addition the Company granted 
     the investors warrants to purchase 498,368 shares of common stock.  The 
     preferred stock is convertible into the Company's common stock, at the 
     option of the holders, commencing 60 days from the date of issuance based 
     upon, among other things, the closing price of the Company's common 
     stock at or near the conversion date. The holders of the Preferred Stock 
     are entitled to receive $80.00 per annum which shall be fully cumulative 
     from the date of issuance. The cash proceeds, net of offering expenses, 
     were $1,072,910.

     The Company's $750,000 note payable with Silicon Valley Bank, as 
     described at note 6, was originally due on October 31, 1996. The loan 
     was extended to November 7, 1996 and is expected to be repaid from the 
     proceeds received by the Company from the October 31, 1996 issuance of 
     1,525 shares of Series A convertible preferred stock as described above.

                                      F-22
<PAGE>


                                                                     SCHEDULE II

                         GRAPHIX ZONE, INC. AND SUBSIDIARIES
                          VALUATION AND QUALIFYING ACCOUNTS
                                (Amounts in thousands)
 
<TABLE>
<CAPTION>

                                                                         Year ended June 30,
                                                                1996           1995           1994
                                                               ------         ------         ------
<S>                                                            <C>            <C>            <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance, beginning of year                                     $  177         $    -           $  -
Additions charged to expense                                      384            154              -
Additions from acquisitions                                        79             23              -
Balance, end of year                                           $  640         $  177           $  -
----------------------------------------------------------------------------------------------------

ALLOWANCE FOR SALES RETURNS AND DISCOUNTS
Balance, beginning of year                                     $  501         $    -           $  -
Net additions (reductions) charged (credited) to sales           (163)           244              -
Additions from acquisitions                                       511            257              -
Balance, end of year                                           $  849         $  501           $  -
----------------------------------------------------------------------------------------------------

ALLOWANCE FOR COOPERATIVE ADVERTISING FUNDS
Balance, beginning of year                                     $  165         $    -           $  -
Net additions (reductions) charged (credited) to sales and
marketing expense                                                  26            165              -
Balance, end of year                                           $  191         $  165           $  -
----------------------------------------------------------------------------------------------------
</TABLE>

 
                                         S-1